Microeconomic Institutional Forms for Providing Stability

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

In keeping with the need for stability and control Galbraith described above, the technostructure resorted to organizational expedients within the corporate enterprise to guarantee reliable outlets for production and provide long-term predictability in the availability and price of inputs. These expedients can be summed up as replacing the market price mechanism with planning.

A firm cannot usefully foresee and schedule future action or prepare for contingencies if it does not know what its prices will be, what its sales will be, what its costs including labor and capital costs will be and what will be available at these costs…. Much of what the firm regards as planning consists in minimizing or getting rid of market influences. [73]

Galbraith described three institutional expedients taken by the technostructure to control the uncertainties of the market and permit long-term predictability: vertical integration, the use of market power to control suppliers and outlets, and long-term contractual arrangements with suppliers and outlets. [74]

In vertical integration, “[t]he planning unit takes over the source of supply or the outlet; a transaction that is subject to bargaining over prices and amounts is thus replaced with a transfer within the planning unit.” [75]

One of the most important forms of “vertical integration” is the choice to “make” rather than “buy” credit — replacing the external credit markets with internal finance through retained earnings. [76] The theory that management is controlled by outside capital markets assumes a high degree of dependence on outside finance. But in fact management’s first line of defense, in maintaining its autonomy from shareholders and other outside interests, is to minimize its reliance on outside finance. Management tends to finance new investments as much as possible with retained earnings, followed by debt, with new issues of shares only as a last resort. [77] Issues of stock are important sources of investment capital only for startups and small firms undertaking major expansions. [78] Most corporations finance a majority of their new investment from retained earnings, and tend to limit investment to the highest priorities when retained earnings are scarce. [79] As Doug Henwood says, in the long run “almost all corporate capital expenditures are internally financed, through profits and depreciation allowances.” Between 1952 and 1995, almost 90% of investment was funded from retained earnings. [80]

Market control “consists in reducing or eliminating the independence of action of those to whom the planning unit sells or from whom it buys,” while preserving “the outward form of the market.” Market power follows from large size in relation to the market. A decision to buy or not to buy, as in the case of General Motors and its suppliers, can determine the life or death of a firm. What’s more, large manufacturers always have the option of vertical integration — making a part themselves instead of buying it — to discipline suppliers. “The option of eliminating a market is an important source of power for controlling it.” [81]

Long-term contracting can reduce uncertainty by “specifying prices and amounts to be provided or bought for substantial periods of time.” Each large firm creates a “matrix of contracts” in which market uncertainty is eliminated as much as possible. [82]

The use of contracts to stabilize input availability and price is exemplified, in particular, by the organizational expedients to stabilize wages and reduce labor turnover under the American labor regime. The purpose of the Wagner regime, created under the New Deal, was “by stabilizing wages and employment, to insulate the cost of a major element of production from the flux of a market economy.” [83] From management’s perspective, the sort of bureaucratized industrial union established under Wagner had the primary purposes of enforcing contracts on the rank and file and suppressing wildcat strikes. The corporate liberal managers who were most open to industrial unionism in the 1930s were, in many cases, the same people who had previously relied on company unions and works councils. Their motivation, in both cases, was the same. For example, GE’s Gerard Swope, one of the most “progressive” of corporate liberals and the living personification of the kinds of corporate interests that backed FDR, had attempted in 1926 to get the AFL’s William Green to run GE’s works council system. [84]

Another institutional expedient of Galbraith’s technostructure is to regulate the pace of technical change, with the oligopoly firms in an industry colluding to introduce innovation at a rate that maximizes returns. Or as Paul Goodman put it, a handful of manufacturers control the market, “competing with fixed prices and slowly spooned-out improvements.” [85]


73. Galbraith, The New Industrial State, p. 37.

74. Ibid., p. 38.

75. Ibid., p. 39.

76. Ibid., pp. 50-51.

77. Martin Hellwig, “On the Economics and Politics of Corporate Finance and Corporate Control,” in Xavier Vives, ed.,
Corporate Governance: Theoretical and Empirical Perspectives (Cambridge: Cambridge University Press, 2000),pp.

78. Ralph Estes, Tyranny of the Bottom Line: Why Corporations Make Good People Do Bad Things (San Francisco: Berrett-Koehler Publishers, 1996), p. 51.

79. Hellwig, pp. 101-102, 113.

80. Doug Henwood, Wall Street: How it Works and for Whom (London and New York: Verso, 1997), p. 3.

81. Galbraith, The New Industrial State, pp. 39-40.

82. Ibid., pp. 41-42.

83. Ibid., p. 65.

84. Piore and Sabel, p. 132.

85. Paul Goodman, People or Personnel, in People or Personnel and Like a Conquered Province (New York: Vintage Books, 1963, 1965), p. 58.

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Organization Theory