Food for thought:
·
Did the rise
of big business (and the merger movement) in the late 19th century
fulfill the promise of capitalism, or did it undermine capitalism?
·
Did the
success of entrepreneurs like Carnegie and Rockefeller demonstrate the power of
free enterprise, individualism, and competition as the means to attain
success? Or did their success ultimately
destroy the promise of free enterprise, competition, and individualism for
others?
Capitalism: the means of production & distribution are
privately owned & operated for profit, under fully competitive conditions;
characterized by a concentration of wealth and, in its later phase, by the
growth of giant corporations.
Socialism: the means of
production & distribution are owned & operated by society or the
community rather than by private individuals, with all members of society or the
community sharing in the work and the products (no profit or concentration of
wealth). The main idea was that workers should share the benefits of their
production.
Characterized by equality and a redistribution of
income from rich to poor. Became popular in late 19th and early 20th
century among certain groups of Americans because of their reaction against
industrialization and laissez-faire production.
[Laissez-faire is a French term that literally means
“leave it be,” and when we use it to describe business-government relations, it
means that government leaves business alone – that business is free from
government intervention.]
Conflict between social classes
intensified during the period of industrialization (the late 19th century.) Let’s define the social classes: upper class refers to a very small minority
of elites that are extremely wealthy and powerful; middle class refers to people of some means,
such as professionals (doctors, lawyers, teachers, etc.), owners of small
businesses, and managers in businesses/factories – think “white collar”; working class refers mainly to laborers and
workers in factories – think “blue collar.”
[Note:
in the period after World War II it became increasingly difficult to
differentiate between the social classes, and now just about everyone, rich and
poor, identifies themselves as “middle class.” The divisions were more distinct
before the war.]
In
other words, conflict between rich and poor (and those in the middle) became
more hostile during this period as big businesses controlled the economy and
exacerbated the differences between the “haves” and “have-nots.”
The
key question of the age was how to deal with economic inequality in this
democratic capitalist nation.
II.
Pre-Conditions
Why
did big business emerge in the United States? Why did it emerge in the
1880s-1890s? This and the following two lectures discuss how and why business
got big, as well as its effect on labor.
A. U.S. blessed
with abundant raw materials – one crucial factor in success of an industrial
force.
B. The fast
growing population of the U.S. (both from natural increase & immigration)
meant that the country enjoyed an abundant labor force to work in the
proliferation of factories. Furthermore,
this meant that America had an ever-growing population of consumers to purchase
the goods that these industries were making. In other words, America had the
necessary number of workers and consumers to make big business thrive.
C. U.S. was an
innovator in transportation systems to move raw materials and finished goods
quickly & reliably. Heavily
significant was the role of the railroad in the rise of big business. The “transportation revolution” had to
precede the industrial revolution.
D. Instruments of
communication – e.g. telegraph and later the telephone – were also instrumental
because they allowed growing businesses to move information quickly and
reliably. As with transportation,
communication is vital if a business expands (either in terms of production or
sales) over a large area, such as regionally or even nationally.
E. Another
important factor in the rise of big business in the U.S. was that business
profited from a favorable political environment – a sympathetic
government. The U.S. government generally
supported business; it viewed prosperous private businesses as beneficial to
the common good. Some examples of this
political environment:
·
U.S. Constitution decreed that there should be no
trade barriers between the states. This
meant that America could grow into the largest free market in the world.
·
Tariff policies.
A tariff is a tax on an imported good (i.e. a good from another
country.) Although different political factions battled over tariffs, in
general the government set high tariffs, which meant that goods from other
countries were more expensive to Americans, thereby “protecting” American
industries – allowing them to undercut foreign competition.
·
Corporation policies. During this period the federal
government established laws that treated corporations like individuals. One
result of this was that corporations were protected by the 14th
amendment. (Ironic: 14th
amend. passed to ensure the rights of freed slaves and ends up being used to
protect big businesses.)
·
In labor-management conflicts, government (local,
state, and federal) was almost always on management’s side and used its power
to hamper labor.
F. And a final
factor in the rise of big business in this country in the late 19th
century was technology, particularly the shift from natural power to artificial
power (coal, steam, electricity): more reliable and powerful. Mechanization. New processes, inventions.
III.
Characteristics of big business
Big
business emerged when entrepreneurs combined mass production with mass
distribution to establish a bureaucracy of managers to coordinate these two
processes and direct the action of unskilled or semi-skilled workers.
A. Entrepreneurs (e.g. Carnegie, Vanderbilt, Rockefeller)
Were
they Captains of Industry (ingenious, heroes of the day, embodiment of the
American Dream); or were they Robber
Barons (greedy, corrupt, engaging in questionable business practices, cruel to
workers, feared & hated men) ??
