CIAO DATE: 07/2009
Volume: 3, Issue: 2
Summer 2008
Craig Biddle
Property Rights and the Crisis of the Electric Grid
Raymond C. Niles
Surveys the history and achievements of America's electricity entrepreneurs, shows how government interference in the transmission grid has hampered their enterprises from the outset to the present day, and indicates what America must do to liberate the grid and enable a new wave of entrepreneurs to supply this vital product commensurate with the country's demand.
Vindicating Capitalism: The Real History of the Standard Oil Company
Alex Epstein
Who were we that we should succeed where so many others failed? Of course, there was something wrong, some dark, evil mystery, or we never should have succeeded!1
-John D. Rockefeller
The Standard Story of Standard Oil
In 1881, The Atlantic magazine published Henry Demarest Lloyd's essay "The Story of a Great Monopoly"-the first in-depth account of one of the most infamous stories in the history of capitalism: the "monopolization" of the oil refining market by the Standard Oil Company and its leader, John D. Rockefeller. "Very few of the forty millions of people in the United States who burn kerosene," Lloyd wrote,
know that its production, manufacture, and export, its price at home and abroad, have been controlled for years by a single corporation-the Standard Oil Company. . . . The Standard produces only one fiftieth or sixtieth of our petroleum, but dictates the price of all, and refines nine tenths. This corporation has driven into bankruptcy, or out of business, or into union with itself, all the petroleum refineries of the country except five in New York, and a few of little consequence in Western Pennsylvania. . . . the means by which they achieved monopoly was by conspiracy with the railroads. . . . [Rockefeller] effected secret arrangements with the Pennsylvania, the New York Central, the Erie, and the Atlantic and Great Western. . . . After the Standard had used the rebate to crush out the other refiners, who were its competitors in the purchase of petroleum at the wells, it became the only buyer, and dictated the price. It began by paying more than cost for crude oil, and selling refined oil for less than cost. It has ended by making us pay what it pleases for kerosene. . . .2
Many similar accounts followed Lloyd's-the most definitive being Ida Tarbell's 1904 History of the Standard Oil Company, ranked by a survey of leading journalists as one of the five greatest works of journalism in the 20th century.3 Lloyd's, Tarbell's, and other works differ widely in their depth and details, but all tell the same essential story-one that remains with us to this day.
Prior to Rockefeller's rise to dominance in the early 1870s, the story goes, the oil refining market was highly competitive, with numerous small, enterprising "independent refiners" competing harmoniously with each other so that their customers got kerosene at reasonable prices while they made a nice living. Ida Tarbell presents an inspiring depiction of the early refiners.
Life ran swift and ruddy and joyous in these men. They were still young, most of them under forty, and they looked forward with all the eagerness of the young who have just learned their powers, to years of struggle and development. . . . They would meet their own needs. They would bring the oil refining to the region where it belonged. They would make their towns the most beautiful in the world. There was nothing too good for them, nothing they did not hope and dare.4
"But suddenly," Tarbell laments, "at the very heyday of this confidence, a big hand [Rockefeller's] reached out from nobody knew where, to steal their conquest and throttle their future. The suddenness and the blackness of the assault on their business stirred to the bottom their manhood and their sense of fair play. . . ."5
Driven by insatiable greed and pursuing his firm's self-interest above all else, the story goes, Rockefeller conspired to obtain an unfair advantage over his competitors through secret, preferential rebate contracts (discounts) with the railroads that shipped oil. By dramatically and unfairly lowering his costs, he slashed prices to the point that he could make a profit while his competitors had to take losses to compete. Sometimes he went even further, engaging in "predatory pricing": lowering prices so much that Standard took a small, temporary loss (which it could survive given its pile of cash) while his competitors took a bankrupting loss.
These "anticompetitive" practices of rebates and "predatory pricing," the story continues, forced competitors to sell their operations to Rockefeller-their only alternative to going out of business. It was as if he was holding a gun to their heads-and the "crime" only grew as Rockefeller acquired more and more companies, enabling him, in turn, to extract ever steeper rebates from the railroads, which further enabled him to prey on new competitors with unmatchable prices. This continued until Rockefeller acquired an unchallengeable monopoly in the industry, one with the "power" to banish future competition at will and to dictate prices to suppliers (such as crude oil producers) and consumers, who had no alternative refiner to turn to.
