Charles R. Geisst. Monopolies in America: Empire Builders and Their Enemies from Jay Gould to Bill Gates. New York: Oxford University Press, 2000. x + 355 pp. $30.00 (cloth), ISBN 978-0-19-512301-2.
Reviewed by Werner Troesken (Departments of History and Economics, University of Pittsburgh)
Published on EH.Net (August, 2000)
Monopolies in America by Charles R. Geisst, is a history of the trust and antitrust movements from their inception in the late nineteenth century through to the present day. In light of the on-going struggle between Microsoft and the Department of Justice, this is a timely contribution to the vast literature on the political economy of antitrust. The book is organized chronologically and summarizes some of the more colorful developments in the historical battle between big business and its critics, in and out of government.
Geisst's central conclusion is that "monopoly is the logical outcome of free market economic organization (p. 319)." This conclusion does not sit well with either standard economic theory or previous historical studies. Economic theory suggests monopoly -- or more precisely high degrees of market concentration -- only in industries with substantial entry barriers and economies of scale. But in industries where entry barriers are low and economies of scale are limited, both theory and casual empiricism (look at agriculture or retailing) indicate much less concentration and market power. Indeed, previous historical studies, notably Naomi Lamoreaux's The Great Merger Movement in American Business (New York, 1985), find that far from being inevitable, the great industrial combinations of the late nineteenth century were anomalies: most trusts and combinations failed. Geisst does not discuss the predictions of standard economic theory, nor does he discuss or cite the work of Lamoreaux.
Chapter 1, "The Monopolist Menace," focuses on the development of the railroads and their close ties to state and federal legislators. Geisst emphasizes the economic and political corruption that came with the railroads. For example, he explains how the managers of railroads routinely "watered stock" and made the stock market a very dangerous place for investors. Despite such pervasive corruption on the part of managers, Geisst claims that investors "always came back for more," attracted by the promise of riches floated by inaccurate press accounts (p. 19). Apparently, investors during this period were a gullible lot. Later in the chapter, Geisst describes how state legislatures routinely "looked the other way" as the railroads plundered consumers and investors (e.g., pp. 24-25). Why did voters tolerate such abuses? Explaining the ease with which Pennsylvania railroads secured patently pro-business legislation, the author writes that "the people and politicians in Pennsylvania still came under Adams' criticism as being 'not marked by intelligence; they are, in fact, dull, uninteresting, very slow and very persevering.' It was just this sort of plodding dullness that made corporations work relatively efficiently" (p. 21).
This portrayal of state legislators as the tools of railroad interests contrasts sharply with other studies of state railroad regulation, which have found strong evidence that state regulators were quite sympathetic to the needs of farmers and shippers. See, for example, Christopher Grandy, "Can Government Be Trusted to Keep Its Part of the Social Contract?: New Jersey and the Railroads, 1825-1888," Journal of Law Economics and Organization, 1989; Mark T. Kanazawa and Roger G. Noll, "The Origins of State Railroad Regulation: The Illinois Constitution of 1870" in Claudia Goldin and Gary Libecap, editors, The Regulated Economy, (Chicago, 1994); and Gabriel Kolko's Railroads and Regulation, 1877-1916 (Princeton, 1965). These studies are neither discussed nor cited.
Chapter 2, "'Good' and 'Bad' Trusts," is broader in scope, discussing such combinations as the Meat-Packing Trust, the "Banking Trust," and Standard Oil. Geisst argues that the rise of the great industrial trusts was driven by a "general price deflation" which pushed "down profit margins," and the severe economic slowdown after 1893 (p. 51). He also ascribes the rise of large combinations to tariffs, lax antitrust enforcement, and other policy mistakes (e.g., pp. 51 and 319). Alfred Chandler's competing interpretation in The Visible Hand (Cambridge, MA, 1977), which emphasizes the efficiency characteristics of large firms, is not discussed or cited. This omission occurs despite well-known studies by economic historians showing that the largest and most successful combinations persisted in industries experiencing rapid technological change and exhibiting significant economies of scale. (See, for example, John James, "Structural Change in American Manufacturing, 1850-1890," Journal of Economic History, 1983; and Gary D. Libecap, "The Rise of the Chicago Packers and the Origins of Meat Inspection and Antitrust," Economic Inquiry, 1992).
