In the decades after the Civil War, Andrew Carnegie captured the American steel industry by pushing down prices. So effective was the Scottish-born telegraph operator at reducing costs, breaking cartels, and driving competition into bankruptcy during the downturns of the 1880s and 1890s, that J.P. Morgan bought out the 66-year-old Carnegie to protect the profitability of his holdings and stabilize the nation’s industrial life. When Morgan incorporated U.S. Steel in 1901, the unprecedented combine controlled two-thirds of the nation’s steelmaking capacity. For the next six decades, the company set the price of steel in the American market, anchoring industry prices by cutting last in recessions and raising last in expansions. Under this “price umbrella,” the other dozen companies owning steel factories in the US remained profitable and expanded healthily. Industry-wide, ingot capacity expanded from 21.5 million to 71.6 million tons between the firm’s creation and the eve of World War II.
Ever since Alfred Marshall first popularized a rough graph of the crossing schedules of supply and demand in 1890, a strain of Anglo-American thinking has fixated on the disruptions caused by the ancient practice of controlling prices. Impose a ceiling too low, theory teaches, and the quantity demanded will outpace the quantity supplied; a floor too high, and producers will build up surpluses above what consumers are willing to absorb at current prices. Because wants are always changing, any ceiling or floor will eventually produce such “distortions.” Limit any price and the whole society may begin to convulse.
Marshall, Carnegie, and Morgan were contemporaries. But a glaring gap stands between the theories of the economist and the practices of the industrialist. At its most quintessential moment, American capitalism was defined not by the laws of supply and demand, but by concentrations of power within the marketplace.
Before macro
Before the rise of macroeconomics that accompanied World War II, price determination was a central problem of economic thought. For a world in which the tempestuous fluctuations of the business cycle brought runaway speculation, widespread bankruptcies, and growing labor militancy, the relationship of price to cost was a critical question. Under classical theory, competitive prices would yield revenues to the firm that covered costs and a normal profit. Firms took rather than gave prices in the market. And competition would check profiteering: where earnings rose well above costs, new producers would enter the market and, with lower prices, bid away customers. In fact, theories about the interrelated movements of price and cost lay at root of some of the earliest empirical studies of the totalizing phenomenon of the business cycle.