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The Myth of the Robber Barons

December 22, 2014

History

Robber Barons

Marxist class theory was incoherent from start to finish. For example, Marx predicted that the first proletarian revolution would take place where the proletarian class was most developed, certainly not in 1917 rural Russia. Furthermore, Marx failed to see that the proletariat would increasingly become obsolescent as unionized workers are replaced by the new entrepreneurial class of franchisors, independent contractors and consultants, scientific researchers, bureaucrats, service workers and managers who function without an underclass to exploit.

Unfortunately the pseudo-scientific trappings of Marxist class analysis led to the neglect of earlier and more valuable work on class theory by liberals such as Charles Comte, Charles Dunoyer, and Augustin Thierry. These theorists recognized that it was not just workers who created value but also anyone who participates in voluntary exchange, including the owners of capital. Absent intervention by the State there is no exploitation. But class warfare does take place when the State interferes in voluntary exchange, creating a conflict between producers, and the parasitical political classes. Or, to quote the view of the later classical liberal John Bright, class warfare is a clash between the tax-payers and “tax-eaters”.

Applying this theory to the rise of big business in America we see that there were two types of entrepreneurs, those who sought subsidies and special privileges (political entrepreneurs) and those who did not (market entrepreneurs). The latter tried to succeed by creating a superior product at a lower cost while the former stifled productivity through monopoly privilege, corrupting both business and politics in the process. Examples of market entrepreneurs include Cornelius Vanderbilt (steamships), James Hill (railroads), Charles Schwab (steel) and John D. Rockefeller (oil). Unfortunately, most historians continue to view the rise of big business in America without the benefits of classical liberal class theory. Entrepreneurs, according to these historians, were often “robber barons” who corrupted politics and made fortunes bilking the public. This has led to the view that government intervention in the economy was needed to save the public from greedy businessmen.

However Cornelius Vanderbilt made a fortune by offering superior service at lower rates while his opponents such as Edward Collins were using the state to extort subsidies and impose high rates on consumers. James Hill was the greatest railroad builder of all time and his Great Northern was the only transcontinental railroad to be built without lavish federal subsidies. At Bethlehem Steel, Charles Schwab used his talents for entrepreneurship and innovation to turn a lethargic company worth less than 9 million dollars into one of the largest enterprises in the world. The New York Times praised the company as “possibly the most efficient, profitable self-contained steel plant in the country”. Rockefeller dominated oil refining by his astonishing efficiency, even to the extent of cutting the drops of solder used to seal oil cans from 40 to 39.

It was the political entrepreneurs who were the real “robber barons”, but unfortunately they are not the ones taught to our children.

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“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.” Burton W. Folsom, ‘The Myth of the Robber Barons: A New Look at the Rise of Big Business in America”.

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill

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37 Comments on “The Myth of the Robber Barons”

  1. matt Says:

    Since the ultimate goal is conformity, marching in lockstep with our fellow downtrodden comrades, it’s no surprise we are taught of the evils of these men. The truth has no place in history, Malcolm. What are you, some sort of radical?

    Reply

  2. Middlemay Farm Says:

    In many cases the labor movement in the US was a drag on workers–not the great leap forward we all have to hear about in Socialist Theory class at college. I can maybe understand why people in the late19th century may have been duped by the whole robber barons thing and Marx, but not now after so many failed programs. How do we not see the corrupting influence of government interference in everything from business to education?

    Anyone outside academia butts up against it on a constant basis. RR history in the US is the perfect example.

    Reply

    • Malcolm Greenhill Says:

      I agree completely. If I was alive in pre-revolutionary Russia I would have been on the side of the Bolsheviks but now there is no excuse except dependency directly or indirectly on government largesse and an imagination incapable of envisioning another way.

      Reply

  3. Michael R. Edelstein Says:

    Malcolm, you always do a wonderful job at eviscerating sacred cows. These are my favorite essays of yours.

    I wonder, are there any true market entrepreneurs left? Don’t all successful companies fight competition with anti-trust and pro-IP law suits?

    Michael R. Edelstein
    http://www.ThreeMinuteTherapy/com

    Reply

    • Malcolm Greenhill Says:

      “I wonder, are there any true market entrepreneurs left? Don’t all successful companies fight competition with anti-trust and pro-IP law suits?”

      Good point Michael. I think they are few and far between. Political shenanigans have raised the cost of integrity to an all-time high.

      Reply

  4. Dalo 2013 Says:

    “political entrepreneurs” brilliant! I have not heard this term before, which is incredible as it is the all the rave in the USA and others countries around the world. Fortunately the hearts of entrepreneurs will always beat strongly, and while they struggle in then they will win (people will always seek freedom…). Cheers to a great, timely post ~

    Reply

    • Malcolm Greenhill Says:

      Unfortunately I can’t claim credit for the term. Yes, people do seek freedom but I’m concerned about the slow erosion of freedom everywhere that goes unnoticed because we all have so many baubles to play with. Happy holidays.