B. Mass
production: Economies of Scale – the more you make, the cheaper it costs
per unit. Before this revolution,
business made profit from mark-up. But with mass production, business made
profit out of volume. (Instead of making $1 off of 100 products, it could sell
the product for less and make 10 cents off of 10,000 – a bigger profit.) During this period businesses built huge
factories, employed thousands of workers.
This came with high fixed costs.
Thus, the business needed to manufacture a lot of the product to make a
profit.
C. Mass
distribution: needed a way to distribute
the large quantities of product they were making. Therefore, growing businesses
looked to large (if not national) markets.
This led to new distribution strategies, especially mass retailing: mail
order, department stores, chain stores.
D. Big business
was also increasingly characterized by a division between owners, managers,
& workers. In the “old days,” when
businesses were small and local, the owner, manager, and worker were often the
same person; there was little distinction, and workers could more easily become
managers and owners. But in the age of
big business the owner could be a financier who didn’t even live in the same
town as the factory; the managers were men who were hired to manage the
business; and the masses of workers could rarely make it up the ranks to be
either a manager or an owner. This
phenomenon is important in understanding the increasing hostility among the
social classes. We will discuss this more in later lectures.
IV.
Problems and Solutions: The Corporate Consolidation
Movement
A. Problems faced
by growing businesses: too much competition, overproduction, fluctuation in
prices, inefficiency, boom and bust economy, periodic economic depressions (one
in 1870s, bad one in 1890s).
In sum, businessmen such as Rockefeller felt plagued
by instability and felt like they lacked control over their markets.
B. What did
businessmen most want?
Control,
order, stability, certainty of profit.
C. How to get
it?
One small company alone could not obtain control. Business leaders (i.e. entrepreneurs) realized that they needed to join companies -- by buying them. Words for this: consolidation, merger, integration.
Two types of integration:
1. Horizontal
Integration: Trusts and Holding Companies
TRUST: stockholders of smaller companies in the
industry yield control of their stock to a large company’s board of trustees
(trusteeship but not ownership).
Next level, HOLDING COMPANY: a big corporation
partially or fully owned other companies’ stock and merge the companies’ assets
and management. (This is what Standard
Oil became: it bought out and merged 40 companies.)
2. Vertical
Integration: completely control the industry, by buying the inputs (raw materials,
e.g. crude oil) and the outputs (e.g. gas retailers). Rockefeller also engaged in vertical
integration, eventually owning the drilling, the huge refineries, and the
railroad tank cars for distribution.
By 1898, Standard Oil refined 84% of the nation’s
oil, controlled most pipelines, and owned an abundant amount of oil-producing
land. It thereby obtained CONTROL over
its market and didn’t have to worry about competition, fluctuating prices,
etc.
A. Merger
movement:
Rockefeller and Standard Oil is just one example of
consolidation within an industry.
Consolidation, or merger, truly became a “movement” in American
business. Between 1889-1903, around 300 trusts and holding companies were
formed, the biggest being U.S. Steel.
The system of capitalism was definitely changed as
everything became bigger and less equal. This phase is called “industrial
capitalism.” Many argued that industrial
capitalism (i.e. big business) threatened the classical capitalist system of
(fairly) equal competition between small entities.
[Note: during this period and later, the words
“monopoly” and “trust” were used loosely and therefore interchangeably, even
though they technically have different definitions.]
I.
Government-Business Relations
A. The Gospel of
Wealth and Social Darwinism
The Gospel: idea that hard
work and perseverance, and no other factors, led to wealth. (The popular
phrase: “pull yourself up by your own bootstraps.”) This led to the conviction that people and
government should not intervene to help the poor: it’s their own fault for not
working hard.
Social Darwinism – the
survival of the fittest.
Comes from people who took Darwin’s biological
theory of evolution and natural selection and tried to apply it to human social
situations. Social Darwinists believed in laissez faire – gov’t should not
interfere in economy or society.
Believed if gov’t left things alone, then power would flow naturally to
the most capable – the fittest.
In practice, Social Darwinism was a defense of
monopoly because, according to the theory, monopoly resulted from the natural
accumulation of economic power by those most capable of wielding it.
Yet these Social Darwinist industrialists and their
supporters ignored all the government assistance they received! (e.g.
subsidies, tax breaks, loans, tariffs, injunctions against labor unions,
sympathetic judicial system)
B. This leads me
to my next point: the American economy was never really laissez-faire even
though people often talked about it as such.
When business leaders said they didn’t want government to interfere,
they meant negatively. In fact, business
leaders actively lobbied for and enthusiastically accepted government’s positive
interference. Business leaders
influenced politics quite heavily. The
vision of a tidy division between industry and government is a false one.
II.
Benefits of Big Business
Despite the criticisms of big business, it
irrefutably had its advantages. It
produced more and often better products for cheaper. Furthermore, it did create better lifestyles
for some and more conveniences. It also accelerated the rise of the middle
class in this nation because the big businesses needed to establish a whole
class of managers to supervise the increasingly intricate business practices as
well as the hundreds of thousands of workers in factories.