1. Making the World Safe from Competition

The evolution of society is substantially a process of mental adaptation on the part of individuals under the stress of circumstances which will no longer tolerate habits of thought formed under and conforming to a different set of circumstances in the past.

—Thorstein Veblen

THE WAR INDUSTRIES BOARD EXPERIENCE

In order to put business responses to competitive practices during the postwar years in proper perspective, one must begin with the WIB. The war itself served as a catalyst for the emergence of corporate institutionalism. As the historian William Leuchtenburg has stated:

The war confirmed the triumph of large-scale industrial organization…. [It] speeded both popular acceptance and acceptance in the business world of the virtues of large-scale, amalgamated, oligopolistic industries....In 1916 America still thought to a great degree in terms of nineteenth-century values of decentralization, competition, equality, agrarian supremacy, and the primacy of the small town. By 1920 the triumph of the twentieth century—centralized, industrialized, secularized, urbanized—while by no means complete, could clearly be foreseen.¹

The historian Robert Wiebe has observed that “the mobilization of 1917 and 1918 illuminated the degree to which an emerging bureaucratic system had actually ordered American society.”²

With the trade associations helping to supply the coordination, the WIB politicized the bulk of the economic life of this country during World War I. This agency played the central role in the most elaborate and pervasive exercise of government regulation of economic activity undertaken within the United States up to that time. Aided by a myriad of other agencies and subagencies, the WIB afforded the business community the unprecedented opportunity to experience business-directed government planning as a tool for the central direction of American industry. For some eighteen months, the American business system had a front row seat from which to observe and assess the apparatus for industry-wide control of commercial practices. The value of such an experience to many within the business community cannot be overstated. One must, therefore, begin any inquiry into postwar business attitudes with at least a brief description of the agency that had provided businessmen with some practical experience in controlling competitive behavior.³

In furtherance of the war effort, the WIB centralized the economic life of America into a highly structured bureaucracy under the effective direction and control of leading business interests. Matters relating to the production, pricing, and allocation of strategic goods and services were handled not by the impersonal forces of the marketplace, but by the quite personal direction of businessmen armed with governmental authority. American industry had, in short, become “mobilized” in the most literal, military sense of the word. Depending upon how one viewed the practice, American businesses found themselves subject to political “coordination” or “regimentation” in furtherance of collective goals. The historian Arthur Schlesinger Jr. has provided an accurate summary:

For a moment Washington became the unchallenged economic capital of the nation. Through the War Industries Board, the government mobilized industrial production. Through the War Food Administration, it sought to control the production and consumption of food. Through the Capital Issues Committee, it tried to regulate private investment. Through the War Finance Corporation, it directed and financed industrial expansion. It took over the railroads and the telephone and telegraph system. It set up independent public corporations in diverse fields from the United States Housing Corporation to the Shipping Board Emergency Fleet Corporation, from the Sugar Equalization Board to the Spruce Production Corporation.⁴

Another historian, Frederick Lewis Allen, more succinctly characterized the WIB as an agency with “almost dictatorial power to decide to what uses the industrial machinery of the country might be applied.”⁵

With the backing of the United States Chamber of Commerce, the Council of National Defense created the WIB in July 1917. It charged it to

act as a clearing house for the war industry needs of the Government, determine the most effective ways of meeting them and the best means and methods of increasing production, including the creation or extension of industries demanded by the emergency, the sequence and relative urgency of the needs of the different Government services, and consider price factors, and in the first instance the industrial and labor aspects of the problems involved and the general questions affecting the purchase of commodities.⁶

On 4 March 1918, pursuant to a directive from President Wilson, the WIB was reorganized as an agency separate and apart from the Council of National Defense; it now operated under direct responsibility to the president. The WIB was, then, the creature of implied wartime executive authority, not of any legislative enactment.

Under the virtual autocracy of its chairman, Bernard M. Baruch—a man whose role had been described by one colleague as “the supreme interpreter of the national good"—the WIB undertook the task of establishing priorities and setting the prices for, as well as allocating the use of, major resources. Grosvenor B. Clarkson, who had been director of the Council of National Defense, wrote that the WIB “directed both production and distribution; it said what should be produced and where, and it said who should have the product.”⁷ It fixed prices at which government agencies would purchase specific commodities. While those associated with the WIB spoke of prices being “negotiated” with given firms, the “negotiations” were undertaken in an atmosphere in which the board retained the ultimate power of commandeering the commodity.

The day-to-day operations of the WIB were conducted in what were referred to as “commodity sections.” Decisions regarding priorities and prices for given products and resources were coordinated through some fifty-seven separate sections, each charged with the responsibility for a particular commodity. Even though the commodity section personnel represented the government, they were, as the historian Robert Cuff has observed, generally drawn from the very industries governed by each section.⁸ Clarkson characterizes such persons as “[b]usiness men wholly consecrated to Government service, but full of understanding of the problems of industry.”⁹ While less polite analysis might raise the question of the conflicts of interest inherent in the staffing of government agencies by personnel from industries that are supervised by such agencies, it can at least be agreed that the basic decisionmaking functions of the WIB were in the hands of persons whose backgrounds and, presumably, postwar careers were tied to the business system. The commodity sections had their counterparts in what were known as “War Service Committees.” Comprised of men representing the industries governed by the commodity sections, and operating under the general auspices of the United States Chamber of Commerce, the War Service Committees were designed, much like trade associations, to represent their industries in the decision-making processes of the WIB, further assuring business domination of this wartime system.

In essence, the commodity sections centralized the basic functioning of the American business system in a business-controlled agency of the federal government; the agency enjoyed an exercise of power from which there was, for all practical purposes, no right of appeal. Through these sections, the business community experienced the benefits of industry-wide regimentation. In Clarkson’s words, the sections “were the substance of the stuff of which requirements, price-fixing, priority, and all the subsidiaries of those three were made…. They were more than the mobilization of industry. They were industry mobilized and drilled, responsive, keen, and fully staffed. They were industry militant and in serried ranks.”¹⁰ The commodity sections were designed to rationalize and coordinate both the demand and supply functions for their respective commodities, thus circumventing normal market pricing and allocation functions. Projections of future needs and of the production to meet those needs were undertaken, and the effort was made to balance the demands of both the government and the public. Conservation programs, and plans for increasing the production of those resources considered to be in short supply, became matters of concern as well. Further serving to homogenize the various industries and to reduce competitive differences among firms was the practice of exchanging trade and statistical data among competitors. As Clarkson summarized it, “The industries gave not only the ordinary statistical data, but revealed trade secrets, special processes, and improved methods, which, being cleared through the sections and the war service committees, enabled their competitors to improve quality or speed up production.”¹¹

Some of the more prominent business leaders to serve with Baruch on the WIB and its related committees were Alexander Legge of International Harvester Company; George N. Peek of Deere and Company; Robert S. Lovett of the Union Pacific Railroad; Herbert B. Swope, brother of the man who was later to become one of the principal architects of the NRA, Gerard Swope of General Electric; J. Leonard Replogle of Cambria Steel Company; Clarence Dillon of Dillon, Read and Company; Howard E. Coffin of Hudson Motor Car Company; Walter S. Gifford of AT&T; Elbert Gary of United States Steel; Daniel Willard of the Baltimore and Ohio Railroad; and Julius Rosenwald of Sears, Roebuck and Company. Other business representatives closely associated with the war effort and serving in government positions included Edward R. Stettinius (assistant secretary of war), Russell Leffingwell (assistant secretary of the treasury), and Dwight Morrow (member of the Allied Maritime Transport Council), each of whom had been—or later became—associated with J. P. Morgan. John D. Ryan (assistant secretary of war) was of Anaconda Copper Corporation; Charles M. Schwab (head of the Emergency Fleet Corporation) was of Bethlehem Steel; and Frank A. Vanderlip (head of the War Savings Stamp campaign) and Samuel McRoberts (chief of the procurement section of the ordinance division) were president and vice-president, respectively, of the First National City Bank. Mention must also be made of Baruch’s right-hand man—a man who had been an executive of Moline Plow Corporation and was later to direct the NRA—Hugh Johnson.¹²

For purposes of this book, the significance of the WIB experiment lies in the exposure of the business community to a system of political coordination, under business direction, of those economic functions that are ordinarily thought of as being best left to the disciplines and pressures of the marketplace. The economic order and allocation of resources that are the products of the impersonal and informal market pricing mechanism were abandoned in favor of formal, political means of ordering economic activity. More importantly, the business community discovered in the WIB the basic machinery for a more permanent system for an effective business direction of economic life.

