INDUSTRIAL ENTREPRENEURS

Transcription

1 LESSON 24 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY 271

2 LESSON 24 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? LESSON DESCRIPTION This lesson focuses on a group of nineteenthcentury industrial entrepreneurs described in many history books as Robber Barons. It calls upon students to analyze the activities of these entrepreneurs in order to draw conclusions about the innovations and business practices for which they are known. To carry out this analysis, the students examine techniques of mass production, division of labor and vertical and horizontal integration, noting their effects on industrial output and other outcomes. They also read a case study on John D. Rockefeller and discuss the characterization of him as a Robber Baron. The nineteenth-century industrialists often described as Robber Barons include Andrew Carnegie of Carnegie Steel, John D. Rockefeller of Standard Oil, and Cornelius Vanderbilt, a railroad magnate. (The term Robber Baron was first used in a history book published by Matthew Josephson in 1934.) Accumulating great wealth through entrepreneurial activity and innovation, these men became recognized leaders in industry and business circles, known particularly for business consolidations on a large scale and for focusing sharply on innovative management practices. Their achievements yielded benefits and costs. The benefits flowed from a new emphasis on improving efficiency in the workplace. Innovators achieved this emphasis by replacing decentralized methods of production with mass production, developing specialized production techniques and cutting production costs through vertical and horizontal integration. The costs, also flowing from an emphasis on efficiency, included certain harmful effects of monopoly practices and conditions affecting workers. MYSTERY During the late nineteenth century, industrialization proceeded rapidly in the United States. Men like Andrew Carnegie, John D. Rockefeller and the Vanderbilt father and son team pioneered the way. Were these men Robber Barons or industrial entrepreneurs? ECONOMIC HISTORY Despite the wealth they accumulated, industrialists late in the nineteenth century lived in a world of scarcity. They coped with scarcity as others do, making choices in their efforts to maximize benefits and minimize costs. To reduce costs and boost output, they sometimes consolidated firms, horizontally and vertically, and implemented new techniques of specialization and mass production. In taking these actions, the industrialists were responding to incentives. They sought to profit from opportunities they saw in a growing U.S. economy; they also sought to respond effectively to competitive pressures arising within that economy. CONCEPTS Benefits Costs Entrepreneurs Horizontal integration Mass production Property rights Vertical integration OBJECTIVES The student will: 1. Evaluate the entrepreneurial careers of prominent industrial and financial leaders in the United States late in the nineteenth century. 2. Analyze business consolidation and techniques of mass production, identifying effects on costs, competition and restraints on trade. 3. Analyze business consolidation and techniques of mass production. 272 FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY

3 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? LESSON 24 CONTENT STANDARDS Economics Entrepreneurs are people who take the risks of organizing productive resources to make goods and services. Profit is an important incentive that leads entrepreneurs to accept the risks of business failure. (NCEE Content Standard 14) When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase. (NCEE Content Standard 6) History How the rise of corporations, heavy industry, and mechanized farming transformed the American people. (Era 6, Standard 1, National Standards for History) TIME REQUIRED 60 minutes MATERIALS A transparency of Visuals 24.1, 24.2 and 24.3 A copy of Activities 24.1 and 24.2 for each student PROCEDURE 1. Explain that the purpose of this lesson is to examine the role played by leading industrialists of the late nineteenth century, including Andrew Carnegie and John D. Rockefeller. Some historians refer to these individuals as Robber Barons. The term Robber Barons connotes a derogatory judgment, implying that the individuals in question gained their success through special privilege or unethical business practices. Others regard the same individuals as industrial entrepreneurs people who took risks in order to produce goods and services for consumers. Which description is accurate? Were these men Robber Barons or industrial entrepreneurs focused on pleasing their customers? 2. Ask: What do you think might be some of the characteristics of an entrepreneur? (Accept a variety of answers.) 3. Display Visual Use it to encourage discussion of the traits of the entrepreneur. Stress the strong tendency of entrepreneurs to take risks and innovate. Emphasize that entrepreneurs always envision success and they always face the risk of failure. 4. Ask: What do you suppose is the most important incentive motivating entrepreneurs to innovate and take risks? (Accept a variety of answers.) Explain that the answer is property rights. Property rights give entrepreneurs the legal right to realize the profits and gain other rewards that result from their risky entrepreneurial ventures. 5. Display Visual Explain how entrepreneurial activities (also referred to as Causes in the Visual) have effects on output, supply, costs and employment. Stress the point that when output increases, prices will fall (if nothing else changes). And when production increases, the demand for labor will rise, along with income and consumption. 6. Display Visual Direct the students attention to S 1 and D. Ask the following: Why do producers increase their output when price increases? (The potential for profit rises as price increases. To earn a profit, producers will produce more of the items that command higher prices. This is why the supply curve is upward sloping.) Why is the demand curve downward sloping? (As the price of a product increases, consumers purchase less of it, seeking instead to buy substitute products at lower prices.) Identify the equilibrium point in the graph the point at which every buyer finds a seller and every seller finds a buyer at one price called the equilibrium price. (X marks the equilibrium spot. At the equilibrium price, the quantity FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY 273

