Excuse Me, Professor: Challenging the Myths of Progressivism

by Lawrence Reed

  John D. Rockefeller’s success, then, was a consequence of his superior performance. He derived his impressive market share not from government favors but rather from aggressive courting of the consumer. Standard Oil is one of history’s classic efficiency monopolies.

  But what about the many serious charges leveled against Standard? Predatory price cutting? Buying out competitors? Conspiracy? Railroad rebates? Charging any price it wanted? Greed? Each of these can be viewed as an assault not just on Standard Oil but on businesses and the free market in general. They can and must be answered.

  Predatory price cutting is “the practice of deliberately underselling rivals in certain markets to drive them out of business, and then raising prices to exploit a market devoid of competition.” Let’s see if it’s a charge that holds water on just one of those one-liners progressives like to toss out whether the evidence is there or not.

  In fact, Professor John S. McGee, writing in the Journal of Law and Economics for October 1958, stripped this charge of any intellectual substance. Describing it as “logically deficient,” he concluded, “I can find little or no evidence to support it.”

  In research for his extraordinary article, McGee scrutinized the testimony of Rockefeller’s competitors who claimed to have been victims of predatory price cutting. He found their claims to be shallow and misdirected. McGee pointed out that some of these very people later opened new refineries and successfully challenged Standard again.

  Beyond the actual record, economic theory also argues against a winning policy of predatory price cutting in a free market for the following reasons:

  1.Price is only one aspect of competition. Firms compete in a variety of ways: service, location, packaging, marketing, even courtesy. For price alone to draw customers away from the competition, the predator would have to cut substantially—enough to outweigh all the other competitive pressures the others can throw at him. That means suffering losses on every unit sold. If the predator has a war-chest of “monopoly profits” to draw upon in such a battle, then the predatory price cutting theorist must explain how he was able to achieve such ability in the absence of this practice in the first place!

  2.The large firm stands to lose the most. By definition, the large firm is already selling the most units. As a predator, it must actually step up its production if it is to have any effect on competitors. As Professor McGee observed, “To lure customers away from somebody, he (the predator) must be prepared to serve them himself. The monopolizer thus finds himself in the position of selling more—and therefore losing more—than his competitors.”

  3.Consumers will increase their purchases at the “bargain prices.” This factor causes the predator to step up production even further. It also puts off the day when he can “cash in” on his hoped-for victory because consumers will be in a position to refrain from purchasing at higher prices, consuming their stockpiles instead.

  4.The length of the battle is always uncertain. The predator does not know how long he must suffer losses before his competitors quit. It may take weeks, months, or even years. Meanwhile, consumers are “cleaning up” at his expense.

  5.Any “beaten” firms may reopen. Competitors may scale down production or close only temporarily as they “wait out the storm.” When the predator raises prices, they enter the market again. Conceivably, a “beaten” firm might be bought up by someone for a “song,” and then, under fresh management and with relatively low capital costs, face the predator with an actual competitive cost advantage.

  6.High prices encourage newcomers. Even if the predator drives everyone else from the market, raising prices will attract competition from people heretofore not even in the industry. The higher the prices go, the more powerful that attraction.

  7.The predator would lose the favor of consumers. Predatory price cutting is simply not good public relations. Once known, it would swiftly erode the public’s faith and good will. It might even evoke consumer boycotts and a backlash of sympathy for the firm’s competitors.

  In summary, let me quote Professor McGee once again:

  Judging from the Record, Standard Oil did not use predatory price discrimination to drive out competing refiners, nor did its pricing practice have that effect . . . I am convinced that Standard did not systematically, if ever, use local price cutting in retailing, or anywhere else, to reduce competition. To do so would have been foolish; and, whatever else has been said about them, the old Standard organization was seldom criticized for making less money when it could readily have made more.

  A second charge is that Standard bought out its competitors. The intent of this practice, the critics say, was to stifle competitors by absorbing them.

  First, it must be said that Standard had no legal power to coerce a competitor into selling. For a purchase to occur, Rockefeller had to pay the market price for an oil refinery. And evidence abounds that he often hired the very people whose operations he purchased. “Victimized ex-rivals,” wrote McGee, “might be expected to make poor employees and dissident or unwilling shareholders.”

  Kolko writes that “Standard attained its control of the refinery business primarily by mergers, not price wars, and most refinery owners were anxious to sell out to it. Some of these refinery owners later reopened new plants after selling to Standard.”

  Buying out competitors can be a wise move if achieving economy of scale is the intent. Buying out competitors merely to eliminate them from the market can be a futile, expensive, and never-ending policy. It appears that Rockefeller’s mergers were designed with the first motive in mind.

  Even so, other people found it profitable to go into the business of building refineries and selling to Standard. David P. Reighard managed to build and sell three successive refineries to Rockefeller, all on excellent terms.

  A firm which adopts a policy of absorbing others solely to stifle competition embarks upon the impossible adventure of putting out the recurring and unpredictable prairie fires of competition.