In discussing Standard Oil, Geisst points out that Standard received large rebates from the railroads. From Geisst's perspective these rebates constitute prima facie evidence that Standard was behaving in an anticompetitive manner (see, for example, pp. 37-38). Yet it is well-known that Standard Oil received these rebates, at least in part, because Standard, unlike most of its competitors, shipped its oil via tank cars rather than barrels. (See Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry: The Age of Illumination, 1859-1899, Evanston, IL, 1959, pp. 528-37.) There was a sound efficiency rationale for giving Standard rebates for using tank cars -- they were cheaper and safer for the railroads to haul than barrels. The rebate programs may well have had anti-competitive effects, but given their historical significance, efficiency rationales deserve at least some hearing.
To be clear, I do not wish to imply that all was goodness and light with the trusts. There is compelling evidence that the trusts repeatedly used anticompetitive strategies in an effort to gain market power. For example, event study methodology shows that the tobacco trust used predatory pricing to reduce the acquisition cost of its competitors (Malcolm R. Burns, "Predatory Pricing and the Acquisition Cost of Competitors," Journal of Political Economy, 1986); direct evidence shows the sugar trust earned a sixty percent rate of return on its investments in predation (see, generally, David Genesove and Wallace P. Mullin, "Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914," Rand Journal of Economics, 1998; and "Predation and Its Rate of Return: The Sugar Industry, 1887-1914," working paper); and event study methodology and voting analyses show how the sugar trust used its political clout to alter tariff policy. Clearly the trusts corrupted the democratic process -- though they certainly were not alone in this (Sara Fisher Ellison and Wallace P. Mullin, "Economics and Politics: The Case of Sugar Tariff Reform," Journal of Law and Economics, 1995) -- and event study methodology shows the merger of several railroads to create the Northern Securities company was anticompetitive (Robin Praeger, "The Effects of Horizontal Mergers on Competition: The Case of the Northern Securities Company," Rand Journal of Economics_, 1992).
Moreover, historical experience and economic theory both tell us that antitrust policy can ameliorate things: clearly, the break-up of AT&T increased consumer surplus and reduced the political clout of a corporate titan; and there is evidence that had the Supreme Court broken up U.S. Steel in 1920 it would have accomplished similar ends (see George L. Mullin, Joseph C. Mullin, and Wallace P. Mullin, "The Competitive Effects of Mergers: Stock Market Evidence from the U.S. Steel Dissolution Suit," Rand Journal of Economics, 1995).
My point, then, is simply this: Geisst omits an important piece of the story when he fails to consider efficiency interpretations of the trusts, and he would not have omitted this aspect of the story had he considered the entire corpus of historical and economic knowledge. Even potentially complementary and supportive studies, like those cited in the two preceding paragraphs, are omitted from the analysis.
Chapter 3, "Looking the Other Way," focuses on the 1920s. After claiming that the twenties were halcyon days for the rich and big business, Geisst observes (p. 93): "Yet amidst what appeared to be prosperity, the wages of the average worker were actually dropping. The rich got richer while the working class scraped to make ends meet. The F.W. Woolworth Company reported profit margins of 20 percent but actually lowered the wages of salesgirls in its stores, citing the need for belt tightening." In short, the rich got richer, and the poor got poorer. Geisst is not the first writer to make this claim about the 1920s, and he undoubtedly will not be the last. Alas, even when read in a light favorable to such pessimistic views, the evidence on this point is decidedly mixed, and when read in a more objective light, the existing evidence contradicts the pessimistic case. Good summaries of the academic debate about what happened to wages in the 1920s can be found in any introductory textbook on American economic history, such as Walton and Rockoff; Atack and Passell; or Hughes and Cain. The basic thrust of the debate can also be captured by looking at the Historical Statistics of the United States (1976, pp. 164-68), which reports a steady increase in the earnings of most industrial workers between 1921 and 1929.
