Principles of Microeconomics Scarcity and Social Provisioning Chapter 14 The Rise of Big Business

CHAPTER 14 . THE RISE OF BIG BUSINESS INTRODUCTION TO THE RISE OF BIG BUSINESS ( A . an . Figure . Organizational diagram of the New York and Railroad , 1855 . Daniel George Holt . Public Domain . LEARNING Introduction to the Rise of Big Business In this chapter , you will learn about Big Business in American History Industrialization and the Factory

PRINCIPLES or ECONOMICS 399 Big Business and Organized Labor you will see in the next few chapters , heterodox economists take a very different approach to studying the modern business enterprise . In contrast to focusing on the neoclassical ideal of relatively small firms in perfectly competitive markets , heterodox economists start with the recognition that the modern business enterprise tends to be large . We may think of large firms as differential advantage over their competitors and the ability to exert control over key moments throughout the production process . Finally , we choose to place big business at the center of our economic inquiry , because the large corporation possesses the power to act in ways that other agents can not . In this regard , the Post economist Alfred call be viewed as a social is , one who may act with institutional capacity . What do we mean when we say that some persons act with institutional capacity ?

It is helpful to return to the problem of institutions . In an earlier chapter on consumption we defined as collectively shared habits of knowing , doing , and valuing . The American economist John Commons suggests that institutions result in shaping individual behavior by controlling , liberating and expanding individual action . Commons view of the relational effects that institutions exert on individual action facilitates examination of history as a process of tive causation . We wish to know how individuals interact with society as a whole , and how they may affect the systems as a whole in varying degrees of efficacy . And in turn , we wish to know how social structures constrain , shape and focus individual action . It is important that we keep these concepts in mind as we study the history of big business . Without a clear view as to how individuals interact with one another and the system as a whole , it is difficult to situate the in history , instead its emergence as one of technical inevitability . With these tools let us proceed with an overview of the history of big business . CORPORATION AND LONG DISTANCE TRADE The modern business enterprise has its roots in the early trade regimes of European nation states ing the and centuries . Corporations like the East India Company were granted special privileges by the political ruling establishment in order to guard against the uncertainties involved with trade an inherently risky proposition . Such privileges are referred to in economic history as Crown , by reference to their relationship with the monarchy . Crown monopolies belong to a class of restrictive trade practices that may be considered to be common to all capitalist markets . However , it is important to stress that the actual that such market governance mechanisms embody depends upon the historical context in which we examine them . It is useful to draw comparisons between the corporations that enjoyed crown monopolies , such as the East India Company , and corporations that benefit from other protections in accordance with modern market governance institutions , but we should exercise caution as some modern developments do not fit with early institutions .

400 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Figure . Coat of Arms of the British East India Company . Commons . MERCANTILISM Mercantilism is a term that economists use to describe a social provisioning process peculiar to European during the and centuries . Philosophers who thought and wrote about economic ideas believed that a strong was one that was able to accumulate more gold and silver than their contemporaries . Hence , the orientation for the economies of these was that of external trade . To effect this end , the monarch had to enable a of merchant that were capable of engaging in trade , often with costly and uncertain outcomes at the end of a long voyage . Merchant vessels and crew are costly endeavors far beyond the capacity of any given individual to finance on a sustainable basis . Therefore , it was necessary to pool the funds of many investors vested in a single shipping enterprise . But , capitalists are easily spooked by the prospect of losses ( early , were no exception ) and so the practice of granting special protections and privileges to investors pooling funds for shipping concerns facilitated and enabled the investment . It is important to note , also , that capitalists vested in corporations for the purposes of trade were not random citizens . They were connected via kinship networks to the aristocracy . Adam Smith magnum opus , An Inquiry into the Nature and Causes of the Wealth of Nations 1776 , may be viewed as an attack on the political economy of mercantilism . Smith critique lies on the theory of value embodied in mercantilism . Smith observes that mercantilism was predicated upon a zero sum game . Enriching the welfare of a given meant that another had to lose relative shares of total economic value . Smith argues that production , not trade , was the Wellspring of value . not special privileges to extended members of the aristocracy , should be the end in View of any nation wishing to enrich itself . For Smith , productivity is enhanced through a greater elaboration of the division of labor and extension of the market in society . Restrictive trade practices only stymied this development , Smith believed . Despite Smith protestations market governance institutions that result in creating special privileges for specific firms remain a commonplace in capitalist society .

PRINCIPLES or ECONOMICS 401 Figure . Pin maker factory , indicating the division of labor in making a simple pin . Depicted in , ou des sciences , des arts et des 1762 , Plate II . This image is in the public domain .

