A Rebirth of Economic Freedoml J. D. Douglas

The independent farmer·· ("free holder") was both the ideal and the overwhelming economic reality in American life until late in the nine teenth century. (After the invention Dr. Douglas is Professor of Sociology at the Univer sity of California in San Diego, though his studies of human action range beyond the usual professional or academic bounds of anyone discipline. He has written and edited twenty-five books on various as pects of the social sciences and his articles have appeared in many professional journals and other pUblications. 662 of the cotton gin in 1793 much of the land of the South became large plantations worked by slaves. But Southerners were far outnumbered by Northern freeholders.) These in dependent farmers were the back bone of the Jeffersonian -Jacksonian "empire of liberty." Being depen dent on no one for their livelihood, as Jefferson argued, they could be counted on to assert their real inter ests and, thus, to maintain the re publican freedoms enshrined in the Bill of Rights.

Jefferson and his successors feared that this republic could not long en dure if the freeholder vanished and workers became dependent on oth ers. The corporate concentrations of capital and employment that devel oped over the century, fueled largely by changes in government laws, es pecially the introduction of high tarTHE DE-BUREAUCRATIZATION OF AMERICA~ BUSINESS _ 663 iffs after the 1830s, limited liability for corporations and huge land grants to the railroads, and partly by new capital-intensive technologies de·· manding many workers (as in steel), was a severe challenge to this entire "natural system of liberty." It looked to an increasing number of Americans as if the economic freedom of a few Big Businessmen was destroying the economic free dom of the many, turning them from independent freeholders into depen dent wage earners, thus threatening liberty in general. While few Amer icans. heeded the. prophecies of peo ple like Marx, who believed monop oly and its exploitation of workers would be the inevitable outcome of capitalism, ever more of them turned against business because of this Bigness. They turned to government and unions to protect them by con. trolling Big Business.

Antibusiness Sentiment By the early part of this century social thinkers, especially those in fluenced by the "institutional econ omists" of Germany, began to see business in general in the form of Big Corporate Bureaucratic Busi ness. Progressives, including such diverse thinkers as the young Wal ter Lippmann and Herbert Hoover, called for more and more restraint on business and more and more planning by government. In the 1930s the great upsurge in antibusiness sentilnent triggered by the Great Depressjon combined with the argument of some economists that Big Business! was now thoroughly bureaucratized and divorced from ownership to. convince ever more people that government bureaucra cies could just ,as well own and man age them efficiently. Joseph Schumpeter, originally a member of th~ extremely free-mar ket oriented Austrian School of Eco nomics (of which Ludwig von Mises and Friedrich Hayek are the best known members), argued in his fa mousbook on !Capitalism, Socialism and Democracy that Big Business was successful because it minimized risks (especiailly those from reces sions) and its, success through bur eaucratization was .preparing the way for government bureaucracies to take them over. Big Business, then, had prepared the way for So cialism.

This kind of argument was most successful in ,the 1930s in Britain, Sweden, Fas~ist Italy, and Nazi Germany. In Britain the govern ment started, intentionally encour aging the so-called "Rationaliza tion" of business, that is, concentration into Big Bureaucra cies. In the 1940s government then started nationalizing Big Business, completing the Schumpeter sce nario. By the 1960s, and continuing up to today, our college students, in664 THE FREEMAN November cluding many of our graduate stu dents of business administration being groomed for Big Business, were looking at business through the so cialist-tinted spectacles of John Kenneth Galbraith, who proclaimed in The New Industrial State that Big Bureaucratic Planning was inevita ble. "By all but the pathologically romantic, it is now recognized that this is not the age of the small man." Given his personal preconceptions and wishes, and living in the first great period of corporate conglom eration of the 1960s, Galbraith failed completely to see that the Age of Big Business was already dying.

Revolutionof Littleness The "Revolution of Littleness" had already begun in business around the world, but especially in the United States. This Revolution was first clearly sighted and proclaimed in 1976 by Norman Macrae in The Economist. But its realities are still largely unnoticed. The early reali ties of even the most sweeping rev 01utions are normally unseen. Even the scientific and Industrial Revo lutions were a hundred years old or more before many people began to realize that something of profound significance was happening. Our traditional preconceptions and our situationally limited views of the broader developments in society conspire to hide the newness and scope of such changes until they are so advanced that they become sud denly obvious. Our Revolution of Littleness has gone unnoticed by most people both for these usual reasons and because our headlines and network stories paint the opposite picture. Most ex perts and politicians providing these stories are too versed in and re warded for the traditional ideas about the Age of Big Business to see how rapidly the tide is now running against Bigness. So are many of our Big Businessmen, but they learn very quickly when the tide starts sweep ing them away.