Later in the chapter, Geisst discusses the shady brokerage practices of banks in the era before the Glass-Steagall Act. He writes (pp. 102-03): "Many of the banks produced literature designed to educate investors on the intricacies of stocks and bonds. What was less apparent, however, was the fact that many of those investors were sold securities that the banks had a vested interest in, namely, securities underwritten and held by the banks themselves. Investors were not aware that the banks were selling them their own inventories, many times at greatly inflated prices. At other times the risks associated with many bonds sold by bank subsidiaries were not made clear to their buyers." This passage contains no notes or cites to supporting studies, nor is it followed by any sort of presentation of supporting evidence in the form of statistics and/or anecdotes. Nonetheless, Geisst goes on to assume that such abuses were commonplace, and given this, concludes that laws like the Glass-Steagall Act were "steps in the right direction" and "served to police malefactors in the banking business" (p. 135).
There are competing interpretations. Probably the best known of these is a paper in the American Economic Review (1994), "Is the Glass-Steagall Act Justified? A Study of the U.S. Experience With Universal Banking Before 1933," by Randall S. Kroszner and Raghuram G. Rajan, both economists at the University of Chicago. Kroszner and Rajan systematically compare the securities underwritten by commercial banks and those underwritten by investment banks. Their findings suggest investors anticipated the conflicts of interest that confronted commercial banks and thereby constrained underwriting behavior and forced commercial banks to deal in better known, low risk securities. Geisst neither discusses nor cites Kroszner and Rajan.
Subsequent chapters in Monopolies in America are similar in tone and presentation to those just discussed, with a few notable exceptions. In chapter 7, Geisst discusses McGee's well-known study of Standard Oil, and the Chicago School approach to antitrust more generally (e.g., pp. 244-45). And in chapter 8, he briefly considers academic defenders of hostile takeovers and other controversial developments during the 1980s. He writes (p. 303): "Another business school professor, Mike Jensen at the University of Rochester, gained wide notoriety by being one of the few academics to defend corporate raids and takeovers. He also argued against a growing trend that decried executive compensation as being too high. He actually favored paying corporate executives more, not less." For readers unfamiliar with this line thought it would have been helpful if Geisst had explained why Jensen made these arguments. Instead Geisst chose to summarize Jensen's reasoning curtly: "In [Jensen's] view, hostile takeovers were nothing more than businesses vying for a position, a natural series of events (p. 303)." The discussion of McGee and the Chicago School in chapter 7 is equally illuminating.
Monopolies in America is best described as a work of popular history: the writing is clear; important persons and events are usually recounted ably; the anecdotes are interesting, though not necessarily instructive; and the narrative is not cluttered with caveats and footnotes. But given the shortcomings discussed above, it says nothing specialists will find particularly interesting, nor does it survey the existing literature in a way that would make it useful in undergraduate courses on economic history.
Copyright (c) 2000 by H-Net, all rights reserved. This work may be copied for non-profit educational use if proper credit is given to the author and the list. For other permission, please contact H-Net@h-net.msu.edu.
If there is additional discussion of this review, you may access it through the network, at: http://eh.net/.
Citation:
Werner Troesken. Review of Geisst, Charles R., Monopolies in America: Empire Builders and Their Enemies from Jay Gould to Bill Gates.
EH.Net, H-Net Reviews.
August, 2000.
URL: http://www.h-net.org/reviews/showrev.php?id=4416
Copyright © 2000, EH.Net and H-Net, all rights reserved. This work may be copied for non-profit educational use if proper credit is given to the author and the list. For other permission questions, please contact the EH.NET Administrator (administrator@eh.net; Telephone: 513-529-2850; Fax: 513-529-3309). Published by EH.NET.