The anticompetitive impact of the WIB has been acknowledged by both Clarkson and Baruch. Clarkson observed that “[c]ompetition in price was practically done away with by Government action. Industry was for the time in what was for it a golden age of harmony.”¹³ Baruch was equally laudatory: "Many business men have experienced during the war, for the first time in their careers, the tremendous advantages, both to themselves and to the general public, of combination, of cooperation and common action, with their natural competitors.”¹⁴ Baruch also noted the implications of the WIB experience for trade association activity:

In line with the principle of united action and cooperation, hundreds of trades were organized for the first time into national associations, each responsible in a real sense for its multitude of component companies, and they were organized on the suggestion and under the supervision of the Government. Practices looking to efficiency in production, price control, conservation, control in quantity of production, etc., were inaugurated everywhere.¹⁵

The WIB was viewed by certain businessmen as not only essential to the war effort but as having the potential for helping to regularize competitive conditions once the war ended. Prior to becoming president of AT&T, Walter S. Gifford told a meeting of the United States Chamber of Commerce in September 1917:

[W]e have never needed such organized industry as much as we need it now when we are engaged in this great war and we never have needed it as much as we shall need it after this war is over, when we shall be in the midst of a world competition of unknown proportions.¹⁶

Echoing this view was Alba B. Johnson, president of the Baldwin Locomotive Works, who declared:

For the last twenty years, this nation has been offering a great sacrifice on the altar of a false god. Happily through the war this false god has been overthrown, temporarily, at least. This false god of whom I speak is the principle of unlimited destructive competition. The foundation on which the temple of this deity has been raised is the Sherman antitrust act, and the results of this act have meant the sacrifice of millions of dollars of American business. If there is any one thing this war has determined it is that the Sherman act will not stand the strain of a national crisis. The Government itself has come to realize this fact, and recognizes that business must be conducted on the basis of a reasonable profit. And the only way to determine a reasonable profit is through a conference of all concerned in any particular business.¹⁷

Shortly after the war’s end, the Electrical Manufacturers' Council met to discuss the matter of the peacetime continuation of the organizational structure employed by that industry during the war. Some of the benefits identified by industry leaders included conservation, uniform accounting systems, standardization, and the general coordination of the industry. In the words of one industry member, the objective was the retention of “the same cooperation that we had during the war,” which cooperation, he went on, would require the changing of existing laws.¹⁸

As the historian Robert Himmelberg has pointed out, many businessmen were not only desirous of modifying the antitrust laws in order to permit trade agreements among competitors but of continuing the WIB in order to protect industries from postwar price adjustments.¹⁹ In connection with such an objective, Bernard Baruch recommended to President Wilson that the board be continued in existence, an action that Baruch felt Wilson could take as part of his general war powers. Wilson declined.

With a Wilson-decreed end of the WIB scheduled for 1 January 1919, a number of proposals were made to get the board to approve industry agreements that would control prices and/or production. The priorities commissioner of the WIB, Edwin B. Parker—who was later to become president of the United States Chamber of Commerce—went so far as to propose that a majority of the firms in an industry be allowed to establish production quotas for each firm in that industry. All of these proposals were rejected by the board, not because of any philosophic opposition to them, but out of a concern that such actions might later be invalidated by the courts, thus subjecting the board to public criticism.²⁰

Not surprisingly, one of the leading business advocates of industrial self-regulation under government supervision was Bernard Baruch. In his report to President Wilson on 3 March 1921, Baruch recommended that an organization along the lines of the WIB be maintained, in skeletal form, in peacetime. Such an organization (to be broken down into section or commodity groupings and to maintain the other basic WIB departmental headings) would, “in the event of an impending crisis, … immediately … mobilize all of the industries of the nation.”²¹

Baruch, a financier closely associated with the Guggenheim copper interests, praised the degree to which American industry had been fashioned into a system of “cooperation” more attuned to the modern needs of the business community. His analysis of the basic policy changes in government and business relationships helped set the tone for business thought in the years leading up to the New Deal:

The processes of trade have so changed their nature that the older and simpler relations of Government to business have been gradually forced to give way before certain new principles of supervision. We have been gradually compelled to drift away from the old doctrine of Anglo-American law, that the sphere of Government should be limited to preventing breach of contract, fraud, physical injury and injury to property, and that the Government should exercise protection only over noncompetent persons. The modern industrial processes have been rendering it increasingly necessary for the Government to reach out its arm to protect competent individuals against the discriminating practice of mass industrial power.²²

Grosvenor Clarkson endorsed Baruch’s sentiments in these words:

Here we see the beginnings of the application in peace of the idea of nationally directed industrial strategy. It is plain that we are to confront nationally directed commercial strategy by our competitors carried to such an extent that it is doubtful if we can successfully meet it without some reorganization of the Government and a delegation of authority that Congress will be reluctant to make. The control of shipping, the tariff, taxes, railway tariffs, and foreign finance need to be centralized in some administrative body, as they were more or less centralized in the War Industries Board.

How to maintain the price benefits of free competition, and obtain the benefits of the economies that can be effected only by association and united effort, is a difficult problem. However it may be solved, the fact will remain that the War Industries Board was the pioneer revealer of the immense wastes of production as generally conducted, and the greatest demonstrators of the possibilities of economies. In the long run economy must find a way to prevail. Tremendous wastes of service and material cannot be tolerated in the lean and laborious years that are before the world.²³

Although the end of World War I brought with it the termination of the WIB, the experiences with the board produced favorable reactions from many business leaders, who saw in the mobilization of businesses into industrial groupings a workable means of rationalizing the economy in peacetime. The WIB provided American business with an experiment in pervasive, systemwide national economic planning; it went beyond the more familiar forays into the regulation of only a specific industry and encompassed virtually the entire productive capacity of the American economy. To the delight of many within the business sector, it was learned that such an agency could not only effectively control business decision-making but could itself be controlled by business interests. The experience of having thousands of autonomous business units integrated into a system subject to unified control—a system capable of regulating the allocation of resources, the amount of production, the prices of goods and services, and the content of trade practices—-was something these business leaders would not soon forget. Their rhetoric continued to express concern for the problems of overproduction, price cutting, unfair trade practices, and other status quo-threatening consequences of a freely competitive economic system. With the war concluded, leaders from a number of industries undertook a campaign on behalf of a system of “cooperation” and “self-regulation” for American industry. World War I may not have made the world safe for democracy, but it did give encouragement to some business leaders that a system of “business cooperation,” subject to legal enforcement by the government, could become a functional reality in order to make competition safe for business. Robert Cuff has concluded:

The war crisis … intensified the commitment of business ideologues to prove the virtues of corporate capitalism. … With a properly rationalized state system directed by businessmen in government, America would be able to combine the traditional genius of individualism and free enterprise with the modern efficiency of administrative centralization and state regulation.²⁴

