Is a laissez-faire economy a bad thing? Socialist Democrats would certainly like you to think so. They have perpetuated so many negative myths about robber barons, big business, and monopolies that one almost forgets that capitalism and its free-market principles made America the world’s foremost economic power in the first place.
Over the last few decades, every sensationalized corporate scandal has been used as a war cry for new regulation. Unfortunately, much of the legislation enacted under the guise of “protecting investors” has actually hurt the economy and the investors it was implemented to protect. The Sarbanes-Oxley Act of 2002 is the largest, most-comprehensive piece of this legislation; it set new standards for boards, management, and accounting firms. The Financial Executives International (FEI) conducted a survey in 2007 and found that annual costs to comply with the Sarbanes-Oxley Act averaged between $1.7 and $3.4 million per year, depending on the size of the company.(1) As a result, America has witnessed the greatest historical exodus of companies from American stock exchanges in its history. Multinational corporations have chosen to forgo onerous and expensive compliance costs by listing on European stock exchanges.
Other than winning politicians’ votes, there is no substantial evidence that such measures stop Enron-like accounting scandals or prevent financial crises. In fact, the recent credit crisis, Bernie Madoff scandal, and the collapse of Lehman exposed how ineffective this type of legislation actually is. What the government doesn’t understand is that accounting is far too complex, with too many shades of gray, to follow all-encompassing standards and regulations.
Sometimes it is more efficient for society to accept the fact that there is going to be some level of corporate fraud and accounting discrepancies as a cost of doing business. Every piece of government legislation should have to pass a litmus test of whether the benefits outweigh the consequences. But then, politicians wouldn’t be able to carry the flags as heroes who brought order to the chaotic financial markets.
Protectionism and serious government intervention in the American economy began to take shape when Ida Tarbell and the muckrakers waged war against the “robber barons” and big business. Much like today’s demagogues, the muckrakers used the media to convince common folks that they were being held down by these hugely successful businessmen. They played on the robber barons’ fabulous wealth to create jealousy and resentment in the average working-class man. In response, populist leaders enacted new legislation to provide further business regulation.
There were certainly some bad seeds among the captains of industry, but as a whole, the fight against big business and the robber barons was unfounded, unjust, and extremely costly to the economy. Historical records prove that most of these men were just hardworking people who served their country by building businesses, providing jobs, and ultimately giving back to their communities through massive philanthropic donations.
John D. Rockefeller, the greatest of all the so-called robber barons, was actually not one at all. He was far from aristocratic, having been born to a snake-oil salesman and having bootstrapped his way to the top. Rockefeller was a noble businessman who treated his employees well and had a tremendously positive impact on the economy. He was the first oilman to implement vertical integration, which involves ownership of all aspects of a production line. He owned barrels, pipelines, oil-rich land, and refineries, all of which reduced his costs and avoided time-delay issues that arose from waiting for oil, barrels, or transportation. Rockefeller also profited from the waste inherent to the oil business by producing oil byproducts such as gasoline, petroleum jelly, and varnish.
Rockefeller’s Wal-Mart–type approach to business reduced the cost of refining a gallon of oil from three cents in 1869 to less than half a cent by 1885. He passed those savings on to his customers as well, reducing the price from thirty cents per gallon in 1869 to eight cents by 1885. Thanks to these lower prices, his company’s market share rose from 4 percent to 85 percent in just ten years.(2)
Rockefeller’s low unit costs resulted in a large market share, which led to discounts from the railroads because of his volume. The muckrakers screamed about monopolies and unfair business practices, but there was nothing untoward about this. In fact, it happens in almost every industry, even today. Had other oil companies been able to match Rockefeller’s volume, the railroads would have offered them similar discounts. In fact, Cornelius Vanderbilt did just that by publicly offering other oil companies a similar rebate should they meet the volume threshold.(3)
The benefits that Rockefeller reaped from his company’s size and superior business practices translated to lower prices for consumers and more jobs for Americans. It is a common misconception that Rockefeller was an unscrupulous businessman. He actually treated his employees well by paying far more than the industry average and offering bonuses for innovation. As a result, he saw increased productivity from his employees and was rarely faced with strikes, which plagued his competition. Rockefeller was a business visionary. He implemented the best modern-day human-resource practices back in the late 1800′s.