BIG BUSINESS IN AMERICAN HISTORY he history of the American experience tends to be viewed as exceptional relative to Europe . The tradition has generally been to view the course of American development as unique and rate from the antecedent European history that America originates from . One consequence of this ideological tradition has been to view corporate power as an anomaly to an otherwise system , in which unfettered market forces generally produce highly competitive , small firms that do not possess effective market power . The actual history is quite different . From the very foundation of the American colonies big business has been the rule , not the exception . The Virginia Company , a company that enjoyed an exclusive patent on very large swathes of land ( see figure below ) established the first British colony in 1607 . A patent is taken here to mean an exclusive grant by the sovereign with respect to a particular land tract , and establishes a fundamental claim to ownership and disposal of that land . The managerial class vested with the power of the charter administered all aspects of colonial life . Virtually all of the land that makes up the area that is described as the original thirteen colonies was held in ownership by a small set of individuals vested with property rights derived from monarchical legal traditions , granted with an exclusive patent for private development . BUSINESS ENTERPRISE AND PROPERTY RIGHTS The corporate firm and the legal structure of property rights in the course of US economic history . When we examine the going concern with an emphasis on its proprietary relationships with other aspects of the economy this appears all the more transparent . That is , the firm is the site of a great many transactions in the economic system . Monetary transactions in which the firm makes a claim to resources generated in the economy involve rules governing the proprietary relationships between the transacting party and the resources in question . In order to secure and steady claim to a set of resources the firm must be contractually entitled to the resources as private property . Hence , it is important to study the between firms and the legal framework on the matter of property . These transactions provide the foundation for the intangible value of the firm as property . Intangible value emerges as the firm is able to maintain differential advantage with respect to other participants in the market , as well as maintain control over stages in the production process in which the firm is engaged , while exerting its over matters of market governance . Precisely how society chooses to assign rights to such property is a matter of primary importance from the standpoint of determining the status of vestiture . Hence , insofar as firms embody the creation of property and affect existing claims to property , it is necessary to adjust the legal framework to establish a coherent tem of property rights . By setting up the problem as essentially a relationship between the law and the

PRINCIPLES OF ECONOMICS 403 Colony of Virginia , Massachusetts , A ' Claimed by ! I Figure . Map of the Colony of Virginia during and early centuries , by . BY SA corporation , we can appreciate the importance of the corporation in the development of American capitalism . COLONIAL LEGAL INSTITUTIONS Colonial America borrowed its legal framework from the English common law system . The common law tradition allows for judges to freely interpret new laws in light of old ones , suggesting that judges take an active role in shaping the subsequent development of legal institutions . This legal tradition of judicial instrumentalism will be important as we examine the changing nature of property and the firm . REAL PROPERTY RIGHTS The colonists derived their property rights as privileges of the king . Since colonists were subjects of the king , they enjoyed all the rights to property that citizens in London enjoyed . The Crown ted the free and common socage system of land tenure in the American colonies , as opposed to other land tenure systems that reflected the myriad feudal relations and systems of mutual obligation . Free and common socage is described by the following features Perpetual ownership

404 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Transmissible to heirs . Free disposal of property Alienable The fee simple system , as Americans would come to know it , embodies a set of rights . Property is often thought of as a bundle of rights for this reason . Accompanying these bundles of rights are a set of rents due the donor of the land , the king . Quit rents , then , represent the debt the holder of real property owes to the sovereign for the right to remain at liberty with the property . If the holder defaults on this obligation by failing to make the quit rent payment , ownership reverts to the sovereign . Modern observers may look to a city like Kansas City , Missouri which possesses a large inventory of housing whose landlords are not current in their tax liability to the local government . Eventually , the state takes possession of the real property and all rights associated with ownership are revoked , until the property is disposed of again as private property . POLICE POWER One of the principal legal developments in American economic history is that the state holds broad powers to establish and define markets , or otherwise exercise its police powers toward some nomic end . This power allows the state to establish special privileges to private entities so that it may collect rents by controlling access to resources . For example , suppose a local municipality wished to transform a waterfall into a lock canal system in order to facilitate inland navigation via steamship . The state may grant a franchise to a firm for exclusive use of the public right of way , thereby the owner of the concern to a rent . Alternatively , the state may attempt to directly develop the falls to remove the impediment to navigation . In either case , the extent to which income is transferred from the community as a result of the establishment of a lock canal depends entirely upon the tion of those in control of the property , who must decide whether and to what extent they will charge rents . In general , the firm must earn revenues from its ongoing marketing activity in order to remain a going concern . EMERGENCE OF PRIORITY RIGHTS One peculiarity of English common law was the institution of granting existing property holders against a future neighbor who may impose costs upon on them in their own pursuits ing their property . The doctrine of ancient lights , as it was known , is the underlying concept of the practice of establishing a basis for prescriptive rights in common law . This common law principle suggests that the long tenured holders of property rights are protected from new developments that would diminish or impede upon their property , in an absolute sense . For example , a property holder who enjoys the benefit of , say , unimpeded sunlight would have the reasonable expectation that rival parties who wish to construct a home adjacent to their property would not be able to do so if it resulted in blocking such daylight . But , the doctrine of ancient lights was not restricted solely to the issue of sunlight , but more broadly as referring to general benefits to property ownership . In effect , the doctrine of ancient lights a conservative bias in the course of development in such a way that favors temporal or generation advantage to prior property holders . As the American economy developed , this doctrine was tested in court and found to obstruct the economic development of urban areas . Prescriptive rights were found to be inconsistent with the social conditions in which American economic development was embedded . In 1838 , a case in New York state , Parker . Fame , established precedent for overturning the institution of prescriptive rights ,