TOWARD CONSERVATIVE COLLECTIVISM

Postwar business efforts to stabilize economic relationships must be considered in the broader context of the development of “collectivism” as the underlying social premise in American life. The 1920s are part of that critical period discussed by the historian James Gilbert in his study of the development of collectivist thinking, a phenomenon he relates to the emergence of “a new industrial civilization in which the giant business organization was the dominant force.”²⁵ As Gilbert has demonstrated, the architects of twentieth century American collectivism had patterned their ideas on the industrial corporation as the central organizational tool. Any form of collectivism is, after all, “conservative” in nature, being premised on the establishment of static, rigidly structured social relationships designed to restrain any influences that would pose the threat of substantial change. A symbiotic relationship thus developed between the forces of “social reform” and those advocating the conservation of existing economic institutions and relationships. In twentieth-century “liberalism,” declared the historian James Weinstein, many business leaders saw “a means of securing the existing social order.”²⁶

Twentieth-century society had become increasingly characterized by large-scale political, economic, and social institutions. The individualistic and diffused forms of social organization had pretty well given way to highly structured and centrally managed institutional systems. The interplay of group forces replaced individual decision-making as heretofore autonomous persons became subordinated to collective, organized authority. Just as political power was moving from the local to the national level, so in the business sector the individual entrepreneur was becoming less significant than the large, nationally organized corporation. This centralizing trend in social organization was well expressed by the economist Simon Patten, who declared: "The final victory of man’s machinery over nature’s control of human society was the transition from anarchic and puny individualism to the group acting as a powerful, intelligent organism.”²⁷ This movement toward increased institutionalism transcended—or, perhaps, one should say absorbed—such matters as ideology or class interests: it was not just political or corporate, socialistic or private-capitalistic organization that was emerging, but organization itself.

While it is not the purpose of this book to thoroughly explore the origins of either large, dominant business firms or large, centralized government, some mention needs to be made of such phenomena, particularly since an expansion of organizational size and authority was occurring within both sectors during the years here under study. At least three separate explanations can be offered for such parallel organizational growth: (a) the emergence of national—rather than regionalized—industries, which generated larger and fewer business firms, was the inevitable consequence of technological and organizational changes that were occurring within the economy. Because centralized political authority could be utilized to help provide the conditions necessary for such a transformation (e.g., a single, nationally uniform body of laws would not only preempt the diverse and often inconsistent laws generated by state governments but could help to standardize competitive trade practices so as to reduce the range of permissible competition), the more dominant business firms found it useful to their interests to help expand the powers of the federal government. Under this explanation, business purposes would have the primary role and governmental purposes a secondary role in the mutual expansion of both sectors. A powerful national government was, according to this view, a byproduct of the expansionist and centralizing trends taking place within the business sector.

(b) A second explanation is that the federal government had its own institutional interests to promote, which it accomplished by expanding and centralizing its powers at the expense of both state and local governments. Large, nationally organized industries found it expedient to influence federal policies in order to further their own economic ends. According to this interpretation, the business sector was only taking pragmatic advantage of an expanding political system. As such, the political system would be the primary, and the business system the secondary, cause of the parallel patterns of growth within these two sectors.

(c) A third explanation is that there was a symbiotic aggrandizement of the size and authority of business and political organizations. Under this view, the interests of the larger, nationally organized firms in having a large national government providing the legal framework within which to operate fed the expansionist interests of the government itself. Likewise, the enlargement of the powers of the national government were conducive to business interests in a number of ways. First of all, larger business firms can more easily spread the fixed costs of government regulation over their larger outputs than can smaller firms, so the larger firms gain a comparative economic advantage that can be utilized in their pricing practices. Secondly, parties with a concentrated economic interest in the formulation of government policies will have a greater incentive to influence the direction of such policies in furtherance of their ends than will those with a diffused economic interest.²⁸ Thus, it could be maintained, the adversarial relationship that might superficially appear to exist between the business and political systems cloaks an underlying symbiosis that permits each sector to expand the range of its interests in mutually supportive ways. A corollary of this explanation can be found in John Kenneth Galbraith’s notion of “countervailing power.”²⁹ According to this notion a large national government developed in response to, and as a check upon, the growth of large national industries.

My own interpretation of such developments would be found in a combination of (a) and (c) above, although such an explanation is not crucial to the validity of the research herein. I am inclined to the view that a system of large, nationally organized industries required a large, national government to direct, enforce, and protect dominant business interests from the destabilizing uncertainties of continuing technological and organizational innovations that would find expression in a freely competitive environment. In a sentence, large national—and multinational—corporations as we have come to know them in the twentieth century would not have been possible without the coercive backing of a powerful federal government³⁰ and, concomitantly, the emergence of the highly centralized federal government would likely not have taken place without the impetus provided by the business system itself.

Such interpretations do not, of course, fully explain the processes by which the business system managed to evolve from smaller, localized firms into larger, nationally organized corporate enterprises. In asking such a question, we must be mindful that size is always a relative term and, furthermore, that business efforts to restrain freely competitive market processes predate the twentieth century; they are as old as the business system itself. Nevertheless, throughout most of the twentieth century, there has been a prevailing orthodoxy about the presumed advantages of organizational size. As William Letwin has demonstrated, by the late nineteenth century, many economists—caught up in the effort to apply Darwinian ideas to social behavior—began to look favorably upon industrial combination as the inevitable consequence of evolutionary growth. Even some monopolies came to be regarded as socially beneficial.³¹ Many came to believe that combinations were an assurance of greater economic efficiencies. In the words of Hans Thorelli, “The exaggerated belief in a direct and universally applicable proportionality between size and efficiency corresponded well to the climate of general economic thinking prevalent among business and political leaders.”³² Such assumptions were easily refutable by a basic understanding of the biological sciences, from which field the evolutionary metaphor had been derived. Nevertheless, such thinking underlay the merger movement, which reached its peak in America during the years 1897 to 1903.³³

Whether the emergence of a system of large, nationally organized industries was either inevitable or desirable is a question about which debate may be had. But that such a system developed is a matter of fact, about which it needs to be asked: why? The business historian, Alfred Chandler, attributes such development to a combination of technological innovations and organizational changes. In his view, “the new generators of power" (e.g., electricity) and new technologies (e.g., the automobile, and instruments powered by electricity) were “the dominant stimuli to innovation … which created new products and processes.”³⁴ It was in “the newer and most technologically complex industries” that the impetus for increased concentration was most prevalent, for within such industries “size had real economic advantages,” and “the necessity of assured supplies … encouraged vertical integration.”³⁵

Whether such increased concentration developed out of a desire to achieve monopoly power—as is so often assumed—or only in order to better coordinate and integrate productive processes so as to foster greater efficiencies is a question beyond the scope of this inquiry. Drawing upon Chandler’s work, Oliver Williamson has suggested the latter explanation. Williamson notes that “[s]pecialization by function” is, depending upon the size of the firm, “the ‘natural’ way by which to organize multifunctional activities” so as to realize “both economies of scale and an efficient division of labor.”³⁶ Because, for manufacturers, “[i]t became profitable to realize … scale economies only when a low-cost distribution system appeared” and because existing distribution systems were not capable of handling the volume of traffic needed in order to realize such advantages, “manufacturers integrated forward irtto marketing.”³⁷ As Chandler has postulated, national marketing practices produced the consolidation of manufacturing “in fewer and larger plants,” which led to a departmentalized structure whose success depended upon “careful coordination” and reliable systems of information.³⁸ In the process, firms became more vertically integrated, while competition, in turn, led other firms to follow suit, causing “many American industries [to become] dominated by a few large firms.”³⁹

The net effect of such changes, according to Chandler, was to cause firms to rely less upon the informal processes of the marketplace to regularize conditions, and more upon the control mechanisms afforded by organizational hierarchies. As he states the matter, “the visible hand of management replaced the invisible hand of market mechanisms,”⁴⁰ because “administrative coordination became more productive and more profitable than market coordination.”⁴¹ He then adds:

