Dr. Barry Asmus is an economist and national speaker living in Phoenix, Arizona. Dr. Don Billings is Professor of Economics at Boise State University.
This article is taken from their book, Crossroads: The Great American Experiment, published in 1984 by University Press of America. Reprinted by permission of the publisher.
The English Industrial Revolution of the late eighteenth and early nineteenth centuries created new technologies, production processes, and machines of both marvel and miracle. Many became available to the rest of the world following the War of 1812. But it was the American entrepreneur who successfully borrowed, adapted, and applied these new ideas in the United States. Complemented on the American continent by the rich endowment of land and resources and a limited but literate population, but unencumbered by vestiges of feudal restrictions, the technologies begun in Great Britain were utilized by the industrious people of this new nation.
In addition, the presence of a political and social environment which rewarded work, encouraged savings and investment, and in large part left individuals alone in the pursuit of their own interests, also contributed importantly to the transformation of the American economy. A crucial ingredient in that advance was a set of economic institutions which provided the impetus for individuals to better their own condition: private ownership of the means of production, voluntary exchange in open and free markets, and a price system which assigned resources to their highest and most valued uses.
The benefits attributed to the “open qualities of American society” produced a willingness to consider and adapt new and better ways to get things done. In this environment, the propensity to “truck, barter, and exchange” was encouraged, and “the uniform, constant, and uninterrupted effort of every man to better his condition,” in combination with the richness of the American continent’s natural environment, generated the most remarkable increase in wealth and progress mankind had ever experienced. Viewed as a long term process of raising living standards, competitive capitalism in the nineteenth century was eminently successful.
From a Feudal System to One of Private Property
In contrast to the success of private property arrangements in the nineteenth century, it is interesting that in the earlier phases of the British colonization of the eastern seaboard, attempts were made to transfer communal arrangements of land ownership to America. The Virginia Company, for example, tried to establish a structure of property rights reflecting the late feudal system of Europe. Such efforts at common ownership discouraged individual motivation, however, and gave settlers little incentive to better their own condition. The Virginia Company was eventually dissolved, and a system of private property rights in the land, a system of “freeholds,” came to dominate American agriculture.
Following the successful revolutionary break with England, the new nation sought to establish the institutional arrangements necessary for economic growth. This would involve, as Adam Smith had said, securing the property rights of individuals, extending the market so that specialization might be encouraged, and insuring that gains in productivity might become part of a self-sustaining process of economic expansion. Fundamental decisions were made which increased and encouraged the role of the private sector of the economy and left relatively few functions for government.
As an example, a significant consequence of the constitutional convention in Philadelphia in 1787 involved the prohibition on tariffs between the several states. Drawing on the ideas of Adam Smith and his Wealth of Nations, free trade was encouraged among the United States. The relevant market was thus extended and future economic expansion was assured. The provision in the new Constitution for a patent system further strengthened private property rights, thereby encouraging inventions and entrepreneurship. The increased security of individual rights to property in combination with provision for the enforcement of private contracts laid the basis for a large and continuous increase in production and wealth. Since rights were protected and en forced, business risk was limited to that arising from the vagaries of the market, exclusive of government changing the legal environment. Thousands upon thousands were willing to take a chance at reaching the golden ring.
This constitutional period set the stage for the economic revolution which would follow in the nineteenth century. As stated in the highly acclaimed American Economic Growth: “In short, the whole structure of the institutions and the legal enactments of this period, was designed to encourage the growth of the private sector by reducing transaction costs, with the supplemental result of shifting the private-public mix in favor of the former.” Government was largely restrained to protecting property rights and private individuals were allowed to work and produce.
The rise of competitive capitalism in the United States had its important beginnings in those early years of the Republic. The emphasis on private property and, therefore, private initiative was also stimulated by a massive shift of resources from public lands to the private sector, culminating in the Homestead Act of 1862. The slow transition to an industrialized America and the pace of economic growth was quickening in the early decades of the nineteenth century.
Civil War Interrupts Economic Progress
The coming of the Civil War represented a dramatic interruption in this economic progress. It was an especially important watershed period. Some industries, mostly in the North, such as woolen textiles, shoes and boot manufacturing, sewing machines, and farm machinery were stimulated by the hostilities. Other industries were contracting. According to Dudley Dillard and other economic historians “. . . the Civil War was a major disrupting influence to American life and retarded, perhaps, as many economic activities as it stimulated.” Based on available statistics on employment and the value of output by economic sector, it is apparent that the Civil War separated an agricultural America from the industrial economy that followed.