PRINCIPLES or ECONOMICS 405 wherein the judge ruled that the doctrine of ancient lights can not be applied without inhibiting the growth of cities and internal improvements . Hence , the law was adjusted by judicial ism to accommodate and legitimate negative as a byproduct of economic development . When economists refer to negative they are describing costs that impact third parties as a result of some economic process not born by the agents principally engaged in such activity . THE VALIDITY OF CONTRACTS BETWEEN UN EQUALS Under English contract law , contracts were held as valid only when struck on an equitable basis . That contract validity rested upon notions of equity was vestigial to feudal institutions . Contracts were not considered valid if they were struck between two parties that were viewed as too unequal . For example , contracts between someone of sound mind and one that is mentally impaired would be invalid on the premise that the two parties were not equal in their contracting ability . It lows that based upon this equity consideration in the tradition contracts between , say , a factory owner and an individual laborer would not be valid . In American capitalism , such an idea is anachronistic and incompatible with the manner in which value is extracted , appropriated and . While the equity tradition remained central to American contract law throughout the century , four important changes to contract law would emerge in the course of American ment . First , in the century the courts interpreted contracts struck between free persons without as valid , on the principle that mutual assent generally implied validity irrespective of equity . For example , if a factory owner made the terms of employment known to the public and workers accepted a labor contract in exchange for wages , then the contract is valid whether or not the worker stands on equitable terms with her employer . In this circumstance equity refers to the of bargaining power between parties in transaction with each other . It would be absurd to think that a factory owner possesses the same bargaining power as an individual worker , for the owner and exercises their discretion over the the production process . Despite this lack of equity , the labor contract is considered valid so long as the worker knows in advance what she signing up for . Second , the rule embodied above , that of mutual assent or meeting of the wills as it is referred to in contract law , applied to transactions in markets . Provided the buyer is free to inspect the quality of the goods , then any asymmetry of knowledge regarding its quality or serviceability does not impair the validity of the contract in exchange . Third , contracts were struck in terms of market prices , as opposed to customary prices that ensure equity through time . That is to say , if the prices of the goods changed from the time the contract is struck and the buyer takes delivery , then the contracted price remains valid . This institutional change facilitated the development of futures contracts . A futures contract is nothing more than a promise to pay at a later date for delivery of some good , where the contracted price is settled in current market prices . The following breakout box provides a simply example to illustrate how they work . HOW FUTURES CONTRACTS WORK Suppose I am in the Wheat milling business . I know that I need 100 bushels of wheat so that I can mill all of the meal I expect to sell next month . I have a feeling that next month the price of wheat is going to increase , so I decide to lock in

406 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER today prices on the Wheat that I receive next month . I can do this by buying a futures contract from a Wheat farmer for delivery of her wheat in a month , but at today price . Futures contracts are the foundation of a whole class of financial instruments called options , which are ubiquitous in American capitalism as they are used to provide risk hedging positions for firms that have an interest in the ties that undergird the futures contract in question . They are also a means of speculating in financial markets , but that is a topic we shall avoid for now . The main point to remember here , is that changing from customary to market prices in contract law opened up space for the firm to thrive and grow , essential to the development of the modern corporation . Fourth , the courts began to interpret contract law such that employer liability for hazards incurred by workers was limited . The presumption that , with the principle of mutual assent , dangers and risks associated with the workplace were encapsulated in the wage , implied that workers that agreed to the terms of employment absolved employers liability of injury . Additionally , the fellow servant doctrine suggested that employers were further limited in liability where injuries to an employee resulted from negligence on the part of his coworkers . Given the nature of production , it is common to expect that contributory negligence plays some part in the hazards , making it difficult for workers to establish negligence and liability on the part of their employer . THE SUPREME COURT Since john Marshall tenure as ( 1835 ) the Supreme Court has exercised power in the shaping of American economic legal institutions . In the 1819 case . Maryland , Marshall established the implied powers of the court in engaging in judicial review and revision of the legal framework as the court sees fit . The basic premise was that the was intended to be robust through the ages to changes in the technical and social character of the nation . Accordingly , the court reserved the right and asserted its power to interpret its scope broadly subsequent rulings would be made in light of new economic and social developments , while preserving the legitimacy of the constitution . In . Maryland , the constitutional legitimacy of the Second Bank of the United States was under question . Marshall ruled that since the bank was chartered with the purpose of effecting the ends of the constitution itself , namely regulation of state commerce , then it was legitimate despite no specific provision in the constitution for a central bank . Several antebellum cases before the Supreme Court helped establish the power of the federal ment to regulate interstate commerce via the Commerce Clause of the Constitution , state and local desires for the same . In Gibbons Ogden ( 1824 ) the court overturned a monopoly granted by the state of New York to a steamship concern because its business involved traffic in New sey , ruling that individual states do not have the authority to regulate interstate commerce . While the powers of the port of Philadelphia were upheld in the service of regulating commerce for its needs , Chief justice in . Board of Wardens ( 1851 ) held that where such regulation touched upon issues of national importance , particularly involving its seaport , those regulatory ers were reserved for Congress . Brown Maryland ( 1827 ) ruled that no state had the power to license and tax importers .