Pick a modern history or economics textbook at random and you are likely to see some variant of the Lloyd/Tarbell narrative being taken for granted. Howard Zinn provides a particularly succinct illustration in his immensely popular textbook A People's History of the United States. Here is his summary of Rockefeller's success in the oil industry: "He bought his first oil refinery in 1862, and by 1870 set up Standard Oil Company of Ohio, made secret agreements with railroads to ship his oil with them if they gave him rebates-discounts-on their prices, and thus drove competitors out of business."6
Exhibiting the same "everyone knows about the evil Standard Oil monopoly" attitude, popular economist Paul Krugman writes of Standard Oil and other large companies of the late 19th century:
The original "trusts"-monopolies created by merger, such as the Standard Oil trust, or its emulators in the sugar, whiskey, lead, and linseed oil industries, to name a few-were frankly designed to eliminate competition, so that prices could be increased to whatever the traffic would bear. It didn't take a rocket scientist to figure out that this was bad for consumers and the economy as a whole.7
The standard story of Standard Oil has a standard lesson drawn from it: Rockefeller should never have been permitted to take the destructive, "anticompetitive" actions (rebates, "predatory pricing," endless combinations) that made it possible for him to acquire and maintain his stranglehold on the market. The near-laissez-faire system of the 19th century accorded him too much economic freedom-the freedom to contract, to combine with other firms, to price, and to associate as he judged in his interest. Unchecked, economic freedom led to Standard's large aggregation of economic power-the power flowing from advantageous contractual arrangements and vast economic resources that enabled it to destroy the economic freedom of its competitors and consumers. This power, we are told, was no different in essence than the political power of government to wield physical force in order to compel individuals against their will. In the free market, through unrestrained voluntary contracts and combinations, Standard had allegedly become the equivalent of a king or dictator with the unchallenged power to forbid competition and legislate prices at whim. "Standard Oil," writes Ron Chernow, author of the popular Rockefeller biography Titan, "had taught the American public an important but paradoxical lesson: Free markets, if left completely to their own devices can wind up terribly unfree."8
This lesson was and is the logic behind antitrust law, in which government uses its political power to forcibly stop what it regards as "anticompetitive" uses of economic power. John Sherman, the author of America's first federal antitrust law, the Sherman Antitrust Act of 1890, likely had Rockefeller in mind when he said:
If we will not endure a king as a political power we should not endure a king over the production, transportation, and sale of any of the necessaries of life. If we would not submit to an emperor, we should not submit to an autocrat of trade, with power to prevent competition, and to fix the price of any commodity.9
But Rockefeller was no autocrat. The standard lesson of Rockefeller's rise is wrong-as is the traditional story of how it happened. Rockefeller did not achieve his success through the destructive, "anticompetitive" tactics attributed to him-nor could he have under economic freedom. Rockefeller had no coercive power to banish competition or to dictate consumer prices. His sole power was his earned economic power-which was no more and no less than his ability to refine crude oil to produce kerosene and other products better, cheaper, and in greater quantity than anyone thought possible.
It has been more than one hundred years since Ida Tarbell published her History of the Standard Oil Company. It is time for Americans to know the real history of that company and to learn its attendant and valuable lessons about capitalism. . . .
Proof of the Atomic Theory
David Harriman
Author's note: The following is adapted from a chapter of my book in progress, "The Inductive Method in Physics." Whereas my article "The 19th-Century Atomic War" (TOS, Summer 2006) focused on the opposition to the atomic theory that arose from positivist philosophy, this article focuses on the evidence for the atomic theory and the epistemological criteria of proof. It is necessary to repeat some material from my earlier articles in TOS, but the repetition is confined mainly to the first few pages below.
Scientists need objective standards for evaluating theories. Nowhere is this need more apparent than in the strange history of the atomic theory of matter. Prior to the 19th century, there was little evidence for the theory-yet many natural philosophers believed that matter was made of atoms, and some even wasted their time constructing imaginative stories about the nature of the fundamental particles (e.g., René Descartes's physics). Then, during the 19th century, a bizarre reversal occurred: As strong evidence for the theory accumulated rapidly, many scientists rejected the idea of atoms and even crusaded against it.
