315 ISS Lecture15 Discussion of Reich: The Work of Nations The REAL Economy in the Atlantic Monthly.
I.
Origin of Giant American Corporations
A. Reduction of Competition by Consolidating Production was the third step (following
tariffs and 'spheres of influence') to solving the problem of overproduction.
B. European (1870s) and Japanese (1890s) strategy. 1. Cultural tradition of cartels, guilds, royal monopolies and other mechanics to restrain
trade, therefore not concerned by large industrial consolidations.
2. Strong bureaucracy experienced in mobilizing resources and directing trade. E.g.
Commissariat General du Plan in France, and MITI and shingi kai in Japan. (Harrop:133)
a. Organized manufacturers when the markets became unruly - coordinated
investment, shared capital, joint purchase of raw material and marketing of goods.
b. Fixed prices and policed against price cutting. c. Major industrial consolidations completed by late 19th century. C. American strategy 1. Cultural distrust of monopolies and any concentration of political or economic power
led to the Sherman Anti-Trust Act of 1890 prohibiting price fixing and monopolies.
a. No strong bureaucracy in 19th century capable of directing or coordinating an
industrial policy.
b. Since American corporations could not coordinate activities as their European
competitors could, the solution was to merge the component parts into one huge corporation. [US Steel owned fleet of ore freighters on the Great Lakes]
c.
High tariffs made raw material costly, therefore buy up the domestic sources of the raw material. [U.S. Steel owned taconite mines in northern Minnesota] prices as well.
d. Permitted the vertical integration of industries and protected by tariffs could fix D. Controlling the Giant Corporation 1. Debated the legitimacy of powerful Corporations free from democratic oversight and
immune to political demands by the public.
a. WWI and the Origins of National Corporate Planning b. Federal bureaucracy created to finance war industries, to provide housing, to
settle industrial disputes, and to allocate fuel, food and shipping resources. 1) War Industries Board scrapped the Sherman Anti-Trust Act.
2) Began a pattern of government subsidies and production cartels (defense contractors). 3) Berle and Means raised popular concern over the accountability of the nation's top executive officers.
II. The National Champion A. Postwar American found its market at home. 1. Economic survival was not in saving but in consumption. 2. Dealing with overcapacity (Reich discusses points a-c) a. Imperialism (Hobson) led to two world wars and created limited additional
markets.
b. Reduction of competition through consolidations within industries. c. Increasing the size of the population with the resources to purchase what is being
made.
3. Vance Packard, The Waste Makers, in early 1960s identified the fourth strategy:
planned obsolesce. If it wears out or goes out of style, it has to be replaced.
a. No "life cycle" data were kept on consumer goods. (U.S. made color TVs were
designed to operate hotter than the Japanese-made units and failed at five times the rate.)
b. The more bells and whistles, the lower the reliability rate (r/r) which is the
product, not the average of, the reliability rates of its separate parts. 1) If a unit has two component parts with an r/r of .99 each, the unit r/r is .98; with 10 at .99 it is .90 and with 100 at .99 it is .37. 2) Demming, an American quality control guru, could find not find an audience in the U.S. in the 1960s, but the Japanese enshrined his quality control and made his books their bibles.
B. Industrial Structure. 1. Oligopolistic coordination, a situation in which a few manufactures in an industry
control a major segment of and thus have a disproportionate influence on the market.
a. The thirty major American industries (e.g. steel, automobiles, food processing,
appliances, etc.)
b. Several thousand Industrial Corporations surround the core corporations - banks,
insurance, railroads, mass retailers (Sears, Montogmery Ward, etc.)
c. Hundreds of thousands of small firms filling productions niches too small for
efficient mass production, all quite vulnerable to the whims of the market.
2. Rise of the American middle class populated by skilled and semi-skilled factory
worker, managers and clerks.
a. 1920s Middleville (Muncie, IN) study by Lynds showed a clear division of labor.
