The Myth of the Robber Barons by Burt Folsom
This blog post is dedicated to my friend George Ryan and his
company, Hatchwise. Live long and prosper
Burt Folsom has an ax to grind with a number of the textbooks that I have or presently use in teaching history. His is an entrepreneurial friendly history of the era of American industrial expansion. His argument, I think is legitimate. American history textbooks tend to conflate all of the leaders of the American Industrial expansion into one criminal class. Folsom does the student of this history the service of giving each industrialist and key company its proper due by noting how it functioned as a “taker” or a “maker.”
Folsom makes the argument that there were some “robber barons” who were not robbers at all. They made money by providing people with the opportunity to make money and they did it with intelligence, courage, risk taking, and hard work. In another group, he argues, were a group of individuals who made their money by manipulating the government and profiting from taxpayers. The later were,
“in fact comparable to medieval robber barons, for they sought and obtained wealth through the coercive power of the state, which is to say that they were subsidized by government and were sometimes granted monopoly status by government. Invariably, their products or services were inferior to and more expensive than the goods and services provided by market entrepreneurs, who sought and obtained wealth by producing more and better for less cost to the consumer.”
Folsum argues that the conclusions that history textbooks lead students to are often contrary to facts, or are often unable to distinguish between the ways that different people acquire similar levels of wealth and remuneration. In the course of the book, he looks with more detail into the rise of these men of great fortunes, Cornelius Vanderbilt, James J. Hill, Andrew Carnegie, John Rockefeller, Leland Stanford, Andrew Mellon, and others. At the heart of his argument is this notion that there may be ways of obtaining success and wealth in business that benefit a society at large and others that act in a more parasitical fashion. “Political promotion of economic development is inherently futile” says Fulsom,
“for it invariably rewards incompetence; if incompetence is rewarded, incompetence will be the product; and when incompetence is the product, politicians will insist that increased planning and increased regulation is the appropriate remedy.”
Essentially, his point is that when the government began to give subsidies to industries, they became all the more interested in increasing them rather than in actually doing what needed to be done to convince the actual “consumers” that their product was worth purchasing. As these industries failed to provide goods and services people wanted, people went to government to demand regulation. Take the steamboat industry for example.
“With annual government aid, Collins had no incentive to reduce his costs from year to year. His expenses, in fact, more than doubled in 1852: Collins preferred to compete in the world of politics for more federal aid than in the world of business against price-cutting rivals.”
Ultimately Collins’ subsidized steamboat services could not compete with the more efficient, safer, faster, steamboats that Cornelius Vanderbilt was producing. (Think about this in terms of public education or healthcare.) When Collins’ subsidies were removed, he was totally unprepared to compete with unsubsidized rivals.
This argument can be clearly seen in the history of the Union and Central and Northern Pacific railroads. The former two were government subsidy based affairs. James Hill’s Northern Pacific railroad was a privately funded initiative. Here is what Folsom writes:
“While some of this rush for subsidies was still going on, James J. Hill was building a transcontinental from St. Paul to Seattle with no federal aid whatsoever. Also, Hill's road was the best built, the least corrupt, the most popular, and the only transcontinental never to go bankrupt.”
“Since congressmen wanted the [Union and Central Pacific] road built quickly, they did two key things. First, they gave each line twenty alternate sections of land for each mile of track completed. Second, they gave loans: $16,000 for each mile of track of flat prairie land, $32,000 per mile for hilly terrain, and $48,000 per mile in the mountains.”
“The UP and CP, then, would compete for government largess. The line that built the most miles would get the most cash and land. The land, of course, would be sold; and this way the railroad would be financed. In this arrangement, the incentive was for speed, not efficiency. The two lines spent little time choosing routes; they just laid track and cashed in.”
“The rush for subsidies caused other building problems, too. Nebraska winters were long and hard; but, since Dodge was in a hurry, he laid track on the ice and snow anyway. Naturally the line had to be rebuilt in the spring. What was worse, unanticipated spring flooding along the Loup fork of the Platte River washed out rails, bridges, and telephone poles, doing at least $50,000 damage the first year. No wonder some observers estimated the actual building cost at almost three times what it should have been.”
“The aid bred inefficiency; the inefficiency created consumer wrath; the consumer wrath led to government regulation; and the regulation closed the UP's options and helped lead to bankruptcy.”
Folsom argues that it is vital to distinguish between those who make their fortunes serving and those who make them “bilking.” The Scrantons he argued obtained their prosperity by bringing prosperity.
"Scranton's founders, as entrepreneurs, created something out of nothing. They created their assets and created opportunities for others when they successfully bore the risks of making America's first iron rails. Without them, almost everybody else in the region would have been poorer. The amount of wealth in a region (or a country) is not fixed; in 1870, Scranton, Platt, and Blair got the biggest piece of the economic pie, but it was the biggest piece of a much larger pie—made so by what they cooked up when they came to Pennsylvania thirty years earlier.”
“When the Scrantons came to the Lackawanna Valley, it was a poor farming region with no close ties to outside markets. In 1850, according to the federal manuscript census, no one in the Lackawanna Valley was worth more than $10,000. In 1870, after the Scrantons had established their city and their iron works, thirty-three families in Scranton alone were worth at least $100,000; and one was already a millionaire. Thousands of other families were working their way toward better lives. The Scrantons' iron works and railroad were the means to this end.”
