All Commentary
Monday, June 1, 1998

The Ghost of John D. Rockefeller

Antitrust Regulation Allows Politicians to Pose as Populists

At the Senate Judiciary Committee hearing on competitiveness in the computer industry last March, Microsoft chairman Bill Gates was compared to the infamous “robber baron” John D. Rockefeller and his company likened to the Standard Oil Company of the late nineteenth century. Federal Trade Commission chairman Robert Pitofsky made a similar analogy in a Washington Post op-ed, where he self-servingly argued for more money for antitrust investigations. Gates’s competitors, too, are working diligently to implant the Rockefeller analogy in the public consciousness.

Even the Wall Street Journal has joined in this attack; reporter Alan Murray claimed in a page-one article that Gates supposedly enjoys “monopoly power” that “even John D. Rockefeller could envy.”

Microsoft’s critics are right. There are many similarities between Bill Gates’s company and the old Standard Oil organization.

Like Gates, Rockefeller was the victim of a political assault for the “sin” of rapid innovation, a vast expansion of output, and rapidly declining prices just the opposite of what the antitrust laws ostensibly police. As with Microsoft, the political attack on Standard Oil was launched by less-efficient rivals who wanted to achieve through the political process what they failed to achieve in the marketplace.

There is indeed a lesson to be learned from Rockefeller’s antitrust ordeal, but it is not the one Microsoft’s critics have in mind.

Rockefeller’s Economic Legacy

The firm of Rockefeller, Andrews, and Flagler was formed in 1865 and was a marvel of efficiency because of Rockefeller’s penny-pinching ways and the managerial genius of his brother William.1 Even Rockefeller’s harshest critic, the muckraking journalist Ida Tarbell (whose brother’s firm the Pure Oil Company was driven from the market by the more efficient Standard Oil), described the company as “a marvelous example of economy.”2

The efficiencies of economies of scale and vertical integration caused the prices of refined petroleum to fall from over 30 cents a gallon in 1869 to 10 cents by 1874 and to 5.9 cents by 1897. During the same period, Rockefeller reduced his average costs from 3 cents to 0.29 cents per gallon.

The production of refined petroleum increased rapidly throughout this period of increasing dominance by Standard Oil as well, as increased competition was provided by Associated Oil and Gas, Texaco, the Gulf Company, and 147 independent refineries that had sprung into existence by 1911 the year in which the government forced the breakup of Standard Oil.

Contrary to popular mythology, Standard Oil’s market share declined from 88 percent in 1890 to 64 percent by 1911. Because of intense competition the company’s oil production as a percentage of total market supply had declined to a mere 11 percent in 1911, down from 34 percent in 1898.

Moreover, Standard Oil’s decades-long price-cutting was not “predatory pricing” the theoretical practice of pricing below average cost to drive competitors from the market and establish a monopoly. Any business person would be a fool to intentionally lose money by pricing below average cost for decades. As economist John McGee concluded in his classic analysis of the Standard Oil case, “whatever else has been said about [it], the old Standard organization was seldom criticized for making less money when it could readily have made more” through other means.3

Indeed, Standard Oil never came close to cornering the market; by the time the antitrust case against it was filed in 1906, it had hundreds of competitors. Nevertheless, Standard Oil was convicted of violating the antitrust laws in 1911 and partially dissolved, despite the fact that the courts conducted no economic analysis of its conduct and performance. That is, they completely ignored the effects the company had on prices, output, and innovation in the petroleum industry, just as Microsoft’s critics tend to ignore that there are tens of thousands of software development firms in the world and that during the period of Microsoft’s rise to dominance the cost of computing has fallen spectacularly while product quality has soared.

Standard Oil was convicted because of a general anti-business animus stoked by socialist intellectuals and journalists such as Henry Demarest Lloyd and Ida Tarbell and urged on by the company’s higher-cost and higher-priced rivals. As a result the most efficient industrial organization of the time was crippled, weakening competition and pushing prices up.

The Protectionist Roots of Antitrust

From the very beginning, the antitrust laws have been a protectionist vehicle. While in theory they guard consumers against monopoly, in reality they politically protect uncompetitive (but well-connected) businesses. In a 1985 International Review of Law and Economics article, I showed that in the ten years before the 1890 Sherman Anti-Trust Act, the industries accused of being “monopolized” by trusts were all dropping their prices faster than the general price level was falling at that time and were expanding output faster than GNP was growing some as much as ten times faster.4 The late-nineteenth-century trusts were the most innovative and fastest-growing industries of their time, which is why they were unfairly targeted by antitrust laws.

Indeed, Congress at the time recognized the great advantages of the trusts for consumers. Congressman William Mason stated during the U.S. House of Representatives debate over the Sherman Act that the “trusts have made products cheaper, have reduced prices; but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to the people of this country by the trusts’ which have destroyed legitimate competition and driven honest men from legitimate business enterprises.”5 Senator George F. Edmunds added that “Although for the time being the sugar trust has perhaps reduced the price of sugar, and the oil trust certainly has reduced the price of oil immensely, that does not alter the wrong of the principle of any trust.”6

Thus, members of Congress acknowledged that the trusts had caused lower prices to the great benefit of consumers, but objected that higher-priced businesses many of which were political supporters had lost market share or had been driven out of business.

The Sherman Act was a protectionist scheme in more ways than one. The real source of monopoly power in the late nineteenth century was government intervention. In October 1890, just three months after the Sherman Act was passed, Congress passed the McKinley tariff the largest tariff increase in history up to that point. The bill was sponsored by none other than Senator John Sherman himself. Sherman, as a leader of the Republican Party, had championed protectionism and high tariffs since the Civil War. In the Senate debate over his antitrust bill he attacked the trusts because they supposedly “subverted the tariff system; they undermined the policy of government to protect . . . American industries by levying duties on imported goods.”7 That is, the price-cutting by the trusts undermined the manufacturing cartel that was created and sustained by the Republicans’ high-tariff policies.

