The Myth of Trust Busting and Roosevelts Failure on Standard Oil

Standard Oil is often depicted as a monopoly, and we are often reminded that monopolies are some monstrous things to be avoided.

This very comic is in numerous history books where the example of Standard Oil is given as a horrible monopoly that preyed on the people. But what did Rockefeller and Standard Oil really do?

Rockefeller worked as an assistant bookkeeper, and a produce salesman from 16-23. Then at 23 years old he had saved up enough ($4,000) to start a produce company (yes, things were much cheaper without taxes and regulations inflating the costs). He and his brother Frank operated the business, profiting more and more every year, but by the end of the Civil War, the government ha been subsidizing oil prices, which drove oil from $0.35 a barrel to $13.75 a barrel. Anyone who found oil could turn a profit, efficiency be damned, and so Rockefeller and his brother switched from foodstuffs to oil, Building their first refinery near Cleveland Ohio.

Rockefeller constantly cut costs, and increased efficiency by detailed record keeping. He eventually began developing his own barrels, wagons, and began to acquire his own wells, and pioneered the practice of Vertical Integration, which is providing the inputs of business in house. He hired in house chemists to develop uses for oil byproducts (typically 40% of what was recovered was considered waste at the time) that other oil refineries typically dumped into our rivers and natural lands. Lubricating oils, waxes, Vaseline, paint, varnish, naptha, tar, and 300 other substances. These by-products all made the process cheaper and cheaper because more goods were available for sale. He even hired his own plumbers cutting the cost of pipe-laying in half.

Standard Oil always had hundreds of competitors who simply could not compete with the low prices Rockefeller could offer. He managed to cut his costs 72% and brought oil prices down from $0.30 gallon in 1865 to $0.08 a gallon in 1885 by offering oil more efficiently than any of his competitors. And their share of the refined petroleum market grew from 4% in 1870 to 85% in 1880 because they were cheaper and more efficient than everybody else. Rockefeller was offered volume discounts by the railways which people often point to as unfair. But the railways had an open offer to any industry that could match the volume of Standard Oil, none ever could. Rockefellers savings were passed directly to the consumer, and Standard Oil is singularly responsible for replacing whale oil with kerosene as the primary source of light. Rockefeller also paid his employees 2-3x as much as the competition and offered bonuses to anyone who developed any innovation for the company. Of course this wouldn't last...

Rockefeller's competition was getting desperate, and they attempted to remove his efficiency advantage through anti-trust laws, on the basis that his pricing was "predatory." Which is a ludicrous theory on it's face since he had the cheapest prices of anyone. A theory was even floated by journalist Ida Tarbell (note, journalist, not an economist) that a company would cut its prices below its costs to drive competition out of the market, then raise prices once it created a monopoly. This is also ludicrous on it's face, and there was no evidence Rockefeller was doing such. He had driven costs down and was passing savings on to the customer. More importantly, what company would take yearly losses with no guarantee that their competitors would close shop, and more importantly, what would stop anyone from starting an oil company once prices are driven back up? Any company attempting to take losses for 30 years straight would not be in business to take advantage of whatever monopoly was created. Yet, the courts bought it hook line and sinker (probably because Sun Oil and Pure Oil had begun massive lobbying efforts), and Standard Oil was broken into nearly 3 dozen companies. The rest of the oil industry had already begun adopting some of his practices and bringing their own prices down, so by the beginning of the prosecution, Standard Oil's market share was already dropping, but nevertheless, after this case numerous laws were created to protect us from an imagined threat.

100+ years later, the word monopoly still has a negative connotation with it, in part because of the way our education system teaches us about the "robber barons" of the 1800's. What really happened was the shift of the US away from market entrepreneurs towards political entrepreneurs. Developments of efficient markets began to slow, while development of government increased as corporations realized they could buy politicians rather than offering value to customers. Will this trend continue, or will we fight for freer markets? Before the trust-busting of the 1900's, no corporation had ever considered that they could appeal to the government rather than appealing to customers as a form of competition. Since this period, the push for increased lobbying, political favoritism and centralization of power has subverted our economy away from one of providing value to customers, to instead currying favor with politicians. For any large corporation to exist, it has to have regulatory hegemony over its market, or shared interests with those companies that do have control over the politicians involved in regulating their market. Such subversion will take decades to fix if we start now, but there is no sign that we are starting anytime soon if at all, and in the meantime the consumer will suffer.