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By the end of the 19th century, business, first of all, was extremely competitive.
..all during the late 19th century; as a broad generalization.
..and prices were falling throughout. In other words, from the Civil War down to about 1900, late 1890's, prices were generally falling.
They were falling for a good reason, namely, that business was so competitive, the economy was so productive..
..that the supply of goods and services was increasing at a rapid rate.
In other words, this was when America industrialized. It was the biggest period of economic growth in the history of the world.
..and standards of living went up and productivity went up and prices fell.
Not that the businesses were suffering because costs were also falling as productivity increased and mass production increased.
So in this situation, many business groups who turned out to be inefficient tried to correct this, tried to correct this price falling situation..
..by organizing cartels, in other words, by organizing a cartel of each industry so that they could cut production and raise prices.
..and this was tried in industry after industry, starting with the railroads, which were the first big business in the United States.
..first large-scale business, and continuing on through manufacturing by the late 1890's.
Either trying through cartels, formal cartels, or through mergers.
In the late 1890's the theory was..
"We'll just merge into one big... we'll have one big firm for the entire steel industry," the oil industry, et cetera..
"..and then we'll be able to cut production and raise prices and raise profits at the same time."
So they tried this systematically. This is the ideology, so-to-speak, among businessmen, that the way to benefit all of us is to have quotas.
Either formal quotas, as in cartels, or in mergers where you just agree that you'll have certain shares of this..
..corporation and then we'll cut production and raise prices; that was the great goal.
All of this was a total flop-a-roo in case after case, hundred.. literally hundreds of cases of this kind of merger or cartel, they all flopped..
..and they flopped for two basic reasons. One is, and economic theory can predict this and this is confirmed time and time again,
..two basic reasons. One is.. well the basic reason is the industry is free; government cannot step in and force people to accept the cartel or accept the merger.
So what happens is that as soon as the cartel is formed or the merger is completed..
..and then they cut production and raise prices and profits go up, other businessmen..
..come and say "Hey, this looks like a great industry here", the zink industry or whatever..
..or the oil industry or whatever.. railroads.. they're making a lot of profits. "Let's nip in there and outcompete them because they're..
..raising prices, and we're gonna come in with a new firm, a new factory, a new railroad new firm a new factory new railroad..
..and we'll bust them." And that's exactly what happened. So you have new competition always coming in and outcompeting the..
..older firms and then the older firms are stuck with a new firm, and they have a permanent competitor,
which is a big pain in the neck. ..cause they come in with later equipment, with new factories and new equipment,
the latest technology, et cetera, and now they have a permanent new competitor on their hands.
So the whole thing became a big pain in the neck for them. And that's one reason. And then internally what happened was that..
..individual firms start breaking the cartel. They say: "Look, we've raised.."
..in other words, the cartel restricts production, raises prices. Prices are very high, and then the individual firm says:
"Look, I'm not supposed to do this. I have a cartel agreement with the rest of my buddies in the industry..
..but here's what we're gonna do for you my old pal, drinking buddy", or whatever, my buyer..
"I will sell you the steel", or whatever, titanium, et cetera, "for twenty percent off list, provided you don't tell anybody about it."
So that you have a secret price cutting and then this firm gains profits, gains sales. And of course this secret leaks out pretty quickly..
..after about six months or a year, and then the other firms get very mad about this..
..and they call you a rate buster, which in business terms is the equivalent of a scab in union terms..
..and the whole cartel falls apart with mutual incrimination and hatred and they're back where they started, except now they've got more hatred than they had before.
So in other words, this system didn't work. A cartel policy, and a merger policy flopped.
..and at that point some of the, each step of the way, some of the more far sighted, in the sense of, realizing this was a flop..
..among the business groups decided the only way to preserve a cartel or preserve a merger is to have the government enforce it.
To turn to the political arm to create the cartel for you. And this was the origin of progressive regulation.
The progressive system was not a group of far-sighted, essentially,
..was not a group of farsighted intellectuals who sat around and said: "We have to plan..
We have to curb businessmen for the sake of the public interest."
It was groups of businessmen saying we have to impose cartels through the government and thereby eliminating our competition,
..curbing the maverick firm which doesn't want to engage in a cartel and gaining profits that way.