May 8th, 2013
(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: email@example.com
Every industry eventually consolidates. And the web is less open than it was 10 years ago. When does the current era end? When does capital regain the upper hand?
In the second tier, the hustler class of new-money industrialists produced a first generation of Robber Barons, and then an asymmetric balance of power between bankers and second-generation hustlers who aspired to Robber Baron level fortunes (egged on by Horatio Alger narratives), but ended up as the tame new middle class. How did this happen?
Carnegie was an old-school, large-scale hustler, like his contemporaries, Rockefeller, Jay Gould and Vanderbilt. Like them, he had some technical knowledge, but delegated most of the technological work to the new engineering class. Where he excelled was in his understanding of the murky emerging market structure and state of play. Like his contemporaries in the hustling game, he made something of a specialty of maneuvering around bankers in the world of finance, and found a certain vicious joy in doing it well (frontier hustlers swindling East Coast bankers before the rise of the telegraph was a common occurrence).
For approximately three decades following the Civil War, a tenuous balance of power situation prevailed, with canny real entrepreneurs like Vanderbilt, Rockefeller and Carnegie facing off against bankers like J. P. Morgan who were trying to do to the new mega-corporations what the Rothschilds had done to nation-states a century before: control them with money. Transitional figures like Jay Gould were starting to turn into hybrid financial operators and business managers: adept at both railroad Go-playing and stock-market manipulation.
But by around 1910, the balance of power had collapsed (as had the political balance of power in Europe, a not-unrelated development). The Robber Barons slowly withdrew from the scene to enjoy their great fortunes and redeem their tarnished images with good works.
In 1901, in an event charged with symbolism, J. P. Morgan managed to buy Carnegie out of the steel industry, to create US Steel. It was a feat Morgan and his crew would repeat across the industrial landscape, arranging new equilibrium conditions and regulatory mechanisms in one sector after the other, filling in for a non-existent central banking function (the Federal Reserve was created in 1913, marking the start of a whole new story).
How did the bankers win? In large part it was because in the balance of power, hustlers lost their main weapon: specialized and indispensable knowledge of murky emerging markets. On the other side, the bankers gained control of the new infrastructure, which were primarily financial beasts in their mature form. Since the newer hustlers needed the infrastructure (for example, hustlers taking advantage of oil, railroads, telegraph and electricity to build businesses in the new booming urban centers), they were at the mercy of the bankers.
The old-school hustlers were left with no leverage at the negotiating table with the owners of capital, while at the same time being at their mercy, instead of at the mercy of Wild West nature. In terms preferred by economists, a situation defined by a principal-agent problem (such as you hiring a doctor or car mechanic who gets to both define your problem and figure out what to charge you for fixing it) was replaced by a much simpler employment relationship: would-be hustlers found themselves being turned into professional, generalist managers.
Whereas in the 1870s, East Coast and European bankers had no option but to trust deeply knowledgeable experts on specific illegible emerging markets such as oil and steel, by the 1900s, bankers could do to wannabe-Carnegies what people like Carnegie themselves had done to the artisan class: extract the knowledge they brought to the party and neutralize its use at the negotiating table. The knowledge itself was turned over to the stewardship of yet another new mercenary class: marketers. Marketers were skilled at using the new emerging media (the mass-market newspapers that had been enabled by the development of cheap printing technologies in the 1890s) to sell, but not particularly interested in the full-spectrum risk-taking required of true entrepreneurs. The story of this mercenary class, which created the modern consumer economy on the foundations of 19th century technology infrastructure, is fascinating, but we won’t get into it (the excellent 4-hour documentary mini-series, The Century of Self, does a great job of telling that story). Again, to peek ahead, we’ve seen a similar rise in new media models.
Instead of hustlers telling credulous investors what returns they could expect, investors told hustlers what returns they had to deliver, based on their own analysis of information made freely available by new media outlets working off the power of the telegraph. They knew enough to understand how hard they could push without breaking things (the rate of return they demanded would soon ossify into a ritualized expectation of stable growth rates, a big enabler of the rise of a middle class that could basically withdraw from the risk frontier).