1) Working Class whose economic activities centered on making or working with things, or performing services. 2) Business Class economic whose activities centered on people in selling or promoting things, goods or services.
b. Core corporations created a middle class whose incomes were not based on
ownership of assets but bureaucratic rank. General trend toward a reduction in inequality.
c. Improving benefits from WWII to 1973
1) Real wages for production workers grew 2.5 to 3 percent annually 2) In 1950, only 10% of union contracts had pensions and only 30% social insurance. In 1955, 45% had pensions, 70% offered life, accident and health insurance. 3) Paid vacations, supplemental insurance (Sup Funds) and COLA (Cost of Living Adjustments) in wages became the norm,
3. Corporate bureaucracies followed military-style organization with top-down planning
and absolute control
a. Fifty percent of earnings went into new plants, equipment, and research and
development.
b. Players
1) The industrial-statesman, such as "Engine Charlie", closely tied to government from WWII production, served on advisory panels, shared common education and values with government colleagues. 2) Middle managers, the "Man in the Grey Flannel Suit", were not entrepreneurs but conformists (Riesman. The Lonely Crowd) in a standardized, high-volume world. 3) Labor was heavily unionized (70% of factory, mine and railway workers) organized by industry each with its own bureaucracy. (i) Contract settlements could be generous in an expanding, non-competitive market where increases could be passed to the consumer. (ii) Wage and benefit settlements with one company in an industry would be automatically implemented in the others (Who will the UAW strike? Ford, GM ...)
III. The National Bargain A. Government Business Strategies 1. Indirect control, managing the money supply to balance inflation and unemployment. 2. Provide mass education to prepare future workers (factory model of consolidated
schools).
3. National defense justified public spending on infrastructure and education. The
military-industrial complex. (National Defense Highway Act built interstates, ND Education Act, ND Foreign Language Fellowship).
a. Technological research funded and manufacturing capabilities developed under
Defense Department contracts. [Packet switching technology developed by DARPA formed the basis of the Internet.]
b. Transfer of wealth between states: major defense contractors in California (20%
of non-agricultural workforce in 1959) with negative flow from states like Michigan.
B. Shaping the global economy with the Marshall Plan, Breton-Woods (see Thurow,
Chapter 1), GATT.
1. Creating stability in the global market. a. Fixed U.S. currency as basis for exchange creating stability for U.S. overseas
investments.
b. Central Intelligence Agency discovered Communist plots where U.S. core
corporation interests were involved. 1) In 1953, an anti-colonialist movement led by Mohammed Mossadegh overthrew the shah and seized the Anglo-Iranian Oil company, CIA funded a military coup to restore the shah. 2) In 1953 overthrew Guzman, the elected president of Guatemala who attempted land reform at the expense of the United Fruit Company's plantations. 3) n 1954, began providing "military advisors", CIA pilots and 70% of the French military budget in Viet Nam, and set Diem up in "South Vietnam".
c. Combined strategy of reduced domestic tariffs with intense penetration of foreign
industrial sectors.
C. The Presumed Problem 1. The world catches up with high volume production, cheaper labor and raw materials.
Japan and Europe going head-to-head with the US in high tech products once the exclusive domain of American corporation.
a. Foreign Competition: by the 1960s America's core corporations could not longer
set their prices. 1) Technology transfer: selling patents abroad, esp. to the Japanese. 2) Protectionism: by end of 1980s one-third of goods manufactured in U.S., by value, were protected from competition. 3) Dumping (earning a profit of less than 8 percent).
b. Strategies
1) Bar foreign products. Inconsistent with GATT initiative. 2) Compete on the basis of price. Cost of labor inputs higher in Europe but
lower in developing countries. 3) Transform industrial corporations into financial holding companies - merger mania. [2007 GM's North American operation lost money, GMAC made money.] 4) Promote global trade to facilitate outsourcing. (i) In 1985, fully $17b roughly 40% of Japan's $39.5b trade surplus with the United States was the result of American corporations' buying or making things in Japan to be sold in the US under their name brands.