PRINCIPLES or ECONOMICS 407 While the Supreme Court was laying the foundation for federal regulation of business enterprise , the immediate impact following Gibbons . Ogden was the liberation of private corporations from state regulation . Not until 1887 with the establishment of the Interstate Commerce Commission , which emerged in response to problems associated with market governance in railroads , did the federal assert itself on matters of regulation . As a consequence , corporations were free to grow and pursue national markets without the interference of local intervention . Recall , this discussion of the history of changing legal institutions is in regards to the proprietary nature of corporations . Perhaps the most important case governing the subsequent development of the legal foundations of corporate property and futurity in America economic is Dartmouth College 12 . Woodward ( 1819 ) Again , Justice Marshall plays a pivotal role in the of property law and corporations . The direct issue at stake was the legitimacy of Dartmouth corporate charter as it rested upon a grant from King George III , prior to the establishment of the United States . Indirectly , all patents granted by the King prior to the revolution were called into question if the court ruled the proprietary basis for Dartmouth charter to be invalid following the American Revolution . shall ruled that revolutions do not inherently undermine vested property rights . This granted macy by judicial review to all original patents by the King , including the original Virginia Company patent , which accounted for a considerable portion of all land in the United State . Nearly all of the areas affected by the Northwest Ordinances were derived from the original crown patents , suggesting that overturning the Dartmouth charter could undermine the legitimacy of all American real rights . CANALS , STEAMBOATS AND RAILROADS The canalization of the Americas inland waterways , a period spanning 1815 1843 , marks an tant moment in the development of the corporation . Particularly , the canal building era laid the for a newfound importance for corporations and the ability for private citizens to control the development of the social provisioning process . In short , society relationship with corporations changed as it used them as institutions for the development of public works projects . As the US grew westward , institutions were established to facilitate trade , and bring to eastern markets the product of the hinterland . State governments issued franchises to concerns that incorporated on the premise that they would improve waterways in the interior of the nation . In return , the corporation was entitled to revenues associated with control over the canals . Similarly , firms were incorporated to engage in inland navigation along the waterways and establish rates sufficient to cover their costs and in accordance with the principle of charging what the market may bear . That is to say , firms set prices and administer them to the market , allowing the firm to capture and accumulate monetary claims on its balance sheet . Firms are limited in the extent to which such rents may be appropriated from the public , which includes factors such as the ability to pay from participants in the market as well as rules , formal and informal , that may provide a governance structure to the market . For instance , an association may exist between navigation that facilitate the orderly division of the market , which may impose limits on the pricing cretion of its members . In other situations , the market may be divided between firms with different cost structures . In the event that the firms with lowest cost structure establishes a market price , less efficient firms will be limited in their ability to capture from the public due to pressure to retain market share . The enterprises that were incorporated for the purposes of building and operating the canals were

403 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER large . The engineering challenges before them required the organizational capacity to administer the provisioning of resources and labor that spanned whole regions . The firm was faced with planning challenges that exceeded the scope and capacity of proprietors . Consequently , most engaged in the canal business were cooperative ventures between private interests and the state . Private interests included merchants who wished to lower transport costs and grow the market for their trade , capitalists vested in navigation companies , as well as land speculators , who believed that improvements following canalization of waterways would increase the salable value of land held cent to the improvement . The state became the financial partner in the venture , providing means for generating revenue through tax levies and bond issues , and remaining ultimately responsible for financing its ongoing maintenance . Notably , the Canal , constructed between 1817 and 1825 , was a landmark achievement of the cooperation between private interests and the State of New York toward the end of transforming economic relationships , such that corporations become a central site of social provisioning in the development of the American economy . Figure . Workers operating a lock at , New York ca . 1839 along the Canal . Engraving by . Public Domain . To better understand how large scale public works projects , like the Canal , were so tive consider the financial and organizational implications of its development . First , the Canal was financed largely through the issuance of bonds . Such bonds were held as wealth by private who became vested in the interests of the canal as a going concern . To remain a going concern , the canal required the establishment of rates sufficient to cover its costs as well as sufficient to provide revenues to support its financial liabilities . As a result , those financially vested in the canal as were compelled to take an interest in the development of the economic space as a whole such that the canal remained viable , to include promotion of settlement in regions cent to the canal and its feeder lines . The grandness of the venture required a further elaboration of the , economic interdependence in which national markets became increasingly important . Second , given the extent of private , interests vested in the canal , an administrative structure was required in order to ensure the orderly operation of the canal and its finances . In the case of the Canal , such an administrative framework was established by legislature and structured as a mission , whose leadership were drawn from the business communities affected by the existence of the canal .

