Dec

18

John D. Rockefeller took the high road in everything he did. He was a great businessman with grand visions: of constantly expanding his markets by lowering his costs, of improving quality and expanding the product line, and reducing costs so that more consumers could enjoy the benefits of things such as illumination and transportation. His philosophy for the future included buying during panics.

I am naturally an optimists, and when it comes to a statement of what our people will accomplish in the future, I am unable to express myself with sufficient enthusiasm.

He was a master at vertical integration, and here are some of the innovative things he did in the last 19th century to lower the price of his basic product, kerosene, from 18 cents a gallon in 1870 to 2 cents a gallon by the end of the century. He built the most modern refineries to leave no part of the crude oil he bought unused, his chemists developing a hundred products including Vaseline, Maybelline, wax. He produced his own barrels to store the oil, manufactured his own sulfuric acid and glue, grew his own trees, built his own wagons.

He was a master at marketing. He created the first World Wide brand, the Standard Oil Co., created and operated a fleet of boats to transport the product, built his own storage facilities and railroad ties, built and operated his own pipelines, sold directly to the consumer, and had his own purchasing agents in the oil field. He developed a world wide export business.

There is no man in American Business who has been more unjustly criticized than him. His business plan was to constantly lower the price of his product and increase his markets. When he did such for products like kerosene and gasoline, lubricating oil, wax and paint, he increased consumer surplus, and therefore the consumer’s wealth. His average cost curve was lower than that of other competitors due to everything above, and due to his superior management abilities and technology. There were increasing returns to scale that Pashigian attributes to such things as how the cost of a pipeline increases by a linear factor of the diameter yet the volume of oil increases by the square of the cross sectional area of the pipe. From 1870 to 1895 the Standard reduced its cost of manufacturing kerosene from 18 cents to 2 cents, and during the 1870 to 1900 period he was able to increase his market share of the refining business from 25% to 85%. He did this by reducing his cost of refining oil from 3 cents to 1/2 a cent per gallon and passing the resulting reductions in the costs on to consumers in the form of price reductions. This contributed to the common person, being able to read during the night, and the replacement of highly inflammable whale oil with kerosene in lamps.

Naturally his competitors tried to get laws passed that would protect them from his cost advantages. They accused him of getting rebates for large use of the railroad, but such rebates, as Vanderbilt announced, were available to anyone with such volume of business. They accused him of predatory pricing, but economists agree that there was no evidence that such pricing existed, and if there had been predatory pricing, it would have been detrimental to the Standard Oil Co. as they would have lost on their much higher volume of production. The main beneficiary would have been the consumer during the low price era, as their consumer surplus increased further. He was accused of buying out competitors at distress prices, but he probably created more wealth by buying out hundreds of inefficient refiners and offering them cash or stock in the Standard Oil Co., than anyone else in early business history.

As an aside, various old multi-millionaire wives of former owners have been trotted out to complain that they wish their husbands had not sold out to Standard when they did, on the theory that there is no better way to discredit a man’s reputation than to accuse him of meanness to a woman, but in every case any fair minded person would have to conclude that such complaints were unjustified as the the widow’s own advisers and relatives have often weighed in against the misgivings.

Indeed there is no person in business history who has led a more exemplary life, created more wealth for the consumer, given more to charity, including the forming of the Rockefeller University, the founding of the University of Chicago, and the forming of the Rockefeller Foundation. It is natural that the enemies of capitalism would have to vilify him and make him out to be what Matthew Josephson and the Palindrome call Robber Barrons without any reference to the facts on hand, which are well described in books by Alfred Chandler, and Allen Nevins, and articles and books by Burton Folsom.

In a subsequent installment I will detail some of the lessons I have learned from reading these books, and The Random Reminiscences of Men and Events by Rockefeller himself.

James Morin adds:

I am about half way through Titan, the Life of John D. Rockefeller Sr. by Ron Chernow … full review to come … but it is an incredibly engrossing, unbiased and detailed account thus far, and much of what Vic mentions is well represented; a highly recommended read.

Dan Grossman offers:

I am afraid I must respectfully disagree that Chernow’s book is unbiased.

It is the engrossing story that makes the book a good read. But Chernow is biased as well as unknowing on economic and business aspects. At his ending appraisal Chernow quotes JD’s accurate and even exciting statement that he did more good for more people by operating Standard efficiently and reducing the price of kerosene than by all his (massive and creative) philanthropy, but Chernow fails to begin to understand the quote and goes on to discuss the puzzling contradictions between John D as a grasping monopolist and philanthropist.

Since this was an authorized biography for which the family opened its historic files, the Rockefellers should be ashamed of themselves for participating in the sullying of the reputation of their founder and greatest member.

Along this line, see the extraordinary recent public letter to Exxon (current name of Standard) by Senator Jay Rockefeller unsubtly threatening them with massive opprobrium and government action for financing research on global warming with which he and other demagogic senators do not agree.

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