The Role of the State in Tipping the Balance

Download: MOLOCH: Mass-Production Industry as a Statist Construct.

I. The Origins of Sloanist Mass Production

A Fork in the Road
A Wrong Turn
The Role of the State in Tipping the Balance

II. The Institutional Imperatives of Sloanism

Economies of Scale, Economies of Speed, and Push Distribution
Microeconomic Institutional Forms for Providing Stability
Mass Consumption to Absorb Surplus
Political Capitalism
State Action to Absorb Surplus: Imperialism
State Action to Absorb Surplus: Creation of New Industries

III. Conclusion

How were existing institutional interests able to thwart the revolutionary potential of electrical power, and divert neotechnic technologies into paleotechnic channels? The answer is that the state tipped the balance.

The state played a central role in the triumph of mass-production industry in the United States.

The state’s subsidies to long-distance transportation were first and most important. Large manufacturing firms presupposed a national market built on the national railroad network. A high-volume national transportation system was an indispensable prerequisite for big business.

We quoted Mumford’s observation above, that the neotechnic revolution offered to substitute industrialization by local economic development for reliance on long-distance transport. State policies, however, tipped the balance in the other direction: they artificially shifted the competitive advantage toward industrial concentration and long-distance distribution.

Alfred Chandler, a leading enthusiast of the large mass-production corporation, himself admitted as much: all the advantages he claimed for mass production presupposed a high-volume, high-speed, high-turnover distribution system on a national scale, without regard to whether the costs of the latter exceeded the alleged benefits of the former..

…[M]odern business enterprise appeared for the first time in history when the volume of economic activities reached a level that made administrative coordination more efficient and more profitable than market coordination. [20]

…[The rise of administrative coordination first] occurred in only a few sectors or industries where technological innovation and market growth created high-speed and high-volume throughput. [21]

William Lazonick, a disciple of Chandler, described the process as obtaining “a large market share in order to transform the high fixed costs into low unit costs….” [22]

The railroad and telegraph, “so essential to high-volume production and distribution,” were in Chandler’s view what made possible this steady flow of goods through the distribution pipeline. [23]

The primacy of such state-subsidized infrastructure is indicated by the very structure of Chandler’s book. He begins with the railroads and telegraph system, themselves the first modern, multi-unit enterprises. [24] And in subsequent chapters, he recounts the successive evolution of a national wholesale network piggybacking on the centralized transportation system, followed by a national retail system, and only then by large-scale manufacturing for the national market. A national long-distance transportation system led to mass distribution, which in turn led to mass production.

The revolution in the processes of distribution and production rested in large part on the new transportation and communications infrastructure. Modern mass production and mass distribution depend on the speed, volume, and regularity in the movement of goods and messages made possible by the coming of the railroad, telegraph and steamship. [25]

The coming of mass distribution and the rise of the modern mass marketers represented an organizational revolution made possible by the new speed and regularity of transportation and communication. [26]

…The new methods of transportation and communication, by permitting a large and steady flow of raw materials into and finished products out of a factory, made possible unprecedented levels of production. The realization of this potential required, however, the invention of new machinery and processes. [27]

We can’t let Chandler get by without challenging his implicit assumption (shared by many technocratic liberals) that paleotechnic industry was more efficient than the decentralized, small-scale production methods of Kropotkin and Borsodi. The possibility never occurred to him that massive state intervention, at the same time as it enabled the revolutions in corporate size and capital-intensiveness, might also have tipped the balance between alternative forms of production technology.

First, the national railroad system simply never would have come into existence on such a scale, with a centralized network of trunk lines of such capacity, had not the state rammed the project through.

Piore and Sabel describe the enormous capital outlays, and the enormous transaction costs to be overcome, in creating a national railroad system. Not only the startup costs of actual physical capital, but those of securing rights of way, were “huge”:

It is unlikely that railroads would have been built as quickly and extensively as they were but for the availability of massive government subsidies.

Other transaction costs overcome by government, in creating the railroad system, included the revision of tort and contract law (e.g., to exempt common carriers from liability for many kinds of physical damage caused by their operation). [28]

According to Matthew Josephson, for ten years or more before 1861, “the railroads, especially in the West, were ‘land companies’ which acquired their principal raw material through pure grants in return for their promise to build, and whose directors… did a rushing land business in farm lands and town sites at rising prices.”

For example, under the terms of the Pacific Railroad bill, the Union Pacific (which built from the Mississippi westward) was granted twelve million acres of land and $27 million worth of thirty-year government bonds. The Central Pacific (built from the West Coast eastward) received nine million acres and $24 million worth of bonds. [29]

An engineer named Judah, an early enthusiast for what became the Central Pacific, assured potential investors, “that it could be done — if government aid were obtained. For the cost would be terrible.” Collis Huntington, the leading promoter for the project, engaged in a sordid combination of strategically placed bribes and appeals to communities’ fears of being bypassed, in order to extort grants of “rights of way, terminal and harbor sites, and… stock or bond subscriptions ranging from $150,000 to $1,000,000” from a long string of local governments that included San Francisco, Stockton, and Sacramento. [30]

Absent the land grants and government purchases of railroad bonds, the railroads would likely have developed instead along the initial lines described by Mumford: many local rail networks linking communities into local industrial economies. The regional and national interlinkages of local networks, when they did occur, would have been fewer and smaller in capacity. The comparative costs of local and national distribution, accordingly, would have been quite different. In a nation of hundreds of local industrial economies, with long-distance rail transport much more costly than at present, the natural pattern of industrialization would have been to integrate small-scale power machinery into flexible manufacturing for local markets.

