Beware Unhampered Capitalism

Beware Unhampered Capitalism

by Thomas E. Woods, Jr.

Recently by Thomas E. Woods, Jr.: 'Advertisers Brainwash Us,' and Other Anti-Capitalist Complaints

Read part 1 and part 2.

I’ve been spending some time refuting common complaints against capitalism, as formulated by a Twitter critic of mine. Here are a few more.

(9) Capitalism creates inequality!

As Ludwig von Mises observed, in the old days the rich traveled in a coach-and-four while the poor traveled on foot. That is inequality. Today the rich travel in fancy cars while the poor travel in run-down cars. That is a dramatic reduction in inequality. This is all the more true when we consider that the amenities many poor people now have in their cars would have been unheard of in the richest people’s homes just four generations ago.

The American middle class and poor take for granted amenities that the greatest kings and queens of Europe could scarcely have imagined.

Over the course of the twentieth century the real incomes of the poor increased by 1900 percent, a far greater increase than any other economic group enjoyed.

Most arguments about income inequality are based on static analysis. They speak of the "lowest quintile" earning a certain amount in 1990 and a certain amount in 2000. We are then supposed to grieve over these numbers. But the numbers are so static as to disconnect them from reality. They neglect to add that people in the lowest quintile in 1990 are not the same people as those in 2000. Robert Murphy, quoting a 1995 report from the Dallas Fed, points out that fully 29 percent of those in the bottom quintile of income in 1975 had moved to the very top quintile by 1991. This movement among quintiles is not captured at all in the standard figures.

And the market economy has repeatedly tried to cut the most politically connected men of wealth down to size, but my critic’s own political hero, Barack Obama, has supported bailing them out. That is not the free market’s fault.

(10) Her complaints included a tweet directing me to the "Catholic Church condemning free-market philosophy."

Well, I have written an entire book on this, after all, not to mention quite a few articles (among them this, this, this, and this), so presumably there is a teensy bit to be said for my side of things.

(11) Unhampered capitalism yielded the terrible "robber barons" of the late nineteenth century.

First of all, it is clear from her other posts that my critic thinks unhampered capitalism is pretty much what we have now. We are supposed to overlook the 80,000 pages of regulation – all of which is innocently aimed at protecting the common good, of course – in the Federal Register added to the Code of Federal Regulations every year. We are not supposed to think about the hundreds of federal agencies (not to mention those of state and local governments), the millions of federal employees whose salaries are paid out of the productive labor of the rest of the population, and the trillions of dollars in taxes.

She likewise thinks the banking system is pretty close to a free market – after all, hasn’t she seen news reports about bank "deregulation"? To the contrary, the banking system is perhaps the least free-market sector of the entire economy. The whole system is overseen by the government-created Federal Reserve System, which presides over a system-wide cartel. It involves monopolistic legal tender laws, a monopoly of the note issue, artificial disabilities on other media of exchange apart from the depreciating dollar, and various forms of bailout guarantees. For a sense of what a free market in banking would actually look like, read Murray N. Rothbard’s The Mystery of Banking.

And that’s not to mention the layers of cronyism all through the federal apparatus, most obviously within the military-industrial-congressional complex. That’s another area I cover in Rollback. What does any of this have to do with capitalism?

But on to the robber barons. We are supposed to believe that these men ruthlessly exploited the public to satisfy their insatiable greed – a human inclination that never seems to afflict our selfless public servants, I might add. I spend some time correcting this cartoon version of history in my Politically Incorrect Guide to American History.

To be sure, no one should try to excuse those who sought to use state power to cripple their competitors. Burt Folsom made a helpful distinction between political entrepreneurs, who got ahead using underhanded tactics like this, and market entrepreneurs, who prospered because they produced what the public demanded at prices people could afford.

Andrew Carnegie almost single-handedly managed to reduce the price of steel rails from $160 per ton in the mid-1870s to $17 per ton in the late 1890s. Given the importance of steel to a modern economy, that massive price reduction yielded greater wealth and a higher standard of living for everyone. Carnegie was so efficient, in fact, that the 4000 people who worked at his Homestead plant in Pittsburgh produced three times more steel than the 15,000 workers at Germany’s Krupps steelworks, Europe’s most modern and renowned facility.

Likewise, John D. Rockefeller was able to reduce the price of kerosene from one dollar per gallon to ten cents per gallon. People could finally afford to illuminate their homes. Rockefeller also developed 300 products out of the waste that remained after the oil was refined. Claims that Rockefeller was an "unfair" competitor (whatever that means), the usual gripe of those who cannot deliver a product at prices that sufficiently please consumers, were laid to rest half a century ago in John S. McGee’s study for the Journal of Law and Economics. (John S. McGee, "Predatory Price Cutting: The Standard Oil (N.J.) Case," Journal of Law and Economics 1 [October 1958]: 137-69.)

