America's Early Industrialists Earned Their Wealth

March 7, 2013

One of the most prevalent myths about economic freedom is that it inevitably leads to monopolies. Ask people why they believe that, and the odds are high that they will point to the "trusts" of the late 19th century that gained large market shares in their particular industries. However, America's early industrialists, like shipping and railroad tycoon Cornelius Vanderbilt and oil magnate John D. Rockefeller, got their money the old-fashioned way: they earned it, says David Henderson a research fellow with the Hoover Institution.

  • Referred to as robber barons, Vanderbilt and Rockefeller are lambasted by many as the pinnacles of greed and cutthroat businessmen.
  • But both Vanderbilt and Rockefeller achieved success the old fashioned way: they earned their money in a system that didn't grant them privileges.
  • In fact, each actually helped to destroy a previous monopoly and helped consumers in the process.

Vanderbilt, who became the manager for a ferry entrepreneur, undercut an existing ferry monopoly granted by the state of New York. By lowering prices, Vanderbilt broke the law and helped passengers save money in the process. The resulting case Supreme Court case, Gibbons v. Ogden, ruled that a state cannot grant a monopoly on interstate commerce.

Similarly, Rockefeller's company, Standard Oil, benefited consumers while acquiring as much as 90 percent of the market. Because Rockefeller built the first pipelines, he was able to reduce the cost of shipping his kerosene by rail by threatening to transport his products solely by pipeline. This reduced the average cost of rail transportation for any company that shipped goods. He also drastically improved the quality of kerosene, which made his product the safest and most desired.

The only way Standard Oil could attain such a large market share was by lowering prices. When it acquired such a large share, theory says the monopoly should have hiked up prices, but Standard Oil lowered them. Between 1880 and 1890, the output of petroleum products rose 393 percent while the price fell 61 percent. During the same time, gross domestic product rose 24 percent, and the price of steel fell 53 percent, refined sugar 22 percent, lead 12 percent and zinc by 20 percent. The only price that fell less than 7 percent in the allegedly monopolized industries was that of coal, which stayed constant.

Source: David Henderson, "The Robber Barons: Neither Robbers nor Barons," Library of Economics and Liberty, March 4, 2013.

 

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