Mega-Mergersversus LittleRealities The great increase in mergers in the last few years has been the most misleading appearance. Businesses last year put up approximately $80 billion for mergers. Many of these were very Big Mergers indeed in which very Big Businesses bought up much smaller ones. U.S. Steel's $6 billion takeover of Marathon Oil was the Big Headline of business news for weeks. On the surface this certainly shows Big Steel getting much bigger. But look beneath the surface. This move itself shows that, just as the United Steelworkers have claimed angrily, U.S. Steel is trying desperately to diversify away from the steel industry. The really big story in the steel industry, as Jeff Blyskal shows in 1982 THE DE-BUREAUCRATIZA,]~ION OF AMERICAN BUSINESS 665 Forbes (January 4, 1982), is diversi·· fication away from steel and the rapid rise in profitability and growth of the smaller steel companies. The most efficient and rapidly growing steel producers in the U.S. (and in some other countries, like Italy) are generally small and slim-and-trim, with low debt-to-equity ratios and small, highly skilled, highly produc·· tive and non-unionized work forces..

Over the last five years U.S. Steel has ranked 18th in growth and 21st in return on equity in the American steel industry. Once-huge Kaiser is quitting steel entirely. Some gov·· ernments, notably Mexico, are pour·· ing billions into huge, centralized steel mills. But these mills will al· most certainly be uncompetitive White Elephants kept alive, if at all, by vast subsidies. This might still mean that, even if steel is getting littler-decentral izing, U.S. Steel will get bigger. But that is not even the plan. U.S. Steel hopes Marathon, with its vast oil re· serves, will provide 51% of its cor·· porate sales and 83% of profits. Mar·· athon, they hope, will make up for their overall shrinkage in steel sales. Those of us who believe the market forces unleashed by the deregula tion of oil and natural gas will de stroy OPEC's monopolistic pricing suspect this merger will prove as di sastrous as most mergers do.

Of course, we must be careful about generalizing from steel to our whole economy. Those still mesmerized by Bigness might'insist that steel, tires, and autos are ~'dying" because of for eign competition, so they are symp toms of the "de-industrialization" of America. Actually, there is no "de industrializati~n" going on, not even in the steel industry. There is only change, above all a shift to smaller, more specialized producers and to mills processing the vast quantities of scrap steel.. Even basic steel pro duction may· eventually resume growth. Prospects for ,Growth Once inflation is wrung out of the economy and· interest rates come down, the new tax incentives (de creased marginal rates, more rapid depreciation, and investment credit) will probably lead to investment in new production technologies. But this investment will very likely be in the smaller and newer firms, using much automation and small, nonunion ized-thus flexible and produc tive-work fo~ces. (Even without the new incentives, industries like tex tiles and watclhes went through this process in the 1960s and 1970s.) But the skeptics have a serious point. So let's look at the other ex treme, that of the very new, high technology world of computers. Here there is indeed a giant to fixate the glare of the believers in Bigness. IBM remains huge' and formidably crea tive, efficient and profitable. It is 666 THE FREEMAN November probably the best example one could find in the world today to support by appearances--the nineteenth century argument that the econo mies of scale (of Bigness) give the Big an inherent advantage over the little and doom a free economy to ever greater concentration.

But even IBM is partially a mi rage of Bigness power. Though it ranks thir~ in return on equity, probably because of its great back..; log of successes, it ranks only ninth in growth over the last five years in the U.S. computer industry. Even in huge and very fast computers, where Bigness gives its greatest advan tages because of the vast capitaliza tion and many specialties de manded, companies like Amdahl (7th in growth) have been very success..; ful competitors. A.T. & T., trying desperately to shed organizational fat through divestiture, .·may soon be come a formidable competitor. And so far IBM has been badly bested in the most rapidly growing new realms of computers, such as personal com puters, by total upstarts like Apple. Apple was created by two whiz-kids with a bright idea and no bureau cratic planning and budget-alloca tion committees. The Big Picture of the Little Trend Is Clear Because of the long-standing ob session with Bigness, conglomera tion and the takeovers of little companies by Big ones get the headlines and airwaves. But deconglomera tion and divestiture (selling off parts of a company) go unnoticed by al most everyone except investment bankers. Who· noticed when Bendix sold its forest products subsidiary for $425 million? Or its holdings in Asarco for $340 million? Or Skagit?