4 LESSON 24 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? demanded by consumers equals quantity supplied by producers.) 7. Continue to display Visual Ask the students to explain how mass production and new techniques to improve efficiency change the supply curve depicted in Visual More specifically: Does supply increase or decrease when efficiency improves and costs are cut through mass production? (Supply increases and is depicted by a rightward and downward shift in the supply curve. Cost-saving techniques increase supply. The supply curve shifts from S 1 to S 2.) How will the shift in the supply curve change the market price and quantity? (Again, X marks the equilibrium spot. Price falls and quantity produced increases.) 8. Explain that John D. Rockefeller has often been described as a Robber Baron. Yet Rockefeller exhibited many of the characteristics of an entrepreneur and a competitive producer in a new market. Distribute Activity When the students have read the Activity, ask: A. What innovations did Rockefeller introduce in the U.S. oil industry? (He introduced cost-cutting measures, especially in transportation of oil. For example, he introduced the use of the railroad tank car.) B. Why is Rockefeller regarded by some as a cutthroat competitor? (He is accused of selling below his costs, or dumping goods on the market in order to undercut his competitors and drive them out of the market.) C. Do you think the criticism is justified? (It is easy to understand why Rockefeller s competitors disliked him. His costs were lower than those of his competitors. He could reduce prices below those of his competitors and still earn a profit. This put pressure on Rockefeller s competitors to combine with him or go out of business.) D. Rockefeller was praised for his philanthropy. Was this his most important economic contribution? (Probably not. His most important economic contribution was providing lower prices to millions of consumers.) 9. Distribute Activity Explain that during the nineteenth century, two types of business consolidation emerged. Horizontal mergers occurred when one firm consolidated with other firms producing similar products. For example: If one manufacturer of lawn mowers merged with another manufacturer of lawn mowers, that would be an instance of horizontal merger. By contrast, vertical mergers occurred when one firm consolidated with other firms producing goods or providing services along the same production chain. For example: If a manufacturer of lawn mowers merged with a manufacturer of small engines used in lawn mowers, that would be an instance of vertical merger. Ask the students to apply their understanding of the two concepts by completing Activity (Answers: 1A, 2B, 3B, 4A, 5B, 6A.) CLOSURE In one of Shakespeare s most famous plays, a character named Juliet poses a famous question. What s in a name? she asks. That which we call a rose by any other name would smell as sweet. Juliet was onto something. No matter what we choose to call them, the industrial magnates of the late nineteenth century left their mark on the U.S. economy. Ask: What are some of the characteristics of an entrepreneur? (In their efforts to earn a profit, entrepreneurs are willing to take risks and organize resources in innovative ways.) What is a primary effect of entrepreneurial activities on supply and market price? (Entrepreneurial activities usually result in an increase in supply and a decrease in price.) 274 FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY

5 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? LESSON 24 How did John D. Rockefeller s business practices benefit consumers? (Through innovations, such as those in transportation, Rockefeller reduced prices paid by consumers.) Why do you think so many competitors were willing to combine with him rather than compete against him? (They wanted to avoid going out of business. Rockefeller offered them an opportunity to stay in business and share in the profits he earned.) Why did many people accuse Rockefeller of being a cutthroat competitor? (Few people enjoy tough competition. Many of Rockefeller s critics stress the difficulties his competitors faced and the dangers posed by his consolidations. Few acknowledge the benefits to consumers, evident in lower prices.) ASSESSMENT Multiple-Choice Questions 1. Fully protected rights to any rewards or profits result in which of the following: ESSAY QUESTIONS 1. In what way did the activities of the industrial magnates positively and negatively impact the lives of their workers? (Possible answer: The positive aspects include, but are not limited to, an increase in the total number of jobs, income and consumption. The negative aspects are stressful, hazardous and changing working conditions.) 2. Use economic reasoning to explain why competitors may have hated Rockefeller while consumers may have loved him. (Possible answer: Rockefeller, through his use of tankers and pipelines, devised ways to reduce his production costs faster than his competitors could reduced theirs. He was accused of selling oil below his costs to drive out competitors. However, the innovations he introduced reduced his costs. He was able to make a profit at lower prices than those charged by his competitors. Consumers benefited from these lower prices.) A. Individuals avoiding risks. B. Consumer rebellion. C. Government intervention. D. Innovation, invention and entrepreneurship. 2. John D. Rockefeller assumed ownership of 39 other oil companies. This is an example of A. Horizontal integration. B. Spending to buy volume. C. Vertical integration. D. Integrating sales staffs. FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY 275

