Integration Completed: Determinants of Size and Concentration

The basic institutional arrangements used in the production and distri- bution of goods in modern America had fully evolved by the 1920s. Salaried managers working in multiunit enterprises had replaced owners in single- unit firms in carrying out these processes in the key sectors of the economy. Where the processes of production were capital-intensive and energy- consuming, and where the creation of a marketing organization assisted in the selling and distribution of mass-produced products, the manufacturers managed these processes and administered the flow. Where the production processes were more labor-intensive and less energyconsuming, and where marketing and distribution did not benefit from specialized scheduling and advertising and other services, the mass marketers and, increasingly, the mass retailers coordinated the flows.

In both cases the visible hand of management replaced the invisible hand of market mechanisms in administering and coordinating day-to-day production and distribution. Yet the difference between the two methods of coordination and control was significant. For where the manufacturer became the coordinator, his firm grew to great size, and the decisions in his industry concerning current production and distribution and the allocation of resources for future production and distribution became concentrated in the hands of a small number of managers. This centralization of decision making, and with it economic power, was of particular importance because it occurred in industries central to the growth and well-being of the economy.

Markets and technology, therefore, determined whether the manufac- turer or the marketer did the coordinating. They had a far greater influence in determining size and concentration in American industry than did the quality of entrepreneurship, the availability of capital, or public policy.

Entrepreneurial ability can hardly account for the clustering of giant enterprises in some industries and not in others. The most brilliant indus- trial statesmen or the most ruthless robber barons were unable to create giant multinational companies in the furniture, apparel, leather, or textile industries. Yet, in other industries the first to try often succeeded. Wiihin the single decade of the 188os entrepreneurs built giant enterprises that dominated their industries at home and abroad in tobacco, matches, break- fast cereals, meat packing, cotton oil, kerosene, photographic film, sewing machines, office machines, agricultural machinery, electrical equipment, telephone equipment, elevators, boilers, pumps, and other standardized machinery. Once these men had completed their integrated international organizations, the opportunities for empire building in their industries became limited. An entrepreneur might enlarge or combine existing enter- prises, but he rarely built a new one. Such an opportunity came again only with changes in technology and major shifts in markets.

Nor can the availability of capital and the nature of the capital markets account for size and concentration in American industry. Enterprises did not grow large and industries become concentrated because the entre- preneurs who built them had privileged access to capital. There is little evidence to document the contention of Lance Davis and others that Rockefeller, Carnegie, and Swift dominated their industries because they had access to sources of outside capital denied to their competitors.37 And there is no evidence at all that the producers of oil, sugar, cigarettes, sewing machines, and other machines had in the 1880s and 1890s sources of out- side capital not available to makers of textiles, clothing, leather, and furniture.

What the enterprises that integrated production and distribution did have was a much greater supply of internally generated capital. The technology of their production permitted them to produce a much higher volume of cash flow than was possible in labor-intensive industries. Inter- nally generated funds financed the expansion of their small number of large plants and paid for the setting up of their branch selling and purchasing offices. It was only when the mergers of the 1890s began to consolidate and rationalize their processing facilities that American industrial enterprises required funds that were not available from local commercial banks and businessmen.

The managers of the mergers of the 1890s had little difficulty in obtaining the capital they needed. By that date the capital markets in the United States, particularly those in New York, were as extensive and sophis-ticated as any in the world. By that decade New York investment houses were marketing blocks of railroad securities to American and European investors as large as any that would be required for industrial expansion. There was no scarcity. If anything, there was a plethora of capital. Bankers, financiers, and speculators were eager to locate securities to sell. They did not discriminate between industries. They promoted enterprises as enthusiastically in those trades that remained competitive as they did in those that became concentrated. The wishes and decisions of financiers had little to do with the size of American firms and the structure of American industries.

Nor can public policy in the form of specific legislation explain why some firms became large and why some industries concentrated and others did not. Tariffs were as high on the products of industries that remained competitive as they were on those that became concentrated. And, of course, American tariffs had no direct impact on the growth of these enterprises abroad. Even when tariffs of foreign nations were specifically directed against the products of these firms, they did little to slow growth. The companies merely went under the tariff wall by setting up factories within the nations that discriminated against their products.

Patents had a greater effect than tariffs. The products of many of the large industrials were new and protected by patents in the American market. This was particularly true for the machinery makers. Manufacturers paid close and continuing attention to protecting their products, processes, and specialized production machinery with patents. Yet American patents often failed to give protection in foreign markets. Even at home they provided only temporary protection on individual products or processes. Moreover, one manufacturer rarely controlled all the patents in his industry. Singer Sewing Machine Company, for example, was one of twenty-four firms employing the Howe patents. It never had patent pro- tection in its overseas markets. Its monopoly came from the effectiveness of its global organization. A set of patents without such an organization could never assure dominance; an organization, even without patents, could.

