19. The Job of Big Business

19. The Job of Big Business If we had no big business,we would have to invent it. And if we are not willing. to have privately operated big business, we shall have to have big business operated by the government. When the President said he would rather see one hundred small steel companies than one United States Steel Corporation, he was merely being nostalgic for the "good old days." But the President himselfheads the biggest businessin the world, the United States Government. Included in this government is the biggest insurance system in the world, the Social Security Administration; the second biggest bank in the world, the Reconstruction Finance Corporation; the biggest owner and operator of ships in the world, the Maritime Commission; and the biggest butter-and-egg dealer in the world, the Com modity Credit Corporation. In these days of big cities, big unions, big armies, and big government departments, there is sometimes a question whether some businessesare big enough. Both government people and corporate executives sometimes show this feeling. Government people have since the war urged that the government be put into new pro grams of electric power and of synthetic fuel develop ment because, they said, these programs were too big for private business to handle.

148 THE JOB OF BIG BUSINESS 149 On the other side of the fence, an instance occurred since the war in which a job was too big for two big private companies to swing by themselves and they called in two even bigger companies. The Texas Com pany and the Standard Oil Company of California, trying to swing the Arabian-American Oil Company, took in the Standard Oil Company (N. ].) and the Socony-Vacuum Oil Company. These are four of the biggest companies in the third biggest industry in America. The technological advantages of size were perhaps first shown in railroading. The present New York Central line to Buffalo was once in the hands of eleven different companies and out of where is now the North Station of the Boston & Maine Railroad once ran lines owned by the Boston and Eastern, the Boston and Lowell, the Boston and Fitchburg, and others. The scale of economicalsize has risen vastly since then and continues to rise. Modern chemical developments take initial outlays in the tens of millions. When du Pont went looking for a competitor to go into cello phane it had to find somebody who could put up $20, 000,000. Du Pont put $43,000,000 into dyestuffs be fore profits offset losses and spent $27,000,000on nylon before it knew whether it had "won or lost." Pratt & Whitney spent $40,000,000 on the development of a single engine and the armed forces spent over $50,000, 000 on the B-54 and then abandoned it. Over twenty years ago, the Ford Motor Company spent $100,000,000 to switch from the· Model T to the Model A, but, in 1948, General Motors had to spend $50,000,000merely to bring out its newly engineered Chevrolet.

Oil wells used to cost between $50 to $100,000, but, with deep drilling, they went to $250,000and, with off150 THE JOB OF BIG BUSINESS shore drilling in the Gulf of Mexico, the Humble Oil Company recently sank $2,000,000 in a single deep water well. The political talk is all of hydro-electric power rather than steam power, but hydro costs about twice as much as steam per kilowatt for original investment. Similarly, the latest developments in liquid fuel call for multiplying original costs; gasoline from natural gas means twice the original plant outlay as from petroleum; from coal, four times as much. And in the steel industry, greatly in creased outlays will be needed in the beneficiation of taconite compared· with those for the mining of Mesabi ore. Whether his humor was intentional or not, the case has been put neatly by the president of the du Pont Company. Testifying in Washington on bigness and the antitrust laws, he· said, ."I think it is false reasoning to deplore the fact that a small company cannot gather unto itself the capital necessary to produce a nylon or a cellophane. If it could it would no longer be a small company." 1 Of course, the reason for the large size of these modem investments is that once the plant is built, the high initial cost is followed by a low production cost. In the last analysis,these big operations are economical. Thus when the President expressed a yearning for a decimation of industrial corporate size he was in effect like the man who went into the store and said "No I don't want the 'large economy' size'; give me the small spendthrift size."

But the really big companies are not so .much justified by the large cost of these things, as by the large risks. The very large corporation is one means by which men can avoid the great risks of a fast-moving and growing economy. These risks include obsolescence of products THE .!OBOF BIG BUSINESS 151 and services, fickle markets, changing fashions and un predictable social trends. The large corporation protects itself against these risks not by avoiding them but, like an insurance com pany, by spreading or diversifying them. It operates in different parts of the country, produces for different kinds of buyers, and keeps bringing .new products on the market. This enables it to stay in business in a dynamic world, which is in a constant state of flux. But this diversification takes size. The greatest risk against which industrialists have learned to protect their companies is obsolescence, the inevitable fading of earning power out of machinery and of marketability out of products due to competitors' innovations in a free economy. Obsolescence has much to do with the growth of bigness in American business.

A classic case was that of the Ford Motor Company, which made no important changes in its Model T from 1918 to 1928. This nearly cost the Ford Motor Com pany its corporate· life, but it was lucky enough or foresighted enough to be able to dig up the $100,000,000 necessary to get back in the game. President Charles E. Wilson of General Motors was recently asked what were the advantages of GM's group ownership of different production units. He said, "One advantage of the grouping of these operating divisions is that they don't succumb as the result of one bad mistake~ which sometimes happens in different companies. "Some people might build up a company and have a pretty nice business and a good reputation and then make one big mistake, and before it was discovered they would be out of business. . . ." 2 It was big American business,in fact, which developed the very concept of obsolescence. It is not mentioned 152 THE JOB OF BIG BUSINESS by any of the classical economists, from Adam Smith to ]evons, and they evidently didn't know anything about it. They took it for granted that if you put money in brick and stone it would keep on earning money, almost as though you put it in government bonds. They called this "fixed capital," or sometimes "sunk capital."