6 LESSON 24 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? VISUAL 24.1 TRAITS OF ENTREPRENEURS Economically speaking, an entrepreneur is a productive resource a special sort of human resource. Entrepreneurs have several characteristics: They organize resources and manage them in innovative ways to increase output or produce new goods and services or both. They look for new ways to produce goods and services. They are willing to take risks. Seeking success, they risk failure. They are willing to face stiff competition. They are willing to take advantage of legal ways to limit the competition they face by using patents and copyrights, for example. They take steps to earn as much profit as possible. 276 FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY

7 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? LESSON 24 VISUAL 24.2 ENTREPRENEURSHIP DURING THE LATE NINETEENTH CENTURY Entrepreneurial Activity (Causes) Definition Effects Mass production Division of labor and specialization Vertical integration Horizontal integration Involves the production of large quantities of similar goods using large-scale operations, especially mass production in factories employing many workers. Examples include breakthroughs in producing steel, clothing, shoes, cans and so forth. Laborers (productive resources) can usually produce more goods and services per hour if their work tasks are divided among different workers. This is division of labor. Division of labor allows laborers working repetitively on the same tasks to specialize in the production process. As time passes and laborers become skilled at specific tasks, output rises and labor costs fall. Vertical integration occurs when firms manufacturing goods or providing resources along the same production chain merge. Gustavus Swift in meat packing and Andrew Carnegie in steel are among those who used vertical integration. Horizontal integration occurs when business competitors in the same industry merge; it occurs when a company in one sector of an industry acquires or gains control over other companies in that sector. For example, a production company may expand by purchasing other production firms. John D. Rockefeller is the best example an industrialist who used horizontal mergers. More output can be achieved at a lower cost. Supply increases. The number of people employed increases because the demand for labor rises. Improves efficiency: output per labor hour rises. Supply increases. Production costs fall. Supply increases. Vertically integrated firms may restrict output and increase prices. Supply decreases. Production costs fall if economies of scale are realized. Supply increases. Horizontally integrated firms may restrict output and increase prices. Supply decreases. FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY 277

8 LESSON 24 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? VISUAL 24.3 MASS PRODUCTION AND NEW TECHNIQUES: CHANGE IN SUPPLY PRICE S 1 P 1 S 2 P 2 D Q 1 Q 2 OUTPUT 278 FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY

9 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? LESSON 24 ACTIVITY 24.1 JOHN D. ROCKEFELLER: NO ONE LOVES A COMPETITOR John D. Rockefeller was an entrepreneur who sensed an opportunity waiting to be grasped. To grasp it, he set about bringing organization and efficiency to the emerging U.S. petroleum industry. He did this by figuring out how to cut costs. Cutting costs allowed him to reap personal benefits and pass some of the savings along to consumers. The rewards for his many innovations were great. He became a very wealthy man. Seeking Less Expensive Lighting The U.S. petroleum industry became increasingly important during the nineteenth century because it provided substitutes for whale and coal oil then used for lighting. Edwin Drake had discovered that petroleum could be pumped successfully from oil wells. Consumer interest in whale oil, already declining, continued to drop as the desirability of less expensive kerosene, produced from petroleum, increased. By the 1880s, kerosene had replaced whale and coal oil as consumers fuel of choice. But the petroleum industry in the 1860s was filled with uncertainty. Prices varied wildly as businesses experimented with ways of drilling, refining and transporting oil. Much confusion existed about which technologies would be best. Reducing Costs Rockefeller entered the uncertain environment of the oil business in Cleveland in He quickly recognized that many cost-savings could be achieved. Soon he bought out the partners of his firm and made changes in production that would reshape the industry. Perhaps Rockefeller s greatest innovations were in the area of transportation. It was there that he managed to get ahead and stay ahead of his competition. Oil in those days was hauled in barrels. Loading and unloading barrels of oil took time and was therefore expensive. Rockefeller substituted railroad tank cars for barrels to carry oil. Because of his potential to be a high-volume customer, he was able to pressure (or negotiate with) the railroads in order to get favorable prices (rebates) for shipping his oil. These pricing agreements had the effect of reducing his costs and allowing him to sell at prices lower than those of his competitors. Rockefeller and his associates established Standard Oil Company in Within a decade, Standard Oil owned major refineries in Cleveland, New Jersey, Pittsburgh and Philadelphia. In 1882, Rockefeller organized the Standard Oil Trust. Standard Oil developed a pipeline system, purchased new oil fields and created new ways to market its products. Rockefeller then controlled most refining and distribution of oil in the United States, and he also controlled much of the world s oil trade. Because of the innovations Rockefeller employed, Standard Oil s transportation costs dropped like a stone. Prices to consumers followed the same path. The price of petroleum dropped from 36 cents a gallon in 1863 to 8 cents a gallon in The Criticisms of Rockefeller Newspapers at the time portrayed Rockefeller as a cutthroat competitor, and many historians have stated the same criticism. Rockefeller was accused of using ruthless tactics to drive out his competition. Was he a ruthless competitor? Let s examine the logic of the case. If the point is that he was in front of his competitors in finding ways to cut costs and lower prices if that s being a ruthless competitor then the answer is a clear yes. Rockefeller and his associates did benefit from undercutting their competitors, but consumers benefited, too. By about 1890, most Americans could afford kerosene lighting. Some business people claimed at the time that Rockefeller competed unfairly. They accused FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY 279

