Listen to part of a lecture in an American history class.
Professor: We’ve been talking about the transformation, the industrialization of the United States economy in the 19th century. As the country shifted from an agricultural to an industrial base, political power shifted, too. Businesses became… A lot of power went from government into the hands of business leaders.
So, why did this happen? How did an elite group—a few business giants—how did they end up dominating, controlling a number of important national industries in the last quarter of the 19th century? How did they get to be so dominant? How did they figure out, how did they take advantage of the new industrialization of American society?
Well, consider the example of Andrew Carnegie and the steel industry. We’ve already discussed the development of a national network, a national system of railroads. Well, this growth created a tremendous demand for steel, a national railroad system needs a lot of railroad tracks, right? And Carnegie seized the opportunity. He built the world’s most modern steel mill. And he came up with a system of business organization called vertical integration. Vertical integration just means that all, every single activity of a particular industry’s processing, is performed by a single company. In the case of the steel industry, this means the mining of the iron ore, the transportation used to get ore from the mine to the mill, turning the ore into steel, the manufacturing process and sales. Carnegie controlled all of these. He practiced vertical integration on such a large scale that he practically owned the whole steel industry. This, of course, gave him a lot of political clout. Just a quick sketch, but you get the idea, right?
Here’s another example: John D. Rockefeller. Rockefeller owned an oil refinery. But he wanted to expand his business. Since there was a lot of competition in the industry, he thought the smart way to go about it would be to buy his competitor’s businesses. But at the time, it was illegal for one corporation to control another. So, what he did was he created an organizational structure called a trust. A trust is—well, I don’t have to go into that now—what matters is that a trust created a single, central management team and that team directed the activities of what otherwise still appeared to be independent companies. This new legal entity worked so well that at one point, Rockefeller controlled ninety percent of the country’s oil refineries which again, gave him lots of political power.
So you’ve got two different approaches to expending a business. And both were quite effective. Of course, these weren’t the only two examples. A number of big businesses run by powerful individuals developed across a wide range of industries like railroad, food processing, electricity. But what they all had in common was the government let them operate pretty much how they wanted to. So why did they do that? Why did the government keep such a low profile and allow individuals to gain so much control of the industries?
Well, obviously, they had the wealth and the power to influence political leaders. But also, the truth is that these industry leaders made a significant contribution. Their investments in technologies led to the development of many new production techniques, which strengthened the economy. And many of them gave lots of money to charity. Andrew Carnegie was particularly admired for his generosity. But there was one thing in particular that gave them power and that’s they were beneficiaries, probably the biggest beneficiaries of a theory—a dominant political theory—in the 19th century, something called laissez faire doctrine.
Laissez faire roughly means let it alone. And that pretty much summarized the theory’s philosophy. The idea was that government should leave business alone. Allow it to operate unregulated. Legislatures weren’t supposed to pass a lot of laws or worry about regulating business practices. When people did challenge a company’s business conduct, I mean in court cases, the few laws that did exist were usually interpreted in favor of business interests.
But overtime it started becoming increasingly obvious and troubling to the public that some of these big companies simply had too much control. There were criticisms that owners had too much opportunity to exploit workers--workers and consumers because they could control prices and wages. And small business owners and small farmers couldn’t compete, so there was bad press, bad publicity, enough that the government eventually felt that it had to do something, so it passed two key pieces of legislation. One law was designed to regulate the prices set by the railroads. Another made it illegal for trusts to be used to limit competition. Both were aimed squarely at reducing the exclusive control that existed in some industries.