Rent-Seeking Captains of Industry and Commerce give Capitalism a Bad Name
Once upon a time you lived, worked and died all within a short walk from each other. In feudalism people owned land and lived well. The landed aristocracy. And other people (the peasants) worked the land. But did not live as well as those who owned it. For it was back-breaking work for long hours with no respite except in death. For those who worked the land belonged to the land. Just as the trees and fields and rivers did. Peasants belonged to the land and the land belonged to the landowner. The peasants couldn’t leave. And they couldn’t work hard to provide a better life for their children. For they were bond to the land as their patents were. With no choice but to work the land like their parents did.
This was how life was before we started to use power to make our work easier. We had long been using animal power to do things we didn’t have the strength or the endurance to do. Such as pulling a plow. Or a wagon full of goods. Or to travel great distances more quickly than we could by walking. Harnessing the power of moving water changed all of that. For a river moves constantly. And when you place a waterwheel in moving water you can convert the linear motion of the water into rotational motion. This rotational motion could turn a main shaft running though a factory. Belts and pulleys could transfer this power to workstations throughout the factory floor. And these powered workstations could do far more work than a person could. Lumberjacks could transport logs down a river to a lumber mill. Where a waterwheel could spin a saw that made lumber out of those logs at such a rate that great cities could arise around these mills. Cities with other factories powered by waterwheels. And homes.
So it’s no surprise that our early cities grew up on rivers. Both for water power. And the ability to use them to ship bulk goods. Ship transport. Something even animals weren’t good at. It is in these cities that wealth and political power grew. Centers of industry and commerce. Creating great wealth for those who controlled the resources that made all of that possible. So another aristocracy grew. Rent-seeking captains of industry and commerce. Who give capitalism a bad name. Who use their political power to maximize their profits. And buy favors from those in power to protect their particular interests. Such as using the power of government to create monopolies for themselves. But advancing technology made that harder to do. Especially the steam engine. And the railroad.
The Steel and Heavy Manufacturing Industries required a Massive Infrastructure and Regionally Located Raw Materials
Control of rivers, ports and harbors provided a great opportunity to amass wealth at other people’s expense. For when economic activity centered on water it made land around that water very valuable. Which concentrated wealth and power on the rivers. Until the steam engine replaced the waterwheel. And the railroad provided a way to transport people and goods inland. So not only did cities grow up along the waterways they grew up along the rail lines. Those controlling these resources still had great wealth and power. But they also offered competition. And more economic liberty. For while there can only be one Tennessee River flowing through Chattanooga, Tennessee, there can be more than one railroad running through Chattanooga. Which made Chattanooga an important city to hold during the American Civil War. For there was a great rail junction in that city. Giving anyone who controlled the city access to any part of the Confederacy.
While the steam engine and railroad allowed industries to grow anywhere in the country some industries still clustered in regional areas. Such as the steel industry. It required three ingredients to make steel. Iron ore, coke (coal cooked into hard charcoal briquettes) and limestone. To make steel you use 6 parts iron ore, 2 parts coke and 1 part limestone. Iron ore was plentiful around Lake Superior. Because it takes a lot of iron ore and a lot of iron ore is located around Lake Superior the steel makers built their mills long the Great Lakes. In Milwaukee. Chicago. Gary. Detroit. Toledo. Cleveland. Or in places like Pittsburgh where coal and iron ore deposits surround the city. These cities made up the Manufacturing Belt. Places with access to bulk ore shipping (on Great Lakes freighter or river barge). And where the steel mills arose so did heavy industry that built things from that steel. From structural steel. To automobiles.
For a while these new industries dominated the economic landscape. Big, heavy industries that couldn’t move. Concentrating money and political power. Giving rise to organized labor. Who took advantage of the fact that these heavy industries could not move. Negotiating lucrative union contracts. With generous pay and benefits. Raising the price of steel and the things we made from steel. Like automobiles. Making the rank and file like rent-seekers of old. Looking to personally benefit from their near-monopoly conditions. Like those early captains of industry and commerce. Life was good for awhile for the rank and file. Who lived very well. And better than most American workers. Thanks to those monopoly-like conditions in these steel and heavy manufacturing industries. Allowing them to charge high prices for their goods to pay for those generous pay and benefits. As there was no competition. For the steel and heavy manufacturing industries required a massive infrastructure and an abundant supply of regionally located raw materials, making it very difficult for a new competitor to open for business. At least, in the United States.
