Going to Extremes

How Deep, How High Can Humans Go?

Few among us have seriously dreamed to go where no human has gone before. Far fewer have risked their lives to live that dream. Ahmed Gabr and Reinhold Messner are two men who lived the dream and exceeded the limits of what was thought to be humanly possible. 

Ahmed dreamed of scuba diving deeper than anyone had ever ventured. When Helen and I vacationed to scuba dive in Mexico and the Caribbean, I wondered what attracted people to attempt the deepest dives. There would be little or no light, no beautiful coral or tropical fish. What compelled divers to seek such depths? Of course, I thought it must be either the challenge to exceed what had been done before or to become a notation in a record book. In any case, a serious attempt to set a diving record would require an extraordinary amount of skill and preparation. This is not the stuff of mere dreamers like me.

Ahmed, a 41-year-old Egyptian, prepared for the dive for four years. When the day of the dive arrived, he dove to a depth of over 1,090 feet in just 12 minutes. It took 15 hours to return to the surface to avoid injury from decompression and other risks of the ascent.  

The human record dive is just 3% of the deepest point of the ocean. Other mammals put the human record to shame. A Cuvier's beaked whale was recorded to dive to a depth of nearly 10,000 feet and other living things have been discovered as deep as 31,000 feet. Nevertheless, Ahmed sets the record for us land-based mammals.

Moving to the other extremity of the earth's landmass, Mount Everest rises to 29,029 feet. It was once thought impossible for a human to reach the summit without supplemental oxygen. The highest mountain I ever climbed was Mount Rainier guided my favorite uncle then in his seventies. During the climb, I marveled at the men and women who had climbed Mount Everest. I was climbing a mountain just half as high. Not having acclimated or trained for the climb, I craved (but did not have access to) supplemental oxygen.

In 1978, Reinhold Messner, considered to be the greatest mountain climber of all time, ascended Mount Everest without the aid of supplemental oxygen. Unlike the traditional Everest expeditions, Messner didn't use Sherpas to carry his gear, used no ladders or fixed ropes, no satellite phones, and carried everything he needed on his back. He climbed as fast as he could climbing slopes that normally take days in hours. Don't think he did all this in ideal conditions. He suffered a storm for two days weathering 125 mph winds and temperatures of 45-below-zero, awakening at night gasping for air because sleeping took more oxygen than he could corral. 

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Two years later he made his second ascent climbing Everest without supplemental oxygen in four days; it normally takes a month to climb expedition style.

I wonder what special discipline and drive make people like Reinhold Messner and Ahmed Gabr succeed beyond our perceived human limits. I don't have what it takes. I handle my daily obligations taking out the trash and repairing the house, even building practical and esthetic structures. But the older I get, the more I admire those who did so much more than even the Walter Mitty in me ever fantasized. 

The Richest Man in U.S. History

The Richest Man in U.S. History

If you read the prior blog post and guessed that the richest man in U.S. history exploited essential facilities and property rights to get rich, you would be correct. But John D. Rockefeller (I will call him JD) brings a couple more economic principles to light. Before examining JD's get-rich tactics, let's put his wealth in perspective. Mansa Musa reached his maximum wealth of an estimated $400 billion dollars. At his peak, JD controlled about 1.5% of the U.S. output, an equivalent of $350 billion in today's dollars. That is more than double the wealth of either of the two richest men in the world, Bill Gates and Jeff Bezos.

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So how did JD do it? He began his career at age 16 working as an assistant bookkeeper. He enthusiastically delved into all aspects of business and, especially, understanding costs. His early mastery of calculating transportation costs would serve him well later in life. At the age of 20, he and a handful of business partners built an oil refinery. At the time, whale oil was used as the primary source of light in homes. Oil held promise as a lower-cost substitute, but the ultimate importance of oil in the world's economies was not anticipated by anyone including JD. Nor was the concept of an essential facility on his mind. Whether by hunch, luck, or his mastery of good business, he had discovered a proverbial gold mine.

