Carnegie, Rockefeller, Ford, Westinghouse, Boeing, Gates and Tariffs

Posted by PITHOCRATES - September 10th, 2013

History 101

Ford brought the Price of Cars down and Paid his Workers more without Tariff Protection

Andrew Carnegie grew a steel empire in the late 19th century.  With technological innovation.  He made the steel industry better.  Making steel better.  Less costly.  And more plentiful.  Carnegie’s steel built America’s skylines.  Allowing our buildings to reach the sky.  And Carnegie brought the price of steel down without tariff protection.

John D. Rockefeller saved the whales.  By making kerosene cheap and plentiful.  Replacing whale oil pretty much forever.  Then found a use for another refined petroleum product.  Something they once threw away.  Gasoline.  Which turned out to be a great automotive fuel.  It’s so great that we use it still today.  Rockefeller made gasoline so cheap and plentiful that he put the competition out of business.  He was making gasoline so cheap that his competition went to the government to break up Standard Oil.  So his competition didn’t have to sell at his low prices.  And Rockefeller made gasoline so inexpensive and so plentiful without tariff protection.

Henry Ford built cars on the first moving assembly line.  Greatly bringing the cost of the car down.  Auto factories have fixed costs that they recover in the price of the car.  The more cars a factory can make in a day allows them to distribute those fixed costs over more cars.  Bringing the cost of the car down.  Allowing Henry Ford to do the unprecedented and pay his workers $5 a day.  Allowing his workers to buy the cars they assembled.  And Ford brought the price of cars down and paid his workers more without tariff protection.

George Westinghouse decreased the Cost of Electric Power without Tariff Protection

George Westinghouse gave us AC power.  Thanks to his brilliant engineer.  Nikola Tesla.  Who battled his former employer, Thomas Edison, in the Current Wars.  Edison wanted to wire the country with his DC power.  Putting his DC generators throughout American cities.  While Westinghouse and Tesla wanted to build fewer plants and send their AC power over greater distances.  Greatly decreasing the cost of electric power.  Westinghouse won the Current Wars.  And Westinghouse did that without tariff protection.

After losing out on a military contract for a large military transport jet Boeing regrouped and took their failed design and converted it into a jet airliner.  The Boeing 747.  Which dominated long-haul routes.  Having the range to go almost anywhere without refueling.  And being able to pack so many people into a single airplane that the cost per person to fly was affordable to almost anyone that wanted to fly.  And Boeing did this without tariff protection.

Bill Gates became a billionaire thanks to his software.  Beginning with DOS.  Then Windows.  He dominated the PC operating system market.  And saw the potential of the Internet.  Bundling his browser program, Internet Explorer, with his operating system.  Giving it away for free.  Consumers loved it.  But his competition didn’t.  As they saw a fall in sales for their Internet browser programs.  With some of their past customers preferring to use the free Internet Explorer instead of buying another program.  Making IE the most popular Internet browser on the market.  And Gates did this without tariff protection.

Tariff Protection cost American Industries Years of Innovation and Cost Cutting Efficiencies

Carnegie Steel became U.S. Steel.  Which grew to be the nation’s largest steel company.  Carnegie had opposed unions to keep the cost of his steel down.  U.S. Steel had a contentious relationship with labor.  During the Great Depression U.S. Steel unionized.  But there was little love between labor and management.  There were a lot of strikes.  And a lot of costly union contracts.  Which raised the price of U.S. manufactured steel.  Opening the door for less costly foreign imports.  Which poured into the country.  Taking a lot of business away from domestic steel makers.  Making it more difficult to honor those costly union contracts.  Which led the U.S. steel producers to ask the government for tariff protection.  To raise the price of the imported steel so steel consumers would not have a less costly alternative.

During World War II FDR was printing so much money to pay for both the New Deal and the war the FDR administration was worried about inflation.  So they put ceilings on what employers could pay their employees.  With jobs paying the same it was difficult to attract the best employees.  Because you couldn’t offer more pay.  So General Motors started offering benefits.  Health care.  And pensions.  Agreeing to very generous union contracts.  Raising the price of cars.  Which wasn’t a problem until the imports hit our shores.  Then those union contracts became difficult to honor.  Which led the U.S. auto makers to ask the government for tariff protection.  To raise the price of those imported cars so Americans would not have a less costly alternative.