As early as the 1890s some of the new integrated industrial enterprises began to shift from relying on patents for even temporary protection to depending on the output of their specialized research departments to help them maintain their dominant positions. As Reese V. Jenkins has written of Eastman Kodak, “patents began to play a diminished role, while continuous innovation became a more effective strategy.”38 In 1896 George Eastman set up his experimental department with managers trained in chemical engineering at Massachusetts Institute of Technology and other universities. By that date companies in less technologically sophisticated industries including American Cotton Oil and National Lead had research departments with their own laboratories separated from those used to test products and control production processes. By the first decade of the new century Western Electric, Westinghouse, General Electric, Electric Storage Battery, McCormick Harvester (and then International Harvester), Corn Products, Du Pont, General Chemical, Goodrich Rubber, Corning Glass, National Carbon, Parke Davis, and E. R. Squibb all had extensive departments where salaried scientifically trained managers and technicians spent their careers improving products and processes.39 Other companies soon followed suit. The research organizations of modern industrial enter- prises remained a more powerful force than patent laws in assuring the continued dominance of pioneering mass production firms in concentrated industries.

Antitrust legislation had a more substantial impact than did patent or tariff legislation on the growth of modern industrial enterprise and on industrial concentration. After all, such legislation was specifically directed at controlling the size and activities of these firms. Yet what antitrust legislation did was to reinforce technological and market imperatives. The passage of the Sherman Act and its intepretation by the federal courts affected the creation and continuing growth of the modern industrial enterprises in two ways.

First, the Sherman Act, which was passed as a protest against the massive number of combinations that occurred during the 1870s and 1880s, clearly discouraged the continuation of loose horizontal federations of small manufacturing enterprises formed to control price and production. The Supreme Court’s decisions in the E. C. Knight, Addystone Pipe, and Trans-Missouri Freight Rate cases, by condemning federations and condoning the holding company, hastened the coming of legal consolida- tion. These decisions provided a powerful pressure for a combination of family firms to merge into a single, legally defined enterprise. And such a legal organization was the essential precondition for administrative cen- tralization and vertical integration. Without the Sherman Act and these judicial interpretations, the cartels of small family firms owning and operating single-function enterprises might well have continued into the twentieth century in the United States as they did in Europe.

In the second place, the existence of the Sherman Act discouraged monopoly in industries where integration and concentration had already occurred. It helped to create oligopoly where monopoly existed and to prevent oligopoly from becoming monopoly. The Court’s willingness, as indicated by the Northern Securities case, to dissolve a holding company found guilty of restraining trade acted as a brake on the formation of large mergers of already integrated companies such as had occurred in the steel and harvester industries. Later, federal actions against American Tobacco, Du Pont, and American Can helped to transform monopolistic industries into oligopolistic ones.

Antitrust action taken against Standard Oil and American Sugar increased the number of competitors in these already oligopolistic industries. Nevertheless, in these formative years of modern industry, federal action under the Sherman Act never transformed an oligopolistic industry back into a traditionally competitive one. Nor did it prevent the rise of the giant integrated firm where markets and technology made administrative coordination profitable.

The rise of modern business enterprise in American industry between the 1880s and World War I was little affected by public policy, capital markets, or entrepreneurial talents because it was part of a more funda- mental economic development. Modern business enterprise, as defined throughout this study, was the organizational response to fundamental changes in processes of production and distribution made possible by the availability of new sources of energy and by the increasing application of scientific knowledge to industrial technology. The coming of the railroad and telegraph and the perfection of new high-volume processes in the production of food, oil, rubber, glass, chemicals, machinery, and metals made possible a historically unprecedented volume of production. The rapidly expanding population resulting from a high birth rate, a falling death rate, and massive immigration and a high and rising per capita income helped to assure continuing and expanding markets for such production. Changes in transportation, communication, and demand brought a revolution in the processes of distribution. And where the new mass marketers had difficulty in handling the output of the new processes of production, the manufacturers integrated mass production with mass distribution. The result was the giant industrial enterprise which remains today the most powerful privately owned and managed economic institution in modern market economies.

The building and managing of the modern multiunit business enterprise was, then, central to the process of modernization in the Western world. The task placed a premium on the ability to create and manage large, complex human organizations. Such abilities became the most needed and often best rewarded of entrepreneurial talents. Of all the new types of business organizations to be formed in the United States after 1840, none were more complex than those that integrated mass production with mass distribution. They carried on a wider range of activities than those created to administer the new means of transportation and communication or those built to handle mass distribution. They operated on a global scale. The creation and continuing administration of such complex human organizations deserve close attention.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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