PRINCIPLES or ECONOMICS 409 As America inland waterways were improved through lock and canal systems , the steamship became increasingly important to the social provisioning process . For some communities , navigation engaged in the steamer trade emerged as its first large , powerful corporations . For example , consider the Oregon Steam Navigation Company ( whose business was centered in Portland , Oregon in the mid to late century . While small compared to East Coast , Portland was the most important city on the West Coast after San Francisco , until the 18905 when Seattle was connected with the transcontinental rail system via the Northern Pacific . The was Oregon first , great monopoly whose intangible value provided the basis for wealth for many of the regions founding The intangible value of the corporation lied in the the exclusive rights of way that the firm enjoyed in Portland ownership and control over key along the Columbia River , and access to the state legislature via the social networks of its owners and agents . In 1866 efforts to extend a regional trunk of the nascent transcontinental railway system into land from the Sacramento Valley in California involved courting the owners of the Oregon Steamship Navigation Company ( on the presumption that their political connections would ensure special acts of incorporation from the Oregon legislature favorable to the Californian interests . Initially , such owners attempted to block the advance of the railroad promoters for threat of the viability of the going business of the . However , later that year , perhaps hedging against the threat of eventual encroachment on their business , members of the leadership sought to secure the franchise for the Oregon section of the regional trunk of the transcontinental , thereby securing associated land grants and privileges from the state , which set off a race between two competing concerns to build a railroad through the Valley in Oregon that would connect Portland with a road from . The ultimate objective lied in establishing legitimate claim to the exclusive charter , ostensibly by demonstrating commitment to actually build the road and fulfill the spirit of the charter , while undermining the legitimacy of the rival concern through the courts and in the public mind through of the press . The outcome was mutual insolvency between the two parties , who had each incorporated variants on the name Oregon Central Railroad . In the late , the stagecoach magnate Ben resolved the by purchasing control of one of the firms , persuading the legislature to reassign the charter to the concern he had acquired , and acquiring controlling stake in his rivals . reorganized his newly acquired railway assets under a new name , California Oregon Railroad , together with some steamship ventures that he had or acquired in order to provide a revenue source while he developed his railway aspirations . To finance this consolidation scheme a considerable amount of bonds to parties in Europe , who were falsely led to believe that the market in the Valley in Oregon was capable of supporting the revenue requirements of his steamship and railway concerns . The sheet of the Oregon and California Railroad relied upon lines of credit extended from tive financiers to remain solvent . The Panic of 1873 undermined the solvency of the Oregon and California , as did not earn enough through revenues from his properties to service his debt obligations without the ability to issue new debt to refinance old . During a financial panic , creditors tend to stop lending , preferring instead to hold more liquid assets on their balance sheet for fear of becoming insolvent themselves , resulting in a vicious cycle of asset value . The response by creditor was to install an agent to take receivership of properties and reorganize his properties on a sounder

410 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER basis . The surest way to achieve this end was to buy out interests , thereby preventing him from exerting any control over the enterprises . Over the next decade , Henry , agent for German would proceed to establish new market governance institutions in the Pacific Northwest such that economic activity adjacent to the railroads would be harmonized or rationalized , with the ultimate end of servicing the debt to foreign creditors . aspirations were grander than the German wanted to engage in thoroughgoing economic development and population growth . wanted to build an empire on the Columbia River . A central problem facing was maintaining control over the market for railroad traffic in the face of the encroaching Northern Pacific , the main line of the transcontinental system . The directors of the Northern Pacific wanted to run the line to or Seattle , where the natural deepwater harbors would facilitate better access to markets . Yet , was vested in properties centered on Portland and its . organized a holding company in 1879 , the Oregon Railway Navigation Company , that consolidated his railroads and steamships in the with his acquisition of controlling stake in the . Initially , sought order in the market along the Columbia River via traffic sharing agreements with the directors of the Northern Pacific . However , the Northern Pacific was determined to build toward the Puget Sound . In order to protect the intangible value embodied in the corporations that he had come to control , he engineered a financial takeover of the Northern Pacific , through the use of another holding company , the Oregon and Transcontinental Company incorporated in 1881 , which allowed to pool funds to acquire control in the Northern Pacific . Once in control of the Pacific , connected the Northern Pacific with the Oregon Railway and Navigation , ensuring that any traffic destined for the Pacific would pass through Portland . It is important to note that holding companies are essentially financial corporations chartered for the purpose of acquiring majority ownership in another corporation , with a minimum outlay of cash . Holding companies can be layered , such that several holding companies stand between a given set of capitalists and the actual underlying corporations that the holding companies are designed to control . This can be illustrated with a simple example suppose that a simple majority of stock ownership is sufficient to control a railroad corporation . If there are 200 shares of stock ing in the corporation , then it would be necessary to acquire 101 shares to ensure control . Now , pose that a holding company can be incorporated and capitalized by issuing 101 shares of stocks and assuming parity value between the two stocks . If the holding company is sufficiently capitalized and has access to credit , it is possible that by owning a simple majority in the holding company allows one to effectively control the first corporation if the holding company is able to acquire a simple ity of its stock , for half the ownership requirement ( see Figure below ) With each layer of holding companies between the capitalist and the firm he wishes to control , the ownership stake required for control is halved . In this way , great corporations may be brought under control of a single individual with relatively little personal outlay involved . This has been a common theme in the area of corporate control since the second half of the century , and continued well into the century . GLOSSARY free and common socage a system of land tenure in the American colonies which included perpetual ownership , to heirs , free disposal of property , alienability