Oil refining was (and is) an essential facility. Between extracting oil from the ground and producing final products like kerosene and gasoline, crude oil must go through the refining bottleneck. To fully exploit the essential facility, JD needed the property right to most or all of the oil refining business. By age 26, JD could see glimpses of the future for oil and the industrial revolution and set about securing property rights to domestic refineries. He bought out his partners who sold cheaply not seeing the future JD saw. Just as he was turning 30 he formed Standard of Ohio and quickly became one of the largest shippers of kerosene and oil in the nation. His next step would be to secure property rights to virtually all refineries in the country and, more importantly, to begin the process of vertical and horizontal integration in the market for all oil products.

Horizontal integration is an economic concept that takes advantage of economies of scale. If one makes automobiles one at a time, the time and cost of the car would be absurdly high. On the other hand, by setting up an assembly line that could produce cars on a much larger scale, the cost per car could fall spectacularly. Reducing the marginal cost of producing a car is the result of economies of scale (with each increase in scale, the cost of producing yet another car, the marginal cost, is lowered). 

JD recognized that if he were to collect more and more oil refineries under Standard Oil, he could take advantage of economies of scale and undercut the prices of the remaining smaller competitors leaving him alone in control of his prized essential facility.

Vertical integration occurs when one acquires the property rights to other businesses "downstream" (oil wells and crude oil pipelines, for example) and "upstream" (manufacturing and distributing final products to consumers, for example). Complete vertical integration would collect the entire production, refining, and distribution of oil-based products under one company. JD set his sights on both horizontal and vertical integration.

The combination of vertical and horizontal integration creates opportunities for economies of scope. For example, by owning or controlling the transportation of refined oil and final products, JD could reduce the cost of transporting the entire scope of his products by combining many products in one delivery contract and in tankers he owned (Jeff Bezos became the wealthiest man today in part by using a similar tactic). He could make home deliveries of more than one product to a home or business at less cost than making two separate deliveries, and so forth. In other words, he could cut costs by managing his products as a group. JD could control the nation's oil-dependent products from bottom to top. He saw opportunities to control horizontal and vertical businesses without owning everything.

To expand his monopoly power over what he couldn't own in the vertical production chain, he found means of control. For example, he used the enormous volumes of his shipping to negotiate rates as low as half the normal shipping rates. By the time JD approached 40 years of age, in addition to owning oil refineries that produced 90% of the nation's refined oil, he owned pipelines, thousands of oil wells, tank cars, home delivery networks, and had developed over 300 final products using refined oil (including paint, tar and hundreds more). But the United States was beginning to treat monopolizing an industry as an abusive business practice not in the public interest, perhaps even criminal behavior.

At age 40, JD was indicted on charges of monopolizing the oil industry. This threatened JD's property rights that had secured his fortune. But he was far from defeated. JD believed that his business practices were a benefit to the public and to the economy. The price of kerosene had dropped 80% since Standard Oil entered the business, for example. Nevertheless, state legislatures made it difficult or impossible to incorporate in one state and operate in another. To comply with the law, JD's oil interests fragmented into more than 40 companies operating in different states. 

But having clever lawyers at his disposal turned the obstacle into an annoyance but not the end of his property rights. He formed the nation's first significant trust. The fragmented companies placed their individual corporate shares of stock in a trust to be managed by the trustees. Nine trustees including JD ran 41 companies consisting of 20,000 domestic wells, 4,000 miles of pipeline, 5,000 tank cars, and over 100,000 employees. The property rights to almost 90% of the world's refining capacity, the oil business's essential facility, remained a property right controlled by JD.

Eventually, antitrust laws strengthened, competition in the oil industry oil throughout the world grew in ways that even JD couldn't control, and JD retired to give much of his fortune to charity.

What JD's story adds to Mansa Musa's story are three things: 1) Property rights in the more modern period operate on a legal and regulatory battlefield rather than on a military battlefield, 2) Horizontal and vertical integration can magnify the value of property rights to essential facilities, and 3) The cost advantages of economies of scale and scope can fortify a business against intrusion from competitors. JD profited from selling at prices competitors could not profitably match.

