Project 3

Abstract

This paper focuses on the parallel economic structure between the second industrial revolution and the modern ‘Dot Com Boom’. Through examining the root causes behind both movements, it becomes apparent that the similarities between the two have continued into the most advanced stages of both historical trends. Technologies have developed with similar pace and significance in both eras, resulting in the consolidation of markets to a degree of monopolization. In a historical lense, we examine the negative consequences associated with such trends to help predict our own economic future, as it is only logical that if both eras have paralleled one another, they will continue to do so in the future.

The Ambiguous Consequences of A Monopolized Society

Upon reflection of society’s history, it becomes clear that certain economic, social, and political developments essentially repeat themselves. These historical developments possess nearly identical features to each other and correspondingly have similar consequences. One of these repetitive economic trends is sudden technological advancement followed by a longer relatively stagnant period of innovation. However, the exact form of these technologies shifts from era to era, as does their market’s economic properties. The analysis of historical monopolization trends in unison with an evaluation of the properties of these newly formed technologies allows for an assessment of the regulatory measures needed to positively optimize the economic impact of these advances.

This historical trend consists of four primary components: the technological increase, the competitive advantage, the consolidation of different markets with the platform business model, and if not closely regulated, the fixation of prices and lowering of quality of goods by industry leaders. As technology abruptly increases, a singular corporation often suddenly develops a superior product, which places them in a position to control an entire market.  At this position, such corporation is able to cut out competition with tactics such as increasing market entry barriers, lowering the of cost goods, and simply creating superior products. Once these companies achieve the status as the sole competitor, they are able to fix their prices to higher than natural levels and also lower their quality of goods, simply since no other companies are able to compete with them. However, proper regulation adapted to specific technological innovation can help eliminate these negative consequences.

An Historical Lens: The Gilded Age

The most historically significant and recent economic monopolization began in the second industrial revolution in the late 19th century and carried on into ‘The Gilded Age’ of the early 20th century. Analyzing the historical developments in this era can allow us to understand current trends and accurately predict our economic future. Understanding these different developments will heighten our ability to implement effective regulation.

The second industrial revolution began with the revolutionization of transportation throughout the United States, primarily through the development of railroads. Railroads spread throughout the United States at a nearly exponential rate, increasing over 600 percent between 1865 and 1900 (Cherny).

 

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The widespread development of railroads across the United States allowed for ideas and industries to be connected. Ryan Engleman explains how railroads served almost as a platform for industries to become interconnected, “innovations in transportation, such as roads, steamboats, the Erie Canal, and most notably railroads, linked distant, previously isolated communities together.” This connection was crucial in creating two components necessary for a technological revolution: an increased spreading of ideas and the creation of a new platform to develop and transport inventions.

Connecting the country with a system of railroads allowed for intellectuals across the country to communicate and collaborate their ideas. The railroad, along with other subsequent communication oriented inventions such as the telegraph, effectively caused “the annihilation of distance” (Engleman). Prior to this sudden influx of communicative ability, the majority of the population was limited to collaborating within the confines of their city or most likely town. However, increasing levels of transportation resulted in increased development in almost every technological field, including communication itself. The increased amount of collaborative opportunities vastly enhanced both the quality and quantity of technological developments.

Additionally, the widespread development of railroads permitted lowered transport costs for manufactured goods. This lowered transportation cost ultimately lowered the total cost of production of these newly invented technologies. Many of these products, such as manufactured steel, would not have been profitable considering the previous high cost of transportation.

Railroads also increased the demand for these new products directly, since railroad manufacturing requires large amounts of oil, steel, and a variety of other products. Thus, many of these developments would not have been viable if it were not for the creation of a country-wide railroad system.

As demand for these railroad dependent industries increased, there was a heightened focus on bettering the products of these separate, but related industries. In the steel industry, the invention of the Bessemer and the Siemens-Martin machines “greatly lowered the cost of steel production and allowed the increasingly lavish use of steel for railroads, construction, and other industrial purposes” (Steele). These new developments in unison with eased transportation cost transformed steel into a practical and affordable metal. In terms of the oil industry, many companies quickly began expanding their drilling and refining operations to meet the new heightened demand for oil (Parr).

These new technologies developed at such a rapid pace that a select group of entrepreneurs, known as robber barons at the time, were able to completely consolidate their associated markets. These industry leaders quickly gained a competitive advantage in the form of a highly superior product or a dramatically lower cost of operation, such as heightened oil refining capabilities or the Bessemer steel manufacturing machine. Possessing superior products at lowered cost, these leaders began making extremely large amounts of money, simply because their cost of production was lowered and the demand for their products was increased ten fold.