  A third accusation holds that Standard secured secret agreements with competitors to carve up markets and fix prices at higher-than-market levels. I will not contend here that Rockefeller never attempted this policy. His experiment with the South Improvement Company in 1872 provides at least some evidence that he did. I do argue, however, that all such attempts were failures from the start and no harm to the consumer occurred.

  Standard’s price performance, cited extensively above, supports my argument. Prices fell steadily on an improving product. Some conspiracy! From the perspective of economic theory, collusion to raise and/or fix prices is a practice doomed to failure in a free market for these reasons:

  1.Internal pressures. Conspiring firms must resolve the dilemma of production. To exact a higher price than the market currently permits, production must be curtailed. Otherwise, in the face of a fall in demand, the firms will be stuck with a quantity of unsold goods. Who will cut their production and by how much? Will the conspirators accept an equal reduction for all when it is likely that each faces a unique constellation of cost and distribution advantages and disadvantages?

  Assuming a formula for restricting production is agreed upon, it then becomes highly profitable for any member of the cartel to quietly cheat on the agreement. By offering secret rebates or discounts or other “deals” to his competitors’ customers, any conspirator can undercut the cartel price, earn an increasing share of the market and make a lot of money. When the others get wind of this, they must quickly break the agreement or lose their market shares to the “cheater.” The very reason for the conspiracy in the first place—higher profits—proves to be its undoing!

  2.External pressures. This comes from competitors who are not parties to the secret agreement. They feel under no obligation to abide by the cartel price and actually use their somewhat lower price as a selling point to customers. The higher the cartel price, the more this external competition pays. The conspiracy must either convince all outsiders to join the cartel (making it i
ncreasingly likely that somebody will cheat) or else dissolve the cartel to meet the competition.

  A fourth charge involves the matter of railroad rebates. John D. Rockefeller received substantial rebates from railroads who hauled his oil, a factor which critics claim gave him an unfair advantage over other refiners.

  The fact is that most all refiners received rebates from railroads. This practice was simply evidence of stiff competition among the roads for the business of hauling refined oil products. Standard got the biggest rebates because Rockefeller was a shrewd bargainer and because he offered the railroads large volume on a regular basis.

  This charge is even less credible when one considers that Rockefeller increasingly relied on his own pipelines, not railroads, to transport his oil.

  Did Standard Oil have the power to charge any price it wanted? A fifth accusation says yes. According to the notion that Standard’s size gave it the power to charge any price, bigness per se immunizes the firm from competition and consumer sovereignty.

  As an “efficiency monopoly,” Standard could not coercively prevent others from competing with it. And others did, so much so that the company’s share of the market declined dramatically after 1899. As the economy shifted from kerosene to electricity, from the horse to the automobile, and from oil production in the East to production in the Gulf States, Rockefeller found himself losing ground to younger, more aggressive competitors.

  Neither did Standard have the power to compel people to buy its products. It had to rely on its own excellence to attract and keep customers. (See chapter 13, “Cooperation, Not Competition” for a brief discussion of the factors which insure that no firm, regardless of size, can charge and get any price it wants).

  It makes sense to view competition in a free market not as a static phenomenon, but as a dynamic, never-ending, leap-frog process by which the leader today can be the follower tomorrow.

  The sixth charge, that John D. Rockefeller was a “greedy” man, is the most meaningless of all the attacks on him but nonetheless echoes constantly in the history books.

  If Rockefeller wanted to make a lot of money (and there is no doubting he did), he certainly discovered the free market solution to his problem: produce and sell something that consumers will buy and buy again. One of the great attributes of the free market is that it channels greed into constructive directions. One cannot accumulate wealth without offering something in exchange!

  At this point the reader might rightly wonder about the dissolution of the Standard Oil Trust in 1911. Didn’t the Supreme Court find Standard guilty of successfully employing anti-competitive practices?

  Interestingly, a careful reading of the decision reveals that no attempt was made by the Court to examine Standard’s conduct or performance. The justices did not sift through the conflicting evidence concerning any of the government’s allegations against the company. No specific finding of guilt was made with regard to those charges. Although the record clearly indicates that “prices fell, costs fell, outputs expanded, product quality improved, and hundreds of firms at one time or another produced and sold refined petroleum products in competition with Standard Oil,” the Supreme Court ruled against the company. The justices argued simply that the competition between some of the divisions of Standard Oil was less than the competition that existed between them when they were separate companies before merging with Standard.

  In 1915, Charles W. Eliot, president of Harvard, observed: “The organization of the great business of taking petroleum out of the earth, piping the oil over great distances, distilling and refining it, and distributing it in tank steamers, tank wagons, and cans all over the earth, was an American invention.” Let the facts record that the great Standard Oil Company, more than any other firm, and John D. Rockefeller, more than any other man, were responsible for this amazing development.

  (Editor’s Note: This article first appeared in FEE’s magazine, The Freeman, in March 1980. Footnotes can be found in that version on FEE.org.)

  SUMMARY

  •If the Standard Oil Company was any kind of “monopoly,” it was not a “coercive” one because it did not derive its high (and temporary) market share from special government favors. There were lots of competitors to it, here and abroad. If it was a monopoly, then it was of the “efficiency” variety, meaning that it earned a high market share because consumers liked what it offered at attractive prices

  •The prices of Standard products (chiefly kerosene in the company’s early history) steadily fell. The quality steadily improved. Total production grew from year to year. This is not supposed to be the behavior of an evil monopolist, who supposedly restricts output and raises prices

  •Accusations against Standard—predatory price cutting, buying up competitors, conspiracy to restrict output and raise prices, securing railroad rebates, etc.—sound plausible on the surface but fall apart upon close inspection

  #42

  “JESUS CHRIST WAS A PROGRESSIVE BECAUSE HE ADVOCATED INCOME REDISTRIBUTION TO HELP THE POOR”

  BY LAWRENCE W. REED

  YOU DON’T HAVE TO BE A CHRISTIAN TO APPRECIATE THE DECEIT IN THIS CANARD. You can be a person of any faith or no faith at all. You just have to appreciate facts.

  I first heard something similar to this cliché some 40 years ago. As a Christian, I was puzzled. I had always understood Christ’s message to be that the most important decision a person would make in his earthly lifetime was to accept or reject Him as savior. That decision was clearly to be a very personal one—an individual and voluntary choice. He constantly stressed inner, spiritual renewal as far more critical to well-being than material things. I wondered, “How could the same Christ advocate the use of force to take stuff from some and give it to others?” I just couldn’t imagine Him supporting a fine or a jail sentence for people who don’t want to fork over their money for food stamp programs.

  “Wait a minute,” you say. “Didn’t He answer, ‘Render unto Caesar the things that are Caesar’s, and unto God the things that are God’s’ when the Pharisees tried to trick Him into denouncing a Roman-imposed tax?” Yes indeed, He did say that. It’s found first in the Gospel of Matthew, chapter 22, verses 15-22 and later in the Gospel of Mark, chapter 12, verses 13-17. But notice that everything depends on just what did truly belong to Caesar and what didn’t, which is actually a rather powerful endorsement of property rights. Christ said nothing like “It belongs to Caesar if Caesar simply says it does, no matter how much he wants, how he gets it, or how he chooses to spend it.”

  The fact is, one can scour the Scriptures with a fine-tooth comb and find nary a word from Christ that endorses the forcible redistribution of wealth by political authorities. None, period.

  “But didn’t Christ say he came to uphold the law?” you ask. Yes, in Matthew 5:17-20, he declares, “Do not think that I have come to abolish the Law or the Prophets; I have not come to abolish them but to fulfill them.” In Luke 24: 44, He clarifies this when he says “ . . . [A]ll things must be fulfilled which were written in the law of Moses, and in the prophets, and in the psalms, concerning me.” He was not saying, “Whatever laws the government passes, I’m all for.” He was speaking specifically of the Mosaic Law (primarily the Ten Commandments) and the prophecies of His own coming.

  Consider the 8th of the Ten Commandments: “You shall not steal.” Note the period after the word “steal.” This admonition does not read, “You shall not steal unless the other guy has more than you do” or “You shall not steal unless you’re absolutely positive you can spend it better than the guy who earned it.” Nor does it say, “You shall not steal but it’s OK to hire someone else, like a politician, to do it for you.”

  In case people were still tempted to steal, the 10th Commandment is aimed at nipping in the bud one of the principal motives for stealing (and for redistribution): “You shall not covet.” In other words, if it’s not yours, keep your fingers off of it.

  In Luke 12:13-15, Christ is confronted with a redistribution
request. A man with a grievance approaches him and demands, “Master, speak to my brother and make him divide the inheritance with me.” The Son of God, the same man who wrought miraculous healings and calmed the waves, replies thusly: “Man, who made me a judge or divider over you? Take heed and beware of covetousness, for a man’s wealth does not consist of the material abundance he possesses.” Wow! He could have equalized the wealth between two men with a wave of His hand but he chose to denounce envy instead.

  “What about the story of the Good Samaritan? Doesn’t that make a case for government welfare programs, if not outright redistribution?” you inquire. The answer is an emphatic NO!” Consider the details of the story, as recorded in Luke 10:29-37: A traveler comes upon a man at the side of a road. The man had been beaten and robbed and left half-dead. What did the traveler do? He helped the man himself, on the spot, with his own resources. He did not say, “Write a letter to the emperor” or “Go see your social worker” and walk on. If he had done that, he would more likely be known today as the “Good-for-nothing Samaritan,” if he was remembered at all.

  What about the reference, in the Book of Acts, to the early Christians selling their worldly goods and sharing communally in the proceeds? That sounds like a progressive utopia. On closer inspection, however, it turns out that those early Christians did not sell everything they had and were not commanded or expected to do so. They continued to meet in their own private homes, for example. In his contributing chapter to the 2014 book, For the Least of These: A Biblical Answer to Poverty, Art Lindsley of the Institute for Faith, Work and Economics writes,

  Again, in this passage from Acts, there is no mention of the state at all. These early believers contributed their goods freely, without coercion, voluntarily. Elsewhere in Scripture we see that Christians are even instructed to give in just this manner, freely, for “God loves a cheerful giver” (2 Corinthians 9:7). There is plenty of indication that private property rights were still in effect. . . .