One company to rule them all?
Saturday, July 19th, 2008 By James Nesbitt
If we don’t carefully regulate the business world, can corporations take over the world and abuse it at the expense of helpless consumers? The belief that they can certainly is a popular one, and the debate started simmering in my head as I watched Pixar’s new film, Wall-E. In the movie, the fictitious “Global CEO” of the monopolistic Buy n Large Corporation, which Pixar implies used its power and market share to bury the globe in garbage, issues directives that determine the lifestyles of and choices available to humankind.
A government, as defined by Merriam-Webster, is an “office, authority, or function of controlling, directing, or strongly influencing the actions and conduct of [the governed].” Merriam-Webster defines a business as a “commercial or mercantile activity engaged in as a means of livelihood.” The mission of a government is to sustain and grow itself by regulating and limiting the actions and interactions of individuals. The mission of a business (or corporation) is to sustain and grow itself by providing customers with products they voluntarily purchase to support their own lives. When an institution drops the latter mission and adopts the former, it ceases to act as a corporation and becomes a government. Different incentives face the decision makers of these two types of institutions, as their missions are different. These distinctions of mission and incentives are lacking in our current government institutions, whose attempts to provide services to consumers are persistently unsuccessful (think FEMA, Medicare, Social Security, and even Fannie, Freddie, and the Fed). The results continually evoke surprise from citizens, who fail to observe the distinctly different missions and incentives of these different types of organizations (including, apparently, the creators of Wall-E). Here’s an historical example of why an institution pursuing the mission of a business rather than a government cannot “take control” of the world:
In 1870, Standard Oil was founded by John D. Rockefeller. By 1900, Standard Oil controlled about 90% of the U.S. oil market. People began to view Standard Oil as a dangerous monopoly operating to the detriment of consumers, a belief advanced by journalists such as Ida Tarbell. In 1909, the Department of Justice used the Sherman Antitrust Act to sue Standard Oil, and in 1911, the Supreme Court ruled in the department’s favor. But even by the time of this ruling, Standard Oil’s U.S. market share had fallen to 64%. It’s interesting to note that this drop in market share happened before the court’s action took effect.
This dramatic rise and fall of Standard Oil’s control of the market was possible because it relied on the voluntary actions of consumers. It had established such a large market share by offering a cheaper and better service to customers. Standard Oil was able to reduce the price of kerosene from 26 cents a gallon in 1870 to 8 cents by 1885. It accomplished this through more efficiency and less waste of byproducts, among other things (For example, Rockefeller found a use for gasoline, at the time commonly dumped as waste product, and helped develop Vaseline using leftovers from the refinement process). Customers flocked to Standard’s cheaper product. But all corporations are composed of human decision makers and therefore make mistakes. Standard Oil’s mistake was to trust an 1891 U.S. Geological Survey report that found the discovery of oil in Texas unlikely. After oil was discovered in Texas by other companies, Standard Oil could no longer offer the cheapest and best product; consumers thus abandoned it for better alternatives. By the time the Department of Justice obtained a favorable ruling, the goal of its legal action had already been accomplished by the market.
In light of these facts, Standard Oil was not a dangerous monopoly at all. It could never have used its “power” of market share to take over the world, because it had no force of law and relied on voluntary actions of consumers. It could control neither the actions of its customers nor the actions of its competitors. Any organization with that power of control is a government by definition, and only when the power of government is used can a market be controlled and competition limited. Ironically, there are some monopolies that have gained at the expense of consumers, but they are all government institutions.
A more detailed history of John D. Rockefeller and the Standard Oil Company can be found in The Myth of the Robber Barons by economic historian Burton W. Folsom.
Tags: Competition