      Reply

  5. Cindy Bruchman Says:

    Have you seen the History Channel’s series, ‘The Men Who Built America’? I dare predict you would love it. It’s a great series, and I show parts to my students in class; they love it.

    Reply

    • Malcolm Greenhill Says:

      Thank you Cindy. You’re a mine of information on great films and documentaries. I haven’t seen this series but I now intend to.

      Reply

      • Cindy Bruchman Says:

        Thomas Carlyle’s “Great Man Theory” is the predominent theme. I like that commentary is provided by the leading moguls of today, too, to explain the characteristics of the entrepreneur. Carnegie is my favorite because after he amassed his fortune, he advocated the Gospel of Wealth and began his philanthropy. We have a Carnegie Library in my home town for which I’m grateful.

        Reply

        • Malcolm Greenhill Says:

          Thank you Cindy. Vanderbilt, Schwab and Rockefeller were also huge philanthropists. In fact I saw some inflation adjusted numbers indicating that Vanderbilt left more to charity than Bill Gates has given away.

  6. Bill Hayes Says:

    “……. scientific researchers, bureaucrats, service workers and managers who function without an underclass to exploit.” The exploited underclass have been exported. This week, again, Apple is found to be building a vast fortune on the efforts of badly treated, and criminally over worked and underpaid Chinese workers falling asleep on their work stations.

    However, I don’t miss the Marxists; especially at parties where they would always trap me in the kitchen, whilst over their shoulders I could see gorgeous women dancing in the living room.

    Happy Christmas.

    Reply

    • Malcolm Greenhill Says:

      Bill, thank you, but while it’s true that many relatively unskilled jobs have been transferred overseas that is not the process that Marx envisaged. The developed countries are becoming richer by specializing in more skilled high end work. While the process is patchy and uneven the average Chinese worker’s standard of living has been rising more quickly than anywhere else in the world, in fact so quick that China is now exporting many low-end jobs to other less developed countries. Everyone still receives a different size piece of cake but the cake itself is still growing, even despite the economic crisis of 2008.

      Strange, but I’ve had exactly the same experience with English Marxists. Wishing you and your family a happy, healthy and prosperous New Year.

      Reply

  7. Bonnie Marshall Says:

    Impressive clarity, Malcolm, that I value so highly.

    Reply

  8. chr1 Says:

    Thank you Malcolm.

    And you didn’t touch on how many lives were made better, and how many human talents developed because of access to more jobs and cheaper products due to the efficiency of such men.

    Do I trust them entirely? No, perhaps not, but perhaps that is not the question to ask, as true market innovators achieve a tremendous amount of success with a tremendous amount of innovation and ultimately respect for those willing to work as hard as they are, or those willing to purchase their products.

    I would love to see any regulation and legal recourse in such areas without the seep of soft Marxism into our laws and institutions, but that is perhaps too much to hope for.

    Given my take on human nature and human affairs, I think such market innovation really is among the best we can do for ourselves, and for those with less.

    Reply

  9. NicoLite Великий Says:

    Marx wasn’t too wrong, but his theory is exactly that: a theory. People tend to view it as a sort of bible, which is inappropriate for any scientific work.

    Reply

    • Malcolm Greenhill Says:

      But scientific theories (he claimed it was scientific) are falsifiable and not one of his predictions panned out

      Reply

      • NicoLite Великий Says:

        He was quite presumptuous to make such forecasts so early on, and he was also blinded by a good degree of confirmation bias, but his theory isn’t useless.

        Reply

        • Malcolm Greenhill Says:

          Well, I will leave it up to you to decide whether or not it’s useless but we know that every 20th century communist state has resulted in catastrophic waste, corrupt investments, poverty and an almost apocalyptic degradation of the environment. Moreover, Friedrich Hayek and Ludwig von Mises have shown us the impossibility of rational economic calculation in a socialist economy. What more is needed to show whether a theory is useless or not?

        • NicoLite Великий Says:

          True, the communist states are not exactly attractive for living or doing business. I much prefer Germany, where we have a social market economy. That’s right, social. It is not directly derived from Marx’ theory, but from Ludwig Erhardt. He didn’t blindly follow Marx’ Manual, but adapted his theory to allow the state to smooth the playing field. It still needs improvement, and it has been constantly developed since West Germany adopted it. But so far, Germanies continued economic success is a strong indicator for the viability of this economic model.