Or United Geophysical Corpora tion? Almost certainly not Teddy Kennedy or John Chancellor. Partly because of this lack of con cern, and even more. because most decentralization (re-littling)of busi ness is not reported outside of the companies, we don't know exactly how much is going on. But we do know a great deal about the trends. Very importantly, the recent "mega-acquisitions" are .not the re sult of any economies of scale that doom us to more Bigness. As econo mists like Dan Orr of Virginia Poly technic Institute have long argued, the conglomeration and general growth of Big Corporations has been due very largely to our tax laws, unions and massive regulations in some segments of the economy (rail road, trucking, air lines) which have severely penalized new and small firms. One of these many incentives, the double-taxation of corporate div idends (first as corporate income and then as individual income), has been very important as an incentive for individuals to let corporations rein vest profits within the company, even 1982 THE DE-BUREAUCRATIZA~rION OF AMERICAN BUSINESS 667 when higher rates of return could be gotten elsewhere (say in money funds). This way only corporate taxes are paid until much later (perhaps after retirement). When the individ ual does receive the dividends or sells the stock he pays the lower tax on capital gains. Even some of the Rea gan economic renewal tax changes compound this government incen tive to Bigness. Worst of all, the leaseback provision subsidizes the dying dinosaurs.

High Inflation Encourages Merger Activity The recent surge in mergers is pre dominantly a result of high inflation and other investment uncertainties that make it less risky (or make it seem less risky to those who believe inflation, OPEC, and so forth, will continue) to buy already established businesses (or proven reserves) than start new ones or expand old ones. Royal Little, who as Chairman in the 1950s made Textron the first of the famous modern conglomerates, and is now part owner of a venture capi tal firm helping companies to decon glomerate, has noted, "This [up surge in mergers] is one of the results ofdouble-digit inflation, which makes it so costly today to go out and buy something new." But note that, in spite of these government generated incentives to Bigness, even today outright decon glomeration and divestiture are probably not. too far behind the mergers in money terms. The fact is, as Peter DruQker has argued, most mergers do nolt make good economic sense and are far more the result of vanity than profit motives. Even with the government generated incen tives, most mergers fail and are fol lowed by outright divestitures, by partial spin-oft's, by radical restruc turing which !decentralizes decision making, or by bankruptcy.

In an unusual study of the out comes of mergers, Arthur Lewis (Fortune, May 3, 1982) found that the ten largest mergers among For tune 500's largest corporations in 1971 were overwhelmingly failures over ten years: "Most of the acquisi tions produced appallingly low re turns during ~981. In three cases ... the estimated return on investment was less than 5%. In three more cases ... the return was between 5% and 10% ... and none of them matched the 13.8% median return for all the companies in this year's Fortune 500. If we go beyond the statistics and consider the 'paths of some of these corporate marriages, the case for conglomeration looks even bleaker ... [Our study] strongly supports the notion that investing in unfamiliar businesses is unduly perilous-just as the critics maintain. Most of the acquirers evidently were lured into buying unstable companies, or into committing .foolish mistakes that harmed stable ones. Only two merg668 THE FREEMAN November ers remained trouble-free from be ginning to end of the decade."

The trend to littleness is equally clear even in companies that are growing in the shares of their mar kets. The old stereotypic view of Big Business as a monolith run by rig idly centralized, top-down command the wayan army is thought to be run (but actually is only by the los ers) has never been true for many. The dominant form has been the General Motors model of decentral ization of most decisions, with cen tralization only of those (such as au diting and financing) required to keep control. Contrary to some of the popular soul searching going on in the aftermath of the Japanese chal lenge, a high degree of decentraliza tion and its concomitant of individ ual decision making has probably always been the dominant form of management in American business, but the degree has varied vastly from one segment to another and over time. The RevolutionTriumphant This variation in decentralized decision making has probably been due mostly to differences in technol ogy and markets. In general, the more complex and changing a tech nology, and the more competitive and changing a market, the more the in centives are for littleness, and, thus, the more decentralized the decision making.

