Six myths about robber barons, sweatshops and the age of capitalism

Somewhere in a high-school classroom there is a cartoon on the wall of a fat man in a top hat, standing on a pile of money, with a tiny worker underneath him holding up the world. The caption says "robber baron." And I'd like to ask the cartoonist a question: if this man got rich by robbing people, why did all of his customers keep coming back? Because I have been robbed, and I have never gone back to the robber for more, and I have never thanked him for the lower price.

Folks, the story we are told about the age of the great industrial fortunes, the second half of the nineteenth century and the start of the twentieth, is one of the great pieces of marketing in American history. It has a villain, a victim and a moral, and it fits on a poster. It also gets a good deal of the facts backwards. Let me take six of the most popular claims one at a time, run each one against the record, and tell you where it falls over. I will be fair. Some of them have a kernel of truth, and I will tell you where.

Why the story matters

This is not antiquarian. The same story is the engine of a great deal of modern policy. If you think that business success comes from squeezing customers and workers, then every large company is a suspect and every price is a crime. If you understand that the great fortunes of the Gilded Age came from making things cheaper and more available, you see a different picture, in which the question to ask about a rich man is how did he get it, from customers who chose him or from a government that chose him. That distinction is the whole game, and I will come back to it at the end.

Myth one: "Rockefeller got rich by raising prices"

The claim is that John D. Rockefeller's Standard Oil squeezed consumers, charging whatever it liked after it had crushed its rivals.

The record says the opposite. Kerosene, the product that made Standard Oil famous, was the main fuel for household lighting in the second half of the nineteenth century, replacing whale oil and candles. Its price fell sharply: by one account from 58 cents a gallon in 1865 to 26 cents in 1870, and by nearly 80 percent over the life of the company. Standard's strategy was to drive down the cost of refining, by improving yields, using by-products that others threw away, making its own barrels and moving oil in bulk, and then to pass a share of the savings along in order to win customers. That is exactly what a low-price seller does.

Where is the kernel of truth? Standard Oil did win a very large share of the refining business, and it did use tough tactics, including negotiating discounts from railroads, which gave it an advantage over smaller rivals. Those tactics were aggressive, and some were rightly condemned. But "aggressive" is not "raised prices." The household that bought kerosene for its lamps paid less each decade, and the poor, who spent the largest share of their income on basics, gained the most. I would invite anyone to find the consumer who was hurt by getting cheaper light.

Verdict: false on the central point. Rockefeller got rich by lowering what it cost to produce light, and sharing enough of that to keep the customers.

Myth two: "Monopolies always raise prices"

This follows from the first. If a firm becomes the sole seller, the argument goes, it will raise prices because it can. The textbook says so, and as a matter of theory, a protected monopolist can.

The key word is protected. A firm that holds a dominant position through the market alone, by being cheaper and better than anyone else, faces a problem: the moment it raises prices above what its costs justify, it invites new entrants, and the larger the margin it earns, the larger the invitation. Standard Oil's market share was very large at its peak, and it declined well before the government acted, as new fields and new competitors appeared. In 1911, in Standard Oil Co. of New Jersey v. United States, the Supreme Court held that the company was an unreasonable restraint of trade under the Sherman Act of 1890 and ordered it broken up into separate companies. The decision gave us the "rule of reason," under which only unreasonable restraints are condemned. The Court found that the company had conspired to restrain trade and to monopolize the oil business, and the breakup followed from that finding about how it had built and held its position.

The durable monopolies in American history are mostly the ones that the government protected: the mail, the utilities with franchises, the railroads that were granted rights of way, the licensed trades. A monopoly with a legal fence around it can raise prices for as long as the fence holds. One without a fence is always a step from being displaced. For the long-run version of how markets discipline the successful, see Creative destruction, why the buggy whip makers lost and America won.

Verdict: the word "always" is false. Monopoly power is dangerous where law protects it, and a good deal less so where it does not.

Myth three: "The Industrial Revolution made workers poorer"

The picture here is of dark satanic mills and crowded slums, and it comes from real sources: the novels, the parliamentary reports, the memoirs. Conditions in early factory towns were harsh, and I will not pretend otherwise.

But the picture compares the factory with an imaginary alternative. The alternative was not a comfortable village. It was the farm and the cottage workshop, where life was shorter, harder and poorer, and where much of the population was close to the edge of hunger. The people who moved into the cities did so voluntarily, and they kept coming, which tells you what they thought of their other options. Economic historians have argued about what happened to the real wages of English workers in the first decades of industrialization, and the early decades remain contested. I will say it plainly: there is an honest debate about the period before about 1840. What is not in dispute is what happened afterward. Over the long run, real wages rose, working hours fell, and life expectancy and living standards climbed to levels that no earlier society had known. In America, the pattern was the same, with the added advantage that wages for workers were relatively high from the start.

Verdict: mostly false for the long run, and honestly disputed for the earliest decades. The factory did not make the workers poor. It made it possible for their descendants to be rich.

Myth four: "Sweatshops hurt poor countries"

This is the modern echo of myth three, and it asks us to look at garment factories in poor countries and conclude that the factories are the problem. Now, I am not going to tell you that these are pleasant places. Some are dangerous, and the worst of them, with locked doors and rotted buildings, should be condemned and fixed by law. America had its own such tragedy in the Triangle Shirtwaist Factory fire of 1911 in New York, which killed 146 workers and led to a wave of safety reforms.

