LESSON 24
INDUSTRIAL ENTREPRENEURS
OR ROBBER BARONS?
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LESSON 24
INDUSTRIAL ENTREPRENEURS
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?
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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.
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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?
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2. Ask: What do you think might be some of
the characteristics of an entrepreneur?
(Accept a variety of answers.)
3. Display Visual 24.1. 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 24.2. 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 24.3. Direct the students’
attention to S1 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
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LESSON 24 INDUSTRIAL ENTREPRENEURS
OR
ROBBER BARONS?
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.)
demanded by consumers equals quantity
supplied by producers.)
7. Continue to display Visual 24.3. Ask the
students to explain how mass production
and new techniques to improve efficiency
change the supply curve depicted in Visual
24.3.
•
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 S1 to S2.)
•
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 24.1. 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.)
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9. Distribute Activity 24.2. 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 24.2. (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.)
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•
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:
OR
ROBBER BARONS? LESSON 24
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.
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LESSON 24 INDUSTRIAL ENTREPRENEURS
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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.
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VISUAL 24.2
ENTREPRENEURSHIP DURING
LATE NINETEENTH CENTURY
Entrepreneurial
Activity (Causes)
Mass production
THE
Definition
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.
Division of labor and
specialization
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
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
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.
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Effects
• 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.
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VISUAL 24.3
MASS PRODUCTION AND NEW TECHNIQUES:
CHANGE IN SUPPLY
S1
PRICE
S2
P1
P2
D
Q1
Q2
OUTPUT
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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 1862. 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 1870. 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 1885.
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
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LESSON 24 INDUSTRIAL ENTREPRENEURS
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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 AntiTrust Act of 1890. 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 1890. 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?
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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
(1835-1919)
Carnegie Steel
Company
1. Other steel companies
1b. Vertical
2. Coke and iron ore firms
2a. Horizontal
3. Firms producing lake
steamers needed to
transport the iron ore
2b. Vertical
3a. Horizontal
3b. Vertical
John D. Rockefeller
(1839-1937)
Standard Oil
Company
Cornelius (1794–1877)
and William Vanderbilt
(1821-85)
Railroads: Staten
Island Railroad
and New York &
Harlem Railroad
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4. Assumed ownership
of 39 other oil
companies
4a. Horizontal
5. Cornelius purchased
ferry and steamship
companies.
5a. Horizontal
4b. Vertical
5b. Vertical
6a. Horizontal
6. They both purchased
other railroad companies. 6b. Vertical
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