intangible value the value of a business enterprise over and above the value of its tangible assets Effective control with only 26 ownership . PRINCIPLES OF ECONOMICS Owns 51 of stock in holding Holding Company 101 shares outstanding Owns 51 of stock in subsidiary Subsidiary A 200 shares outstanding Figure . 411

INDUSTRIALIZATION AND THE FACTORY fter the Civil War , the United States economy passed into an era of rapid industrialization . The term industrialization is used here to describe a process of development that activities such that they conform to a machine logic , as opposed to a handicraft logic . That is , the economy becomes increasingly constituted by a series of interconnected machine processes . When we think of the United States undergoing industrialization we are really envisioning its economy becoming a machine , capable of churning out all of the goods required to tain the community efficiently and to sustain the machine itself , through production of intermediate goods . When we think of the economy as we are actually considering a qualitative change in the economic system . To better understand what a qualitative change in the economic tem entails , consider the following key features of an industrialized , machine process economy . TECHNOLOGIES THAT MAKE UP THE CORE OF THE ECONOMIC SYSTEM Particular combinations of technology incorporated into the economic system were massive in scale . For example , consider again the case of the railroads . We have previously discussed why railroads required administration from the managerial bodies of corporate entities capable of organizing the business over the scale and scope of its activities . The technology itself was massive establishment of steam powered with a rail and car transportation system over vast geographical areas was quite literally the greatest engineering marvel that humans had achieved to date . With the railroads came the telegraph , which created the possibility for transnational and interregional rapid communication . Other hallmark technologies of an century American economy include electric light and power , streetcars , improvements in steel production , and petroleum refining . INTEGRATED CHAINS OF PRODUCTION THAT LINK MARKETS AND INDUSTRIES The largeness of the business enterprise implies a high degree of interconnectedness between ent stages in the production of the social product . To illustrate our point , consider the generation and provisioning of electric power . We can envision a simplified model of electric generation by breaking the whole production process into four stages . Production of fuel source . In this example , we will assume were talking about a coal fired power plant . This is a good choice , because coal served as the primary fuel source for electric generating during its advent in the United States . Coal is produced by mining and is subject to geological processes that have resulted in an uneven spatial allocation of coal in the earth crust . Therefore , coal can only be mined in certain areas . The story of coal in America begins in Pennsylvania . Energy conversion . The chemical energy embodied in coal must be converted into mechanical energy before it may be used to generate electricity . This conversion process is accomplished by burning the coal to transform water into steam , which creates the

PRINCIPLES OF ECONOMICS 413 RAILROADS , Figure . Atlas of the Historical Geography of the United States , Plate 140 by Charles . Curated by the Carnegie Institution of Science necessary pressure to power an engine . The engine now embodies some of the energy that existed in the coal , less losses due to in the conversion process . The steam engine itself is the product of a set of interconnected production processes . Electric Generation . The mechanical energy of the steam engine is then used to power an electric generator . Electric generators require steel , copper , and most importantly , a patent to produce . Distribution . Once generated , the electricity is distributed to the end user via cables that conduct electricity . Edison first system in New York used copper as its conductor . If you think about each of these stages of production occurring as a production process that occupies a different space geographically , then you begin to see how something like the provisioning of ity is really a network of interdependent production processes that establishes connections between different regions . Coal is mined in Pennsylvania , and then shipped to New York for use as fuel in the production of steam . A boiler and electric generator is purchased from a firm in New York that is licensed to sell Edison patented systems . Edison generators are produced in upstate New York and require a steady of steel from Pennsylvania and copper from Michigan for ing production . And so on . Every single economic activity is the product of an orchestra of connected production processes . To function efficiently those must be managed so

414 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER that they they function as a whole machine . This is what we mean when we describe the economy as industrialized .