After the Civil-War, progress began again. One author has called that period until the eve of World War I “the most rapid and striking transformation of a major social order in the history of mankind.” Other writers and historians have characterized this time as the “Gilded Age” or the “Age of Excess.” In any case, the United States was propelled to the rank of being the wealthiest country and having the highest standard of living in the world. While progress was uneven due to cyclical changes in the level of economic activity, the real material standard of living, as measured by the real earnings of nonfarm employees, showed an accelerating advance. Not only did real wages rise significantly, but at the same time the work day was becoming shorter.
The average work day in manufacturing and mechanical establishments was 11.5 hours in 1850, 9.8 hours in 1900, and down to 8.5 hours in 1920. Dorothy Brady, in American Economic Growth, observed that “. . . the refinements that households with modest means were introducing into their homes in the 1830′s and earlier, became available to the poor. By the 1870′s such ar ticles as beds, bedding, chairs, tables, dishes, knives, and forks were considered indispensable even to the poor.” And these material gains, it must be remembered, occurred before labor unions were at all significant as a portion of the American labor force.
Historically, we must remind ourselves, economic progress has been very slow throughout the world. Generations and even centuries would pass without noticeable differences in the standard of living. This so-called “Age of Excess” in the United States, and the earlier Industrial Revolution in Great Britain, represented an unprecedented break with the past. Per capita income was doubling every 30 years, and Americans came to expect a constantly improving economic life. The die was cast, there was no turning back. The agricultural revolution in America was giving way to an industrial revolution. By the late 1870′s, employment in non-agricultural occupations exceeded employment in agriculture. Between 1860 and 1910, the percentage of the labor force engaged in agriculture fell from about 60 percent to approximately 30 percent. Today it is less than 3 percent. The value of output in the manufacturing sector surpassed that of agriculture during the decade of the 1880′s.
The massive and rapid transition to a fully industrialized economy was assisted by the building of the transcontinental railroads. While railroad building involved a curious “mixture of government paternalism,” it was essentially a laissez faire philosophy that marked public policy. Government was careful not to offend the strident individualism of the post-Civil War period. In order to stimulate and accelerate the pace in the construction of a transcontinental rail connection with the West, more than 130 million acres of land adjacent to railway right-of-ways were granted to railroad companies between 1850 and 1871. For example, the Union Pacific received 20 million acres, while the Northern Pacific acquired 42 million. Nevertheless, and in spite of these land-grant subsidies, the actual construction of the railroads was with private money and was carried out through the entrepreneurial skills of the Vanderbilts, Goulds, Hills, and Morgans. Capital was more generously available in part because of the decline in the federal debt during this period. On the eve of the Civil War there were roughly 30,000 miles of track, by 1890 there were 170,000 miles, and by 1916 there were 250,000 miles. The railroad construction boom created a truly integrated national market for the products of American farms, mines, and factories. Indicative of this growth in markets was the growth in ton-miles of freight hauled. In 1859 railroads carried 2.6 billion ton-miles, by 1890 the figure had exploded to 80 billion ton-miles.
Since more geography meant expanded markets, economies of scale could be attained by specialization in production and distribution. Mass production techniques were encouraged by the new national market, and assembly line principles of production were employed by a number of industries. Automobile companies adopted the “process experiments” conducted by the slaughterhouses and grain mills. The “disassembly” of pigs in slaughterhouses during the first decade of the 20th century provided the guidelines followed by Henry Ford’s assembly line in the second decade. The “rationalization of the work process” permitted larger volumes of production and lower costs than would have otherwise been possible. In 1916, the Ford Motor Company sold more than one-half million Model T’s at a retail price of less than $400 and shipped them all across the country on the radically improved and integrated national transportation network. Ford’s experiment, which relied on an industrial system that used “the principles of power, accuracy, economy, system, continuity, speed, and repetition,” made available to the growing middle class the automobile: America’s great “freedom machine.” Henry Ford literally placed a steering wheel in the hands of every working person in America. This is a feat which most industrialized countries of the world have still not totally accomplished.
The Great Entrepreneurs
In the process of rationalizing techniques of production, the great entrepreneurs of the Gilded Age brought to the American people ever greater quantities of consumer goods at continuously lower prices. Since an essential input to most, if not all, of the new industries was steel, it was Andrew Carnegie who, through his entrepreneurial leadership and production techniques, filled the void and brought remarkable results. Writes William Greenleaf:
Carnegie’s unrelenting insistence of cost-cutting through progressive technology reduced the price of a ton of steel from $65 a ton in 1872 to $20 a ton in 1897. Between 1889 and 1900, Carnegie boosted his annual steel output from 322,000 tons to 3 million tons. During that time his profits increased eight times over, reaching $40 million in 1900.
Rising productivity also meant higher real wages for steel workers. In the process of searching for entrepreneurial profits, Carnegie’s efforts generated large increases in the output of steel at drastically lower prices, but higher wages for those in the industry. Unfortunately, the clearly beneficial results of Carnegie’s cost cutting efforts are still viewed by many as selfish profiteering. This is a most unfortunate twisting of the facts.