These two industries received their tariffs.  And other government protections.  Allowing them to continue with business as usual.  Even though business as usual no longer worked.  So while the foreign steel producers and auto makers advanced their industries to further increase quality and lower their costs the protected U.S. companies did not.  Because they didn’t have to.  For thanks to the government they didn’t have to please their customers.  As the government simply forced people to be their customers.  For awhile, at least.  The foreign products became better and better such that the tariff protection couldn’t make the higher quality imports costly enough to keep them less attractive than the inferior American goods.  With a lot of people even paying more for the better quality imports.  Losing years of innovation and cost cutting efficiencies due to their tariff protection these American industries that once dominated the world became shells of their former selves.  With General Motors and Chrysler having to ask the government for a bailout because of the health care and pension costs bankrupting them.  Something Carnegie, Rockefeller, Ford, Westinghouse, Boeing or Gates never had to ask.

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LESSONS LEARNED #20: “It is never a consumer that complains about ‘predatory’ pricing.” -Old Pithy

Posted by PITHOCRATES - July 1st, 2010

ECONOMIES OF SCALE and vertical integration can do two things very well.  Make industrialists rich.  And make the things they sell cheap. 

The more you make, the less each thing you make costs.  Businesses have fixed costs.  Big one time investments in plant and equipment.  Businesses have to recover these costs.  Each thing they sell has a portion of these fixed costs added to its price.  The more they sell, the less they need to add to each unit sold.  This is economies of scale.  Think of bulk goods.  Warehouse clubs.  Places where you can buy large quantities of things at lower unit prices.  You may buy an ‘economy pack’ of 3 bottles of shampoo shrink-wrapped together.  The purchase price of a 3-pack will be greater than the price of a single bottle of shampoo at your convenient corner drug store.  But the unit cost of each of the bottles in the 3-pack will be less.  You save more over time by buying 3 bottles at a time.  Spending more, then, means spending less.  In time.

Few of us buy raw materials.  Few have a need for crude oil.  Iron ore.  Coal.  Limestone.  Manganese.  But they make the stuff we buy.  A lot of things have to happen before those raw materials make it to us in those things we buy.  It has to be mined or drilled/pumped.  Transported.  Processed.  Stored.  Transported again.  Processed again.  Stored again.  Transported again.  There are many different stages between extracting raw materials from the earth and incorporating them into a final product we consumers buy.  At every stage there are costs.  And inefficiencies.  Which add to costs.  By reducing these costs along the way, the component materials used at the final manufacturing stage cost less.  This reduces the selling price of the final product.  This is what vertical integration does.  It puts everything from the extraction of raw materials to the incorporation of those processed materials into the final product for sale under control of the final user.  It brings in a high level of quality, cost containment and reduction of inefficiencies into the entire process resulting in a high quality, mass produced, inexpensive product.

Not everyone can do these things.  You have to live and breathe the industry you’re in.  You have to understand it intimately.  An industrialist at the top of his game can do this.  A politician can’t.  States trying to take control of their economy have failed.  Every time they’ve tried.  Why?  Politicians are ‘intellectuals’.  They’ve never run a business.  They only thought about it.  And, somehow, that gives them the moral authority to tamper in something they are simply unqualified to do.  And when they meddle, they destroy.  Purposely.  Or through unintended consequences.  In the process, though, they enrich themselves.  And their cronies.

ANDREW CARNEGIE WAS a brilliant entrepreneur.  After working for a railroad, he saw the future.  Railroads.  And he would build its rails.  And its bridges.  With his Keystone Bridge Company.  Which used steel and iron.  So he built his Union Mills.  Which needed pig iron.  So he built his Lucy blast furnace.  Which consumed raw material (iron, coke, limestone).  So he secured his own sources of raw materials. 

His Lucy blast furnace set world records, nearly doubling the weekly output of his steel competitors.  No one made more steel than Carnegie.  For less.  In about 20 years, he brought the price down for steel rails from $160/ton to $17/ton.  And got rich in the process.

Economies of scale.  Vertical integration.  And innovation.  Carnegie hired the best people he could find and used the latest technology.  Always improving.  Always cutting costs.  Always making steel more plentiful.  And cheaper.  His steel built a nation.  Dominated the industry.  And destroyed the competition.  Of course, that drew the attention of the government.  And they tried to break up the steel giant because it was unfair to the competition.  Who couldn’t sell steel as cheap as he could.

JOHN D. ROCKEFELLER was a brilliant entrepreneur.  After trying the oil drilling business, he saw the future.  The refining business.  For America lit the night with kerosene.  And he would provide that kerosene.  At prices that a poor man could afford.  And he did.  And he saved the whales in the process (his cheap kerosene put the whale oil business out of business).