BIG BUSINESS AND ORGANIZED LABOR the business enterprise becomes large it operates on a scale of production that requires the labor of a proportionally large number of workers . The managers of the firm must ensure that they reliably and efficiently meet their production goals . To achieve this end , managers methods for controlling their labor force so that rate of production remains within their full discretion . Introduction of mechanization into the production process serves as one historical ple of the methods of controlling labor . Mechanization establishes the pace of production , by ing machine technology . For example , an assembly line sets the rate at which workers must labor . In this sense , workers on an assembly line must work at roughly the same pace , harmonizing their labor . By adjusting the speed of the machine , worker productivity may be adjusted across the board as desired , subject to physical limits of the labor force . Similarly , the machine process results in a process , which tends to homogenize the labor requirements for production . transforms the labor process by removing the power that workers enjoy via their specialized edge of craft production . Machine production depends , to a much lesser degree , on the specialized knowledge of workers . Instead , this knowledge is transferred to the managerial class , who may sess knowledge of the machine and its technical requirements or retain the expertise of an engineer . Loss of worker control over the production process results in the ability for the managerial class to retain a larger share of the monetary value of the output of the labor process . Managerial focus on cost efficiency and meeting its production targets , coupled with control over the labor process , resulted in dangerous and poor working conditions . The large business enterprise , by exercising its control over the labor process in order to exploit its workers , created the conditions for the emergence for an organized labor movement . An exhaustive review of the labor history in the United States is beyond our reach , however , we may highlight some of the major themes and events that helped shape its development . THE KNIGHTS OF LABOR Organized in 1869 by tailors in Pennsylvania , the secret organization named the Noble Order of the Knights of Labor would serve as an organizational body for workers seeking collective action ing the Panic of 1873 . Coal miners helped drive membership growth in the Knights of Labor through the depression of the . By 1884 there were members of the Knights of Labor . By 1886 this figure exploded to . The Knights of Labor participated in strikes in order to achieve their primary goal of an hour day . Most notably , the Knights of Labor won a struggle against Jay Gould over a dispute concerning the Wabash Railroad in 1885 .

416 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER THE GREAT RAILWAY STRIKE OF 1877 Railroads figure prominently in the course of American economic history for they have left lasting and transformative imprints on the course of development . It is natural , then , to link a major moment in the history of the labor movement to consequences of railroad speculation and administration . The economic depression of the was global in nature and was caused largely by a financial crisis related to the value of railroad securities . The Panic of 1873 emerged from a financial system that had become increasingly fragile during the speculative episode in railroad securities , mostly bonds , following the Civil War . jay , a major US banker during the latter part of the century , was heavily vested in the market for Northern Pacific bonds to interests in Europe . During the Europeans were less keen to accept the risk associated with holding American railroad bonds . In turn , this led to the inability for to continue issuing debt and ultimately resulted in his firm ing insolvent . The failure Company set off a wave of bank failures and a closure of the New York Stock Exchange . The result of this financial panic was a nearly decade long depression . As a result , railroads were under pressure to cut their labor costs . Notable railroads such as the and Baltimore Ohio Railroads had administered waves of wage cuts . Railroad workers organized themselves in the summer of 1877 and succeeded in bringing the railroad system in the eastern part of the United States to a grinding halt . Striking railroad workers were joined by thetic workers in other mining and manufacturing sectors , which resulted in fears on the part of the state and business interests that labor was growing into a coherent and powerful force . To quell the strikers , initially local militias were deployed . However , local militias were ineffective due to their propensity to defect and join the strikers , as they found themselves in common interest with their fellow members of the community . Consequently , National Guard and federal troops were brought into cities under the control of the strikers and were far more effective , because the soldiers were not particularly vested with the interests of the community and more likely to follow the orders of their commanding officers . The strikes of 1877 serve as an important moment in the development of the political economy of the labor situation in the United States . Following the strikes , membership in labor organizations increased substantially . Likewise , more national guard units were established with an eye toward checking the power of labor going forward . In the realm of economic theory , the struggle between big business and big labor was taken as a serious matter of consideration . The development of cal economics owes much of its theory of distribution to the international labor struggle that reached a fever pitch in the . For eXample , ohn Bates Clark , the father of the marginal product theory of distribution , was working out a theory of distribution that sought to move consideration of the distribution of the social product away from conflict between social classes , toward one based upon marginal contributions of each factor of production ( land , labor , capital ) in the production process . The result , is a theoretical system that finds fairness in an unequal distribution of income and wealth . Bates theory was a direct response to the class embodied in events like the Great Strikes of 877 . While it is not possible to give the history of the labor movement in the United States a thorough treatment here , we can summarize some of central implications and consequences Ongoing coherence and emphasize around the demand for an hour working day . Development of systems of administration and organization capable of exerting a force against big business .

PRINCIPLES or ECONOMICS 417 Figure . Maryland National Guard Sixth Regiment fighting to suppress strikers in Baltimore . Harper Weekly , journal of Civilization , Vol , No . 1076 , New York . Public domain . Formation of institutions capable of allowing Workers to regain some of the control over production that was lost with the demise of handicraft production as a result of industrialization .

