8. In Retrospect

The aversion to change is in large part an aversion to the bother of making the readjustment which any given change will necessitate; … any innovation calls for a greater expenditure of nervous energy in making the necessary readjustment than would otherwise be the case. It is not only that a change in established habits of thought is distasteful. The process of readjustment of the accepted theory of life involves a degree of mental effort—a more or less protracted and laborious effort to find and to keep one’s bearings under the altered circumstances.

—Thorstein Veblen

The revolution that was forging institutionally structured organizational patterns upon American society demanded fundamental reforms of the environment in which these new systems were to operate. During the years 1918–38, notions of economic autonomy and self-regulating market behavior confronted the forces of industrial concentration. Free competition—with attendant low prices and aggressive trade practices—was identified with the older, unstructured forms of organization characterized by smaller, self-governing business firms. An unrestrained marketplace brought with it the specter of incessant change, a condition that was unacceptable to those charged with the responsibilities of managing and preserving the assets and market positions of business organizations. In the confrontation between “individualism” and “institutionalism,” competition came to be identified with the decentralized, unstructured practices representing the past. Individual self-interest, with its decentralizing tendencies, had to be suppressed in favor of the emerging institutional order. The attack on autonomy was a defense of the new order: the institutionally dominant, centrally directed, collective society. Businessmen came to embrace the industrial theology of “responsibility,” and learned a new set of cartelizing catechisms. The campaign to reform trade practices and promote “fair” competition had little, if anything, to do with business ethics, efficiency, “justice,” “fairness,” the elimination of waste, or any of the other rationalizations employed on behalf of “industrial self-rule.” It was, instead, part of a strategy designed to secure the political supervision indispensable to the group domination of industry members. Only in the structuring of economic behavior, it came to be thought, could the status quo be maintained against the inconstancies and uncertainties of the marketplace.

As the law of entropy, chaos theory, and history combine to remind us, however, efforts to structure and institutionalize the processes by which negative entropy is produced can be fatal to both firms and civilization as a whole. Life is defined in terms of a continuing capacity to respond to nonequilibrium conditions. Change, not stability, and uncertainty and variation, not security and the status quo, are the characteristics of any healthy, surviving system. That the increased politicization of American life, during the twentieth century, has detracted from such resilient capacities, can no longer be denied. It will be left to historical analysis to assess the contributions of such practices to the decline of the American economic system—and, perhaps, the civilization itself.

A major public policy question raised by this inquiry has to do with the role of free competition as a regulator of economic behavior in society. To what extent—if, indeed, at all—should political intervention be invoked to structure market relationships and decision-making? To what extent—if at all—should market participants be deprived of competitive advantages earned through successful responses to the demand preferences of others? If Mancur Olson is correct in concluding that—under the conditions he specified—the collective interests of a large group cannot be advanced without the use of coercion, do the collective interests of various industries in securing stable pricing and nonaggressive competitive practices, justify the abandonment of an environment of unrestrained economic decision-making? These and many other questions still await a more thorough public analysis.

An examination of such questions must be prefaced by clearly distinguishing between the myth and the reality of competition. Though our public-policy rhetoric is replete with endorsements of the abstraction “competition,” it is difficult to find any consistent institutional support for the concept when translated into the functional realities of concrete decision-making. When operating as a buyer of raw materials, a firm may have undiluted praise for the competition that allows it to bargain among competing sellers for a lower price. But that same process becomes an “unfair method of competition” or “unethical price-cutting” when employed by buyers and sellers in the market in which that same firm is a seller of a finished product. Labor unions argue for the “freedom of contract” to allow unions and employers to agree to make union membership a condition of continued employment, but deny to workers with low marginal productivity the “freedom to contract” to work at a less than prescribed minimum wage. Politicians publicly extol the virtues of “free competition,” but then privately devote themselves to working on behalf of special interests to enact legislation to weaken or destroy competition. About all that one can safely conclude about public responses to competition is that business firms, labor unions, consumer groups, trade associations, political agencies, or individuals will—on a case-by-case basis—either support or oppose the principle of unrestrained competition depending upon their perception of what is to their self-interest. Beyond that (except for some isolated ideological commitment to free competition) it can hardly be said that American society shares any consensus favoring a freely competitive market environment.