The advantages of internalizing the activities of many business units within a single enterprise … could be achieved only when a group of managers had been assembled to carry out the functions formerly handled by price and market mechanisms. Whereas the activities of single-unit traditional enterprises were monitored and coordinated by market mechanisms, the producing and distributing units within a modern business enterprise are monitored and coordinated by middle managers.⁴²

Chandler illustrates this transformation by drawing upon the railroad industry. Prior to the railroad, the prevailing methods of transportation such as horse-drawn wagons and canal barges were not sufficiently powerful enough to generate the volume of traffic, for any carrier, that would “require the services of a large permanent managerial hierarchy” to coordinate sub-units within a firm.⁴³ With the appearance of the railroad, however, enterprises “grew large enough to require the coordination of the activities of several geographically contiguous operating divisions.”⁴⁴ Through a variety of informal means, the managers of various railroads began cooperating with one another to coordinate and integrate their multifaceted operations. Over time, such “constant consultation and cooperation … made possible an administrative coordination of transportation” that was not only “more efficient than prerailroad market coordination” but also became the organizational model for other sectors of the economy, particularly in transportation and communication.⁴⁵

It is important to remember that the business community, like any other abstraction, does not exist as a monolith and, consequently, not all industries—or firms within specific industries—underwent such changes or experienced them to the same degree. With such a caveat in mind, Chandler tells us that the modern enterprise was “the institutional response to the rapid pace of technological innovation and increasing consumer demand,” the consequence of which was seen in the decline of the “small traditional enterprise” and the growth of the “modern multiunit business enterprise.”⁴⁶ While the firms Chandler studied were to develop decentralized forms of organizational structures,⁴⁷ “as the large enterprises grew and dominated major sectors of the economy, they altered the basic structure of these sectors and of the economy as a whole.”⁴⁸

There have been other explanations offered for the emergence of dominant business firms. Thorstein Veblen has focused a good deal of attention on the separation of “workmanship” from “salesmanship” that accompanied the demise of handicraft production and the emergence of larger-scale machine industry. The “increasing scale and efficiency of technology” helped to transform the role of the craftsman—who was adept at both the commercial and technical aspects of his business—into that of the employed workman. When “the ownership and control of the industrial plant passed out of the hands of the body of working craftsmen,” business decision-making came to be controlled by managers who exhibited “proficiency in pecuniary management and the acquisition of wealth.” As a consequence, the emphasis in business enterprise was less upon “technological mastery and productive effect” and more upon making money. Such transformations led, further, to the practice of absentee ownership, a phenomenon facilitated by the use of the corporate form of organization.⁴⁹ In his view, “the corporation came into use as a means of increasing the scale on which industry was carried on.” Improvements in “mechanical facilities” and other “industrial arts” have produced changes “in the material conditions of life” that have further contributed to the larger scales of business organization.⁵⁰ One of the consequences of all of this, according to Veblen, has been the erosion of traditional ideas of competition by substituting “competitive selling" for the “competitive production of goods.”⁵¹ While “[f]ree competition still stands as the popular ideal to which trade and production ought to conform,” it has remained the primary purpose of political authorities in the advanced nations “to safeguard the security and gainfulness of absentee ownership.”⁵² Whether this explanation derives from historical fact or only ideological conviction need not concern us at this point.

Veblen does offer another explanation that deserves some attention. He had earlier characterized the business system as an expression of “the machine process,” which “conditions the growth and scope of industry, and … inculcates habits of thought suitable to the industrial technology.”⁵³ Such thinking is purely mechanistic in nature; "materialism” and “efficiency” are among its highest values, and a “standardization of conduct” is enforced upon those subject to it.⁵⁴ Political and business practices became dominated by such thinking, with the result that “the machinery and policy of the state [were] in a peculiar degree drawn into the service of the larger business interests.”⁵⁵ (This would be an expression of the earlier explanation for the emergence of large business and political institutions.) While business leaders may continue to genuflect before the altar of free competition, they “neither are inclined, nor will business competition permit them, to neglect or overlook any expedient that may further their own advantage or hinder the advantage of their rivals.”⁵⁶ The relevance of this interpretation to the events under study herein should become evident.

If, as many believed at this time, such large-scale business organizations were both unavoidable and wholesome, and yet led to a greater concentration within industries, how could the benefits of free and open competition be maintained? These questions became an important part of the debate over government antitrust and other regulatory practices.⁵⁷ Many felt that the public interest could best be served by regulating rather than prohibiting such combinations.⁵⁸ The 1904 annual report of the United States Bureau of Corporations reflected this widely held view of the large corporation as an “industrial necessity” produced by the “irresistible tendency toward combination.” Accordingly, the bureau urged various regulatory proposals by which reasonable and unreasonable methods of combination might be legally distinguished.⁵⁹

According to no less an authority on the subject than Thurman Arnold, even the antitrust laws took on a ritualistic role in the struggle to rationalize the demands of large-scale industrial organizations with the traditional values of individualism and free competition. The “machine process” identified by Veblen led to a specialization of production that made large organizations inevitable. “In order to tolerate” such conditions, said Arnold, “men had to pretend that corporations were individuals.”⁶⁰ The antitrust laws helped to create the illusion that corporations could be thought of as “persons,” as moral agents whose conduct could be subjected to the same standards of “reasonableness” as anyone else. Such laws

became the great myth to prove by an occasional legal ceremony that great industrial organizations should be treated like individuals, and guided by principle and precept back to the old ways of competition and fair practices, as individuals were. … [The antitrust laws] have stood as a great moral gesture which proves that in a nation of organizations individuals really are supreme; or, if not, they are going to become so very soon through the intervention of the Federal Government.⁶¹

As a consequence, “the antitrust laws, instead of breaking up great organizations, served only to make them respectable and well thought of by providing them with the clothes of rugged individualism.”⁶² John Munkirs has likewise characterized early-twentieth-century antitrust decisions as being more ceremonial than substantive in nature, declaring that “[s]ociety’s response to the expanding dichotomy between cherished economic beliefs concerning what economic reality ought to be and actual economic conditions was to create a series of judicial and legislative rituals.”⁶³

Joseph Schumpeter has pointed out another change that occurred within the business system: the shift of control of corporate organizations from “owner” to “managerial” groups. Such a transformation has also been identified by Chandler, Veblen, and Adolf Berle and Gardiner Means, among others. Schumpeter believes the outlook of owners is affected more by long-term considerations, while managers are influenced by shorter-term interests. He concludes that this shift leads to a decomposition of the conditions supportive of free-market capitalism. The result is the evolution of a “managerial” mentality that Schumpeter describes in these terms:

[T]he modern businessman, whether entrepreneur or mere managing administrator, is of the executive type. From the logic of his position he acquires something of the psychology of the salaried employee working in a bureaucratic organization…. Thus the modern corporation, although the product of the capitalist process, socializes the bourgeois mind; it relentlessly narrows the scope of capitalist motivation; not only that, it will eventually kill its roots.⁶⁴

In Schumpeter’s view, the evolution of capitalism “tends to automatize progress” and thus “tends to make itself superfluous.”⁶⁵ The transformation results in the demise of the more venturesome owner-entrepreneur and the flowering of the more conservative, security-oriented administrator. Entrepreneurs rarely put together great enterprises with their money alone. The interests of lenders or investors are usually involved in any business organization, as evidenced by almost all large corporations. Bankers, not being renowned for their daring, and stockholders, desirous of preserving the present value of their interest in the corporation, have relatively cautious outlooks. In time, the entrepreneur—whose innovative, risk-taking, creative skills gave birth to the firm—comes to be regarded with suspicion and distrust by investors and creditors, who view his “freewheeling” methods as “irresponsible” and a threat to the enterprise. In order to insulate the assets of the firm from his more hazardous pursuits, the entrepreneur is removed from his position of control and replaced by the “prudent” and “fiscally responsible” manager. Such a change need not be hostile, however, as many entrepreneurs lack any interest in administering what they have created and are content to move on to other creative pursuits. Hired to preserve and protect the interests of the institution from risky decision-making, the manager is steeped in the methods of cost accounting, organization charts, projections, and paperwork systems, and regards the guaranteed rate of return on investment as preferable to the risks associated with actions that could as likely bankrupt the firm as multiply its value.