The Richest Man in World History

Note: this is the first in a series of blogs that explore how economic principles have been exploited to make people rich. 

Mansa Musa: the African King of Kings

It is impossible to say for certain who in the history of the world accumulated the greatest wealth. You can imagine the difficulties comparing the worth of salt, gold, and land across places and times that had no standard way to count money. Indeed, there is controversy today about how to compare the prices we pay now compared to a year ago. We presently rely on the Consumer Price Index (CPI) to compare prices of a "typical" mix of goods most people tend to buy. But if you only bought bananas and someone else only bought wine, you would experience very different changes in the cost of living throughout the year.

Nevertheless, economists have ways of roughly estimating who was the most wealthy person in recorded history. However wealth is measured, there is some (though not unanimous) agreement that an African king, Mansa Musa, was the wealthiest person in history. I will use him to illustrate two economic principles that can be used to make one incomprehensibly wealthy. So how did Mansa Musa get to be so rich and how did his heirs lose it all in two generations?

Mansa Musa did not set out to own all the copper mines, salt mines, camels, or riverboats. He acquired and maintained control of what economists call "essential facilities". Most trade moving through Africa was funneled through Mali.  Mansa Musa used military force to expand Mali into an empire that spanned all of western Africa. The Mali Empire encompassed virtually all critical junctures in the overland and river trade routes. The Mali Empire contained the most navigable portions of the River Niger used to transport goods by water. The rich soil of the Niger Delta supported an abundance of food and animals to support trade. Mali housed cities that were centers of cultural, religious, educational, and economic activities. In other words, Mali contained all the resources that were necessary to facilitate trade within Africa and between Africa and Eurasia. Without the support of the Mali Empire, Africa's contribution to trade in much of the ancient world would have remained an obscure footnote in history.

Salt and gold were the most important commodities on the trade routes. Salt was mined in the dry Sahara Desert and transported south where it was an essential nutritional supplement replacing the natural body salts lost through sweat. Salt was transported towards the savanna south of Mali. Gold, an essential component of all international trade, was mined in and near the Mali Empire and exported north to international destinations. Only Mansa Musa could legally own gold nuggets inside Mali, only gold dust was used for local trade. Salt and gold were exchanged ounce for ounce on nearly equal terms. In addition, all goods crossing into or out of the Mali Empire (kola nuts, slaves, copper, and other resources) were taxed by Mansa Musa.

One look at the map of trade routes suggests why the Mali Empire, with Timbuktu at its center, became (what economists term) an essential facility in African trade. Without the support and permission of Mali, African trade would come to a halt. That is the nature of essential facilities: critical production and transactions require the essential facility to function. But it takes more than an essential facility to milk it for wealth.

To exploit an essential facility for gain, one needs to establish and sustain a property right to the facility. Thus the concept of a"property right" is the second lesson in economics Mansa Musa teaches us. Musa inherited the property right to Mali and used his military to encompass all major African trade routes.

Musa sustained his property rights in several important ways. He set taxes on trade at levels that didn't invite serious military challenges. He used his extensive military forces to protect merchants using the trade routes for which merchants were appreciative. And he prevented civil revolts by generously giving to the poor. Musa also promoted Islam as a religion of peace and equality among all humans (likely excepting slaves since he facilitated the slave trade on the trade routes). He is best known for his trek to Mecca leading 60,000 people and lavishing gold on the needy along the way (so much so that he depressed gold prices for years after). However, he ruthlessly dealt with any who threatened him or his regime. He had great management skills and built universities, mosques, and safe urban environments. All of these actions served to sustain his property rights to his essential facilities.

When Mansa Musa died, control of the Mali Empire passed to his heirs who lacked this management skills and strategic thinking. They disregarded the need to balance economic power with an understanding of human nature and complex organizational oversight. Within two generations, all the wealth of the empire was lost amid civil unrest, succession disputes, and the inability of Musa's son and older brother to keep Mali'a vassal states from becoming independent.