Both of these errors-the dogmatic belief that was unsupported by evidence, followed by the dogmatic skepticism that ignored abundant evidence-were based on false theories of knowledge. The early atomists were rationalists; they believed that knowledge can be acquired by reason alone, independent of sensory data. The 19th-century skeptics were modern empiricists; they believed that knowledge is merely a description of sensory data and therefore references to non-observable entities are meaningless. But scientific knowledge is neither the floating abstractions of rationalists nor the perceptual-level descriptions of empiricists; it is the grasp of causal relationships identified by means of the inductive method. In this article, we will see how the atomic nature of matter was identified as the fundamental cause that explains a wide range of narrower laws.
If we follow the idea of atoms from ancient Greece to the 19th century, one remarkable fact stands out. So long as the atomic theory was not induced from scientific data, it was entirely useless. For more than two millennia, scientists were unable to make any predictions or to devise any experiments based on the theory. It explained nothing and integrated nothing. Because the Greek idea of atoms did not derive from observed facts, it remained isolated from the real knowledge of those who investigated nature. If one tries to think about the implications of an arbitrary idea, one simply draws a blank; implications depend upon connections to the rest of one's knowledge.
Everyone, including scientists, must start with the evidence available to the senses, and there is no direct perceptual evidence for the existence of atoms. On the perceptual level, matter appears to be continuous. At the early stages of science, questions about the ultimate, irreducible properties of matter-including the question of whether it is discrete on some imperceptible scale-do not legitimately arise. The questions that do arise from observations are very challenging: How do bodies move? What forces can they exert on each other? How do they change when heated or cooled? Why do objects appear colored, and how is colored light related to ordinary white light? When different materials react, what transformations can they undergo, and under what circumstances?
By 1800, after centuries of investigating such questions, scientists finally had the advanced knowledge that made the question of atoms meaningful and the answer possible. When the idea of atoms arose from observed facts, scientists had a context in which they could think about it, and therefore they could derive implications, make predictions, and design experiments. The result was a sudden flurry of scientific activity that quickly revealed an enormous depth and range of evidence in favor of the atomic composition of matter.
Chemical Elements and Atoms
Prior to the Enlightenment, there was no science of chemistry. There was practical knowledge about the extraction of metals, the synthesis of glass, and the dyeing of clothes. There were also premature attempts to reduce the bewildering variety of known materials to a few basic elements. The Greeks had supposed that all terrestrial matter was made of four elements: earth, water, air and fire. Later, some alchemists tried to reduce "earth" to salt, mercury, and sulfur. But these early attempts were empty speculation, not scientific theory; such ideas were unsupported by the observations and incapable of explaining them.
The situation changed dramatically in the second half of the 18th century, when the method that had led to such spectacular success in physics was applied to chemistry. The father of modern chemistry, Antoine Lavoisier, wrote in a letter to Benjamin Franklin that his aim was "to follow as much as possible the torch of observation and experiment." He added: "This course, which has not yet been followed in chemistry, led me to plan my book according to an absolutely new scheme, and chemistry has been brought much closer to experimental physics."1 . . .
The Rise of the Conservative Legal Movement: The Battle for Control of the Law by Steven M. Teles
Larry Salzman
Princeton: Princeton University Press, 2008. 358 pp. $35.00 (cloth).
Reviewed by Larry Salzman
Conservatives today have considerable influence on America's legal culture. They are welcome on law school faculties at even the most elite institutions, and they man dozens of think tanks, policy centers, and public interest law foundations pressing varying brands of conservative doctrine on the courts-with a degree of success rivaling competing liberal organizations. Shrill leftists allege a "vast right-wing conspiracy," and senators now begin judicial nomination hearings with hand-wringing warnings about the behind-the-scenes influence of "Federalist Society lawyers."
The current status of conservatives in the law is, however, a relatively new phenomenon. From the 1930s to the 1970s, liberal or leftist ideas had a nearly monolithic dominance, including overwhelming adherence by faculty and administration at law schools and the American Bar Association, and the support of a bewildering number of lawyers working full-time for private and taxpayer-funded activist institutions advancing "rights" to welfare, attacking private property, pushing environmentalism, and implementing collectivist doctrines in tort law.
