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Andrew Carnegie: An Economic Biography

Author(s):Bostaph, Samuel
Reviewer(s):Rogers, Robert P.

Published by EH.Net (June 2016)

Samuel Bostaph, Andrew Carnegie: An Economic Biography. Lanham, MD: Lexington Books, 2015. xii + 125 pp. $75 (hardcover), ISBN: 978-0-7391-8983-2.

Reviewed for EH.Net by Robert P. Rogers, College of Business and Economics, Ashland University.

This book, a concise biography of Andrew Carnegie, focuses on some important issues concerning his business and philanthropy.

Carnegie’ life was a rags-to-riches Horatio Alger story but with an interesting twist.  While he was born a poor Scot, his family was well-read and knowledgeable about their surroundings.  Carnegie used a succession of seemingly prosaic but strategically placed jobs to become a major executive with the Pennsylvania Railroad.  He employed his connections there to start several businesses supplying the railroad with important inputs such as bridges and rails.  Eventually he built a steel rail firm using the Bessemer process.

His ability to obtain financing and find competent executives and engineers enabled Carnegie to develop a large efficient steel firm.  Among the people he attracted to the firm were Henry Frick and Alexander Holley.  Frick and Holley were pioneers in the development of, respectively, coke ovens and Bessemer furnaces.  Not only did the firm capitalize on the demand for rails, but it also became the leading firm in construction steel.  To do this, the firm employed another new steel furnace, the open hearth.  By the 1890s, Carnegie’s company had become the leading steel firm in the world.

Given its brevity and its focus on the issues of government intervention, firm governance, and property rights, this is the biography that I would recommend to a generalist wanting to understand Carnegie.

On three issues, however, I see problems with the analysis.  They concern tariffs, railroads, and the intertwined issues of property rights and governance.  Ironically, it is on the latter two issues that Bostaph breaks new ground, but there are still questions.

Bostaph overstates the role of tariffs in Carnegie’s success.  Fogel (1964) and Temin (1964) have ascertained that protection had some positive effect on the success of the American steel industry.  Nevertheless, it seems unlikely that absent tariffs a country as well endowed with coal, iron ore, and human capital as the United States would not have developed a large domestic steel industry.  Had a free trade regime existed in the United States, Maine might have had ten Carnegie libraries instead of fifteen.  Carnegie might have been rich anyway but not as rich.

My second quibble with Bostaph is the relationship of railroads to steel.  Many writers have correctly posited that through subsidies the government unnecessarily encouraged railroads.  Yet, it is likely that the United States would have developed a large railroad system without this government help.

I have intimated that Bostaph’s major contribution concerns firm governance and property rights.  The major issues were the Carnegie firm’s relationships between two of its human inputs — factory workers and firm executives.

Most interesting is Bostaph’s analysis of the Homestead strike.  Many workers viewed their jobs as a property right.  This idea was based on the labor theory of value that asserts that the value in an item arises from the work put into making it.  Bostaph rightly argues that this theory is wrong citing the nineteenth century marginalist economist, Karl Menger.  The marginalists posit that the value of an item arises from the utility that it gives to the user who pays for it.  Pieces of iron ore do not have any value until they are metamorphosed into items that can be used such as rails or beams.  Entrepreneurs like Carnegie figured out how to combine capital and labor to produce the items that users will buy.

Given Bostaph’s analysis, still, Carnegie might have developed an efficient job property rights system for factory jobs.  Law and accounting firms are so organized.  Other steel firms have developed with the factory job as a property right.  The above contention, however, cannot be confirmed or refuted.

Nevertheless, Carnegie did give property rights to some of his labor — managers.  By making them partners in the enterprise, he gave them a stake in the enterprise, i.e. a property right.  Until the middle 1890s, the Carnegie firm was a large complicated partnership.   It is not clear how well it worked.  Through much of the firm’s history, however, there existed extensive conflicts between the various manager-partners.  From reading Bostaph’s account of the firm in the 1890s, one has to wonder how steel got made given all the squabbling.

While this system was efficient to a degree, a better system might have been developed.  A piece of evidence is the attitude of W. J. Jones, the illustrious manager of the Homestead works (some time before the strike).  Refusing a partnership, he demanded and got a high salary (equal to the President of the United States).  Might he have seen the problems with a partnership with Carnegie?

Furthermore, there were large firms that ran more smoothly and efficiently at that time.  Among them was John D. Rockefeller’s Standard Oil.  Rockefeller has been subject to much criticism, but most scholars compliment his internal management.

Interestingly, while Bostaph does a good job describing the conflicts between Carnegie and his partners, I am not sure he understands its possible implications.  U.S. Steel, the Carnegie successor firm, was noted for lackluster management.  Many scholars have attributed it to x-inefficiency and management’s emphasis on getting along with the government (Rogers, 2009).  Perhaps, the competitive problems with the American steel industry had their start with Carnegie’s inability to develop an efficient managerial system.

I got this admittedly tentative insight from Bostaph’s book.  By putting the firm’s history into an alternative economic context, this book reveals much about Carnegie and the steel industry — maybe more than the author realizes.  I hope to see similar works from him on other historical figures.

References:

Robert W. Fogel. 1964. Railroads and American Economic Growth: Essays in Econometric History, Baltimore: Johns Hopkins Press.

Robert P. Rogers. 2009. An Economic History of the American Steel Industry, London: Routledge.

Peter Temin. 1964. Iron and Steel in Nineteenth Century America: An Economic Inquiry, Cambridge, MA: MIT Press.

Robert P. Rogers is (rrogers1@ashland.edu) is a Professor Emeritus of Economics, Ashland University.  He has published An Economic History of the American Steel Industry (Routledge, 2009) and a number of articles on the steel industry.

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Subject(s):Business History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII