4-7-09 Southern Agriculture

- Ransom and Sutch, the institution of slavery has failedo Lead to southern poverty

- Problems with the storyo Ransom and sutch have a counterfactual

There is a better set of instituins, but they are NOT specified The freedmen, could have been better off if the south hadn’t turned to

sharecropping and country merchant systemo Ransom and sutch institutions are not 100% to blame

The country merchant is not the bad guy they are being made outo Rehash of the Agrarian discontent story

- Country merchantso Country merchant wouild not have been able to stick it to farmers if they

didn’t have monopoly?o Cost to entry?

Easy to start up a new store Nuermous entries and exits in post-war period How to find out information about farmers?

Figure out which stories are profitableo Potential entrant comes from somewhere elseo Comes from local farmer who does have local

information If the country store is profitable, the country merchant would

fend off potential entrants by lowering prices and cutting profits

Country merchants don’t have the power ransom and sutch haveo Merchant interest rates

Cost to funds may be high Charges a somewhat higher rate Its high but its not as exporbatent at first glance based on the risk and

the cost of merchants Landlords cut in on the marchaqnt’s business

landlords could cherrypick prime prospects leave country merchant with bad farmers] they do this

landlord may borrow merchant, and then extend to all of tenants there are various other arrangements that would focus upon

farmers who did borrow did not borrow that mucho further true that indebtedness did not predict crop mixo famrer who borrows is not more likely to put money into cotton rather than

farmer who did not borrow it is not a good explination for behavior of farmers even if there is a monopoly, it is nto a good idea to effectively deal

with the merchantso another argument:

1

o implicit assumption that sharecroppers are trapped farm the same piece of land year after year, after year record shows theres mobility of sharecroppers

move from tenant to tenant often simply flee

sharecroppers are not the serf you can make farmers only so miserable until they leave

- bottom line of counter arguments: o merchants could not have forced overproduction of cotton to extent institution

requires south did grow a lot of cotton and overproduced during 1860s why?

Farmers must be willing to choose so- Western farmers aspire to be commercial farmers- Same thing with southern farmers

o Role of merchant is reversedo Not forcing the famrer to produce cotton

Bankrolling farmers to gamble on cottono A few farmers won

10% of land owned by freedmen They were making a reasonable decision rather than subsistence

farmingo Lien is not an instrument of coercion, but uses the crop to secure the loan

Initaiatiive is to secure farmerso Gambling farmers and merchants to explain farmer overproduction of cotton

Nothing to be explained in post-war south- Labor market with absolutely no assets

o All they have to sell is labor powero No physicial assts, no financial assetso If you throw this financial description into labor market, what do you think is

going to happen?o These people won’t be fabulously wealthy,o If you start with nothing, 30 years down the road, many will still have nothingo Given this sudden dumping of 4 million of people, the performance of the

south is perdictable- This is an indictment of the federal government

o Should have had better freedmen’s bureau- There is a grain of truth in Ransom and Sutch, but it is overblown

o it can’t carry the entire weight of the institutional storyUpland Farmers

- southern culture is dualistic- majority of white southern famrers

o only marginally involved in staple productiono those who live in up country and are oriented towards subsistence production

- Upcountry

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o main obstacle towards subsistence farming was lack of entry to marketso cotton would grow in these areas but there is no point, since you can’t get ito these shift, after the civil war, into cottono why?

A few things happen that make it possible for upcountry farmers Transport revolution comes to interior south Prior to war, only one rail line into upcountry

Railroad building boom in upcountry There’s a technological change in agriculture

This is the availability of phosphate fertilizers that are mined in south Carolina and florida

Railcars are filled with fertilizer one way in upland, allows old land to continue in use

o can remain in cultivation if its used year after year phosphate fertilizers cause cotton plants to grow more rapidly

o important for upcountry areas, where growing season is shorter

o has effect of enlarging cotton belt shortens harvest season

o ripening of cotton tends to bunch upo harvest time is shorter

upcountry farmers could now profitably produce cotton changes snowballed

railroad got denser more faremrs got into process phosphate fertilizer fell

o growing of cotton fell upland areas change

country merchants began to move into areaso previously, they would not have been able to make

moneyo most of these small farmers own assets, they have

money to secure loano cotton/corn ratio increases by factor of five in upland areas

increases by factor of less than 2 in cotton beltThe New South

- Period after reconstruction up until WWI- Expression that became current in 1870s under southern boosters- New south bootster

o Give it new structureo More diversified agricultureo Industrial baseo New system of citieso Want south to shed colonial relationship with rest of country