John D. Rockefeller was another “Robber Baron” who, with the assistance of entrepreneurial partners Samuel Andrews, Henry Flagler, and his brother William Rockefeller, led the race in petroleum refining and distribution. This competitive race, in which Rockefeller set the pace for a while, revolutionized the average American’s life and standard of living. The Rockefeller organization began refining petroleum products in 1865. By 1870, Rockefeller’s share of total refined output was 4 percent, and at that time there were approximately 250 independent refiners. By 1880 the Rockefeller share was more than 80 percent, and the number of independent refiners had fallen to less than 100. The decrease in numbers was encouraged by the generally deflationary movement in prices during the 1870′s, and by the economies of large scale production associated with the introduction of destructive distillation (petroleum “cracking”). The myth of predatory pricing, as the source of Rockefeller gains, has been soundly refuted by John S. McGee in a 1958 article in The Journal of Law and Economics. In actual fact, rival refineries were frequently purchased by the Standard Oil Company at “outrageously” high prices. One George Rice in 1882 literally tried to “bribe and blackmail” Standard Oil into paying a price for his refinery which was inflated by a factor of ten.
For economic growth and American living standards, however, we are interested in the implications of the competitive forces for costs of production and consumer prices. During the period in which the Rockefeller interests were supposed to have monopolized the petroleum industry, Dominick Armentano has captured the flavor of what was in fact going on:
Between 1870 and 1885 the price of refined kerosene dropped from 26 cents to 8 cents per gallon. In the same period, the Standard Oil Company reduced the average costs per gallon from almost 3 cents in 1870 to 0.452 cents in 1885. Clearly, the firm was relatively efficient, and a good share of that efficiency was transmitted profitably to the consumer in the form of lower prices for a much improved product.
As costs and prices continued to fall into the twentieth century, Standard Oil experienced a progressively less important and less secure position. Fuel oil, lubricating oils, and gasoline began to replace the kerosene age; new crude supplies were discovered in the Southwest and California; and additional integrated petroleum companies entered the competitive oil business. Standard’s share of crude supply fell from 34 percent of total market supplies in 1898 to just 11 percent in 1906. On the eve of the government antitrust suit against the Standard Oil Company in 1911, its share of the petroleum products market was 64 percent, down from a high of 88 percent in 1890. The per gallon barrel price of refined oil, which had been 9.33 cents in 1880, declined to 5.91 cents in 1897, and continued to decline into the twentieth century.
Yet in the face of these facts, on May 15, 1911, the United States Supreme Court ruled that the Standard Oil Company had “unreasonably” conspired to restrain trade, and, therefore, was in violation of the Sherman Antitrust Act of 1890. The socially beneficial effects of lower prices, and very large increases in the production and consumption of petroleum, was apparently not considered at all. The accepted meaning of monopoly—the restriction of output and higher prices—was to be turned on its head. Standard Oil was to be dissolved for increasing output and lowering prices. This case is just one example of where government chooses to interfere with economic activities regardless of the actual situation. In our own time, government agencies find fault with IBM for increasing production and lowering the price of processing information through innovation. If the price is too high, then government charges monopoly. If the price is too low, government charges unfair competition. What about the same price? Then, of course, the government charges price fixing. The government rule seems to be: no matter the price, it is suspect.
Competition and Government in the Gilded Age
In fact, the conventional wisdom that the American economy in general was controlled by giant monopoly trusts around the turn of the century is itself incorrect. As the railroad tycoon James J. Hill said in 1901: “. . . the trust . . . came into being as the result of an effort to obtain ruinous competition.” According to the economic historian Gabriel Kolko, monopoly during this period “. . . was the exceptional and not routine characteristic of most industries, and the use of the term ‘monopoly’ or ‘trust’ by defenders of the status quo, was based more on wish- fulfillment than on economic reality.” Kolko quotes from an issue of The Iron Age in 1900 which sadly summarized the difficulty encountered in short-circuiting the competitive process:
Experience has shown that very few of the promises of the promoters of consolidation have materialized. That some of them are satisfactorily profitable is undoubtedly true . . . Others are less so, some are conspicuously unprofitable, some have dissolved, and more will have to dissolve within the next two or three years.
The pressures of the inherently competitive open market system required that those wishing to protect themselves from new and potential competition had to turn to government for aid and protection. But imagine the kind of world we would have if business was generally successful in hiding behind government. Instead of solving problems through individual initiative, people would be encouraged to lobby, demonstrate, coerce, threaten, and use government power to their own ends. In most cases, government action is synonymous with monopoly and the naked use of power. Seldom can a company maintain a monopoly position for long without the mantle of government protection. Profits attract entry. The life of the incumbent is quite uneasy, and they must constantly be looking over their shoulder for potential competitors. However, through licensing, controls, import restrictions, tax credits, depletion allowances, and other devices, government can successfully impede rivalry, and, hence, reduce or eliminate competition. In reality, government is controlled by powerful special-interest groups, and it is these minority interests that, without exception, work at cross-purposes to the private interests of the average citizen. It is this movement to state enforced monopoly which Gabriel Kolko has termed “The Triumph of Conservatism.”