Like Carnegie, cutting costs and production efficiencies consumed him.  He built his own kilns and used his own timber for fuel.  He made his own barrels from his own timber.  He used his own horse-drawn carts, boats, rail cars and pipelines.  He bought up competitors.  He grew to dominate the industry.  By far the biggest shipper, he got better shipping rates than his competitors.  And he constantly innovated.  When others were dumping the gasoline byproduct from refining kerosene into the river (no internal combustion engine yet), he was using it for fuel.  He hired the best talent available to find a use for every byproduct from the refining process, giving us everything from industrial lubricants to petroleum jelly (i.e., Vaseline).

His company, Standard Oil, was close to being a monopoly.  When they controlled 90% of the market kerosene was never cheaper.  He brought the price down from $0.26/gallon to $0.08/gallon.  And that was an outrage.  We can’t allow any one company to control 90% of the market.  Sure, consumers were doing well, but the higher-cost competitors could not stay in business selling at those low prices.  So the government broke up Standard Oil via antitrust legislation (the Sherman Act).  To protect the country from monopolistic practices.  And cheap kerosene, apparently.

BILL GATES WAS a brilliant entrepreneur in building Microsoft.  The personal computer (PC) was new.  You couldn’t do much with it in the early days unless you were pretty computer savvy.  But programs were available that made them great business tools (word processing and spreadsheet programs). 

IBM created the PC.  And they licensed it so others could make IBM-like machines.  IBM clones.  The PC industry chewed each other up.  But Gates did well.  Because all of these machines used his operating system (Microsoft’s Disk Operating System – DOS).  Apple developed the Macintosh (with a mouse and Graphical User Interface – GUI) but it was expensive.  Anyone who used one in college wanted to buy one.  Until they saw the price.  So they bought an IBM clone instead.  And when Gates came out with Windows, they were just as easy to use as the Macs.

Because of the higher volume of the IBM platform sold, Microsoft flourished.  Software was bundled.  New machines came preloaded with Windows.  And Internet Explorer.  And Windows Media Player.  You got a lot of bang for the buck going with a Windows-based PC.  And Windows dominated the market.  Consumers weren’t complaining.  Much.  Sure, there were things they did bitch about (glitches, drivers, viruses, etc.), but it sure wasn’t price.

Of course, Microsoft’s competitors were hurting.  They couldn’t sell their products if Microsoft was giving away a similar product free.  Because they were hurting their competitors, the government tried to break up the company with the Sherman Act. 

THE NORTHERN SECURITIES SUIT of 1902 found a holding company guilty of not yet committing a crime.  Teddy Roosevelt’s administration filed a Sherman antitrust suit against Northern Securities.  This was a holding company for Northern Pacific, Great Northern, and Chicago, Burlington, and Quincy Railroads.  What’s a holding company?  It replaced a trust.   Which large corporations created in response to government’s attacks on large corporations.

Small competitors feared large corporations.  They could not compete against their economies of scale and vertical integration.  The little guys couldn’t sell things as cheap as the big corporations could.  So the government intervened to protect the little guy.  So they could sell at higher prices.

But businesses grow.  All big corporations started out as little guys.  And the growing process doesn’t stop.  So the big corporations had to find other ways to grow.  They formed trusts.  Then the trust-busters busted up the trusts.  The next form was the holding company. 

The trust-busters said that the big corporations, trusts and holding companies were all trying to become monopolies.  And once they eliminated all competitors, they would raise their prices and gouge the consumers.  Northern Securities never did.  But they could.  So they were guilty.  Because they might commit a crime.  One day.

ALL BUSINESS OWNERS aren’t morally ethical and honest.  But the market is, albeit cruel.  Economies of scales will always put the little guy out of business.  Sad, yes, for the little guy.  But for every little guy put out of business, millions of consumers save money.  They can buy things for less.  Which means they have more money to buy more things.  New things.  Different things.  From new little guys who now have a chance with this new surplus of purchasing power.

But when politicians get involved, consumers lose.  When they help a competitor, they help them by keeping prices high.  To keep competition ‘fair’.  For the politically connected.

Consumers never complain about low prices.  Only competitors do.  Or their employees.  Those working on whaling ships didn’t like to see the low price of Rockefeller’s kerosene.  But the new refining industry (and its auxiliaries) created far more jobs than were lost on the whaling ships.  We call it progress.  And with it comes a better life for the many.  Even if it is at the expense of the few.

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