10 LESSON 24 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? ACTIVITY 24.1, CONTINUED JOHN D. ROCKEFELLER: NO ONE LOVES A COMPETITOR Rockefeller of dumping oil or selling it below his costs in order to drive them out of business. Does this charge make sense? Standard Oil owed much of its success to reducing costs. Rockefeller could not have sold oil below his costs for very long. If he had, he would have been forced out of business. Rather, through the use of tank cars and pipelines, he developed ways to reduce his costs sharply. This allowed him to sell oil at prices below those of his competitors. Who benefited from lower costs and prices? Standard Oil and consumers of kerosene and other oil products. Who was hurt from lower costs and prices? Producers unable to compete and consumers who otherwise might have experienced still lower prices from greater competition in the oil industry. Another charge is that Rockefeller forced other firms to join him. Rockefeller is described as shamelessly selling at lower prices in order to force reluctant firms to join his emerging monopoly. Rockefeller s competitors had little choice, according to this view. This charge overlooks the fact that most of the firms Rockefeller acquired approached him and asked to be acquired. We can speculate about the conditions leading up to these appeals. However, it is clear that Rockefeller s competitors realized that they could not compete successfully with him. His costs were lower. They wanted to avoid going broke. They hoped that in combination with Rockefeller they could stay in business and eventually gain wealth. The owners of these firms concluded that it was to their advantage to join the competition while their businesses were still attractive. Breaking It Up The Standard Oil Trust that Rockefeller established was found to be illegal under the Sherman Anti- Trust Act of The Sherman Anti-Trust Act prohibited businesses from acting in combination to restrict competition. Standard Oil continued to operate as a holding company called Standard Oil of New Jersey until 1911, when the U.S. Supreme Court ordered the firm dissolved. Giving It Away While Rockefeller has often been attacked for his business tactics, he is often praised for his generous and far-sighted philanthropy. He gave away $550 million during his lifetime. The legacy of his giving might be familiar to you. He formed the Rockefeller Foundation and Rockefeller University. He helped found the University of Chicago in He was responsible for the renovation of Williamsburg, Virginia. He funded the restoration of Versailles in France. He acquired the land that eventually became Grand Teton National Park in Wyoming. These are just a few of the endeavors that he supported. QUESTIONS FOR DISCUSSION A. What innovations did Rockefeller introduce in the U.S. oil industry? B. Why is Rockefeller regarded by some as a cutthroat competitor? C. Do you think the criticism is justified? D. Rockefeller was praised for his philanthropy. Was this his most important economic contribution? 280 FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY

11 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? LESSON 24 ACTIVITY 24.2 HORIZONTAL AND VERTICAL MERGERS Instructions: For each entrepreneur, identify which type of merger took place when the main company acquired the other firms. Entrepreneur Main Company Types of Firms Consolidated to Permit Production at a Larger Scale at a Lower Cost Type of Merger (Circle the correct type of merger.) 1a. Horizontal Andrew Carnegie ( ) Carnegie Steel Company 1. Other steel companies 2. Coke and iron ore firms 3. Firms producing lake steamers needed to transport the iron ore 1b. Vertical 2a. Horizontal 2b. Vertical 3a. Horizontal 3b. Vertical John D. Rockefeller ( ) Standard Oil Company 4. Assumed ownership of 39 other oil companies 4a. Horizontal 4b. Vertical Cornelius ( ) and William Vanderbilt ( ) Railroads: Staten Island Railroad and New York & Harlem Railroad 5. Cornelius purchased ferry and steamship companies. 6. They both purchased other railroad companies. 5a. Horizontal 5b. Vertical 6a. Horizontal 6b. Vertical FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY 281

12 LESSON 24 INDUSTRIAL ENTREPRENEURS OR ROBBER BARONS? 282 FOCUS: UNDERSTANDING ECONOMICS IN UNITED STATES HISTORY NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, NY