We might also mention James J. Hill, who grew up in poverty but whose entrepreneurial skill helped make the Great Northern Railroad, which extended from St. Paul to Seattle, a major success without any government subsidies at all. In 1893, when the government-subsidized railroads went bankrupt, Hill’s line was able both to cut rates and turn a substantial profit.

Still another of the alleged robber barons was Cornelius Vanderbilt. In 1798 the government of New York had granted Robert Livingston and Robert Fulton a monopoly on steamboat traffic for thirty years. Vanderbilt was hired to run a steamboat between New Jersey and Manhattan in defiance of that monopoly. Vanderbilt evaded capture while at the same time charging only one-quarter of the monopolists’ fare.

After Gibbons vs. Ogden (1824) overturned New York’s steamboat monopoly, the fare for a trip from New York City to Albany dropped from seven dollars to three. The trip from New York to Philadelphia, which had been three dollars, fell to one dollar. Travelers going from New Brunswick to Manhattan now paid only six cents, and ate for free. When he moved his steamboat operation to the Hudson River, Vanderbilt charged a fare of ten cents, as opposed to the previous three dollars. Later he dropped the fare entirely, running his operation on the proceeds from concessions aboard the ship.

Even when his competitors had unfair advantages, Vanderbilt came out on top. Edward Collins received a government subsidy for his steamship business to provide mail delivery across the Atlantic – to the tune of $858,000 a year by the 1850s. When Vanderbilt entered the field in 1855, he outperformed Collins in passenger travel and mail delivery with no subsidy at all. Congress did away with Collins’ subsidy in 1858, and before long he went bankrupt.

Meanwhile, Vanderbilt was also outperforming two subsidized steamship lines that brought passengers and mail to California. They charged $600 per passenger per trip. The unsubsidized Vanderbilt charged $150 per passenger, and nothing to deliver the mail.

Forgive me, but I am supposed to fear and despise these benefactors of mankind why, exactly?

These men were able to acquire such substantial portions of their industries because they consistently produced goods at low prices. When they stopped innovating, they lost market share. The cartoon version of events notwithstanding, competition was vigorous. It was only after voluntary efforts — pools, secret agreements, mergers, and the like — failed to stabilize this highly competitive environment that some firms began to look to the federal government and its regulatory apparatus as a way to reduce competition coercively. "Ironically, contrary to the consensus of historians," acknowledges New Left historian Gabriel Kolko, "it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it."

Speaking of the situation that faced Standard Oil, Kolko writes:

In 1899 there were sixty-seven petroleum refiners in the United States, only one of whom was of any consequence. Over the next decade the number increased steadily to 147 refiners. Until 1900 the only significant competitor to Standard was the Pure Oil Company, formed in 1895 by Pennsylvania producers with $10 million capital…. By 1906 it was challenging Standard’s control over pipelines by constructing its own. And in 1901 Associated Oil of California was formed with $40 million capital stock, in 1902 the Texas Company was formed with $30 million capital, and in 1907 Gulf Oil was established with $60 million capital. In 1911 the total investment of the Texas Company, Gulf Oil, Tide Water-Associated Oil, Union Oil of California, and Pure Oil was $221 million. From 1911 to 1926 the investment of the Texas Company grew 572 percent, Gulf Oil 1,022 percent, Tide Water-Associated 205 percent, Union Oil 159 percent and Pure Oil 1,534 percent.

Standard Oil’s decline preceded the antitrust ruling against it in 1911, and was "primarily of its own doing — the responsibility of its conservative management and lack of initiative." By the time government got around to breaking up Standard Oil, the normal operation of the free market had already reduced its market share from 80 to 25 percent.

As a matter of fact, it was very difficult for top firms to maintain their positions in a great many industries in the United States in the late nineteenth century. This was true of industries as diverse as oil, steel, iron, automobiles, agricultural machinery, copper, meat packing, and telephone services. Competition was extremely vigorous.

It is not easy to understand the hostility toward a system that has made possible the greatest explosion in wealth and living standards in human history, and which has done more to eradicate poverty than all the rock stars and government transfer programs put together. (Ludwig von Mises takes a crack at it in The Anti-Capitalistic Mentality.) People seem almost eager to believe the most transparently false claims about the market. Commerce is viewed with suspicion. We treat merchants with a disdain we would never show the TSA. The critical role of the entrepreneur is not understood at all.

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