In general, then, most historians have this thing backwards. Seldom have antitrust laws ever been used against a firm that was restricting production and raising prices, but almost always the firms that get prosecuted are the ones that expand production and lower prices. The result is that they get a larger market share. The question is: Should that be construed as bad? Suits are brought against these firms because they attract and hold customers day-after-day, and conduct transaction-after-transaction in markets where new entrants are always a realistic possibility. In the final analysis, these firms are merely being responsive to the consumer because they recognize that the consumer is king. As an example, and contrary to popular assumptions, the Interstate Commerce Commission was not created to regulate a natural monopoly. It was lobbied in the Congress by influential eastern railroad interests as a means of enforcing their price fixing agreements and other cartel-type behavior; enforcement which had proven to be impossible in the free and open market place. Kolko summarizes this more realistic perspective:
Despite the large number of mergers, and the growth in the absolute size of many corporations, the dominant tendency in the American economy at the beginning of this century was toward growing competition . . . As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could rationalize the economy . . . ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.
The Great Transformation
On the eve of World War I, after a century of remarkable progress in the United States, economic growth and its benefits for raising the standard of living were evident for all to see. It was a time during which capitalism (cynics call it “Social Darwinism”), was given a chance, the role of government in economic affairs, while substantial in some instances, was quite limited in scope. Living standards, longevity, and economic opportunity grew to levels unimaginable merely a hundred years earlier. Though progress was uneven, and some people grew fabulously rich, it was in part the poor who experienced the greatest improvements. By the end of the nineteenth century, America’s poor enjoyed material living standards significantly higher than most of the world’s population.
Something indeed must have been right in America. If not in the view of many historians and their social theories, then in the actions of the “teeming millions” who immigrated to the United States by voting for competitive capitalism with their feet. The truth was out that America offered economic opportunity and political freedom. Between 1860 and 1890, more than ten million immigrants came to America to seek their fortunes. During the period between 1895 and 1915, on the average, more than one million immigrants a year came to the United States. Thomas Sowell, a contemporary economist, documents in his Race and Economics, the important degree to which these immigrants, mostly carrying just the clothes on their backs, were largely assimilated, within a generation or two, into the mainstream of American economic life.
The great increase in wealth and economic progress in the nineteenth century, which was shared by most if not all Americans, can largely be attributed to the revolutionary ideas of John Locke, Thomas Jefferson, and Adam Smith. They redefined the relationship of sovereign individuals to their government, and clearly demonstrated the socially beneficial results of a system of natural liberty. Political and economic freedom, after all, go hand-in-hand, and they produced living standards which even Karl Marx recognized would occur.
But “capitalism” in many quarters is, nevertheless, perceived to be morally unacceptable. While agreeing to its material advantages, academicians, pastors, parlor groups, people in the media, and other word merchants, believe capitalism is unworthy of compliment or retention. Even in the face of Stalin and Mao, the gulag and bureaucracy, and repeated socialistic failures worldwide, the dream lives on that there exists a better system than capitalism. Perhaps there is. But history, and especially the United States and its economic system during the nineteenth century, shows clear and overwhelming evidence that private ownership and limited government produce a system of natural liberty that allows man more freedom, economic opportunity, and a better chance to improve himself than any other system known to man. Though falling far short of utopian dreams, it would seem far ahead of whatever is in second place.
Armentano, Dominick. Antitrust and Monopoly: Anatomy of a Policy Failure. New York: John Wiley & Sons, 1982.
Davis, Lance; North, Douglas C., et. al. American Economic Growth: An Economist’s History of the United States. New York: Harper & Row Publishers, 1972.
Dillard, Dudley. Economic Development of the North Atlantic Community. Englewood Cliffs, N. J.: Prentice-Hall, 1967.
Greenleaf, William, ed. American Economic Development Since 1860. New York: Harper & Row Publishers, 1968.
Kolko, Gabriel. The Triumph of Conservatism: A Reinterpretation of America’s History, 1900- 1916. New York: Free Press, 1977.
Crossroads is an important and comprehensive presentation of the rise, decline, and restoration of freedom and the market economy. The authors do an outstanding job of introducing readers to the history and nature of the American free market experiment. Copies can be ordered from the American Studies Institute, 3420 East Shea, Suite 266A, Phoenix, Arizona 85028: Paper $14.25, Cloth $26.75. Please add $1.50 for shipping and handling.