Within the post-World War I business community, as we have seen, any consensus—if it existed at all—was in favor of a lessening of competition. Even before the turn of this century, many business leaders were involved in efforts to eliminate or reduce competitive threats. These efforts involved a mixture of voluntary and political methods. As Gabriel Kolko has pointed out, the merger movement at the beginning of this century was just such an effort to bring competitive trends under control, an undertaking that failed and led businessmen to look to the federal government for a solution to the problems of unhindered competition.¹

Throughout the 1920s, trade associations helped set the tone and supply the machinery for collective efforts to reduce the intensity of competition. As Robert Himmelberg has concluded, such endeavors (including proposals for revising the antitrust laws to allow for a more “cooperative” mode of competition) “originated in the enthusiasm for cooperative capitalism which businessmen felt as a result of their wartime experience.”² Both simplistic and sophisticated attempts to persuade business firms to voluntarily restrain their self-seeking impulses were inadequate, however, to overcome the inherent conflicts between individual and group interests.

As a result of such influences, many business leaders were drawn to more formal, politically enforceable alternatives. Being dissatisfied with an economy in which decision-making was diffused among autonomous and unsupervised business firms and customers, many leaders of commerce and industry began opting for a centralized direction of economic life through business-created, government-enforced trade practice standards. By the time the Great Depression brought the decade to a close, a sizeable and influential portion of the business community had already accepted the basic premise underlying what has been termed the “corporate state.” That premise is that the impersonal, voluntary influences of a market regulated by the pricing mechanism should be replaced by politically structured restraints upon the exercise of economic free choice. The trade associations helped to facilitate the emergence of an environment favoring the cartelization of American industry and, with it, the diminution of the role of free, unhindered competition as the catalyst in determining the success or failure of business firms. Such efforts played a significant role in helping to shape and direct the relationships between business and government in succeeding years.

STABILITY OR CHANGE

There is a prevailing view that government regulation serves both as a countervailing force to economic influence and a substitute for preexisting market disciplines that have been eroded through years of intense competition. According to this view, the competitive processes are truly “destructive,” with unsuccessful competitors gradually being eliminated until only a few large, powerful, and efficient firms remain. The market is seen, by the adherents to this position, as a self-consuming process, with large corporate enterprises and heavily concentrated industries surviving as the natural consequence of aggressive, highly competitive market activity. This outlook is an extension of the interpretation of industrial growth and development during the so-called age of the robber barons in the late nineteenth century. It assumes that a market economy is unable to maintain internal discipline and will naturally evolve into monopolistic or oligopolistic forms.

Studies of the origins of government regulatory programs belie such interpretations of economic behavior. In the first place, it is not at all clear that large enterprises necessarily have, by virtue of their size, a commanding advantage over their smaller competitors. As Kolko and others have pointed out, the merger movement at the beginning of this century often failed to provide the stabilizing results business had desired. Far from providing increased concentration, domination, and control, mergers frequently resulted in substantial declines in market shares for the firms that had merged. Alfred Chandler Jr., of course, has identified many of the advantages associated with the organizational changes that led to the emergence of the modern “multiunit business enterprise.”³ Nevertheless, size alone did not seem to assure any firm a secure market position. It was the efficiencies associated with vertical integration, and not the domination of an industry sought by horizontal combination, that accounted for organizational success. Since the rhetoric of the regulatory process is grounded in notions of “power” and “abuses” of power, it is important to distinguish, at least conceptually, between situations in which size gives a firm nearly arbitrary power to dominate markets and competitors and those situations in which size promotes efficiency and allows a firm to put its products into the market at lower prices.

Any analysis of the nature of competitive influences within a given market must take into consideration the time frame within which such behavior is evaluated. Let us assume, hypothetically, that a firm thoroughly dominates its particular industry and, furthermore, seeks to take advantage of its position by trying to charge monopolistic prices. Let us, for purposes of this example, disregard the fact that competition might well be present in the form of industries offering substitutable goods or services (e.g., aluminum, concrete, or lumber, as a substitute for steel in construction) and consider this firm as having no direct competitors. The classic model of competition would suggest that, unless legal coercion is available to prevent the entry of new firms into that market, the monopolistic prices will quickly attract new competitors. Since it would take some period of time for one or more competitors to get into production, our hypothetical firm might enjoy a short-term noncompetitive benefit. But, as a long-term proposition—again, assuming the absence of any legal restraints upon entry—such practices offer little concern. Indeed, a rationally managed firm in such a position might well wish to avoid trying to take advantage of its situation in order not to attract new competitors.⁴

Any assessment of systemic change—or of unsystemic change—must keep such temporal factors in mind. Work being done in other disciplines has greatly modified our understanding of the processes of growth and change in systems generally. Earlier assumptions about the continuous processes of development are giving way to models of disscontinuous, or punctuated, change, wherein a major nonlinear break occurs, followed by a period of relative stability.⁵ If punctuation does more accurately describe the temporal framework within which systems evolve, it should be apparent to us that “stability” and “change” are inextricably entwined, as work in the study of “chaos” and “complexity” suggest.