A related problem that arises when the control of corporations shifts from owners to managers has been observed by Adolf Berle and Gardiner Means. After noting that the “[o]wnership of wealth without appreciable control and control of wealth without appreciable ownership appear to be the logical outcome of corporate development,”⁶⁶ they point out how such a division of interests can generate a conflict of purpose between these two groups. The interests of the owners may lie in the distribution of corporate earnings, while those of the managers may rest in the pursuit of other ends (e.g., personal profits that come at the expense of the corporation, the prestige or power interests associated with their corporate positions, or, as Chandler has noted, the reinvestment of profits in the firm in order “to keep the organization fully employed”).⁶⁷ Such cross-purposes have a tendency to reduce the role of profits as a means of fostering corporate efficiency, a phenomenon that is particularly evident in corporations in which ownership is so broadly dispersed as to make organized opposition to current management rather ineffective.⁶⁸

While Chandler acknowledges the separation of the management from the ownership of the modern business enterprise, he differs with Schumpeter about the short-term outlook of managers. According to Chandler, “managers preferred policies that favored the long-term stability and growth of their enterprises to those that maximized current profits.”⁶⁹ Chandler also does not share Schumpeter’s pessimism about the innovative traits of managers. Quite the contrary: he regards the development of modern organizational structures as a crucial, innovative response to economic and technological conditions. It appears that Schumpeter and Chandler are not so far apart, however, in their conclusions about the more cautious, stability-seeking attitudes of managers. Chandler has noted the preference of managers for conditions that would “maintain the long-term viability of their organizations,”⁷⁰ an outlook that also served as the underlying premise for post-World War I business efforts to stabilize competitive relationships.

Schumpeter’s thesis has been endorsed by business leaders themselves, but never more clearly than by Walter S. Gifford, a president of AT&T who, in 1926, addressed himself to “the changing character of big business.” Gifford distinguished the earlier “pioneering” era, with its “captains of industry,” from the later period, with its need for “statesmen of industry.” The pioneers were men who “had to create their own precedents, invent their own methods, brush aside the inertia of less vigorous spirits, and drive directly to their goals.” Such men trusted, in his view, to “luck and speculation” but were able to create “an unrivalled system” of industrial production.

While, according to Gifford, such men served a purpose in the scheme of things, he noted the necessity for “corporation managers” to take control of the modern business organization. “Their task,” he declared, “is less to carve out a place for their business than it is to carry forward a highly organized undertaking already established. They must conserve what has been built, and steadily add to it.” The maintenance of “this more stabilized condition” required the abandonment of the attitudes of the past. Decisions came to be based more upon “deductions from… probabilities” than upon risk taking and speculation. In a word, “nothing that can be foreseen is left to chance.” Although Gifford discounted the danger, he did acknowledge that a stabilized environment could turn the business corporation into “a sort of bureaucracy, where men become so secure in their jobs that they will lose energy and initiative.”⁷¹

What was occurring within the American economy at this time can be partially explained by the law of entropy and the more recently emerging science of “chaos.” Chaos theory is helping us to become more aware of the interplay between systemic structure and destabilizing processes in maintaining healthy, viable systems. As we shall see, however, it was just such interplay that the more dominant members of the business community found unacceptable. As a consequence of work being done in chaos theory, we are beginning to appreciate the deeper meaning of “order,” for within conditions of seeming irregularity and randomness can be found recurring patterns. What we have come to call “chaos,” in other words, contains a deep hidden order. Smoke from a cigarette may rise rather smoothly for a few inches and then reach a point where it breaks up into turbulence. One sees the same phenomenon at work in the eddy of a river, or the heartbeat of a patient with arrhythmia, or a sharp rise or fall in the Dow Jones industrial average on a given day: a regularity that suddenly jumps into chaos.

Until recently, it was thought that these shifts from relative constancy to discontinuity reflected a change from an ordered to a disordered system—that the system was “falling apart” in some way. Because these chaotic conditions represented a movement from linear to nonlinear behavior (i.e., an additional unit of input produces not a corresponding increase in output, but a change that is disproportionate to the increased input), the ability to predict—and, thus, control—such conduct was lacking. Because we have been conditioned to think that what was not controllable was, therefore, disorderly, we convinced ourselves that such nonlinearity meant confusion and unruliness. But after modern computers made it possible to study the dynamics of such processes, it was discovered that these unpredictable, nonlinear systems were nevertheless exhibiting a kind of recurring regularity organized around points known as “strange attractors.” (The pricing system for a given product in a given market might be characterized as a “strange attractor,” for instance, for the behavior of market participants.) Furthermore, chaos scientists were discovering that such turbulence provided the environment within which creative change and growth occurred. Rather than proving that equilibrium conditions are necessary for the survival of systems and that disequilibrium is a threat to their survival, as the accepted wisdom would have it, the study of chaos is revealing just the opposite.

The second law of thermodynamics informs us that orderly systems move inevitably from states of order to disorder; every closed system is ultimately doomed by the processes of entropy. For an open system, however, such disintegration can be temporarily delayed by a system’s ability to absorb energy (or negative entropy) from outside itself. Whether this externally derived energy is in the form of money, new technology, information, or other resources capable of temporarily reversing this entropic decline, systems must be prepared to change if they are to remain healthy and viable. Indeed, unless more order is brought into a system from its environment, it will soon experience entropie death. For the purposes of this book, it can be said that the survival of any business firm—or an entire industry, economic system, or even civilization—is dependent upon maintaining an unceasing resiliency, a capacity to accommodate itself to the inevitable changes occasioned by our entropie world. Insofar as they imply the maintenance of stability, equilibrium conditions are incompatible with this need to resist entropy, for stability is a resistance to change, and change is precisely what any healthy system must do if it is to avoid entropic death.

None of this is to suggest that all change is necessarily beneficial to a system, or that negentropic changes might not be so minuscule in nature as to be initially unobservable. Clearly, a business firm could introduce a new product for which there was great sales resistance, and the result could be disastrous (e.g., Ford Motor Company’s “Edsel”). Another firm might continue making minor adjustments to its product lines in order to accommodate changing consumer preferences, without giving much external appearance of having changed at all. Change, in other words, can be destructive as well as creative. What the study of chaos informs us is that, in any complex (yet seemingly stable) system, a bifurcation point will be reached at which turbulence and randomness begin to be exhibited. While systems will endeavor to anticipate such changes, with practices designed to prevent fluctuations, complex, nonlinear behavior does not lend itself to prediction. When such fluctuations do occur, a healthy system must be prepared to respond in ways that reduce—rather than accelerate—entropy.

The distinction between static and dynamical systems can be seen in the analysis of marketplace pricing. While it is commonplace—particularly in short-term analyses—to speak of “equilibrium” prices in a free market, it is more realistic to think of prices fluctuating around a price level that economists label “equilibrium.” (Again, the language of “chaos” might characterize this point around which prices fluctuate as the “strange attractor” for the prices and production of a given commodity.) The continuing adjustments in supply and/or demand that accompany such price changes—and tend to keep prices fluctuating around an equilibrium price level—is an example of the disequilibrium operating within dynamical systems. Once again, the adjustments may or may not be dramatic in nature; compare, for instance, the 1929 collapse of the stock market to the more common drops in the Dow Jones index. It is the sensitivity to environmental changes, coupled with a resiliency to adjust to such changes, that differentiates static and dynamical systems.

