BA107 (WEEK 3) -THE RISE OF BIG BUSINESS AND BIG GOVERNMENT
1. Why history matters to business.
2. Key characteristics of big business.
3. Video application #1: "Money and Power" clip on Bolton & Watt.
4. Key drivers of the rise of big business -- 1700-1800s.
5. Video application #2:
transcontinental railroad.
"Money
and
Power"
6. Post-1900 innovations in business organization.
7. Forces driving the rise of big government.
.
clip
on
the
PREPARING FOR SECTION
This week's section will consider the rise of big business and big
government in America. Come prepared to discuss the following:
1. What are the conditions that enabled big business to grow in
the US?
2. What are the conditions that enabled big government to grow in
the US?
3. How has American ideology changed in the century since the
passage of the Interstate Commerce and Sherman Antitrust Acts?
4. How do trends in business organization today compare to those
of a century ago? What is similar and what is different?
5. Are there "robber barrons" today in the sense of a few business
leaders who enjoy immense economic power?
WHY HISTORY MATTERS TO BUSINESS
1. The past shapes the business environment in the present.
2. The past provides lessons for the
alternative solutions to business problems.
present,
including
3. Differences in history help to explain differences in national
economic systems.
SOME KEY CHARACTERISTICS OF BIG BUSINESS
1. Large-scale capital requirements.
2. Separation of ownership and control.
3. Broad geographic scale.
4. Creation of new forms of management and organization.
5. The standardization
(Fordism).
of
work
and
full-scale
automation
6. Professionalization and the separation of economic spheres.
a. rise of professional management as social force
b. rise of professional investors (Wall Street) as social force
7. Greatly increased wealth, power, and influence compared to the
small-scale, Jeffersonian economy of the early US.
VIDEO DISCUSSION POINTS -"Money and Power" clip on Bolton & Watt
1. The industrial revolution is "the most important happening in
the history of the economy," and the steam engine was critical to
this.
2. To make this happen, the inventor of the efficient steam engine
(James Watt) needed a financier and manager (Mathew Bolton) to
help improve the technology and bring it to market.
3. Within a few years, the Bolton & Watt rotary steam engine was
powering British textile mills, which dominated the world economy
well into the 1800s.
4. Eventually, steam engine technology was applied to other
businesses, opening up entire new industries and expanding the
scope of the industrial revolution.
5. One of the most important of these new industries was the
railroad, which would not have been possible without the steam
engine.
Evidence of positive externalities: Bolton & Watt never made money
from the development of the railroad.
It was other
businesses that did.
Public policy implication: These "social returns to innovation"
(positive externalities) have resulted in increased public
funding for basic science and engineering around the world
over the past two centuries.
KEY DRIVERS OF THE RISE OF BIG BUSINESS -- 1700-1800s
1. Legal environment.
a. Legal personhood -- corporations were given a legal identity
independent of the people who own and operate it. Companies
themselves could freely hold, use, and transfer property;
write contracts; etc.
b. Limited liability -- investors in the corporation were liable
only up to the amount of their investment, not their entire
personal fortunes.
c. This allowed investors (Bolton) and inventors (Watt) to work
together to build large-scale businesses that could take
advantage of new technologies.
2. New technologies.
a. Power technologies -- the steam engine, electricity, etc.
b. Transportation technologies -- railroads, steamships, etc.
c. Communications technologies -- the telegraph, telephone, etc.
3. Greatly expanded markets.
a. Raw materials -- eg, the discovery of oil in Pennsylvania, then
Texas, then overseas.
b. Customers -- "go west young man" was a battle cry that led to
waves of settlers in the expanding frontier.
4. New organizational and management practices.
a.
Vertical integration.
b.
Horizontal integration.
c.
Increasing
internal
complexity,
facilitated
through
organizational innovations such as multidivisionalization.
VIDEO DISCUSSION POINTS -"Money and Power" clip on the Transcontinental Railroad
1. Railroads were the next great technology after the steam
engine, and helped to make the US the world's largest economy.
2. By 1860, 30K of miles had been laid down.
But this was
entirely in the eastern half of the US, so a decision was made to
build a transcontinental railroad.
3. This eventually became the largest project (the "moon project")
of the 19th century, and railroads became the biggest employer in
the US.
4. The federal government was instrumental in helping to sponsor
and fund the project, which introduced an important role for
nonmarket strategies (eg, using lobbyists).
5. The scale and scope of the project led to various
swindles and congressional payoffs by people like Durant.
stock
Question: What does this suggest about the prevalence of scandals
and slimy dealings during boom periods?
6. In the end, the project was successfully completed, and one
could move coast to coast in one week -- "instantaneous" in that
day.
POST-1900 INNOVATIONS IN BUSINESS ORGANIZATION
1. Increasing elaboration of the large-scale corporation through
internal organization innovations.
a. The multidivisional form.
b. "Matrix" forms, etc.
2. Post-WWII.
Proliferation of American multinationals.
3. 1960s.
Focused on increased
through "conglomerate" mergers.
4. Mid-1980s.
diversification,
especially
The rise of the corporate raider.
1. The bust-up takeover, to undo what the 1960s brought forth.
2. Leveraged buyouts (LBOs).
The return to owner management?
5. Early 1990s.
1. Downsizing ("right sizing") -- driven especially by heightened
competition.
2.
Strategic alliances
opportunities.
--
driven
especially
by
technological
6. Bubble economy of mid-late 1990s.
a. The return of the horizontal merger -- telecom (MCI-Worldcom),
media (AOL-Time Warner), etc.
b. The rise of the dot-com economy -- MBAs with business plans in
their back pocket.
7. Post-bubble economy.
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FORCES LEADING TO THE RISE OF BIG GOVERNMENT
1. The increasing scale and scope of public works projects: The
transcontinental railroad was the largest project in the world in
the 19th century.
2. The rise of social regulation: The "progressive" movement in
the late 1800s led to new concerns with solving societal problems,
such as dirty food, dirty cities, dirty politics, etc.
3. The rise of economic regulation:
The first regulatory agency was the Interstate Commerce Commission
(ICC), which was created in the 1870s to oversee the
increasingly critical railroad industry and ensure "just and
reasonable" rates and equitable treatment of shippers and
communities.
Another important regulatory agency was the SEC, which was created
in the 1930s to restore confidence in financial markets.
4. Concern over the rising scale and concentration of business:
President Theodore Roosevelt, Supreme Court Justice Louis
Brandeis, and others worried about "the curse of bigness."
5. The New Deal: F. D. Roosevelt called for "a partnership in
planning between government and business, with government having
the right to prevent, with the assistance of the overwhelming
majority of that industry, unfair practices and to enforce this
agreement by the authority of government."
6. Keynesian economics: The publication of Keynes' "General
Theory" in 1936 argued for government intervention through deficit
spending where aggregate demand was low.