American industries, faced with little European or Japanese compet ition, dominated their markets until the 1960s or, in some cases (like au tos), the 1970s. In addition, in some industries, notably steel and autos, technology changed little. When the technology did change in steel man ufacturing, dominance in the do mestic market was partially main tained by the union wage at the big firms and then by protectionism both the result of government. These conditions combined with the gov ernment generated inducements to bigness to produce growing Bigness in some segments, especially in au tos and steel. But even in that period competi tion was so great and technological development so rapid that in general there was no increase in concentra tion in our overall industry (regard less of the conglomeration headlines and the pronouncements of anti business ideologues). At the same time autos and some other segments got more concentrated, the more technical and competitive segments, like electronics and cameras, frag mented-littleness was rampant.

And within companies like IBM and Polaroid the growing proportion of technical specialists were increas ingly free to create their own jobs and work in small teams-and were thus more efficient at creating new products and keeping down costs. Today, even with those govern1982 THE DE-BUREAUCRATIZATION OF AMERICAN BUSINESS 669 ment generated incentives, all really Big corporations are severely threatened by the more slim-and trim ones, especially the new ones. Even General Motors, which a few years ago seemed a secure Goliath, is severely threatened by the much smaller, highly decentralized and automated automakers of Japan-approximately ten of them, not one. Without the government's "orderly trade agreements" with Japan, who would bet on this Goliath surviving David's onslaught? Meetingthe Challenge The Big Businesses that are meet ing the challenge are doing so by systematic decentralization, partial spin-offs, and subcontracting to small teams both within and outside the company. One of the most effi cient and rapidly growing compa nies, 3M, continually decentralizes even its manufacturing plants (to keep employees down to a few hun dred at each plant) and increases its incentives for individual initiative and creativity. Gordon Engdahl, 3M's vice president for human resources, summed up their view for The Wall Street Journal (Feb. 5, 1982): "We are keenly aware of the disadvan tages of large size. We make a con scious effort to keep our units as small as possible because we think it helps keep them flexible and vital.

When one gets too large we break. it apart. We like to say that our SllCcess in recent :years is due to multi plication by division." In his study of Digital Equipment (Fortune, May 3, 1982), Geoffrey Colvin noted the general principle of diminishing returns-and eventual death-from growing size: "In busi ness, as in nature, there seems to be a law that things slow down as they grow toward the elephantine." How has DigitallIlaintained its dazzling growth rate tHis long? First, note that it's still only 137th on the list of 500, is still reasonably young and a pi 0neer in the (most rapidly growing major segment of the world econ omy. Beyond· those factors, the sys tematic pursuit of littleness-de centralized decision making - is crucial. Theyfve never acquired any company. The corporation is broken down into 18 largely autonomous units. Says security analyst Stephen Dube with Dean Witter Reynolds, "It's not one big business-it's 18 small ones. " The heart of any high technology :firm is its engineers.

Digital keeps them efficient and cre ative by decentralizing its 5000 into quality teams of about 30, by avoid ing almost aU bureaucratic rules and forms, and ~y keeping them in di rect contact iwith the equipment in use and with. customers. Subcontracting to outsiders is not only the now.;.famous"secret" of much of the success of Japanese auto mak ers, but is also growing rapidly in businesses a.round the world. Much 670 THE FREEMAN November of the programming for computers, especially the new personal ones, is being created by Lone Ranger entre preneurs in their home studies, and then marketed by the computer firms or retail outlets. Even once arrogant IBM has moved more to use these outsiders and make its products compatible with those of other firms. Today almost all office work could be done at home-or anywhere in the world where a computer console can be plugged into the Worldwide Electronic Net-and thus sub-con tracted out to the most efficient.

The ElectronicRevolution The Electronic Revolution is now rapidly transforming business in all economically advanced societies, and most rapidly in the United States. Computers wed to robots are rapidly making it possible for mini-factories to efficiently manufacture products with far greater flexibility than has been possible, thus allowing a far greater variety in the end products. It is also more efficient now for com panies that once needed to be cen tralized because of their specialized products to decentralize. The Elec tronic Revolution makes decentral ization even more efficient and this will quickly eliminate our ancient bureaucratic dinosaurs. This is one major reason why companies have been moving from more expensive cities like New York to less expen sive smaller ones, especially in the South and West, and even to non urban areas. For years Harcourt, Brace, Jova novich, a major publisher, has been decentralizing its corporate head quarters from New York City to San Diego, Orlando, Paris, Canada and elsewhere. By 1982 only 2,000 of its 8,300 employees were still in New York. In February of that year Wil liam Jovanovich, the chairman and chief executive officer, announced that almost all the remaining 2,000 would leave the City, thus saving an estimated $20 million a year just by moving all publishing functions to San Diego: "The notion that we have to be in New York City to conduct business is a shibboleth. With the modern electronic techniques of in stant communication by video ter minals, satellite communications and conference calls, it is no longer nec essary to be in one place and not an other."