Should not need to import technology

3

Should not neet to borrow from north Southern owned capital and technology

- How did it work out?o South did dvelop rapidly with industryo This started from a very low baseo South remained far behind rest of countryo It is simply fact

If you start at near zero, the south looks pretty good If you stack it up against rest of country, its far behind

o In terms of urbanization, urbanization rate in 1860 is 9.6% 1920, 28% 60 years, triples urbanization rate Problem is rest of country, by this time is at 52% Number of cities, south does well

1860 South has 119 cities 1920: 643 But rest of country is doing well. In terms of larger city, south

isn’t gaining any ground at all Large southern city in 1860: new Orleans, by 1890, no

southern city is in top 10 in USo Southern manufacturing

Extremely high growth rate 7% Manufacturing capital, number of wage earners, bill, output, grew

faster in South than rest of country Productivity grew faster in south than in this period 1920: south still has only about 13% of the wage earners in US This compares to 18% of wage earners alone

o Southern industry is still only small part of southern economy and very small part of national picture

- Southern citieso Coastal Port cities

Southern ports overwhelmingly devoted to cotton New Orleans

o River port Memphis

o Exceptions Richmond Industrial center

Not a cotton centero Changes

Articulation of hierarchy of cotton service centers Cotton service cities:

o In post-war period, cotton cultivation spreads rapidlyo Even the plantation belt is specialized more heavily in

cotton production

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o Phosphare fertalizerso Spread of large commercial cotton gins

Previously, all gins located on plantationso Now in small towns, and accessible by anyone for fee

Introduction of cotton presseso Cotton-seed millso Compressed cotton baleso Used in conjunction in shipment by railo Used to compress to half of original size

Cotton seed mills Produce oil from cotton seeds

o Post-war period, railroad building boom in south In 1890, 90% of all counties in south have new

railroad Cotton producers can be virtually anywhere in

south They don’t have to be anywhere near a river Much of the cotton in the 19th century does go

by railo What happens in the urban system of the south

At the lowest level, there are a large number of market towns

Typically have a cotton gin On the order of 4,000 persons or fewer Cleaning, ginning, bailing cotton for shipping,

trading cotton Also have commericial services, stores, Reason for being is cotton trade Within a days travel of cotton farmer Country store that farmer frequents

o Second order of urban place has a cotton press and cotton-seed mill

Also Has cotton gins High order places have lower places plus more These take off around 1880 By 1930, over 500 presses and mills

o Why the sudden interest in cotton-seed oil? Cotton seed oil is a good subsitutute for other

vegitable oils Became economical for people to go into

cotton seed oil business Olive oil went up sharply in post war

periodo Market of a press of cotton seed mill had 25-50 miles

One press could handle up to 30 gins

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o Around a 2nd order city, small market towns that had gins

How does cotton move?o Farm to small town where its ginned, packed into baleso Goes to second order city where its pressed

Shipped to large city Large cities

o 29 of themo Dallas-fort wortho Houston galivistono New Orleanso Atlantao Memphiso Rest of the cities are waypoints

They are then shipped to big city area Atlanta

o Small city in 1860o Moves onto large city list by 19th century

New burst of growth atlanta Richmond

o Old manufacturing center Holds on with tobacco, flower, iron and steel

North Carolina tobacco citieso Durham, Winston

High pointo Becomes known in furniture trade

Tampao Center of phosphate and fertilizer production

These industries don’t have value added Low skills High tech industries struggle in post war period

Industrial drive is under the idea that processing raw materials should happen in the south itself

Pronounced gap between south wages and north wages This applies, in particular, to unskilled labor

o The gap is largeo It is persistent

Gaps in north in place to place However, there is a notable gap between north and south

o Unskilled wages gap in south Black wages gap?

Does NOT appear to be true If there is a black white gap, its very small

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Discrimination in employment in south was primarily in terms of advancement

Distribution of jobs, there is a clear difference At the bottom of the payscale, there is no difference between

black and white wages North is tied into world labor market

Wages in new England and Europe tend to move together This is not true in the south

o Insulated in north and rest of worldo May pass through south and stay there

Foreign born is lower wages Cheap labor in south

- Southern industryo Southern industry is labor intensiveo Low wage, low skillo Imported technology

- Best known: textile industry o Have interesting parallels with GB and new Englando In textiles that industrial revolution comes to south just like new Englando However, great Brittan and new England very much leaders

South follower Coming into markets that are already filled

o Textile workers: 100,000 workers by 1900 Second largrst industry, behind lumber Where are these mills?