        • Malcolm Greenhill Says:

          Whoa! Ludwig Erhardt was a free-market liberal and a member of the Mont Pelerin Society founded by Friedrich Hayek. Erhard reluctantly accepted Germany’s transition to a welfare state. If you live in Germany you should know that much of Germany’s economic success is put down to the Hartz labor market reforms under the leadership of Gerhard Schroeder, which among other things reduced long term unemployment benefits and increased labor flexibility.

        • NicoLite Великий Says:

          Right, Ludwig Erhardt was skeptical, which made him the best person for the job. And living in Germany, I am familiar with the Hartz system. It definitely needs improvement. I’m not so sure it helps curb unemployment. I was never desperate enough to put up with the people who work there. I tried it once, and I can understand why someone would go there with the intention of stabbing their unemployment agent. I don’t want to have to go there ever again. In that respect, sure, it keeps people who can work at work by being complete a-holes. I hear people get treated better in german penitentiary facilities. Of course, if you don’t mind being treated like a worthless piece of s***, the Hartz system is the way to go for entire families. If I worked the Hartz system, I could get more money out of it than I currently get working 180h+ per month.

          I am not saying all of this because I generally disagree with you. I just believe you are scoping the effects of Marx’ theory too narrowly, focusing on the worst people have done with it. Everything needs constant development because tbe world isn’t static, and the inflexibility of communism can well be attributed to the rigid dogmatism and extremism with which they were constructed and upheld. I, too, believe that market economy is the way to go, but it also requires a degree of moderation, and since a state is pretty much required to develop and enforce legislation for that, there also needs to be a strong regulation mechanism against corruption and cronyism.

  10. aaforringer Says:

    Posted a link and part of your article on a forum i frequent, Old Elm Tree. Loved the article as always.

    Reply

  11. authorbengarrido Says:

    Couple of things to think over …

    Why wouldn’t a company seek “lavish subsidies?” Profit is profit and it’s odd to expect a sudden social consciousness to take over when the money comes from government, isn’t it?

    What, effectively, is the difference between a sufficiently large firm and a small government and what makes the latter inevitably evil?

    Reply

    • Malcolm Greenhill Says:

      Ben, trust you to come up with the really great questions! In answer to your first one, subsidies don’t add to profit in the way you are assuming. Quite the reverse, subsidies are corrupting and lead to malinvestments. The railroads are a great example. In 1862 Congress passed the Pacific Railroad Act which led to the creation of the Union Pacific laying miles west and the Central Pacific building east. The idea was for the two railroads to compete for government largesse. The line that built the most miles would get the most cash and land, so the incentive was for speed not efficiency. The two lines spent little time choosing routes, they just laid track and cashed in, building circuitous roads to collect mileage and using cheap and shoddy rails which did not last. The rush for subsidies led the UP to lay track in the winter knowing that the line would have to be rebuilt in the spring following flooding which washed out rails, bridges and telephone poles. Some observers estimated the actual building cost at almost three times what it should have been. Even with 44,000 acres of free land and over $61m in cash loans, the UP and CP were almost bankrupt by the time construction was finished.

      On the other hand, in extending the Great Northern, James Hill built slowly and developed the export of an area before he moved farther west. Hill knew that if farmers prospered, their freight would give him steady returns every year. He built his railroad for durability and efficiency, not for scenery like his competitor, Henry Villard at the Northern Pacific. Hill believed that building a functional and durable product saved money in the long run. He used more expensive but better quality rails and his search for short routes, low grades and few curvatures became an obsession. Hill believed it was wrong for the government to subsidize competitors with public funds and he was ultimately proved right as the Northern Pacific, the Union Pacific and the Santa Fe all went bankrupt and had to be reorganized. Hill recognized that his refusal to accept subsidies also gave him a freedom from government restraint that helped him succeed, for example, the subsidized transcontinental railroads were required to buy inferior American-made steel while Hill could buy superior foreign rails. Also, the subsidized railroads were required to carry government mail at a discount and could not build spur lines off the main line, while Hill credited spur lines as critical to the success of the Great Northern.

      This segues into answering your second question, as one difference between a large corporation and a small government is the role of entrepreneurship, which is simply assumed away in your question. A corporation and a government are not simply two identical bureaucracies doing the same thing, although by heavily regulating corporations and/or industries (like the mortgage industry today), it’s possible for government to reduce the role of entrepreneurship to a cipher. Secondly, governments have a legal monopoly on the use of coercive force and can use this advantage to restrict competition. Unless large corporations are granted special privileges and protection by the government, they are forced to compete with other corporations, which tends to benefit consumers. Government monopolies, on the other hand, restrict competition and tend to harm consumers.