Once in this position, these leaders reinvested their profits back into further improving technologies. Leaders such as Andrew Carnegie and Rockefeller repeatedly invested as much money as they could to develop a superior product and to control larger portions of the market, “To continue growing, [Rockefeller] went on a buying spree, buying two dozen refineries in 60 days..” (Parr). Barons such as Rockefeller also began to reinvest their profits into separate, but associated industries: “Rockefeller pioneered the practice known as “vertical integration,” or in-house provision of various inputs into the production process” (DiLorenzo). By doing so, the initial product had been used as platform to expand and control other industry markets, while simultaneously lowering their cost of production. These ‘robber barons’ made it their sole mission to create more and more innovative products and to own as much of the industry as they can.

Additionally, they bought out competitors while simultaneously raising the market entry cost. “Carnegie continued building despite the depression—cutting prices, driving out competitors, shaking off faltering partners, plowing back earnings.” (Parr)  Leaders also began conspiring with the government and other corporations to plot the dominance of a market. As these leaders began producing in such large quantities, their cost of production was so low that no new company could compete with their prices. They also could buy out any of the remaining competitors with an offer they could not refuse. While they may have lost cash in the short run, in the long run they acquired much more valuable shares of these entire industries’ markets.

Once in complete market control, these leaders were able to manipulate the market to their favor. Since Rockefeller’s oil or Carnegie’s steel were the only available products, these barons rose their prices, simply because the consumer would have no choice but to comply. Robber barons also went on to eliminate any attempts of competitors to step into their markets with buyouts and coalitions to prevent the success of rival companies (Beattie).  Eventually, some leaders’ power got so immense that they were able to lower the quality of their product and continue to charge more and more, simply because the consumer had no alternatives. In a natural economic setting, capitalism would set in, and those with fixed prices and poorly produced goods would start to lose market share. However, these companies controlled the entry to the market so well that these fundamental capitalistic principles were not able to take effect. This series of events showcases the detrimental effects of complete monopolization without regulation.

If these companies had stuck true to their real prices, then the disadvantages of monopolized industries likely would have never occurred.  An industry structured under one company has the ability to invest all of its profit together; opposed to in a competitive market, where various companies will invest small amounts of money just to develop competing technologies, monopolized companies can invest large sums of money as a whole in order to optimize the technology created. In other words, rather than multiple investors allocating resources to invent the same product, a monopoly can singularly work to produce such an innovation and not waste resources to develop the same idea multiple times. Monopolization also entails the standardization of an industry, ensuring that all products are at the same utmost quality (Beattie).

Historically, there are some companies that have maintained a monopolized status with fair prices, who also continued to reinvest into their products. However, a company fueled by self interest has no incentive to continue to create better products and keep prices low. As a result, the majority of these companies are either government-run or regulated. For instance, USPS possesses a complete dominance in the mail market, yet maintains extremely competitive competitive prices and offers an innovative, reinvested in service. This is simply because USPS is a government agency, so it is not permitted to act out of pure self interest. (USPS) However, it is possible to have a private company perform in a similar manner, if the government regulates its functions. For instance, SDG&E, a private  company that owns San Diego’s entire energy market, is regulated by the government to maintain its fair prices and technological innovation. If SDG&E does not continue to uphold fair prices and aim to innovate their products, they are subject to major penalties. (Rivard) This course of regulation creates a system consisting of the beneficial aspects of monopolization: standardized products and optimized reinvestment, but eliminates the lack of incentive associated with developed monopolies. However, this system does not follow the capitalistic principles our economy is based on since the government is essentially dominating potentially competitive markets, and thus is only used in industries with utilities that are directly essential to citizens’ basic needs.

The Government Takes A Stand: Regulation

In terms of the Gilded Age corporations, none were government services, and they were indeed capitalistic business fueled by self interest. So, these companies continued to raise their prices and lower the quality of their products to maximize profit at the expense of the American consumer. These companies had become so dominant and manipulative of their power that the federal government decided that they needed to be stopped. As a result, the Sherman and Clayton Act were implemented, which ultimately broke up these companies for their unfair annihilation of competition:

The Sherman Act outlaws ‘every contract,combination, or conspiracy in restraint of trade, and any monopolization, attempted monopolization, or conspiracy or combination to monopolize.’”

Congress specifically created a vaguely worded bill that could be used at the government’s discretion. In addition, the law only formally outlaws agreements to “fix prices, limit industrial output, share markets, or exclude competition”. However, “the [Supreme Court’s] so-called ‘rule of reason’ interpretation of the Sherman Act, explains that not every contract or combination restraining trade is unlawful. Only ‘unreasonable restraint of trade through acquisitions, mergers, exclusionary tactics, and predatory pricing constitute a violation of the Sherman Act’” (Britannica). The unspecific nature of the law allows for the government to be able to effectively bring down monopolies who are deemed detrimental to the economy, but are not obliged to put an end to market dominating companies who are helping the greater economy. Ultimately, the government developed a system that incentives capitalistic market dominance, while simultaneously maintains government ability to terminate these companies if they detrimentally impact the U.S macroeconomy.