REGULATION OF BIG BUSINESS central problem facing the business enterprise is maintaining the orderly governance of the markets in which they operate . The going concern wishes to form stable expectations over the viability of its business through time . An industrialized economics system means that firms are embedded in networks of interdependent financial , which suggests that firms must find to coordinate their operations and establish norms governing how other participants in the markets will behave , especially via their pricing policy . Formal and informal cartel systems were established in an attempt to bring harmony to markets . Earlier we have referred to these arrangements as restrictive trade practices , due to their objective of avoiding price competition between firms over market share . Recall , the business enterprise must ensure that it is capable of administering a price to the market that embodies a sufficient markup that recovers their costs over some defined period . Prices must be also provide a of income to its shareholders as profits , as well as a means of accumulating funds for investment purposes . If firms engage in a price war to ture a larger share of the market , they will undermine their revenue streams and have difficulty achieving their desired cash flows . The solution is to institute controls on individual firms so that they are properly incentivized to cooperate . Market governance institutions are best viewed as efforts on the part of the business community to socialize the risks and rewards to individual firms . However , voluntary and privately organized ket governance institutions were not terribly stable . There was always the risk that some participants would defect and undermine the cooperative agreement , resulting in a newfound round of ruinous competition . A solution to the instability of private market governance structures was found in the federal . The Interstate Commerce Commission ( was established in 1887 in order to provide regulation over railroad rates , and emerged largely as a result of lobbying efforts by the railroads themselves . Government regulation over markets was not new to the American economic history . However , establishment of the resulted in the federal government exercising its discretion over of the development of economic affairs , by instituting a new form of market governance by regulatory commission . With a standing commission now responsible for authorizing proposed rate schedules the problem of coordinating and enforcing voluntary rate design policies solved by outsourcing this function to the federal government . The Interstate Commerce Commission emerged as a result of two political processes . On one hand , agricultural interests organized through the Grange , Patrons of Husbandry , and the like , viewed roads as monopolies that extracted unfair monetary from them by charging exorbitant rates , and administering differential rate schedules that had the effect of some at the expense of others , and undermining the ability for some farmers to bring their goods to market . These agricultural interests tended to view their monopoly power as the primary concern , and sought to compel railroads to act as if they were competitive and thereby undermine their ability to

PRINCIPLES or ECONOMICS 419 ture rents . Businessmen in the railroad and finance industry sought regulation as a means to ensure coordination between competitors , but held different views about how such regulation should be structured . Ultimately , the railway interests embraced the for it helped to quell agitated while preserving private control and ownership of the railway system . THE SHERMAN ACT The mark a turning point in American economic history . Historians generally mark 1890 as the close of the frontier , as the transcontinental railways had linked the Pacific with the Atlantic and allowed for rapid and low cost transportation and communication . In the cities in the United States began electrifying . By the , big business had become a powerful and central organizing institution in the American economy . Passage of the Sherman Act in 1890 serves as an important landmark in the history of big business and provides a useful bookend for delineating a new phase in the American economic development . The Sherman Act of 1890 sought to prohibit behavior that may be construed as acting in restraint of trade . The act makes illegal cartels and conspiracies to engage in price fixing . Consequently , some mechanisms that firms relied upon previously to govern markets were no longer legal , such as pooling arrangements and cartels . While the Sherman Act was seldom applied in earnest as a means to restrain corporate power , it did encourage the practice of firms attempting to consolidate control through mergers and acquisitions of their competitors . The first great merger wave occurs between 1895 and 1904 and represents the effect of the Sherman Act on the methods by which firms attempted to control markets in the wake of the Panic of 1893 . Efforts by firms to capture more market share in order to spread their fixed costs more widely , led to ruinous price wars . Since previous forms of market governance had been largely prohibited by law in the Sherman Act , firms responded by consolidating in order to eliminate the costs associated with redundant capacity in light of the depressed economic conditions of the early . Between 1895 and 1904 roughly 300 firms disappeared on an annual average basis . From 1898 to 1902 this wave of mergers was particularly acute , with 1028 firms lost to consolidation in 1899 alone . The merger movement produced some of the more notable monopolies in American history , such as Steel , American Tobacco , Du Pont , and International Harvester . The Sherman Act , when measured by its efficacy in preventing the consolidation of corporate control , was a total failure . However , it is important to note its foundational importance to subsequent processes of between the going concern as big business and the legal framework . revision of the laws governing corporate behavior would occur in the century . Nevertheless , the Sherman Act serves as a an excellent reference point for a turning point in the history of the in American and closing our discussion of the history of big business .

CONCLUSION his chapter has sought to provide a broad outline for understanding some of the more tant themes that the big business in American history . The history is expansive , and so we have held a fairly narrow view of the going concern in a limited period of American history . The value in this approach , however , has been to focus on a foundational period in American economic history , the century , and explore how the interaction between corporations under the control of members of the business community and legal established a course of in which big business becomes a normal feature of capitalism in the United States . By tracing the corporation from its roots in colonial Virginia to the landmark Sherman Act in 1890 , we have taken care to view the firm as a vehicle for institutional change and the locus of cumulative causation . Therefore , we walk away from this reading of American economic history with the understanding that thinking about the firm as a site of institutional capacity facilitates a more dynamic ing of economic development . We see that power , control and matter in formulating a rich understanding of why the United States economy developed as it did , rather than following some other technical possibility .