Wednesday, June 12, 2013

Structuring the Instruments of Expansion

The goal is to restrain disturbing influences, to stabilize prices, and to assure those in the business the comfortable feeling that their position is secure.
—Harold Fleming

An illustration of how political and corporate institutions have generated a symbiotic relationship to restrain the processes of creativity and change that keep a civilization vibrant, can be found in the history of government regulation of business. In one form or another in America, modern government economic policies are centered on forcibly preserving the interests—including the existence—of large corporate enterprises from the turbulence and uncertainties that are so much a part of a flourishing culture. Free and unrestrained competition demanded a continuing resiliency in responding to market changes. The innovation in products, services, and business methods that made economic life creative and vibrant came to be seen as a threat to the survival of firms unable or unwilling to respond. Concerns for security and stability began to take priority over autonomy and spontaneity in the thinking of most business leaders.

In the volatile climate of a creative culture, change is one of the few constants upon which businessmen could rely. Economic survival often depends upon innovative adaptability; firms with higher unit costs and prices must either become more efficient, or drop out of the race. Instability and turnover have been continuing threats with which firms have had to contend. The severity of the competitive struggle has been no better reflected than in the automobile industry: of the 181 firms manufacturing cars at some time during the years 1903 to 1926, 83 remained in business as of 1922, while 20 managed to survive through 1938.

Economist Joseph Schumpeter has observed that price competition is not the most significant factor to which firms have to respond. In his view—and particularly relevant to the theme of this book—it is not that kind of competition that matters, but the competition provided by “the new commodity, the new technology, the new source of supply, the new type of organization, . . . competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms, but at their foundations and very lives.” Citing retailing as an example, Schumpeter declared that the competition that was most critical arose “not from additional shops of the same type, but from the department store, the chain store, the mail-order house, and the supermarket.” Schumpeter’s analysis may provide insight into how technology-driven innovations—including the Internet—are forcing the institutional order to respond.

With an ever-increasing frequency, the state has imposed upon the marketplace controls to regulate such matters as trade practices, pricing policies, and the size and entry of business firms. Government contracting and research and development funding, along with outright subsidies, have become so much a part of corporate life as to cause many people to regard such practices as synonymous with a “free market” system. The benefits of maintaining openness in competition—with no legal restrictions on freedom of entry, product design, or on the terms and conditions for which parties could contract with one another—have long been rejected by major business organizations more concerned with the survival of individual firms and industries. The phrases “laissez-faire” and “invisible hand” that once articulated an awareness of the conditions under which prosperity might prevail, have been replaced by the dogma “too big to fail,” that have allowed modern governments to “bail out” failing firms with gifts of hundreds of billions of dollars!

The conversion from a more openly competitive to a protected security environment for American businesses was focused on the period from World War I to the start of World War II. During these years, a broad range of turbulent social and economic conditions existed: a war, an era of seemingly endless prosperity, the “Great Depression,” and the New Deal with its promises of a politically engineered recovery. Continuing throughout this period was an organizational transformation that had begun long before World War I: the “collectivization” of human society. The principle of “collective organization,” postulating the superior interests of the group over those of its individual members, was emerging within the business system as well as within other sectors of society.

It must be recalled that the 1930s was a period of intense interest throughout much of the Western world in the collectivization of economies. The Soviet Union, Mussolini’s Italy, Hitler’s National Socialism in Germany, and the New Deal in America had in common the premise that economic life should be centralized under the strict authority of a bureaucratic state. Franco’s coming to power in Spain in 1939 added to the phenomenon. The experience in America demonstrates that the driving force for such a system came from members of the business community desirous of controlling the inconstancy of a free market—wherein the self-interested actions of individual firms generated destabilizing competitive conditions—in order to moderate the pace of competition. The collectivism implicit in the New Deal came from within the business system, with the dominant firms working to restrain the “instruments of expansion” of which Quigley has written. Here is to be found one of the clearest examples of how collectivist thinking and practices have thwarted the productive efforts of individuals and, in the process, contributed to the enfeeblement of the civilization itself.

Because “collectivism” reflects conservative, status quo sentiments, its underlying premises were consistent with business efforts to resist change. Under the National Recovery Administration (NRA), industries organized themselves through the machinery of the trade associations and began the task of altering the attitudes, belief systems, and practices that represented the old order. Business decision making that emphasized the well-being of the individual firm was to be eschewed in favor of attitudes that stressed the collective interests of the industry itself. Individual profit maximizing was to be de-emphasized when confronted by the “greater interests of the group”; independence and self-centeredness were to be put aside in favor of a more “cooperative” form of “friendly competition;” “standardization” and “uniformity” were to help define trade practices.

Nothing so threatened the interests of this emerging industrial order as the free play of market forces at work in an environment of legally unrestrained competition. Nothing so preoccupied industry-oriented business leaders in the post–World War I years as the effort to structure this environment so as to keep the conduct of trade within limits that posed no threat to their collective interests. The interplay between the creative influences of inconstancy, and the forces of stabilization that restrained change, became dominated by corporate interests that were more readily satisfied through state power than through the marketplace. The resulting transformations reflect a continuing institutionalization of economic life, contributing to the conditions various historians have identified as bringing about the demise of civilizations.

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