Disequilibrium is a condition to which any system—organic or inorganic—must respond creatively by moving to higher levels of order (that is, by generating negative entropy); otherwise it faces the entropie death inherent in stabilized systems. Far from just learning to tolerate such disequilibrium, healthy systems—whether we are considering firms or entire societies—will actively promote such conditions in order to generate the change necessary for their survival.

A system, then, does not promote order by becoming stable. It is the point at which a system goes into turbulence or chaos when new information generates significant instability that it can pursue either of two courses of conduct. It can make no changes, in which case such instability will lead to a further entropie disintegration; or it can respond to such turbulence by developing more complex patterns of orderliness. Such processes have been well analyzed by two pioneers in the study of chaos, Ilya Prigogine and Isabelle Stengers. In their discussion of what they call “dissipative structures,”⁷² they demonstrate how nonequilibrium conditions provide the environment within which new forms are developed that permit systems to achieve the greater complexity required to overcome entropy. Such systems manifest “order through fluctuations,”⁷³ and maintain their resistance to entropy by constantly renewing themselves.

The health of any system, then, is to be found in a kind of “creative disequilibrium.”⁷⁴ The resiliency to respond to changing conditions is enhanced by the system’s capacities for autonomous and spontaneous behavior. Indeed, the degree to which one manifests such resiliency could be considered a measure of the health of that system. What this means, of course, is that we must begin to rethink the nature and meaning of individual freedom: rather than regarding such a condition as little more than a subjectively held preference, we must begin to think of it in terms of its organizational and social necessity. Because equilibrium conditions are, by definition, devoid of the new energy required to sustain these processes, the entropic implications of designing and protecting stabilized systems seems evident.⁷⁵

These dynamics are at work within the business system. A business organization is created, and its initial successes in attracting investors and customers infuse energy into the firm. Under the leadership of an innovative entrepreneur, these investments and earnings are used to develop a more complex system of order that, presumably, will generate even more investments and earnings. Such continuing successes mean that the firm is overcoming entropy. With other firms operating under the same constraints—so the theory goes—an unrestrained system of competition will assure that the most innovative and efficient firms will continue to resist entropic forces and survive, while those that do not will perish. Thus a system of free competition exists not as a kind of game contrived by ambitious men and women of commerce to amuse themselves, but as the social expression of our most commonly held need: to overcome entropy and survive.

There are, unfortunately, influences at work within firms that seek to counteract these continuing needs to resist entropy. A healthy, resilient system will respond to changes in its environment by modifying its behavior so as to develop more effective strategies to overcome entropy. An institutionalized system, on the other hand, will generally endeavor to change its environment—including the behavior of other systems—so as to bring such environment into harmony with its interests. Such were the responses to competition made by most major business interests not only during the period here under study but in the preceding and following years as well.⁷⁶ Organizational size appears to be a major factor influencing the kind of response. As Prigogine and Stengers point out, “the more complex a system is, the more numerous are the types of fluctuations that threaten its stability.”⁷⁷ The larger and more structured the system, in other words, the more frequent are the responses such a system must make in order to maintain its vitality.

The following example may help to illustrate the point being made. Let us imagine a firm—the Consolidated Buggy Whip Manufacturing Company—that has, until quite recently, been the nation’s leading manufacturer of buggy whips. With the advent of the automobile, however, most buggy whip manufacturers have left the business and gone into other fields, perhaps the spark plug or tire business. But Consolidated doesn't really get the message until, one year, its catastrophic drop in earnings threatens it with bankruptcy. A great deal of entropy, energy that is unavailable for productive work, has built up within the company. There might be, for instance, an inefficient allocation of resources for product advertising rather than for research into new product lines. Consolidated is now in a state of internal chaos, or nonequilibrium. In a completely free market, its options would seem to be limited to two choices: (a) to do nothing and go out of business, completing its entropic collapse; or, (b) to move into a completely new—and more profitable—product line. But in a system in which political institutions are able to intervene in the market on behalf of the interests of business firms, Consolidated has yet another option: to try to persuade the government to act on its behalf to obtain benefits it has been unable to secure by its own efforts. Perhaps it will be able to maintain an antitrust action against the automobile manufacturers; perhaps it can get the government to subsidize the manufacture of buggy whips; or, as is more relevant to the topic here under study, perhaps it can get Congress to enact legislation defining its competitors’ conduct as consisting of “unfair trade practices.” Should it succeed in any of these efforts, Consolidated will have, at least temporarily, overcome its entropy, but only by transferring its entropy to others, namely, its more efficient competitors and/or the consuming public.

Schumpeter’s use of the phrase “Creative Destruction” suggests his anticipation of the more recent work in the study of chaos. An orderly system can survive only by remaining resilient within a constantly changing environment, only by a willingness to take the risks of changing accepted practices when the consequences of doing so are uncertain, and only by understanding that stability and equilibrium conditions are incompatible with creative processes. If, as Schumpeter argues, firms tend to get transformed from owner-controlled to manager-controlled enterprises, and if manager-controlled organizations are more cautious and conservatively disposed in their decision-making, then such tendencies would suggest the presence of countervailing pressures to the commonly feared accumulation of organizational size and power. Whereas the prevailing view has been that such countervailing influences must be exerted from without—in the form of government regulation—entropy and chaos theories suggest a more spontaneous source of such pressures arising from within the business organizations themselves! As Prigogine’s and Stenger’s analysis suggests, it may be that the very success of any firm generates internal influences that make it increasingly difficult for larger firms to sustain themselves. Such a conclusion finds some support in one study showing that, of the one hundred largest firms in 1909, only thirty-six continued among the top hundred as of 1948.⁷⁸

The processes by which individual organizations have evolved must be considered here. As firms become institutionalized, they transform themselves from organizational tools for the accomplishment of some common purpose (e.g., to generate profits for their investors who, in turn, are using the firm as a means of producing negative entropy in their lives) into an entity that becomes an end in itself, its own reason for being. I have partially defined an “institution” elsewhere as “any permanent social organization with purposes of its own.”⁷⁹ Increasingly, the leadership of such institutionalized firms becomes more interested in preserving the existence and the market positions of their firms than in continuing the never-ending cycle of negentropic innovation and renewal. While any institution may well employ creative strategies in efforts to further its interests, increased organizational size carries with it tendencies for the structuring of behavior and for the conservation of beneficial arrangements. While there is no determinism at work here, all too often the need to remain resilient and creative in order to resist entropic forces gives way to illusions of maintaining equilibrium conditions by short-circuiting the processes that foster vital changes.

In his study of bureaucracy, Anthony Downs has identified some of the institutional dynamics to which the American business system has been subject. In his view, “All organizations tend to become more conservative as they get older, unless they experience periods of very rapid growth or internal turnover.”⁸⁰ Furthermore, internal pressures are brought to bear upon organizational officials to get them to become “conservers,” who are “essentially change avoiders.”⁸¹ As a consequence of such conservative influences, as the organizations grow older “they tend to develop more formalized rule systems covering more and more of the possible situations they are likely to encounter.”⁸² Such rules “increase the bureau’s structured complexity,” which reinforces its “resistance to change” and makes it less able to adapt to the changed conditions it faces.⁸³ Other factors help to maintain such inertia: as higher officials intensify their control over subordinates, the latter will increase their efforts to subvert such controls, while officials will resist any changes that diminish “resources under their own control.”⁸⁴ Further, as any organization increases in size, “the weaker is the control over its actions exercised by those at the top” and “the poorer is the coordination among its actions.”⁸⁵ While Downs notes that such inertia has socially beneficial consequences as well (for example, stabilizing social practices and maintaining various “cultural values”),⁸⁶ its adverse impact upon the organization’s capacities for effecting change outweigh such benefits.

