A Free-Market Energy Blog

Standard Oil: A Centennial Evaluation (Part IV: A free market, not political company)

By Eric Lowe -- May 20, 2011

[Ed. note: This post is taken from Robert Bradley’s conclusion in chapter 18 of Oil, Gas and Government: The U.S. Experience. In this series, Part I summarized the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry; Part II critically interpreted rebates and other ‘unfair’ practices of Rockefeller’s Trust; and Part III critically reviewed other complaints about unfair practices against Standard Oil.]

The Standard Oil Trust of John D. Rockefeller qualifies as a free market company, not a political one. The major mistake of Standard Oil in its distinguished history was not a failing of economic performance. It was underestimating the need to present information to explain to the public and critics the virtues of integration and scale economies, particularly in petroleum. (This was an intellectual problem of critics too–see the Appendix below.)

By following an explicit policy of secrecy until the late 1880s, Standard allowed opponents to get the upper hand in a public debate that for Standard would worsen at almost every turn, culminating in the 1911 Supreme Court dissolution decree.

Successful consumer service was considered by the company as its best strategy; it was not understood that competitors would be dissatisfied by the very fact that the public was so well served by Standard Oil. Given the precedent of intervention at all government levels, offense would have been the best defense.

Prior to the onslaught of state antitrust activity, political action by Standard was occasional and defensive. Eminent-domain rights, tailored to the needs of Standard’s pipeline competitors, and rate regulation of company pipeline and storage facilities, prompted Standard’s entrance into state politics in the 1880s in Pennsylvania, Ohio, Maryland, and elsewhere to financially support friendly politicians. In the late 1890s, federal politics became important to Standard, and company pesident John Archbold made large contributions to favored candidates until a 1907 law prohibited corporate political contributions.

By this time, Standard regularly spoke for the public record, but it was too late. Numerically powerful producer interests, who blamed their cyclical difficulties on Standard, joined by hard-pressed independent refiners and marketers, inspired muckraking journalism that nudged the public to the “little man’s” side.

Ida Tarbell’s standard of goodness was not superior consumer service but “the right to do an independent business” and “free and equal transportation” for all. The idea that consumers decide the structure and form of business and that in a free market less efficient firms – which she realized existed in the independent sector – must conform or perish had no part in her ethics, understanding or sympathy.

State and federal politicians, many with personal motives, data points all for what later would become public-choice economics, readily capitalized on anti-Standard themes to seal the fate of the trust. Standard, meanwhile, had to wastefully redirect resources to the political fight when it found itself persecuted by regulation it neither sought nor benefited from. Standard’s distaste of the political means to success, as opposed to the economic means of consumer service, was noticed and criticized by Ida Tarbell.

The notion that the business man must not appear in politics… save as a “stand-patter” – not even as a thinking, aggressive force – is demoralizing, intellectually and morally. Ever since 1872 the organization has appeared in politics only to oppose legislation obviously for the public good.

But Tarbell was off the mark to idolize political activity. State and federal regulation of the day was the work product of special interests and unjustified from the consumers’ point of view (although some consumers may have supported it). It is an enduring monument to Standard and Rockefeller that special privileges such as subsidies or tariffs were not sought. The company placed its fate in the hands of the consumer. It passed every test except the political one.

Appendix: Intellectual Error and the ‘Muckrakers’

There were personal motives that skewed a fair evaluation of Rockefeller and Standard Oil–witness the prejudice of Ida Tarbell who put family first. But there was intellectual error too given the infant state of business economics that explained why big firms did so well in the marketplace. As explained in chapter 6 of Bradley’s Capitalism at Work: Business, Government, and Energy:

What explains the muckrakers’ preconceived notion that business titans were predatory promoters injuring the natural competitive order and public weal? Why did these writers—at least prior to 1929—give so little weight to the results of industrial change—improved affordability, better products, and mass production for mass consumption? As Harvard business historian Thomas McCraw would later explain, these writers did not have an adequate theoretical foundation to understand the whys and wherefores of commerce:

“Without the benefit of a vocabulary that distinguished conceptually between center and peripheral firms, productive and allocative efficiency, vertical and horizontal integration, economies of scale and transaction cost, these observers had only their personal sensibilities and political ideologies to guide them. And both their personal and political values concerning the nature of liberty, the meaning of opportunity, and the promise of America were directly threatened by the trusts.”

The despair of boom-gone-bust made for an angry decade, one in which intellectuals rushed forth with ideas and proposals that precluded key free-market reforms. The intelligentsia, in fact, had much to do with Hoover-FDR interventionism.

It did not have to be this way. Eighteenth century’s Adam Smith, and a long line of capitalist thinkers after him, would have asked and determined why their products and firms were so successful. They would have differentiated between the market and political means to success and praised or criticized accordingly. Smith would have seen John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt as classic market entrepreneurs— capitalists practicing capitalism. Smith would have applauded Vanderbilt’s victories against Robert Fulton and Edward Collins, two business rivals wed to political means. The Scottish professor would have been disappointed in, but hardly surprised by, the likes of railroad titans Henry Villard, Leland Stanford, and Jay Gould, who feasted off government subsidies and/or legislatively blocked new entrants.

Leave a Reply