Wednesday, August 29, 2007

Slim Pickings

August 29, 2007 - WSJ

In the world of wealth, the big news this summer is that Carlos Slim, 67, of Mexico may have surpassed Bill Gates as the world's richest person. Inevitably, writers compare Mr. Slim, who built his wealth on a telecommunications monopoly, to America's so-called "robber barons" -- including men such as John D. Rockefeller, James J. Hill and Henry Ford.

This is bad history. America's most famous rugged entrepreneurs, especially men such as Rockefeller and Ford, the wealthiest men of their eras, reached mass markets by producing quality products -- kerosene and cars -- at low prices. More recently, Sam Walton did the same thing in retailing. Mr. Slim, by contrast, is better characterized as a "political entrepreneur," who relied more on manipulating Mexico's bureaucracy than on satisfying consumers in a competitive arena.

In the great heyday of late-19th century American capitalism, successful businessmen had to innovate and compete as they helped create mass markets. Government was limited, property rights and contracts were protected, and, except for tariffs and occasional subsidies, government could not play favorites.

Whoever satisfied the most customers would have the largest businesses. Only when Rockefeller sold cheap kerosene to tens of millions of Americans did he become the nation's first billionaire. "We must ever remember," Rockefeller told his partner, "we are refining oil for the poor man and he must have it cheap and good." Ironically, the price of Rockefeller's kerosene dropped to eight cents a gallon in 1885 from 26 cents in 1870 -- all the while he was viciously pilloried as a monopolist by the press, Congress and his competitors.

Ford, Walton and Mr. Gates also had to sell widely to masses of Americans at competitive rates before they rose to the top. Putting a car in every garage, not just the garages of the rich, was Ford's working motto. In serving the most customers, he reaped the largest reward. So did Bill Gates with computers. When America did deviate from free markets -- for example, by granting government subsidies to the Union Pacific and Central Pacific Railroads -- the economy suffered instabilities. But it recovered from the experience and learned a lesson. James J. Hill built the Great Northern Railroad with no federal subsidy -- and outperformed all other transcontinentals.

Mexico, unfortunately, has had a long tradition of weak property rights and a strong, intrusive government. The Constitution of 1917 almost guarantees economic chaos. According to Article 27, property is not a right but a social function. Government officials, therefore, may confiscate land or industry which, in their opinion, is not serving a "public use" or the "public interest."

Inevitably, different groups lobbied the Mexican government to confiscate property "in the national interest." Beginning in the 1930s, railroads were nationalized and turned over to union leaders; banks, the oil industry and some utilities were also expropriated. The dreaded oil gringos from the U. S. were paid off later at about 10 cents on the dollar.

The new nationalized industries, of course, performed erratically and incompetently. The unions and government officials running these industries had little experience managing large firms and no knowledge of how much their workers were worth, how much to invest in new technology, which engineers to hire, and, in the case of oil, where to do exploratory drilling. PEMEX, the nationalized oil company, floundered for decades losing money and trying to recapture lost markets.

Enter Carlos Slim. His father, Julian Slim Haddad, a Lebanese immigrant, made his money as a merchant during the chaos leading up to the Constitution of 1917. Carlos Slim greatly expanded the family fortune by working closely and cleverly with government officials. (In fairness to Mr. Slim, there may not be another avenue to great wealth in a massively interventionist economy.)

His major opportunity came when President Carlos Salinas de Gortari decided to privatize some inefficient industries. Mr. Slim bought Telmex, the nation's phone company, in 1990 in a controversial auction which was decidedly less than transparent. With that purchase came a six-year monopoly guaranteed by the government. Although Mr. Slim was supposed to relinquish the monopoly in 1997, he used a variety of legal and political tools to maintain it, for example filing injunctions in court to block orders from the regulator to provide competitors fair access to his network. According to OECD figures, Mexican consumers and businesses still pay above market telephone rates. Fewer than one-fourth of Mexican homes have telephones.

With a near monopoly of fixed-line telephones and data access (the Internet), Mr. Slim has reaped windfall profits which, wisely invested, have propelled him to immense wealth. Meanwhile, Mr. Slim's newer ventures -- his construction company and his oil services company -- rely on government contracts for their major business. Recently President Felipe Calderón met with Mr. Slim and urged him to accept greater competition.

Not surprisingly, when striving Mexicans want to better themselves, they look to where competition is the rule and property rights are more secure -- and head for the land of the robber barons.

Mr. Folsom is professor of history at Hillsdale College and author of "The Myth of the Robber Barons: A New Look at the Rise of Big Business in America" (Young America's Foundation, 5th edition, 2007).

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