The Sherman Act was a political fig leaf designed to deflect attention away from the real source of monopoly power the tariff and the true price-fixing conspirators Congress and protectionist manufacturers. The New York Times saw through this charade when it editorialized on October 1, 1890, that the “so-called Anti-Trust law was passed to deceive the people and to clear the way for the enactment of this . . . law relating to the tariff. It was projected in order that the party organs might say to the opponents of tariff extortion and protected combinations, Behold! We have attacked the Trusts. The Republican Party is the enemy of all such rings.’”8

Economists were almost unanimously opposed to the Sherman Act because they viewed competition as Austrian school economists view it as a dynamic, rivalrous process of discovery.9 According to historian Sanford D. Gordon, who surveyed all professional journals in the social sciences and all books written by economists regarding the late-nineteenth-century trusts, “a big majority of the economists conceded that the combination movement was to be expected, that high fixed costs made large scale enterprises economical, that competition under these new circumstances frequently resulted in cutthroat competition, that agreements among producers was a natural consequence, and the stability of prices usually brought more benefit than harm to society. They seemed to reject the idea that competition was declining, or showed no fear of decline.”10

The Myth That Antitrust “Saved” Capitalism

A popular argument made at the time was that antitrust was necessary to stave off something even worse the more extreme forms of regulation or outright socialism. Antitrust was adopted, but Americans were subjected to the more extreme forms of regulation and socialism anyway. As Milton and Rose Friedman pointed out in Free to Choose, by the 1970s the entire Socialist Party Platform of 1920 had been adopted in the United States. Socialism, F. A. Hayek pointed out in The Road to Serfdom, no longer meant nationalization of industry and central planning, but rather the institutions of the welfare and regulatory state. Antitrust did nothing to stop the spread of socialism in America.

Quite the contrary; the adoption of antitrust helped speed up the adoption of socialism. By weakening the competitive process, it has led to slower productivity growth and diminished prosperity. Government always reacts to slower economic growth, unemployment, and economic crises by adopting even greater economic interventions. The late-nineteenth-century proponents of antitrust had it all backwards. This is why it is so disingenuous, to say the least, of contemporary proponents of antitrust, such as the Wall Street Journal’s Murray, to repeat this same discredited argument, urging Bill Gates to “place trust in trustbusters,” or else “he may eventually find the Justice Department and Congress considering more-radical remedies.”11

The Real Robber Barons

John D. Rockefeller, like Bill Gates, achieved his economic success by offering the best products for the lowest prices on the free market. The real “robber barons” of the late nineteenth and the late twentieth centuries are the business people who, having failed to achieve competitive success in the marketplace turned to government and asked it to enact laws and regulations granting them special privileges and harming their competitors. A century ago, such immoral special pleaders included Leland Stanford, who became wealthy by using his political connections to obtain a government-created monopoly franchise in the California railroad industry; Thomas Durant and Grenville Dodge, who pocketed millions in government subsidies to build the Union Pacific railroad; Henry Villard, who “rushed into the wilderness to collect his [government] subsidies” to build the Northern Pacific railroad; and steel industry magnate Charles Schwab, who championed the disastrous 1930 Smoot-Hawley tariff.12 Their modern-day counterparts would include many of Bill Gates’s competitors, such as the chief executive officers of Netscape, Sun Microsystems, Novell, and other companies that have lobbied the federal government to use the antitrust laws to diminish or destroy the competitive efficiency of their most effective rival, Microsoft.

For over 100 years antitrust regulation has allowed politicians to deceitfully pose as “populists” while stifling competition with politically motivated attacks on the most innovative and progressive companies. These attacks have been supported for over a century by socialist intellectuals and journalists who have taught many Americans to hate capitalism, to envy successful people, and to support government policies that undermine or destroy them both. Being the most successful businessman in the world, Bill Gates was an inevitable target of the anti-capitalistic crusaders. It’s time we recognized antitrust for the protectionist racket that it is and repealed the antitrust laws.


  1. The following information about Standard Oil is from Dominick Armentano, Antitrust and Monopoly: Anatomy of a Policy Failure (New York: Wiley, 1982).
  2. Ida Tarbell, The History of the Standard Oil Company (New York: Peter Smith, 1950), pp. 240 41.
  3. John S. McGee, “Predatory Price Cutting: The Standard Oil (N.J.) Case,” Journal of Law and Economics, October 1958, p. 168.
  4. Thomas J. DiLorenzo, “The Origins of Antitrust: An Interest-Group Perspective,” International Review of Law and Economics, 1985, pp. 73 90.
  5. Congressional Record, 51st Congress, 1st Session, House, June 20, 1890, p. 4100.
  6. Ibid., p. 2558.
  7. Ibid., p. 4100.
  8. New York Times, October 1, 1890, p. 2.
  9. Thomas J. DiLorenzo and Jack C. High, “Antitrust and Competition, Historically Considered,” Economic Inquiry, July 1988, pp. 423 34.
  10. Sanford D. Gordon, “Attitudes Toward Trusts Prior to the Sherman Act,” Southern Economic Journal, 1963, p. 158.
  11. Alan Murray, “It’s Time Gates Placed Trust in Trustbusters,” Wall Street Journal, March 9, 1998, p. 1.
  12. Burton W. Folsom, Jr., The Myth of the Robber Barons (Herndon, Va.: Young America’s Foundation, 1991).