High Costs and Low Efficiencies have shuttered most of America’s Steel Making Past
Foreign competition changed all that. And large ocean-going ships. So new industries in other countries with lower labor costs could manufacture these goods and ship them to the United States. And did. Challenging the monopoly-like conditions of the rent-seeking steel and heavy manufacturing industries. So the rent-seekers turned to government for protection. And got it. Import tariffs. Which raised the price of those imported goods to the higher price level of the domestic goods. Which did two things. Insulated the domestic manufacturers from market pressures allowing them to continue with the status quo. And forced the foreign manufacturers to find less costly and more efficient ways to make their goods to counter those import tariffs.
So what happened? Technology advanced in these industries overseas while they stagnated in the US. The US didn’t invest in new technologies like they did in the previous century to find better ways to do things. Because they didn’t have to. While the foreign competitors worked harder to find better ways to do things. Because they had to. As they weren’t insulated from market forces. The Japanese invested in robotics. Transforming their auto industry. Improving quality and lowering costs. Making their cars as good if not better than the Americans did. And selling them at a competitive price even with those import protections. So what did these US actions to protect the domestic manufacturers do? Changed the Manufacturing Belt to the Rust Belt.
The big steel cities in America are no more. High costs and low efficiencies have shuttered most of America’s steel making past. Gone is the era of the sprawling steel mill. Today it’s the minimill and continuous casting. Small and efficient steel mills with small labor forces that can make small batches. Thanks to their electric arc furnaces that are easy to turn on and off. Unlike the big blast furnaces that took a while to reach operating temperatures and when they did they didn’t shut them down for years. Making it difficult to adjust to falling demand. Like the minimills could. Which helped save the steel industry by finally adopted technology that allowed it to sell at market prices. Making it harder for the rent-seekers these days. But better for consumers. Because of this relentless march of technology. That allows us to continuously find better ways to do things.
Tags: animal power, capitalism, captains of industry and commerce, coke, factory, find better ways to do things, generous pay and benefits, Great Lakes, heavy industry, industry and commerce, Iron ore, Lake Superior, Limestone, Manufacturing Belt, monopolies, rail lines, railroad, rent-seeking, rotational motion, Rust Belt, ship transport, steam engine, steel, steel industry, water power, waterwheel, wealth and power
Cement is basically Dehydrated Limestone Rock
Limestone is a sedimentary rock. Made from the sediment of dead sea life. Skeletal remains that settle to the bottom of the sea. And shells. Made largely of calcium carbonate (CaCO3). Which gives them strength. (We even urge people to drink milk for the calcium to build stronger bones.) Calcium carbonate makes strong shells and bones. And over time they make a strong rock called limestone. Which has many uses. One of which has changed the world.
If we crush limestone and mix it with some other materials and then heat it up to about 2642°F (1450°C) we will remove all the water from it. We do this in a very large cylindrical kiln that slopes downward. A fuel-fed fire heats the lower end. The hot exhaust gases travel up the kiln. The crushed rock and other materials are loaded in the higher end of the kiln. As the kiln rotates slowly the rocks tumble down the kiln as they heat up to the melting point. But not quite. They become gooey globules as they exit the kiln. They then cool into hard round lumps. Or clinker. Then this clinker is ground into a powder. In another large round rotating cylinder. Only this one is not heated. It’s full of steel balls. The end product is a fine powder free of all water we call cement.
So, basically, cement is dehydrated rock. And it can be as strong as rock again once we rehydrate it. Which brings us to how this fine powder has changed the world. When you add water to cement it starts a chemical reaction. The water molecules join with the other chemicals in the cement and they start to combine into new molecules. Add some sand and we get mortar. The stuff that binds bricks and blocks together. And tiles in our kitchens and bathrooms. Add some crushed stone and we get concrete. The stuff we pave our roads with. Build bridges out of. Buildings. Sewer pipes. Runways. Dams. Canals. Reservoirs. Aqueducts. The Romans even used it to build an empire.