The complete securitization of market dominance is ultimately what eliminated these companies’ incentive to innovate new technology. As these robber barons took complete control, they no longer needed to produce new technology to retain market dominance. Technological innovation therefore halted because leaders no longer had an incentive, and anyone with an incentive to innovate could not compete within these dominated industries. This phenomenon is the cause behind these historical ‘trends’ of rapid innovation and prolonged technological stagnation. However, if these companies never lost their incentive, the technological innovation could have theoretically continued for prolonged periods of time. The Sherman Act was essentially designed as a incentive for companies to continue to produce at full force; the Supreme Court made it clear that unless antitrade coalitions were developed, a fully functional monopoly would most likely not be brought down if they continued to produce and compete competitively.

The Dot Com Boom

Technology developed through the internet in the 1990’s at a pace parallel to the industrial revolution and has continued into today’s age. Although not fully developed, we are in the middle of an economic monopolization paralleled by the industrial revolution. We can turn to the Gilded Age to help infer how our current economic state will develop, yet we must also consider the fundamental differences between then and now. At the start of this new era, the internet and its software became accessible to all of its users and was soon a cardinal component of American culture. The internet and its software capabilities parallel the railroad innovation of the 1890’s in two very important manners: it heightens communication and serves as a platform to create further technological innovation. The internet is as fundamental to technological innovation as the railroads once were.

The rapid development of technology has increased communicative potential by an amount relatively equal to that associated with railroad development.

Development of the internet as a platform has directly increased the level of communicative opportunity amongst our world’s population. Just as the railroads allowed for increased collaboration between those separated by distance, the internet made intricate communication possible amongst those across the world.  This has paralleled the industrial revolution in terms of there being a substantial increase in potential for the creation of ideas due to an enhanced level of interaction among the greater population.

Similar to how the railroad industry innovated new industries, the internet has been used as a platform to create entirely new industries. If it were not for the internet’s practicality, many of these industries would not have been viable enough to be heavily invested in or even developed at all. These developments have stretched out throughout nearly all realms of our society, impacting the average person’s life significantly more than the second industrial revolution. Examining specific cases of this innovation puts in perspective the sheer significance of these innovations and their corresponding economic consequences.

The retail industry is one of numerous revolutionizing industries and has particularly focused on expanding itself as a platform into different markets.  Online retailers have developed services allowing users to purchase virtually any product they could imagine and to have this product delivered to their doorstep. Initially, these platforms were somewhat simplistic, but as consolidation occurred, rapid reinvestment into technology completely changed online retailing.(Rao) Amazon has taken the largest stride in capitalizing on the potential of online retailing technology. Additionally, Amazon has used their product as a platform to connect different industries. Amazon’s paying users “can stream digital movies, TV shows, podcasts, and Amazon’s original productions in addition to getting free two-day shipping and one-hour delivery on certain orders” (Rao). Developing their service as a platform to access different industries improves the user experience and ultimately increases the demand for Amazon.

The cell phone industry is yet another area of our society that has possessed rapid transformation. Just as the steel and oil industry would not have been practical without railroads, the development of cell phones would not have been viable if it were not for previous developments of the internet. Cell phones transformed from devices that can only make simple phone calls to a device with capability greater than a computer.

 

Apple is at the forefront of cell phone development. As software and hardware have dramatically improved, “through iOS, iTunes, and the App Store, [the iPhone] has offered platforms that connect buyers and sellers of every kind of digital good you can imagine” (Moazed and Johnston). Just as the railroads served as a platform connecting industries, the cell phone has connected various industries together and increased its own demand by doing so. The expansion into different markets to raise demand for one’s corporation is also seen through Rockefeller’s vertical integration tactics; the form of Apple’s platform expansion is significantly different than Rockefeller’s, but the strategic plan is essentially identical.

Old Tactics, New Technology

As these corporations have begun to gain the majority or even complete control of different markets, they have used similar tactics as the barons once did to maintain their dominance. This phenomenon demonstrates once again how this current economic trend is nearly identically paralleling the Gilded Age.