Instead, the state artificially aggregated the demand for manufactured goods into a single national market, and artificially lowered the costs of distribution for those serving that market. In so doing, it drastically increased both market areas and predominant firm size. In effect, it created an artificial ecosystem to which large-scale, mass-production industry was best “adapted.”

The first organisms to adapt themselves to this artificial ecosystem, as recounted by Chandler, were the national wholesale and retail networks, with their dependence on high turnover and dependability. Then, piggybacked on them, were the large manufacturers serving the national market. But they were only “more efficient” in terms of their more efficient exploitation of an artificial environment which itself was characterized by the concealment and externalization of costs. With all the concealed and externalized costs fully subsumed into the price of mass-produced goods, rather than shifted onto society or the taxpayer, it is likely that the overall cost of goods produced flexibly on general-purpose machinery for local markets would have been less than that of mass-produced goods.

Besides almost single-handedly creating the artificially unified and cheap national market without which national manufacturers could not have existed, the railroad companies also actively promoted the concentration of industry through their rate policies. Piore and Sabel argue that “the railroads’ policy of favoring their largest customers, through rebates,” was a central factor in the rise of the large corporation. Once in place, the railroads — being a high fixed-cost industry — had

a tremendous incentive to use their capacity in a continuous, stable way. This incentive meant, in turn, that they had an interest in stabilizing the output of their principal customers — an interest that extended to protecting their customers from competitors who were served by other railroads. It is therefore not surprising that the railroads promoted merger schemes that had this effect, nor that they favored the resulting corporations or trusts with rebates.

“Indeed, seen in this light, the rise of the American corporation can be interpreted more as the result of complex alliances among Gilded Age robber barons than as a first solution to the problem of market stabilization faced by a mass-production economy.” [31]

Second, the American legal framework was transformed in the mid-nineteenth century in ways that made a more hospitable environment for large corporations operating on a national scale. Among the changes were the rise of a general federal commercial law, general incorporation laws, and the status of the corporation as a person under the Fourteenth Amendment. The functional significance of these changes on a national scale was analogous to the later effect, on a global scale, of the Bretton Woods agencies and the GATT process: a centralized legal order was created, prerequisite for their stable functioning, coextensive with the market areas of large corporations.

The federalization of the legal regime is associated, in particular, with the recognition of a general body of federal commercial law in Swift v. Tyson (1842), and with the application of the Fourteenth Amendment to corporate persons in Santa Clara County v. Southern Pacific Railroad Company (1886).

Still another component of the corporate legal revolution was the increased ease, under general incorporation laws, of forming limited liability corporations with permanent entity status apart (severally or collectively) from the shareholders.

Arguably, as Robert Hessen and others have made a case [32], corporate entity status and limited liability against creditors could be achieved entirely through private contract. Whether or not that is so, the government has tilted the playing field decisively toward the corporate form by providing a ready-made and automatic procedure for incorporation. In so doing, it has made the corporation the standard or default form of organization, reduced the transaction costs of establishing it relative to what would prevail were it negotiated entirely from scratch, and thereby reduced the bargaining power of other parties in negotiating the terms on which it operates.

Third, not only did the government indirectly promote the concentration and cartelization of industry through the railroads it had created, but it did so directly through patent law. Mass production, as we will see below, requires large business organizations capable of exercising sufficient power over their external environment to guarantee the consumption of their output. Patents promoted the stable control of markets by oligopoly firms through the control, exchange and pooling of patents. [33]

These were the conditions present at the outset of the mass production revolution, in which the development of the corporate industrial economy began. In the absence of these necessary preconditions, there simply would not have been a single national market or large industrial corporations serving it. Rather than being adopted into the framework of the paleotechnic factory system, the introduction of electrical machinery would likely have followed its natural course and lived up to its unique potential: powered machinery would have been incorporated into small-scale production for local markets, and the national economy would have developed as “a hundred Emilia-Romagnas.”

But these were only the necessary conditions at the outset. As we shall see below, the growth of big government continued to parallel that of big business, introducing newer and larger-scale forms of political intervention to address the corporate economy’s increasing tendencies toward destabilization, and to insulate the giant corporation from the market forces that would otherwise have destroyed it.

Notes: 

20. Alfred D.Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge and London: The Belknap Press of Harvard University Press, 1977), p. 8.

21. Ibid., p. 11.

22. William Lazonick, Business Organization and the Myth of the Market Economy (Cambridge, 1991), pp. 198-226.

23. Chandler, The Visible Hand, p. 79.

24. Ibid., pp. 79, 96-121.

25. Ibid., p. 209.

26. Ibid., p. 235.

27. Ibid., p. 240.

28. Piore and Sabel, pp. 66-67.

29. Matthew Josephson, The Robber Barons: The Great American Capitalists 1861-1901 (New York: Harcourt, Brace & World, Inc., 1934, 1962), pp. 77-78.

30. Ibid., pp. 83-84.

31. Piore and Sabel, pp. 66-67.

32. Robert Hessen, In Defense of the Corporation (Stanford, Calif.: Hoover Institution, 1979).

33. For a detailed account of the role of patents in American industrial history, see my previous C4SS paper, “Intellectual Property: A Libertarian Critique” C4SS Paper No. 2 (Summer 2009). See especially the material quoted from David Noble, America by Design: Science, Technology, and the Rise of Corporate Capitalism (New York: Alfred A. Knopf, 1977).

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