These subcontractors of bigger businesses are predominantly ser vice workers, by far the most rapidly growing segment ofour economy. The Secretariat of the General Agree ment on Tariffs and Trade found that "Between 1970 and 1980 there was a net increase of 19 million jobs in the U.S. (24%)." Roughly 87% of these were service jobs and the great majority of these were in small firms-some ofone person. One study of data on 5.6 million firms by an MIT group found that, between 1969 1982 THE DE-BUREAUCRATIZATION OF AMERICAN BUSINESS 671 and 1976,66% of new jobs in the U.S. were in firms with fewer than 20 employees. New Jobs with Small Firms Since the underground economy has been growing extremely rap· idly, and since almost, all of these consist of one or only a few individ·· uals, far more than two-thirds of all new jobs are in very small firms. By contrast, the U.S. Census Bureau's "County Business Patterns" surveys show that the proportion of Ameri·· cans working for companies with ove]~ 500 ,employees was '27.6% in 1967 and shrank to 22.4% in 1979-a de crease of one-fifth in a mere 12 years.

In the 1970s the number of employ ees at U.S. Steel shrank by one fourth, from 531,000 to 399,000. The same thing is happening in the other, industrialized nations. In Japan one Japanese worker out of six has his own business, and some of these are one-man robot-run fac tories. Even in the big companies the emphasis 'is strongly against' top down, bureaucratic decision making and, very much on individual and team decision making. As Harvard's Ezra Vogel notes, "The essential building block ofa Japanese COIIl pany is not a man with a particular role assignment and his secretary and assistants, as might be the case in an American company. The es sential huilding block of the organi zation is the section. A section might have perhaps· eight or ten people. Within the section there is not as sharp a division of labor as in an American company. To some extent, each person in the same section shares the sa~e overall responsibil ity."

Vogel errs only in failing to real ize that the most creative, efficient, profitable and growing American companies in i high technology and with highly competitive markets have been doing this for decades. Thomas Edison, who created the first modern research lab early in this century, ran ilt entirely on the prin ciples of team. spirit and individual initiative. He is continually quoted for his apocalyptic, anti-bureau cratic pronouncements: "Organiza tion! Hell! I'm. the organization! ... Hell! There ain't no rules around here! We are tryin' to accomplish somep'n'." They did and later high technology firms like IBM followed in their path. The Japanese bor rowed these. ideas and sometimes improved on ·them. Big Bureaucra tized Business in America was al ways partly a figment of the imagi nations of socialistic critics and the rest was ovrerwhelmingly due to government · mandates on union powers, taxes, regulation and even direct· procurement policies by the Defense Dep,rtment.

In a recent update on his earlier prophecy (TJ"e Economist, April 17, 1982), Norman Macrae finds that the 672 THE FREEMAN Revolution is rapidly gaInIng mo mentum. In addition to the acceler ating rate of decline of the Big and creation of the little, he finds the re maining Big are seeing the hand writing on the wall and are rapidly introducing "intrapreneurial prac tices": that is, more and more firms are breaking themselves up into largely autonomous teams that compete with each other in bidding for company projects. The New Message The general point is to internalize losses and profits into the smallest idea-creation and product-manufac turing team possible-bring the market incentives to each individual as directly and immediately as pos sible, while at the same time opti mizing all the powerful motivating forces of team work ("fellow feel ing"). As Macrae is well aware, this idea has long been used by very suc cessful American companies like Regulatory Taxation Arthur D. Little. But what is new is the rapid spread of the practices and-even shoaking - the spread of the message. There are now consul tants in Sweden and the U.S. (such as Mr. Bob Schwartz's Tarrytown School for Entrepreneurs outside New York) and even professors (such as Reg Revans at Manchester Col lege of Science and Technology) who are propagating the message. And even Prophet Macrae is being ho nored in his own day, having been invited to give talks on the Revolu tion of littleness in twenty nations.