The societal implications for the institutionalizing and structuring practices under study in this book go far beyond matters of economic concern; they include the decline and collapse of civilization itself. While it is not my purpose to go into a complete analysis of such a topic, an understanding of the consequences of our organizational practices would be incomplete without at least some brief mention of it. The historian Carroll Quigley⁸⁷ has explained such declines as the consequence of a civilization’s “instruments of expansion”—which he identifies as those organizations engaged in invention, saving, and investment—becoming institutionalized. When such systems are transformed from being the means by which the interests of the civilization are produced and become ends in themselves, they have become institutions. By developing purposes of their own, such institutions become interested in creating conservative environments in which threats of any substantial change are restrained in favor of maintaining the stability of the institutions themselves.

These “instruments of expansion” can take many forms, depending upon the nature of the civilization. While modern industrial societies would employ such instruments as technology and the production and distribution of goods and services, other civilizations might find their “instruments of expansion” in the sciences, medicine, the arts, agriculture, or navigation. Whatever the concrete forms such instruments may take, when they become institutionalized and structured they lose those qualities that are essential to the continued growth and expansion of the civilization. Having transformed their purposes from being the creators of the values upon which their civilization rests to becoming ends in themselves, institutions begin to exhibit ossification and an unwillingness to adapt themselves to the kinds of changes any healthy organism must exhibit if it is to remain vibrant.⁸⁸

The historians Arnold Toynbee—in his “challenge and response” analysis of the emergence, growth, and collapse of civilizations⁸⁹—and Will and Ariel Durant⁹⁰ have reached similar conclusions. Toynbee has observed, for instance, that “[g]rowth is achieved when an individual or a minority or a whole society replies to a challenge by a response which not only answers that challenge but also exposes the respondent to a fresh challenge which demands a further response on his part.”⁹¹ A civilization begins to break down, he goes on, when there is “a loss of creative power in the souls of creative individuals” and, ultimately, “a tendency towards standardization and uniformity” within society.⁹²

The Durants share this interpretation. In their view, whether a given civilization will continue to develop or decay depends largely upon whether—and how—challenges to existing situations are met. This, in turn, depends upon “the presence or absence of initiative and of creative individuals with clarity of mind and energy of will… capable of effective responses to new situations….”⁹³ They then add: “When the group or a civilization declines, it is through … the failure of its political or intellectual leaders to meet the challenges of change.” As with organic systems, “civilizations begin, flourish, decline, and disappear—or linger on as stagnant pools left by once life-giving streams.”⁹⁴

While a system of open and unrestrained competition provides the disequilibrium within which creativity and innovation could flourish—and thus maximizes the opportunities for individuals, firms, and civilization itself to resist entropy and thrive—these same conditions are looked upon as threats by those firms that have come to regard the stabilization of their institutional interests as a purpose that preempts the broader survival needs for change and growth. Apparently unaware that healthy organisms can continue to survive only by remaining in nonequilibrium states that generate more creativity and that equilibrium conditions are synonymous with death itself, the officials of such firms begin to design and assemble structures to restrain these processes of change. Rather than having to endure the constant competitive turbulence caused by other firms pursuing their strategies for resisting entropy, they have sought a less variable trade climate. Their efforts to resist change have taken many forms: voluntary agreements among competitors; political restraints in the forms of tariffs, import restrictions, and laws that standardize product designs, employment policies, and sales practices; and the more recent development of government regulatory agencies whose principal purpose is to enforce an economic stability conducive to the interests of major commercial and industrial institutions. Such have been a few of this century’s contributions to institutionalizing our society’s “instruments of expansion.” As William Lazonick has suggested, we might learn from the British “the dangers of the static, competitive equilibrium model” of economic systems. In his view, a major problem in the economic life of twentieth-century Britain “was that ‘statical equilibrium’ rather than ‘organic growth’ was too representative of economic reality.”⁹⁵

As we shall see, much of the American business community was actively involved, during the years 1918 to 1938, with further structuring those practices by which the production and distribution of goods and services depend. In increasing numbers, businessmen began to identify open competition as “wasteful” and “destructive.” In the perceived turbulence of such conditions, some even spoke of the “death” of firms. Under such conditions, one’s first impulse might be to empathize with their desire to preserve their existence by attempting to stabilize such discord. But such empathy begins to wane when one considers not only the adverse consequences of such efforts on other firms and individuals, but on broader societal interests as well.

Policies designed to preserve the interests of existing business institutions have only contributed to the entropic decline to which the present American economic system may be destined. In endeavoring to protect their institutional interests from the chaotic fluctuations and uncertainties of an unrestrained competition, business leaders are inadvertently generating the processes of decay and ossification that prevent systems from remaining resilient and innovative. American industries that are no longer able to compete with their more efficient foreign competitors; factories and transportation systems that make up a spreading “rust belt” across many parts of the country; a continuing recourse to taxpayers as involuntary (and unsecured) “creditors” to bail out increasing numbers of failed commercial and industrial interests; and a continuing decline in the quality of life for most Americans—these are a few of the more visible symptoms of an economic system whose apparently terminal condition may yet be reversed by a change in our thinking as to what it is important for us to preserve. One thing seems rather certain, however: as an understanding of entropy and chaos would allow us to predict, and as Quigley’s historical analysis demonstrates, unless there is a reversal of these governmental policies, the processes of change that are essential to a system’s being able to successfully resist entropic tendencies will continue to be thwarted and, with it, will likely come the collapse of the American economic system.⁹⁶

THE BENEFITS OF SIZE RECONSIDERED

Because our behavior so often expresses our underlying metaphysical assumptions, it is worthwhile to raise the question of whether this century’s attraction to large institutional systems has its origins in empirically based pragmatism or a kind of systemic determinism, or is only a reflection of belief systems about the presumed efficacy and/or inevitability of large organizations. In other words, has our world become institutionalized through the impersonal and irresistible interplay of social and economic forces, or because our thinking has convinced us that large organizational systems are generally advantageous?

If the study of chaos and complexity do not offer sufficient challenges to our assumptions regarding the advantages of increased size, recourse may be had to American business history. The presumed benefits associated with organizational size generally failed to materialize from the merger movement that was so popular at the turn of this century. In his early study of corporate reorganizations, Arthur Dewing concluded that the experiences of firms that had undergone consolidation attested to “the inadequacy of mere consolidation as a basis of economic efficiency.”⁹⁷ In one study involving ten unrelated companies, Dewing observed that the combined postconsolidation earnings had averaged only 65 percent of the preconsolidation levels.⁹⁸ In Dewing’s opinion, the reasons that most combinations failed to live up to their promoters’ expectations involved “the difficulties attending the administrative management of a large business” and “the difficulties attending the creation of a business organization sufficiently powerful to dominate an industry in the presence of actual or potential competition.”⁹⁹ Following the merger that created United States Steel in 1901, its market share fell from 61.6 percent in 1901 to 39.9 percent by 1920.¹⁰⁰ Likewise, the 1902 merger that produced International Harvester was followed by a drop in market share from 85 percent in 1902 to 64 percent by 1918.¹⁰¹ Gabriel Kolko partially explains these declines in terms of the internal problems created by organizational size. In his view, “U.S. Steel… was a technologically conservative, increasingly expensive operation that illustrates the inadequacy of the dominant theories on the positive relationship between size and efficiency current since the end of the nineteenth century.”¹⁰² While many large firms were able to overcome such influences by remaining resilient and responsive to changed conditions, organizational size, per se, did not seem to afford the advantages expected.