      Reply

      • authorbengarrido Says:

        Hey Malcolm,

        I’m not really asking why we shouldn’t make subsidies as a society, but why a company would ever turn down a net subsidy (the examples you mention above were net costs)? What does the company gain by taking the Randian high road? Taking a subsidy hardly forces the company to damage its own bottom line, it simply offers them the opportunities to waste public funds and enrich themselves. The second part of that sentences is the incentive behind capitalism. If the subsidy isn’t a good deal, of course, nothing forces the company to take it.

        Can’t a company, sufficiently large, crush competition and form monopoly on violence? Microsoft exists, and it has armed security guards, for example. Lassez faire, in my reading of history, tends to be anti-competitive in the long run as well, since there’s nothing to stop mergers culminating in monopolies.

        I’m not saying you’re wrong about subsidies or the often higher efficiencies of private markets, but I am saying that the government = bad, private industry = good thing is to really shortchange the complexity of a modern, efficient capitalist market. There are externalities, there are market failures, there are public goods, there are perverse incentives, there are tragedies of the commons, there are people who will simply start shooting capitalists if their lives suck too much, there is imperfect information, there is the fact that the most useful (competitive) capitalism and the most profitable capitalism are nothing alike.

        You can’t deal with any of those things within a lassez faire framework.

        Reply

        • Malcolm Greenhill Says:

          I’m not really asking why we shouldn’t make subsidies as a society, but why a company would ever turn down a net subsidy (the examples you mention above were net costs)? What does the company gain by taking the Randian high road? Taking a subsidy hardly forces the company to damage its own bottom line, it simply offers them the opportunities to waste public funds and enrich themselves. The second part of that sentences is the incentive behind capitalism. If the subsidy isn’t a good deal, of course, nothing forces the company to take it. The point I was making is that subsidies very frequently do represent net costs i.e. they come with strings attached and distort incentives. However, as Adam Smith pointed out long ago businesses are only too willing to take subsidies and use every means at their disposal to restrict competition, so, other things being equal, a company will not benefit from “taking the Randian high road”

          There is nothing inherently wrong with a monopoly. A corner shop has a monopoly. A monopoly is only bad when it has the power to prevent another company entering the field, for example the United States Postal Service. Without this legal protection, even a company the size of Microsoft (with armed guards to boot), has to remain paranoid about competition and has to keep looking over its shoulder.

          Can’t a company, sufficiently large, crush competition and form monopoly on violence?

          Theoretically yes, but presumably Microsoft and other companies do not do so for numerous reasons including the fact that it is not in their interest to do so (would alienate consumers), it is extremely difficult and perhaps impossible (they would have to stamp out competitors worldwide) and they are physically prevented from doing so by the State and/or other defense agencies. Even in the absence of the State presumably people would be willing to pay more to defend their rights than others would be willing to pay to violate the rights of others.

          Microsoft exists, and it has armed security guards, for example. Lassez faire, in my reading of history, tends to be anti-competitive in the long run as well, since there’s nothing to stop mergers culminating in monopolies.

          I don’t know what history you have been reading but again, monopolies are not anti-competitive unless corporate interests are allowed to capture the government and use political power to protect themselves. If monopolies were inevitable then the technology sector would not be as competitive as it is today (it would be even more competitive without government protection of intellectual property)

          I’m not saying you’re wrong about subsidies or the often higher efficiencies of private markets, but I am saying that the government = bad, private industry = good thing is to really shortchange the complexity of a modern, efficient capitalist market. There are externalities, there are market failures, there are public goods, there are perverse incentives, there are tragedies of the commons, there are people who will simply start shooting capitalists if their lives suck too much, there is imperfect information, there is the fact that the most useful (competitive) capitalism and the most profitable capitalism are nothing alike. You can’t deal with any of those things within a lassez faire framework.

          You are comparing the imperfections of the market against what? Governments suffer from all the same shortcomings and more. Do you think governments are free of perverse incentives and the problem of externalities? Do you think people don’t shoot politicians and others if “their lives suck too much”? Do you think governments don’t suffer from imperfect information? The issue is simply whether spontaneous markets work better than top down government direction, and which is better at solving problems such as externalities, the tragedy of the commons and imperfect information.

        • authorbengarrido Says:

          “Do you think governments are free of perverse incentives and the problem of externalities? Do you think people don’t shoot politicians and others if “their lives suck too much”? Do you think governments don’t suffer from imperfect information? The issue is simply whether spontaneous markets work better than top down government direction, and which is better at solving problems such as externalities, the tragedy of the commons and imperfect information.”

          The answer is sometimes.

  12. Rise above Says:

    Very interesting, the same thing can be observed throughout the world not just in America.

    Reply

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