“Because the Scrantons did what they did, thousands of Americans had new opportunities in life.”
“A lot can be learned from the story of the Scrantons. The first lesson is that entrepreneurs are needed to create wealth; when they succeed, others then have the chance to build on what they started.”
As one former President of Standard Oil said of John D. Rockefeller, when asked to explain his company’s owner’s success,
"Well, it is simple. In business we all try to look ahead as far as possible. Some of us think we are pretty able. But Rockefeller always sees a little further ahead than any of us—and then he sees around the corner!”
Folsom argues that Rockeffeller’s genius for improving quality and lowering costs were unpopular with all those who wished to compete with him. But that ultimately, the light that the public read by at night, and that allowed them to live more productive lives themselves came from that very ability. “Some of the oil producers were unhappy,” he writes of Rockefeller’s Darwinian tactics for squeezing out the opposition,
“but American consumers were pleased that Rockefeller was selling cheap oil. Before 1870, only the rich could afford whale oil and candles. The rest had to go to bed early to save money. By the 1870s, with the drop in the price of kerosene, middle and working class people all over the nation could afford the one cent an hour that it cost to light their homes at night. Working and reading became after-dark activities new to most Americans in the 1870s.”
His last chapter about Andrew Mellon is particularly interesting in light of recent debates over getting the wealthy to “pay their fair share” of the American tax burden. Mellon’s experience and observation led him to believe that one could lower tax rates and increase tax revenue. How? His argument was that people will contribute taxes up to around 25% of their incomes but that at that point, they begin to think of taxation as a confiscatory exercise and fight back by withdrawing it from taxable endeavors. There is, he was suggesting, a “phase transition” that takes place when you ask too much of people who feel that they have given their “fair share” already (whether you think they have or not). At the lower levels of the economy, workers will stand to have their wages reduced only so much before they strike and entrepreneurs will stand to have their taxes raised only so much before they go looking for ways to hide their profits in in tax free safe havens. Mellon argued that wealth was being diverted to tax free municipal bonds so as to protect it from confiscatory taxation and that when that happened, the government was forced to get the taxes from the middle class (who are less adept at hiding it.
“When Harding died in 1923 and Coolidge became President, Mellon found himself with a strong ally to help break the Congressional deadlock. Coolidge studied the tax problem and agreed with Mellon's conclusions. "I agree perfectly," Coolidge said, "with those who wish to relieve the small taxpayer by getting the largest possible contribution from the people with large incomes. But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden."
For Mellon (and Coolidge) “taxes had to be slashed "to attract the large fortunes back into productive enterprise." “The Progressives denigrated his achievements whenever possible,” writes Folsom, “They could hardly dispute his results.” Thus, “On one level, Folsom shows that the ‘Robber Baron’ school of historians of American business enterprise was partly right and partly wrong but was unable to distinguish which was which.”
This is history with an agenda. IF you want better services at lower prices, let the markets determine who gets paid, not the Congress or Parliament in the case of England.
“John B. Thompson of Kentucky said, "Give neither this line, nor any other line, a subsidy. . . . Let the Collins line die. ... I want a tabula rasa— the whole thing wiped out, and a new beginning." Congress voted for this "new beginning" in 1858: they revoked Collins' aid and left him to compete with Vanderbilt on an equal basis. The results: Collins quickly went bankrupt, and Vanderbilt became the leading American steamship operator.”
“Without government aid to inefficiency, the Cunard Company would have been compelled to adopt improvements in order to compete with other and more progressive lines.”
The Myth of the Robber Barons does not suggest that there were none. It’s argument, as articulated above is that history is generally more complicated than a simple formula like “If you got rich, you cheated and someone suffered.” “To sum up, then,” the book concludes,
“we need to divide industrialists into two groups. First, were market entrepreneurs, such as Vanderbilt, Hill, the Scrantons, Schwab, Rockefeller, and Mellon, who usually innovated, cut costs, and competed effectively in an open economy. Second, were political entrepreneurs, such as Edward Collins, Henry Villard, Elbert Gary, and Union Pacific builders, all of whom tried to succeed primarily through federal aid, pools, vote-buying, or stock speculation. Market entrepreneurs made decisive and unique contributions to American economic development. The political entrepreneurs stifled productivity (through monopolies and pools), corrupted business and politics, and dulled America's competitive edge.”
“If we seriously study entrepreneurs, the state, and the rise of big business in the United States we will have to sacrifice the textbook morality play of "greedy businessmen" fleecing the public until at last they are stopped by the actions of the state. But, in return, we will have a better understanding of the past and a sounder basis for building our future.”
Question for Comment: Yesterday, I listened to a radio interview with my friend, George Ryan. A few years ago, he was making $10 an hour at a lumber yard and was unhappy with his job. So, he started a business. Today, he is what you might call a successful entrepreneur and small business owner at http://hatchwise.com . His company no doubt takes business away from traditional graphic art businesses and gives it to freelancers all over the world. In short, he profits from saving people money and giving people work. What is needed in the American economy (and education system) for this to happen more often?
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