It has not been the purpose of this study to thoroughly explore any general theory of organizational development. The contrasting views on this subject by such scholars as Joseph Schumpeter, Arthur Dewing, and Alfred Chandler Jr. suggest that such questions are best left to separate and more extensive inquiries. Nevertheless, it is apparent that increased size has a tendency to foster inertia, conflict, inflexibility, and general instability within organizations. It also appears that large organizations tend, as a consequence of these internal counterpressures, to become less resilient, less capable of making satisfactory responses to market changes. There is much evidence to support the contention that large organizations are increasingly less capable of sustaining their market positions in the face of competitive challenges without the use of artificial restraints to control the behavior of other firms that pose threats to their established interests.

This is not to deny that many large firms have been able to overcome these internal, countervailing influences. Chandler’s research documents the effectiveness of the organizational changes occurring throughout much of the business system. Both before and during the twentieth century firms did, indeed, respond to the conditions in which they found themselves, and many became organizationally more efficient. But to what extent did the artificial structuring of competitive relationships become an increasingly attractive strategy to large business organizations because of certain dysfunctional factors associated with firm size? At the same time, what influence did an extended political intervention into economic decision-making have in the fashioning of organizational structures? The organizational changes identified by Chandler were occurring within a much broader politico-economic context in which corporate-state policies were increasingly influencing, and defining the parameters of, economic behavior. It would be difficult to isolate all the variables to determine how much of the organizational revolution taking place within the business system was actually fostered by anticompetitive, trade-stabilizing policies of government. It is clear, for example, that the regulatory process tends toward greater industrial concentration by permitting larger firms to more easily spread the costs of regulation over its production than is the case with smaller firms. In the words of Walter Adams:

[I]ndustrial concentration is not the inevitable outgrowth of economic and technical forces, nor the product of spontaneous generation or natural selection. In this era of big government, concentration is often the result of unwise, manmade, discriminatory, privilege-creating governmental action. Defense contracts, R and D support, patent policy, tax privileges, stockpiling arrangements, tariffs and quotas, subsidies, etc., have far from a neutral effect on our industrial structure. In all these institutional arrangements, government plays a crucial, if not decisive, role. Government, working through and in alliance with “private enterprise,” becomes the keystone in an edifice of neomercantilism and industrial feudalism. In the process, the institutional fabric of society is transformed from economic capitalism to political capitalism.⁶

In any event, it can hardly be denied that many business leaders and trade associations perceived that their interests would be furthered by an extension of political controls over their competitors, and that such controls have helped to shape contemporary American commerce and industry. What may prove to be the case is not that increased government intervention emerged as some countervailing force to large business enterprises, but that the interests of large firms and the state worked, in symbiosis, to aggrandize the power interests of both sectors.

Traditional interpretations of economic behavior fail for a more compelling reason: they are contrary to historical evidence. Government intervention has been invoked not at the behest of persons who saw the market failing to function properly, but at the prompting of business interests who were concerned that the market was functioning all too well. None of this is to suggest that all business interests desired political intervention. The events of the 1920s and 1930s clearly demonstrate that many business firms enjoyed a comparative advantage under a system of unrestricted competition, and not only opposed political efforts to eliminate that advantage but resisted any temptation to use political means to benefit themselves. Nevertheless, while businessmen have always paid homage to the litanies of “competition,” the energies of far too many of them have been devoted to establishing political controls that would make “free competition” secondary to the maintenance of an environment of stabilized security. Any public policy inquiry must be premised on a clear understanding of the tensions between a stabilized and structured form of economic order, on the one hand, and, on the other, the order that is associated with the continuing processes of change to which firms must be prepared to respond. This distinction has been made by Robert A. Dahl and Charles E. Lindblom in these terms:

[O]rder is not the same as the absence of change. Competition is often identified with disorder—hence, by some doubtful logic, monopoly with order—because competition means losses as well as profits and because it calls for a never ending procession of bankruptcy. But preferences change; so also do technology and resources. If an economy is to economize, the first requirement is adaptability. An economic order provides for the systematic elimination of the obsolete and inefficient, as well as for constant experimentation. The test of genuine experimentation is that much of it fails.⁷

This view of order is finding additional confirmation in studies of “chaos,” which remind us that the health of any system—be it an individual, a firm, an industry, or a society—depends not upon maintaining conditions of equilibrium, but upon the capacity and resolve to remain responsive to those endless processes of nonequilibrium.

The principal purpose of this inquiry has been to provide a more complete understanding of the business purposes that have helped influence public policy responses to competition. The lessons learned herein must, however, be put into perspective: the advocacy of restraints was neither new to nor unique with the American industrial system. In the final analysis, perhaps, this inquiry only serves to remind us of an observation by Adam Smith that is two centuries old. In words that seem to have anticipated both the “Gary dinners” and the NRA, Smith warned:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.⁸