Saturday, November 08, 2008

Miller Time

The Fly Under the Bridge Academy's Outreach Program to Affable Comedians Whose Jib is Cuttable--polling of the FLUBA's members shows 100% solidarity with Dennis Miller's choice in the recent election for POTUS--but some of whose jiblets are spoiled, has had its candle lit, Hiroshi.

On one recent talk radio program, the aforementioned Mr. Miller mentioned that he was reading Ida Tarbell's history of Standard Oil, and asked if anyone in his audience knew anything about it. Subsequently, the FLUBA's Head of Debunking Emotional Monopoly Arguments Nationwide--hereinafter, HeDEMAN--found himself speaking on the telephone with the comedian.

HeDEMAN, trained to teach by industry specific example, opened by saying that the Tarbell diatribe is probably as accurate as one could expect from the daughter of a man who lost his Pennsylvania oil refining business due to his inability to compete with John D. Rockefeller and Henry Flagler; say, like a book written by a child of Joan Rivers (or, David Bremmer) purporting to excuse her mother's late night talk show career failure to a conspiracy led by Fred DeCordova (Northwestern, 1931), to keep advertisers from buying time on competing shows.

HeDEMAN has been advised not to quit his day job.

However, the point is valid. Tarbell was not an economist, but a gifted polemicist. Facts do not matter to such. Only what they can get their readership to believe are the facts, matters. And, she convinced many people that her version of the story was factual.

Including, it appears, Dennis Miller. Fortunately--and from a surprising source, there are antidotes available on Al Gore's invention. From which we summarize:

John D. Rockfeller began his business career at the age of 16, in the 1850's, as a clerk in a firm that sold agricultural commodities, in Cleveland, Ohio, after studying at a business college to learn bookkeeping and other basic skills.

He quickly impressed his employers, and gained more and more responsibilities. One of which was what today would be called logistics; the efficient movement of products from production to consumers. That skill would one day be used to build the greatest corporation of the 19th century: Standard Oil.

In 1859, oil was discovered in nearby Titusville, PA. Soon Rockefeller realized the opportunity available to him. During the Civil War Rockefeller became a refiner of oil, producing kerosene that allowed homeowners to light their homes.

By 1868 Rockefeller--and his partners, including the indispensable Henry Flagler--was the largest refiner in the world. He'd realized that Cleveland had an advantage over other locations where refineries operated; midway between New York and Chicago, on Lake Erie, he not only had water transportation via the Erie Canal, there were two railroads available to transport his kerosene to northeastern markets. As opposed to the Pittsburgh area which had only Tom Scott's Pennsylvania RR.

Which eventually proved decisive, allowing what became Standard Oil of Ohio, to dominate 90% of the kerosene market in the 1870's. Standard was able to ship huge quantities at regular schedules, which allowed it to negotiate favorable freight rates from the railroads, and thus deliver its products to consumers at lower prices than the smaller, independent refineries in northwestern Pennsylvania.

Rockefeller tried to bring those small refineries into the Standard Oil organization, and allow them to profit along with him. But, many--including the Tarbells--resisted doggedly, and eventually were driven out of business, because consumers had the lower cost option of Standard Oil products.

That didn't sit well with romantics such as the Tarbells, and Ida later wrote a series of magazine articles, eventually made into a book, attacking Rockefeller for the sin of economic efficiency. Consider, from chapter three of that book:

[The small refiners of northwestern Pennsylvania] believed in independent effort-every man for himself and fair play for all. They wanted competition, loved open fight. They considered that all business should be done openly; that the railways were bound as public carriers to give equal rates; that any combination which favoured one firm or one locality at the expense of another was unjust and illegal. This belief long held by many of the oil men had been crystallised by the uprising into a common sentiment. It had become the moral code of the region.

Mr. Rockefeller's point of view was different....he knew that the railroads ... had regularly granted special rates and rebates to those who had large amounts of freight. That is, you were able to bargain with the railroads as you did with a man carrying on a strictly private business depending in no way on a public franchise. Moreover, Mr. Rockefeller probably believed that, in spite of the agreements, if he did not get-rebates somebody else would; that they were for the wariest, the shrewdest, the most persistent. If somebody was to get rebates, why not he? This point of view was no uncommon one. Many men held It and felt a sort of scorn, as practical men always do for theorists, when it was contended that the shipper was as wrong in taking rates as the railroads in granting them.

Thus, on one hand there was an exaggerated sense of personal independence, on the other a firm belief in combination ; on one hand a determination to root out the vicious system of rebates practised by the railway, on the other a determination to keep it alive and profit by it. Those theories which the body of oil men held as vital and fundamental Mr. Rockefeller and his associates either did not comprehend or were deaf to.

Or, simply, recognized the fundamental economic reality that it is less costly for a railroad to show up at one location, on a regular schedule to pick up sixty tanker cars of kerosene and haul them to New York, than it is to send a locomotive to numerous small refineries in Pennsylvania picking up a tanker here, two or three there, until a trainload is assembled, perhaps 20 stops (and days) later.

And Tarbell knew, because she quotes a railroad executive saying so, that anyone who would ship the same quantities on the same schedule as Rockefeller, would get the same rates as Rockefeller. And, Rockefeller was offering to help those refiners do just that. But, their pride went beforeth their fall.

And, the recognition of this simple economics lesson didn't stop serving well the country with oil. Henry Flagler retired from management of Standard Oil in the early 1880's and took his expertise to northern Florida. There he bought a small railroad and extended it south, along the eastern coast to serve the luxury hotels he built in St. Augustine, Daytona Beach, Palm Beach and Miami--even building track over the water to Key West's deepwater port.

The same laws of economics that produced Standard Oil's near monopoly of the kerosene business transformed the backwater state of Florida into what it is today.

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