But the question to ask is: compared to what? For a poor woman in a poor country, the alternative to the factory is usually farm work, informal scrounging or nothing at all. The factory pays more than the alternatives, or she would not take the job. The East Asian economies that grew from poverty to wealth in the second half of the twentieth century, including South Korea and Taiwan, started with low-wage export manufacturing, and a generation later they were making cars and chips. A country does not skip the first rung. For more on the point that growth starts where the rules allow it, see Xiaogang village signed a secret contract in 1978 and China began to grow.

The compassionate policy is therefore not to boycott the factory, which takes the job away, but to push for safer buildings and enforceable contracts while the country climbs. A boycott that succeeds leaves the worker with a worse option, and the people who organized it get to feel good.

Verdict: false as a general claim. Sweatshops are bad compared with American factories and good compared with the available alternatives, and the ladder matters.

Myth five: "Vanderbilt's fortune came from the government"

Cornelius Vanderbilt, the shipping and railroad magnate, is often held up as an example of a man who got rich off public favours. The record is more interesting. Vanderbilt began in steamboats and made his name by undercutting his rivals on fares. The old steamboat monopoly on the Hudson, a legal privilege granted by the state of New York, was the very thing at issue in the case of Gibbons v. Ogden in 1824, in which Thomas Gibbons, whose steamboat Vanderbilt captained and whose business he managed, challenged the monopoly and the Supreme Court sided against it. Vanderbilt, in other words, rose in part by helping to fight a government-granted monopoly. Later he built the New York Central railroad, a business whose success rested on consolidation and efficiency.

Where is the kernel of truth? Vanderbilt was a hard bargainer and played the financial game hard. But the contrast is with another group of fortunes. The first transcontinental railroad was built by companies that received government land grants and loans under the Pacific Railway Acts of 1862 and 1864, and the scandals of that era, such as the Crédit Mobilier affair, show how public money attracted insiders. James J. Hill, by contrast, is generally described as having built the Great Northern Railway with little or no public money.

Verdict: false for Vanderbilt, true for some of his contemporaries. The better question is not whether a man got rich, but whether his fortune came from customers or from a charter.

Myth six: "Capitalism needs exploitation"

The last myth is the philosophical one. It says that profit is, by definition, what is taken from the worker, that the owner pays less than the value of the work, and that someone has to lose for someone else to win.

I would like to answer this with a plain fact. In a voluntary exchange both sides expect to gain, and typically both do. The worker takes the job because the wage is worth more to him than the time. The employer pays the wage because the worker's output is worth more to him than the pay. Both are better off, and the difference is what makes trade worthwhile. If the worker were being robbed, he would have a way out: take another job. The more competition there is among employers, the less room there is to pay less than the value of the work. And the evidence for that is not abstract. It is the long, steady rise of real wages in countries where employers compete for workers. For a detailed account of why prices and profits serve this function, see profit is a signal, not a sin, and what a loss tells a company.

Real exploitation exists, and it has a name: it is fraud, coercion, force and monopoly privilege. It is found where a person cannot refuse, as in slavery, or where the state closes the exits. It is not found in a free market. The error is in calling a voluntary deal robbery because one side did better.

Verdict: false as a rule of economics. Exploitation is an abuse that markets and the rule of law reduce, and it is not a premise they depend on.

The distinction that settles the matter

I promised to return to the game. The most useful idea to take from the Gilded Age is the difference between two kinds of businessman. The market entrepreneur gets rich by serving customers: he finds a cheaper way, a better product or a new market, and customers choose him. The political entrepreneur gets rich by serving officials: he wins a subsidy, a land grant, a tariff, a licence or a regulation that blocks his rivals. Both can be wealthy, and both can be called capitalists. But they are different things, and a country should welcome the first and be wary of the second.

Many of the villains of the old textbooks were a mixture, and the honest historian sorts them. Rockefeller, Hill and the early Vanderbilt are on the market side. The beneficiaries of the railroad land grants and the high tariffs of the era are on the political side. Today the same divide is visible in the big firms that lobby for rules that raise their rivals' costs, a subject treated in big companies love the regulations their small rivals cannot afford.

The Founders and the equal playing field

The Founding had a name for the second type: privilege. The Constitution forbids the grant of titles of nobility, in Article I, Section 9, and the spirit of that ban is a society without hereditary or government-given advantage. The Declaration holds that all men are created equal, which has always meant equal before the law, not equal in results. A system in which anyone can offer a better product, and is permitted to, is the economic version of that principle. The villain of the Gilded Age story was never the businessman who won. It was the privilege that rigged the game. A conservative should be able to say that clearly, in a way that neither the cartoonist nor his opposite number is willing to say.

The case in brief

1. Rockefeller did not get rich by raising prices; kerosene fell from 58 cents a gallon in 1865 to 26 cents in 1870, and by nearly 80 percent over the company's life.
2. Monopolies do not always raise prices: a market-won dominant position invites competition, and the durable monopolies are the ones government protected.
3. The Industrial Revolution's earliest decades are honestly disputed, but over the long run it raised wages and lifted living standards.
4. Low-wage factories are a ladder that poor countries climb, as South Korea and Taiwan did, and the humane response is safety and enforceable contracts, not a boycott.
5. The test of a fortune is whether it came from customers who chose freely or from officials who granted favors, and Vanderbilt's early career included helping to fight a government-made monopoly.

What you can do: when a company in your state asks for a subsidy, a tax break or a new regulation, find the vote on your legislature's website and ask your representative who benefits besides the company.