Oct

30

The Myth of the Robber BaronsThere are many reasons to read the Myth of the Robber Barons by Burton Folsom.

1. It shows how the key to business success in those days was lower costs, through attention to detail, hands on management, improved technology to produce a higher quality product, accurate predictions of where the market was going, price reductions to increase markets, sound financial structure to prevent getting in over the head, swooping down to buy their competitors out during times of panic.

2. It shows that the great entrepreneurs of the late 19th century, Vanderbilt, Hill, Rockefeller, Mellon, Schwab, Scranton, made their $100 million plus fortunes, by passing on their improved efficiency to consumers thereby widening the market, and allowing better utilization of the technologies they developed.

3. It shows that economic history as it is taught is completely wrong concerning that era; especially that the myth that these legends were robber barons is completely untrue. There were Robber Barons, but because most of them developed inefficient methods because of government subsidies they eventually succumbed.  It was the partnership of government with what we would now call political rent seekers like Collins, Cunard, Harriman, Leland Stanford, Villard, that were the evil doers.

4. It provides an introduction to three of the greatest and most able businessmen who ever lived, Andrew Mellon, James Hill, and George Scranton.

6. It contains numerous hints on how to run a business successfully.

7. It makes you understand the sources of wealth and progress in our society.

8. It provides a snapshot of the interaction of business and finance and the stock market at the turn of the 20 th century.

It will be impossible to summarize all the techniques that the entrepreneurs used and how they compared to the non-innovative and fixed methods of doing business that all their competitors used. However, here are some isolated facts about cost reduction that were the cornerstone of the better efficiency these entrepreneurs were able to achieve.

Vanderbilt made his fortune in steamboating by reducing the price of passenger travel from $7 that Fulton's rival steamships were charging to $3, then to 10 cents, then free. He did the same from New York to New Haven, reducing the prices from $5 to $1. Schwab and Carnegie in 1897 installed new furnaces and reduced the price of finished steel by 34% and passed the saving on to increase markets by reducing the price of rails by 60%. Hill reduced the cost of travel from Minnesota to Washington from $50 to $10 one way. He reduced the price of transporting lumber from Washington to New York by 50%. The key to Hill's success was a lower cost structure, constantly improving technology, a better foundation than any of his competitors, and a vision to build markets by lowering prices. This enabled him to survive hard times, and buy them out during times of panic. Here are some facts about Hill's methods but they provide almost a composite of the secrets of success of the other famous and usually villified entreprenuers of that period, including Rockefeller, Carnegie, Vanderbilt, and Scranton. Hill's goal in building his railroad was to use the best possible rail, to go the shortest distance, the lowest grade, and least curvature. He then provided research and low transportation costs to his passengers so he could develop more of a consumer base for the rail traffic. He rode horseback himself to find the shortest route and found the Marias Pass in the Rockies, shortening the route to Washington by 100 miles. He purchased his coal at $2 a ton less than his competitors, and was using coal when they were using wood as fuel. Then when the depression of 1893 came, all his competitors went into bankruptcy and Hill with his lower costs was able to buy them out. He purchased "steel rails, ballasting track, transfer yards, terminal facilities, new equipment, new shops" and thus had lower fixed costs than all of his competitors . He was able to make a profit while the others that had relied on an inefficient rail system descended into bankruptcy. He then expanded his market by building steamships to take the freight from Washington and the East to sell cotton, copper,and wheat to Japan. He built the rail system in Japan, bidding 20% below any of his competitors.He developed the Washington lumber business by lowering freight rates by 50% and selling 1 million acres to Weyerhauser at $6 an acre, which turned out to be half its value. The themes and case studies in The Myth of the Robber Barons as well as all the follow up material for each of the greats available on the search engines are well worth studying because they are timeless and provide invaluable lessons for success today.

Mikhail Osipov adds:

It’s unfortunate that many view the world as a fixed-sum game and conflict ridden where A’s gain is B’s loss. Institutions that provide a framework for free markets and private property, allow for mutually beneficial gains via voluntary interaction, i.e., a positive-sum game. As Vic pointed out, Hill’s success was largely due to his entrepreneurial ability to constantly come up with novel ways to reduce costs which he passed on to the consumer in the form of a lower price. You can only increase revenue by lowering price if the demand for your product or service is relatively elastic, which implies that other alternatives and substitutes exist for your product or service exist. And to consider someone like Hill a monopolist or a robber baron contradicts basic economic principles.

I am an avid reader of Daily Speculations, an admirer of Vic and Laurel's work, and a PhD student in Economics at George Mason University. Just a few days ago I was reading up on rent seeking and one analogy came up that I think may have something to offer in terms of an insight into how markets behave. The analogy has to do with the competition among Bull Moose during a mating season. After my midterms I will complete this piece and would like to submit it to you.

Robert McAdams writes:

Thanks for the heads-up on this book. When one looks at the wealthiest people in history, they have one thing in common: volume. If you can convince more and more individuals to engage in voluntary exchange with you, your wealth explodes. Toyota has made far more money than Lamborghini. Further, one of my definitions of profit is: “profit is what happens when you save someone else time or money." Vic's quotes from the book back that up. I support free markets and oppose those that try to use political maneuvers to erect barriers and prevent competition.

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