Steven Teles's The Rise of the Conservative Legal Movement documents important elements of this reversal. The book outlines the strategy and tactics conservatives used to counter the left-wing legal culture. Teles, a professor at the University of Maryland School of Public Policy (and currently a visiting lecturer in law at Yale), explains the means by which conservatives gained a hearing for their ideas in academic and legal circles of influence during the past thirty years, providing the richest account in print of the movement's failures and successes. . . .
Sun-tzu: Art of War, translated with an introduction and commentary by Ralph D. Sawyer
John David Lewis
Boulder, CO: Basic Books, 1994. 375 pp. $15.95 (paperback).
Reviewed by John David Lewis
War is one of man's most destructive activities (only dictatorship has ruined more lives), and it is not surprising that thousands of books have been written about it. Yet, paradoxically, books on war itself-books concerned with war as a phenomenon, rather than focused on strategy, tactics, or some particular war-have been relatively few. This is due in part to the focus by modern scholars on the minutiae of human affairs, and their reluctance to deal with broad generalizations; but the failure to come to grips with the abstract principles of war goes back to the dawn of historical writing. The ancient Greek historian Thucydides, a soaring intellect obsessed by the great war between Athens and Sparta, identified "honor, security and interest" as causally important principles that motivate men "for all time." But even Thucydides did not examine the philosophical foundations of these factors; he took them as given in human nature, which left the study of war mired in the vagaries of human desires and without philosophical grounding.1 As a result, important questions remained unanswered: What are the principles of war; what are their philosophical foundations, and what methods of waging war do they imply?
In ancient China, a thriving culture of thinkers tried to answer such questions. They derived principles of warfare from ideas that were fundamental to their own philosophies and applied those principles to the practical needs of military commanders. The extant remains of these works have been compiled into the so-called seven Chinese military classics, the best preserved of which is Art of War by Sun-tzu, who lived sometime between 450 and 250 BC, about the time of classical Greece.2 This was approximately the "Warring States" period of Chinese history, when China was divided among military warlords, iron was first used in weapons, armies grew to more than one hundred thousand men, and commanders needed expert guidance to help them organize their huge forces. Ralph Sawyer has produced a lively translation, with a historical essay and explanatory notes, of Sun-tzu's classic work. Sawyer also includes new supplementary material, found in graves and carved on bamboo stalks, that adds to our knowledge of ancient Chinese thought. . . .
Reforming Philosophy: A Victorian Debate on Science and Society by Laura J. Snyder
John P. McCaskey
Chicago: University of Chicago Press, 2006. 386 pp. $45.00 (cloth).
Reviewed by John P. McCaskey
The 19th-century philosopher John Stuart Mill is widely regarded as one of history's leading proponents of inductive science and of political liberty. Yet, oddly, philosophers working in his train have been remarkably unsuccessful in saying exactly what is wrong with the scientific skepticism or the political tyrannies of the past one hundred and fifty years. Is it possible that Mr. Mill was not such a good guy after all? This question is not the stated theme of Laura Snyder's Reforming Philosophy, but it is the underlying spirit of this excellent work of scholarly intellectual history.
Snyder introduces us to Mill as he saw himself-a social reformer locked in epic battle with the forces of the status quo, whose philosophy Mill called intuitionism and whose most forceful advocate was one William Whewell, a "lion-like man" (Tennyson's phrase, p. 1) and Master of Trinity College. Mill was born into London's elite intellectual circles. He read Latin at age three, Greek by eight, Aristotle and Plato at age twelve, scholastic logic and political economy by thirteen. His first publication was on a theory of economic value. He was sixteen. He never attended college. He nominally had a career at Britain's East India Office, but primarily he was a writer, producing works on logic, political economy, literature, moral philosophy, and current political and cultural affairs.
Whereas Mill was an intellectual-class prodigy, his nemesis was a working-class one. The son of a carpenter and twelve years older than Mill, William Whewell entered Cambridge University on a scholarship to study science and mathematics. He was elected to the Royal Society at age twenty-three and remained throughout his life an active member of the major mathematical and scientific communities and institutions in Britain. He spent his whole career at Cambridge. At different times he was professor of mineralogy, professor of moral philosophy, and vice-chancellor of the university. He penned important works on mechanics, geology, the tides, crystallography, scientific method, history, international law, moral philosophy, and political and cultural affairs. He translated Plato's dialogues and German literature. He hated Mill's moral philosophy. . . .