Such a conclusion also finds support in a study by the Temporary National Economic Committee (TNEC) on corporate incomes for the year 1919, which showed “that the larger corporations earned less than the average of all corporations; that those with an investment of more than $50,000,000 earned the least, while those with an investment of less than $50,000 earned the most; and that earnings declined almost uninterruptedly, with increasing size.”¹⁰³ In another study of profits from 2,046 manufacturing firms from 1919 to 1928, it was found that “those with an investment under $500,000 enjoyed a higher return than those with more than $5,000,000 and twice as high a return as those with more than $50,000,000.”¹⁰⁴ It seems, then, 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 firms have been able to overcome these internal, countervailing influences. Chandler’s research documents the effectiveness of the organizational changes that occurred throughout much of the business system.¹⁰⁵ Firms were, indeed, responding to the conditions in which they found themselves, and many were becoming 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 numerous dysfunctional factors associated with firm size?

Any consideration of the effects of size upon organizational behavior ought to include the landmark work of Leopold Kohr in challenging our culture’s deeply engrained assumptions about the advantages of size. Beginning with the observation that “[w]henever something is wrong, something is too big,”¹⁰⁶ Kohr proceeds to make the case for what he calls “the size theory of social misery.”¹⁰⁷ In his view, “[o]nly relatively small bodies—though not the smallest, as we shall see—have stability…. [B]eyond a certain size, everything collapses or explodes.”¹⁰⁸ Furthermore, “[t]he instability of the too large … is a destructive one. Instead of being stabilized by growth, its instability is emphasized by it. The same process, so beneficial below a certain size, now no longer leads to maturity but to disintegration.”¹⁰⁹ Though his analysis preceded the work being done in chaos theory, it is evident that Kohr’s conclusions are compatible with other studies in nonlinear dynamics. The allometric principle governing biological systems—namely, that there is an optimal size for the members of various species and that too much variation above or below this level will not allow the organism to function adequately—adds analogical support to the proposition that diseconomies of scale operate to restrain organizational size. Furthermore, the studies of Dewing, Kolko, and the TNEC, demonstrating the disadvantageous consequences to firms that have gone through mergers and other consolidations, affords additional support for Kohr’s basic thesis.

A more realistic understanding of the nature of organizational size, as well as of the purposes and economic consequences of government regulatory practices, might be served by further research and analysis incorporating these various strains. It may be that increasing the size of any organization tends to produce countervailing influences that foster inertia, conflict, communications breakdowns, inflexibility, and general instability. It may be, in other words, that large organizations tend, as a consequence of these internal counter pressures, to become less resilient, less capable of making satisfactory responses to changing conditions in the marketplace. What we may discover, in our application of chaos theory to organizational systems, is that government intervention and regulation, far from serving as a countervailing pressure to offset large-scale, dominant business firms, actually serves as a deterrent to the functioning of those hidden patterns of order that lie deep within the turbulence of a competitive marketplace-—hidden patterns of order that militate against both organizational size and efforts to insulate firms from the processes of change to which their size makes them increasingly less capable of responding.

CONCLUSION

The conservative orientation of many members of the “managerial” groups influenced business thinking during the years that followed World War I. Charged with the authority and responsibility for profitably managing assets worth many millions of dollars, and faced with competition from radically new product lines and methods of production and distribution, and intense and aggressive trade practices by other producers and sellers, it is not surprising to find such business leaders seeking means of maintaining and regularizing existing conditions. Out of a desire to preserve the value of their organizations as going concerns, businessmen were attracted, in increasing numbers, to proposals for artificially structuring otherwise competitive relationships. It was neither the egoistic pursuit of power nor the promotion of abstract social doctrines that impelled business leaders to seek the fundamental alteration of commercial and industrial practices during the years in question. Motivations were grounded, rather, in concerns that were purely pragmatic in nature. To paraphrase Justice Holmes’s classic observation of the history of the common law, the development of the American business system has been a product of experience, and not of theoretical design.¹¹⁰ Businessmen (and nonbusinesspeople as well) have been attracted to systems of either unrestrained or regulated competition, depending upon the anticipated benefits they perceive in each. The high-flown rhetoric and appeals to “fairness” and “cooperation” and the recitation of the need for new principles of market behavior in order to bring the times into harmony with the changes and complexities wrought by the evolutionary forces of capitalism were, as we shall discover, window dressing for the merchandising of concepts designed to satisfy more immediate and material interests. From this perspective, the efforts of businessmen to modify and structure the competitive environment become neither a sinister conspiracy nor an ideological commitment, but only a pragmatic response based on economic self-interest.

Government regulation of economic behavior has largely been focused upon trying to stabilize the positions of various economic interests that have been responsible for fostering regulation, to the detriment of the processes of change that are necessary for the continuing health of all systems. As the study of entropy and chaos remind us, it is the processes of continual transformation and adjustment that represent the vitality and well-being of a system, while states of permanence and equilibrium are synonymous with death.

Of course, to the degree we have been successful in our endeavors, we tend to develop an attachment to what we have produced, as well as to the instrumentalities we have employed to produce them. As a consequence, our capacities to respond to changing conditions in our world are complemented by an attraction for stability. Most of us feel a need to accurately anticipate the consequences of our actions and to have our world function in a manner consistent with our interests. We seek to create environments in which purposeful, self-seeking activity can occur, and in this regard, businessmen are not unlike anyone else. They create those systems and foster those practices that serve to maximize their profits. As Robert Wiebe has suggested, “The desire for predictability,” along with the “values of continuity and regularity, functionality and rationality, administration and management … required long-range, predictable cooperation through administrative devices that would bend with a changing world.”¹¹¹ In such a way do organizations begin to get transformed into institutions.

This felt need for certainty and predictability in business decisionmaking is partially explainable in terms of Schumpeter’s analysis. The more conservative, short-term outlook held by many members of the “managerial” classes has a tendency to find expression in demands for a business environment made secure from the uncertainties associated with a condition of unrestrained decision-making. The unhindered exercise of free choice by both buyers and sellers poses the continuing threat of change. The wants and innovative capacities of humans are boundless, and in a free environment the self-seeking motives of people will cause many to organize their resources in order to produce goods and services that can better satisfy those human wants than can existing goods and services. To the cautious businessmen with a managerial outlook, such a condition is inconsistent with the objectives of preserving existing institutions from the vicissitudes of the marketplace. In the past, such institutional pressures for stability came to dominate business thinking, and produced proposals for restricting the autonomous decision-making of firms.

As we have argued, such structuring of human behavior in order to maintain the status quo and to forestall the threats associated with free competition is totally inconsistent not only with the concept of human freedom but with the processes of growth and change required for any system seeking to overcome entropy. Freedom implies change, as decision makers continually adjust their behavior in response to altered conditions within their environments. In the long run, the failure to maintain such variability and resiliency will produce the entropic collapse of any system employing such a strategy. Such consequences are enhanced by the fact, as chaos theory informs us, that the behavior of complex systems is unpredictable, meaning that the best strategy for survival consists in remaining flexible in the face of changing circumstances. But the prospects of change become increasingly unacceptable to those charged with the shorter-term responsibilities of managing and preserving the assets of business organizations. Therein lies the paradox: the survival of firms depends upon maintaining a competitive environment in which the threat of extinction is a continuing possibility. Such considerations, arising within the context of the major changes taking place within the economy, were central to business efforts to achieve “self-regulation” in the years following World War I.

Frederick Lewis Allen has characterized the general state of the reform movement at the end of World War I as one in which, due to the enormity of the war itself, “the wish to regulate and control business and finance was thoroughly played out.”¹¹² This statement fails to fully account for the postwar interest among men of commerce and industry in restructuring the business system along collectivist lines. What emerged from the intellectual community was a set of premises consistent with business purposes, namely, the creation of “a collective society to control the forces of economic change,” subject to the direction of those “social entrepreneurs … who would work out the generalized schemes for regulating that new society.”¹¹³ The fundamental question confronting business leaders throughout the 1920s has been well stated by Gilbert as “[w]hether an antiquated individualism or a new collectivism would emerge to mold this new industrial society.”¹¹⁴ Encouraged by their wartime experiences with the WIB, many businessmen began the peacetime task of mobilizing themselves on behalf of the latter proposition.