Almost all of these corporations are using the strategy of complete reinvestment of profit to continuously improve their products and maintain superioritization. Just as Rockefeller invested nearly all of his earnings to expand his empire and improve his product, Amazon has repeatedly invested all of its profit back into improving technology and connecting different industries. In 2015, Amazon had a revenue of over $107 billion, but profited under $600 million, simply due their large commitment to reinvestment (Roettgers). Amazon has allocated a large portion of money to creating its own shipping service, which greatly reduces the cost and time of their shipping (McFarland). Amazon has also invested its profit to expand to as many industries as they possibly can, ranging from movie streaming to groceries, simply to increase their greater economic presence and the practicality of their service (Bezos). Amazon is among countless tech companies who are utilizing these tactics.
These corporations are also buying out any competitors attempting to gain market share. For instance, as Apple was working on a voice assistance program, they spent $20 billion on patent litigation, and when the AI company Nuance developed the technology behind the future ‘siri’, Apple sued the small company for patent violation. Although Apple lost the suit, they cost Nuance $3 million in legal fees, forcing them to sell their technology to Apple (Lohr). These tactics directly parallel the strategies used to eliminate competition by robber barons.

Where Are We Headed and What We Can Do

It is clearly evident that the technological innovation, industry consolidation, and market dominance present in our current age parallel that of the Gilded Age. Therefore, it is only logical that the detrimental aspects of monopolization will follow the market dominance of the modern tech era, just as it did during the Gilded Age. However, during the Gilded Age, there was almost no regulation of the power of these monopolizing corporations, so many of these corporations lost any incentive to innovate and price competitively. The implementation of the strategically vague Sherman Act poses a threat to these corporations that incentivizes them to continue their innovation in order to avoid the disbandment of their corporation. It should seem more profitable in the long run to continue innovation efforts and to maintain competitive pricing rather than to fix prices and lower the quality of goods and risk being shut down. However, these corporations may eventually grow large enough where they can challenge the government’s willingness to actually shut down these corporations. However, at their current state, these companies have continued to operate at full employment and have not shown any sign of challenging the legislative power of the government. The fear of legal disbandment will possibly differentiate the long term economic behavior between the corporations in the Gilded Age and the Tech Era.

The modern age tech giants have continued to lower their prices and increase their technology in order to avoid being deemed “unreasonable” by the Supreme court. This has resulted in numerous economic advantages throughout our society, involving the standardization of products and technological advancement. These innovations are best showcased through Amazon, which is arguably the most powerful company in our society. Amazon is able to ship any product imaginable to your doorstep in two days free of cost or even deliver groceries within two hours. Amazon has also standardized all of its products by certifying their legitimacy and offering free returns. Amazon has irrefutably improved our quality of life, and as long as the government demonstrates their ability to bring Amazon down, Amazon should remain incentivized to continue to innovate.

If corporations such as Amazon continue to function as benevolent monopolies as a result of the Sherman Act’s incentive, our quality of life may continue to rise exponentially, but these corporations will completely dominate our economy. These companies are developing at accelerated rates, being permitted to monopolize markets while reinvesting their profits. “Amazon’s market value as of 30 December was almost US $356 billion, more than the combined value of Best Buy, JCPenney, Kohl’s, Nordstrom, Sears, Target, and Walmart: about $298 billion” (Rozenfeld). While these companies may not directly manipulate their power to exploit a lack of competition, they will surely attain a colossal amount of our country’s GDP. With these levels of economic impact, these companies will undoubtedly develop large amounts of power, unparalleled by any other corporation in our nation’s history. Regardless of whether these companies are unreasonably using their power, we as a society must reflect and decide if such a powerful company is reasonable in itself. Do we truly want a corporation possessing this level of economic power? If Amazon continues to grow, it will not be long until nearly all trade and transactions go through Amazon.

Bringing down these companies would not only be a step back from capitalist principle, but would ultimately lower our quality of life. However, an alternative to completely shutting down Amazon is simply branching it out into separate local entities that compete with one another. The government used the same tactic by breaking down Rockefeller’s U.S. Standard Oil Company into more than 30 competing oil companies. Using this strategy, the technological innovation behind corporations such as Amazon is upheld in these smaller companies, but each company would have to face large levels of competition and be forced to price competitively. However, this system would drastically lower the quality of service behind Amazon, simply because it would essentially destanderized their products and services. The question then becomes: is a marginal reduction in quality of life worth the elimination of a corporation with a annual market value larger than the GDP of Denmark?

Although the disbandment of these corporations may seem theoretically worthwhile, there is currently little support to do so, which renders this idea as currently impractical. Implementing this strategy would require large public support and quite possibly additional legislative action, making these changes very challenging to create. 

It therefore seems logical to allow for these legalized monopolies to continue to grow, assuming that we as a society closely monitor them for any exploitation of power and be prepared to implement further legislation to bring them down. Our government effectively brought down similar coalitions during the Gilded Age, and the continued demonstration of the government’s willingness to legislate the disbandment of these organizations will disincentivize these companies to exploit their power.

 

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