Transit-Mix Trucks have about 90 Minutes to Deliver their Concrete before it Cures
This chemical reaction takes time. And when it’s done curing the concrete sets. That is, it becomes rock again. So the clock is running once we mix cement, aggregate and water together. Concrete doesn’t cure because the water evaporates. If it did we could ship concrete cross-county in unit trains with all the concrete needed for one project. But we can’t. Because once the water starts rehydrating the cement you only have so much time to pour it. Shape it. And trowel it. Before it becomes rock again. Which is why you see a lot of concrete trucks racing through the city from different companies. A concrete plant can only service a given radius. So the larger the city the more concrete plants you’ll see. And the more concrete trucks plying the streets.
These concrete trucks, or transit-mix trucks, actually mix the concrete. At the concrete plant, or batch plant, the materials that make concrete come together in the transit-mix truck. The truck pulls under a hopper and the cement, aggregate and water pour into the drum on the truck. The drum turns slowly in one direction to mix these materials. The truck then has about 90 minutes to get to the construction site. Once there they position the truck near the area of the placement and add chutes to transport the concrete from the truck to the concrete forms. When ready the drum rotates in the opposite direction at a higher speed. And the concrete rides up a screw inside the drum and out onto the chute. If a truck arrives too late on site the concrete cures inside the rotating drum. Requiring someone to crawl inside with a jack hammer to break it apart back at the batch plant.
Because of this approximate 90 minute limitation large projects don’t use these concrete plants. Instead they’ll build a batch plant on site. Or near the site. And ship cement, aggregate and water to the project batch plant. Or connect it to a local water source. When they schedule a larger pour (or placement) a caravan of trucks will line up at the batch plant. Load up. And deliver their concrete. Then wash out the residual concrete from their trucks at a designated location. So they won’t have to use a jack hammer later to chip it out. You’ll see a large sloppy pile of concrete there. Which they can bust up later and recycle into aggregate.
A Cylinder Compression Test determines the Strength of Placed Concrete
Depending on the concrete mix you can get different properties. Increasing one property, though, often reduces another property. For example, to increase workability you can add more water. This will allow the concrete mix to flow easier and fill in all voids in a concrete form. But the tradeoff is strength. If you watch a concrete placement on a construction site you may see the concrete workers using tools to help get rid of any trapped air to help the concrete fill all the voids in the forms. Such as a vibrating hose placed all around the concrete in a building foundation form or basement wall form. And you may see them fill a cone with each batch delivered to the site. For a slump test. Concrete specifications will call for a slump range. Which is basically how much the concrete will slump when that cone is removed. If the slump fails the test they reject the batch.
Concrete strength is so important there is a test for that. Especially for roads and runways. Which are very costly and very inconvenient to replace. So the concrete specification calls for a specific strength to get a predetermined number of years of use out of these surfaces. But the higher the strength the higher the cost. Which is why roads break apart far sooner than an airport runway. A road is much easier to close. Because you can reroute traffic elsewhere. Not quite that easy with a runway. There aren’t many places a 747-400 with a full fuel load can take off from. So they build runways to last. Which makes them very expensive. They could make roads as strong and long lasting as runways. But that would leave little funding available for anything else.
A contractor could under bid a new runway project with the intention of cheating the specifications. And put in a weaker runway than specified. And pocket a nice profit. But they don’t. Because of those strength tests. With every batch of concrete they place they also have to fill cylinders with that concrete. Which they send to an independent testing lab. After the concrete cures they place these cylinders in a press. For a cylinder compression test. Which compresses these cylinders until they break. If they break below the specified strength they will reject the concrete. Which means the contractor will have to replace it. Or the owner may discount their final payment to the contractor to factor in the inferior product they delivered. Which is a powerful incentive not to cheat the specification. And few do. A pothole strewn road may not be the fault of the contractor. Over-weight trucks may have caused that damage. By not having enough axles under their load to disperse that weight over the surface of the road. Putting higher than allowed weights per axle on the pavement. Greatly increasing the stress each axle applies. Exceeding the design strength of the road. And breaking the pavement apart as these axles roll and bounce across it.
All of this from the little sea creatures that died so long ago. Forming the limestone that we use to make cement. Which we mix with aggregate and water to make concrete. That lets us enjoy the modern world concrete gives us.
Tags: aggregate, batch plant, calcium carbonate, cement, clinker, concrete, concrete placement, concrete plant, concrete trucks, cure, curing, cylinder compression test, dehydrated rock, kiln, Limestone, slump test, transit-mix truck
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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