Ida Tarbell and other muckrakers made careers out of vilifying successful businessmen such as Rockefeller. It was easy to do—the poor love to see the rich struck down from their pedestals. Rockefeller’s competitors, whom he outperformed into the poorhouse, jumped on the bandwagon, and at the end of the day the government created an ingenious plan to deal with his “monopoly”: it split it up in favor of a government-controlled monopoly. The price of oil, which had been dropping for decades under Rockefeller due to his efficient business practices, finally started to rise and has been increasing ever since. The government stepped in and the consumer lost—not so different from what’s happening today.
The economic principles of the United States, from its foundation until the end of the age of the robber barons, was probably the closest thing to a laissez-faire economy the world has ever seen, and if it were still in existence today, we would probably have a low-cost energy substitute for oil.
The greatest criticism lodged against this sort of true capitalism (not the half-measured American capitalism of today) is its distribution of resources. Many today believe it is inequitable for a person to have access to a vast amount of resources while some have access to very few. The Founding Fathers and the Constitution wholeheartedly disagree. There is no limitation on freedom. Americans used to believe that a man had a right to life, liberty, and property. That did not mean only a poor man had the right to property, or that a man had the right to property up until he had a certain amount of wealth, and then he only had the right to a percentage of his property. None of the Founding Fathers believed in welfare, income-tax redistribution, or other socialistic programs.
Freedom and fairness dictate that there is no better owner of something than the one who produced it, but this principle is practical as well. An economy is most efficient when the resources are in the hands of the most intelligent, capable, and industrious people. They create the jobs, promote technological innovation, save money, and spend it far more efficiently than any government.
Financially successful people usually give back to their communities—at least most do. Some will not, but their kids may; studies show that most wealth recirculates after three generations. Some of that is nothing more than heirs squandering their inheritances, but even that returns the money to the economy.
It takes only a few philanthropists in a family line to spread the resources to their fellow human beings. Among the so-called robber barons, Rockefeller gave away more than $540 million—over half of his net worth. In today’s dollars, that’s equivalent to $20 to $30 billion. His son gave away $537 million, and his grandson, David Rockefeller, gave over half a billion to charity as well.
Another robber baron, Andrew Carnegie, gave away his entire fortune, totaling more than $350 million, which is also equivalent to tens of billions today. Carnegie is responsible for the construction of thousands of public libraries across the United States and has been called one of the fathers of free education. We should ask ourselves: do we want the government handing out welfare checks? Or do we want the Rockefellers and Carnegies building libraries, providing scholarships, and giving hundreds of millions of dollars to other good causes?
Today’s entrepreneurs are no less generous. In 2006, the two wealthiest people in the world, Bill Gates and Warren Buffett, pledged to give away 53 percent and 89 percent of their wealth respectively. That is a total of nearly $69 billion, and they have promised more donations in the future. In 2010, Buffett and Gates started a campaign to convince other billionaires to do the same and within a few months had convinced forty of the world’s richest billionaires to donate half their fortunes.
Of Business Week’s fifty greatest philanthropists, some have donated almost 1,000 percent of their entire net worth. That means that over the course of their lifetimes they have donated ten times their current net worth. The amount of giving among these people should shame all the churches around the world. Warren Buffett’s and Bill Gates’s donations alone are probably more than all organized religions combined have given to humanity in the last ten years. In total, the fifty greatest philanthropists gave more than $110 billion to various causes. Given the government’s horrendous track record of spending, it is safe to assume these donations are probably equivalent to a trillion-dollar allocation by the federal government. After all, we have seen how the government spends its money: on $1,800 hammers, $2,000 pencils, kickbacks, and corruption.
In America today, the problem is not a lack of regulation, but rather that bloated and inefficient banks and corporations are using government regulation and interference to force out competition. The preceding chapter was taken from the book America: Land of the Free? The subsequent chapters explain how governmental interference in the American economy has guaranteed the aristocracy of the 1%. It can be found at: http://www.amazon.com/America-Land-Free-ebook/dp/B0058ED852
1)“FEI Survey: Average 2007 SOX compliance cost $1.7 Million,” FEI, http://fei.mediaroom.com/index.php?s=43&item=204.
2) “The Truth About the ‘Robber Barons,’” Ludwig Von Mises Institute, http://mises.org/daily/2317.