Today, we learn that one of the titans of our new economy—Peter Thiel, a PayPal founder and tech investor—shares the same views on competition as one of his most illustrious predecessors, John D. Rockefeller, the founder of Standard Oil. They don’t like it.
Specifically, both of them see competition as wasteful and monopolies as the ideal way to organize businesses for the benefit of society, ridiculing economic theories that suggest competition is the most efficient way to distribute resources. Thiel outlines his view in this Wall Street Journal op-ed, an excerpt from his new book. For some perspective, below are Rockefeller’s views, from Ron Chernow’s biography Titan.
(Thiel is in blue text, Rockefeller in purple.)
“In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.”
“What a blessing it was that the idea of cooperation, with railroads, with telegraph lines, with steel companies, with oil companies, came in and prevailed, to take the place of this chaotic condition in which the virtuous academic Know-Nothings about business were doing what they construed to be God’s service in eating each other up.”
“Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and finance the ambitious research projects that firms locked in competition can’t dream of.”
Once, describing the “foundation principle” of Standard Oil, he said it was the “theory of the originators … that the larger the volume the better the opportunities for the economies, and consequently the better the opportunities for giving the public a cheaper product without … the dreadful competition of the late [1860s] ruining the business.”
“This movement was the origin of the whole system of economic administration. It has revolutionized the way of doing business all over the world. The time was ripe for it. It had to come, though all we saw at the moment was the need to save ourselves from wasteful conditions.”
“Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly—usually by exaggerating the power of their (nonexistent) competition.”
“We realized that public sentiment would be against us if we actually refined all the oil.”
Rockefeller’s views stemmed from the boom and bust cycles of the early oil business, which alternated between over- and under-production as companies sought to be the top dogs in the brand-new sector. His monopoly, formed with the collusion of the railroads, allowed Standard Oil to stabilize the business and create one of the greatest companies in US history. But its grip on the entire industry—and on the US political system—led to consumer protests and, eventually, the first antitrust laws in the US.
Thiel’s views also are influenced by his experience creating a brand new industry, as his company was a leader in the field of electronic payments in the early days of the internet. He sees monopolies as coming naturally from invention, whether through the patent office or in the creation of a new business. But Thiel’s definition of a monopoly is a narrow one—he concedes that rent-seeking monopolies exist, but that his focus is on companies that simply do something none other can. That kind of monopoly is easy to favor. But Thiel’s view—that all successful companies meet his definition of monopoly—does not explain the continuing existence and profitability, for example, of both Coke and Pepsi. Nor is it likely to alleviate the complaints of people who live in monopoly-dominated economies—just ask a Mexican.
Of course, there’s a chain of influence here: Thiel’s interest in Austrian economics is well-known, and Joseph Schumpeter, a key figure in that canon, took inspiration from Rockefeller’s life in formulating the defense of monopolies that Thiel endorses. Rockefeller’s life also gives some credence to Thiel’s idea that monopolies are naturally superseded by other monopolies: By the time antitrust law broke up Standard Oil in 1911, the company already had lost its dominance in the oil market, thanks to new oil discoveries and disruption from an unexpected new industry—the automobile.