Andrew Carnegie: An Economic Biography, by Samuel Bostaph (Lexington Books, 2015), 124 pages.
Andrew Carnegie, that remarkable steelmaker, was a key player in the rise of the United States to becoming a world power in the late 1800s. More than that, Carnegie was one of the most spectacular entrepreneurs in all of U.S. history — ranked number four (behind Rockefeller, Gates, and Ford) according to the entrepreneur poll Blaine McCormick, chair of the management department in the Hankamer School of Business at Baylor University, and I recently conducted among prominent economists and business historians.
Carnegie has been the subject of several long biographies, but Samuel Bostaph, professor emeritus at the University of Dallas, has given us something different: a short economic biography that captures the high points in Carnegie’s life and career. Bostaph’s book is well written and balanced in its evaluation of the wily Scot.
Carnegie’s background is instructive. Born in Scotland, his father, Will Carnegie, was a skilled hand-loom weaver whose trade was automated by new power looms. In 1848, seeking opportunity, Will, 13-year old Andrew, and the rest of the family joined relatives across the ocean in the Pittsburgh area.
Will Carnegie, even in America, never recovered from his trade’s being replaced by a machine. His work record in the New World was spotty, and he died forlorn at age 51.
Young Andrew, by contrast, saw America as the land of opportunity, and eagerly sought to make his way. Starting as a mere bobbin boy in a textile mill in 1848 at $1.20 per week, Carnegie soon mastered the new technology of the day — the Morse Code for the telegraph industry — and he became a telegraph operator for the Pennsylvania Railroad. He then learned the details of railroading just as he later mastered the steel industry — asking questions, reading, and absorbing details like a sponge.
“There was scarcely a minute in which I could not learn something or find out how much there was to learn and how little I knew,” Carnegie later explained. Later, when he was CEO of the largest steel company in the world, he conceded that he wasn’t the smartest guy in the room. But he usually got the best results because he had a high EQ (entrepreneurial quotient). He was a master of human nature, wise in taking risks, and a decisive leader under pressure.
When his bosses on the Pennsylvania Railroad saw his ambition, his sound judgment, and his ability to guide men, they promoted him. But by the early 1870s Carnegie shifted gears and founded his own steel company. He desperately needed orders for his tiny enterprise. After building a large factory, he craftily named it after J. Edgar Thomson, the regal president of the Pennsylvania Railroad. Soon he had orders from Thomson and a foot in the door to the American steel business.
Carnegie, brilliant as he was at reading people, hiring people, and promoting people, rose to the top because he made the best steel at the lowest cost. That was always the Scot’s goal and Bostaph emphasizes that point.
First, Carnegie was quick to innovate. Not an inventor, Carnegie sought to apply the best inventions of others, like the Bessemer process for making high-quality steel rails.
Second, Carnegie envisioned economies of scale before his competitors did. That meant Carnegie outbid others for major contracts by assuming he could regularly cut costs on big orders and thereby eke out the small profits others could not imagine.
Third, Carnegie promoted on merit, not seniority. That way he attracted talent, discarded the deadwood, and improved his company from the ideas and actions of his talented staff.
In 1870, steel rails sold for about $60 a ton, but by 1900 Carnegie was making better rails for about $11.50 per ton. No other company in the world could match him. When J.P. Morgan tried to buy his way into the steel business in the 1890s, Carnegie thrashed Morgan’s new companies so soundly that one observer thought Carnegie might capture the steel output of the whole world. Ever the master of timing, Carnegie in 1901 sold out to the eager Morgan for almost half a billion dollars. Morgan then founded U.S. Steel, mainly from Carnegie’s operations, and the first billion-dollar corporation in U.S. history was born.
Human capital
Happy to retire, Carnegie became a prolific writer. He also became a philanthropist and gave almost all of his fortune away. In doing so, he sought to build human capital, not create dependents. Thus, he started a college and he also gave payments to build more than 2,800 libraries. He even started a fund to reward heroes; and he offered a pension to Grover Cleveland, who vetoed more bills than any of his predecessors. (It is not surprising that Cleveland vetoed the gift.)
Bostaph recognizes Carnegie’s genius, and builds much of the book around that. With Carnegie’s success in steel, the United States vaulted into world leadership in a key product of the industrial revolution. Without Carnegie, the United States might not have had dominating economic and military capacity in the early 1900s.
But Bostaph also describes Carnegie’s failings. For example, despite his brilliant competitive edge, he often sought tariffs and eagerly joined pools (he didn’t need either of them). Some of his efforts at collusion were intended to learn what others were doing and upstage them when possible. When he first joined the Bessemer Steel Association, its leaders assigned him a small share of the steel market. He then put on a show, yelling at his peers and threatening to undersell all of them if they didn’t give him the largest share. They capitulated to him and that may say as much about the pitiful state of the early U.S. steel industry as it does about Carnegie.
Carnegie had mixed labor relations. Sometimes he could be very innovative — he occasionally raised wages and he liked to give performance bonuses. But steel was an evolving international industry and he had to innovate to win the largest market share. When he ripped out old factories or adopted new technology, he sometimes cut wages or fired hundreds of people. The Homestead Strike of 1892 led to violence, deaths, and hard feelings for many years.
Perhaps the churning and the changes needed to make steel profitably made such labor unrest inevitable. But in the case of the Homestead Strike, Carnegie was out of the country when it happened and he made little effort to resolve it, or to regularly apply his abundant interpersonal skills to his own labor force. The example of his father, automated and out of work for most of the rest of his life, seems not to have given Carnegie compassion for those in his own factories going through what his father went through.
Nonetheless, Carnegie is a masterful study in the art of entrepreneurship. His rags-to-riches story fits the novels written during the late 1800s by Horatio Alger. Even the later story of the new U.S. Steel Corporation shows how the dynamic Scot was missed. Sure, the new leaders installed Charles Schwab, Carnegie’s man, as president, but they soon fired him. And the market share held by U.S. Steel steadily dwindled from about 61 percent to 39 percent in the first two decades of the twentieth century.
There is something amusing about the progressives of the early twentieth century regularly denouncing U.S. Steel as a sinister behemoth, with the potential to crush any competitor. But without Carnegie, U.S. Steel couldn’t even hold its own market share, least of all take more from others. Bigness did not equal greatness. But, as Samuel Bostaph shows in his excellent biography, a great entrepreneur does more than any politician to improve the quality of life for ordinary people.
This article was originally published in the June 2016 edition of Future of Freedom.