The capitalists, however, who made this mistake, usually found themselves in a fix and, if they didn't keep putting more money into better property, they eventually were also sunk. Nor did the two American writers who have had the most to do with fashioning present-day economic theory, Wesley Mitchell and Thorstein Veblen, give it any im portant place. In fact, it has no accepted place in modem accounting, where it appears only in the guise of depreciation. Industrialists learned about it, not from books, but the hard way. The role of obsolescence in the story of big business lies in three hard facts of economic life. First, only those companies who have consistently "thrown good money after bad," developing ever new products at ever better prices, have stayed in business. Second, in the competitive games that big businesses play, the price of the chips to stay in gets bigger and bigger. And third, no new development, no matter how many millions it costs, is a sure thing. It may be a flop and, unless its company has "other irons in the fire," the company will flop as well.

One way "the bigs" meet these risks, or are able to take them, is through the diversification of their markets and their products. Another is through the continual development of new products. And back of this is "production research" or "applied research." Finally, still further supporting this, is "pure research."

THE JOB OF BIG BUSINESS 153 For this latter, only the members of the "billion-dollar club" with the very longest pocket-books can afford the price and the waiting. It takes millions of dollars and years of waiting before such investments payoff. Another way of discussing obsolescence is to reverse the emphasis and talk of "innovation." For one man's obsolescence is due to another man's innovation. And as Barron'sMagazinerecently said, "There are apparently just two important roads to obtaining above-average prices. One is monopoly, the other innovation." It might have added that in fact there are only two ways to stay in businesspermanently: monopoly or innovation. Despite what is said in Washington, American big businesses have chosen the way of innovation. They have, in fact been forced to, in the sense that since some do, all must. There can be no lasting big monopolies where there are big innovators. Even legal monopolies are not safe, as the fate of the street cars and the diffi culties of the railroads show. True monopoly and in novation cannot long exist side by side.

This is why the big American companies that seem to fit, in part, the traditional picture of monopolies in the control of all or nearly all of a certain product, like aluminum, do not and could not fit the rest of the tradi tional monopoly picture, the holding down of production and holding up of prices. They too must keep on in novating with new products, new uses, lower prices, expanded capacity, and so on. "The commercial results of being too grasping would in the long run be fatal," a big-businesspresident has said. "For exampleI suppose it is quite literally true that if we elected to charge five times the present price of nylon yams, we would find a marketa minute market, but nevertheless a market-and the profit per pound might 154 THE JOB OF BIG BUSINESS be quite impressive. But our own interest and that of the consuming public leads us in the other direction." 3 [Italics added.] In the recent House Judiciary hearings on "monopoly,"

committee members kept hammering on the question of whether big businessescrowd out little businesses.4 But big businesses·do not normally compete with little busi nesses. They compete mostly with each other. The relations between big and little businessare mostly those of buyer and seller, rather than of competitors. In other words, the large businessesdo the large jobs, for which they are best qualified, and keep out of the little jobs, for which they are not. Thus, Standard Oil's biggest competitor is not the Jonesville Filling Station, but Socony-Vacuum, Gulf, or Shell. GM's threat is Ford, not Joe's Garage; GE's is Westinghouse, not a little-known electrical supply house. Only when a little fellow works up to big league size, as did Chrysler, Sylvania, Great Lakes Steel, Monsanto, Philip Morris, Pepsi-Cola, and Motorola, do they come into competition with the big fellows. Big business' own story on this was indicated by Charles E. (General Electric) Wilson, before the House Judiciary Subcommittee. He said, Where the objective to be undertaken is easily met, the company formed will be a small one; where the objective is large, the company must, in turn, be big. . .'. There are many fields wherein small business is the only answer . . .

and many more where small business, with its superior adaptability, is in a highly advantageous position.... That small business can compete . . . more than holding its own with big business . . . is demonstrated in virtually every portion of our economy. . .. In nearly every in dustry [there are companies] which, like the following, are small, make a well-known product, compete with very large THE JOB OF BIG BUSINESS 155 companies, and are eminently successful: Hormel Packing Company (canned meats), Webster Manufacturing Com pany (record-changers), Brockway Truck Company, Mc Graw Electric Company (toasters), Lincoln Electric Com pany (welding equipment), General Tire Company, Western Tablet Company (paper), Hires (soft drinks), and Okonite Company (cable). A survey of "Business Size and the Public Interest," published by the National Association of Manufacturers, has said that certain figures "suggest.that in manufactur ing the large business firms differ from the small firms not only in size but qualitatively. The large companies in general are doing different jobs and using different methods."

On the other hand, the interrelation between big and little business may be shown by some of the big com panies' estimates of their suppliers and customers. The Alcoa people say there are 18,000 firms who produce fabricated castings or otherwise use aluminum for the manufacture of products. The United States Steel Cor poration has an estimated 50,000 small suppliers and 90,000 small customers. The du Pont Company either buys from or sells to an estimated 80,000 suppliers or customers. General Electric has some 31,000 suppliers and sellsto some 200,000 dealers through several thousand distributors. And census figures show that there are more men employed in the repairing, servicing and sell ing of automobiles, which are essentially small business operations, than in their manufacturing. As President Benjanlin F. Fairless of United States Steel said to the Monopoly Subcommittee, "If there is one economic lesson which our twentieth century ex perience has demonstrated conclusively it is that America can no more survive and grow without big business 156 THE JOB OF BIG BUSINESS than it' can survive and grow without little business. . . .

You cannot strengthen one by weakening the other. Big business needs small business; small business needs big business; and the nation needs both."