Georgia, Carolinas, virgina, Tennessee, smattering other southern states

Widely dispersed Southern mills are generally well-equipped

Newo Buy equipment from northern textile machinery

producerso Their northern competetors are using the older

machineso Ring spindle

90% of southern mills have innovation 70% in new England

o Buying off the shelf equipment Pre-war textile industry in the south

o Couldn’t compete with new England insustryo South was much more successful in exploiting labor

costso Helps that textiles are mature technology

Could buy high technology off shelf Benefit from cheep labor and standardized equipment

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o Southern product hierarchyo Southern firms are smaller

38% size of new England firm Almost all southern firms incorporate,

88% soutehern incoporate compared to 62% elsewhere

cheep stock sold to local investors almost everyone invested in local mill

80-90% of southern textile industry was locally owned Many of these textile mills were owned and operated Collective venture

o Building new workforce labor Starting from zero Stable labor force that accumulates skills over periods of time Marketing

Solved heavily by outside agents Agents of textile trading companies dictate what southern mills

will produce Very responsive to outside agents Southern industry does very well

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NEED NOTES 4-9

9

4-14-09Big Business in NE

- New organizationo corporation

- Urbanizationo Many of the cities become identified with industry

- The economic landscape changes rapidly in the course of a generation, change from rural agrarian society to urban/industrial one

- Emergence of big business and industryo Before we track big business, what does it mean?o Big means

quanitiatively big Manufacturing/large firlsm going from a million dollar assets to

hundreds of millions of assets They mean more than just quantity

Capital and costso Obvious observation:

Larger pools of capital in firms of 19th century Firm of 1860 involves personal wealth of soamll

group of peopke Even new England textile mills were closely

held This limited size of individual firms

Entry and exit was quite easy given the small sizes of firm

Individual industrialists tried numerous industries Small size was associated with fluidity and mobility

o Almost everyone was a businessman in some sense Step to industry was not a quantum leap, it was

from running workshop to running slighter organization with 20-30 employees

o Skip to 1890 Firms are vastly larger

Not closely held anymore Entry into big business is difficult

Not change from apprenticeship to larger firm, massive gulf between two firms

By 1890, new class identified with new creatureo Cost structure of industrial firms changes dramatically

Total costs are made up of variable costs and dixed costs

These are commitments Fixed assets whether you operate or not Pay to employees, whether you operate or

not Variable costs=0, hourly labor and materials

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In 1860s, fixed costs were small, variable costs were largest part

If business wasn’t going well, simple to shut down What does this mean? Shop is probably

barn/first floor of house You don’t have a lot tied up in fixed assets

Change to 1890 Bulk of costs are fixed costs Typical of manufacturing firm to have well

over 50% of costs in fixed Its hard to stop and start production

o Andrew Carnegie: its cheeper to run at a loss per yard or ton than to shut down, run at a loss for months or years

This is a massive change of thought Scale and scope

o Geographical operationso Firm in 1860 or 1865 was highly localized

All production facilities were localized Marketed through small number, perhaps one,

wholesale outlet World of textile producer was quite small, can see

all of business from his office windowo After civil war, growth in transportation network

Situation changes dramatically Many industries become national in scope Become physically located nationwide

GE had sales operations in 23 locations by 1905, as well as various manufacturing organizations

Exploiting transport facilities where to put operations

Looking out of office window and seeing whole firm is gone

o Individual firms diversify into many operations Typical textile firm of 1860-865 may sell throguhn

external wholesaler Big business will have internal sales organization

Will not just manufacture, but market and sell product

Will also have sourcing and procurement Internal organization and management

o Managers are owners and visa versa Some owners are managers

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Every succession of ownership requires someone else finding owner for business or otherwise it ends

Business is just a cloak people put on for the sake of doing business

Everyone knows its smith or jones, eteo Hallmark of big business is separation of owners and

operators Technology of 19th century is beyond that of

individuals New organizational structure Business becomes corporation Owners typically hire professional managers

This is a transition, far along from 1901 to 1910

o Found that majority of top managers were hired outside or worked way up through firm

Were not organizers or owners

Business schools emerge by 1910 By 1860, managers were previously exactly

the same, but by 1910, typical to find top managers who are professional

Conspicuous change Development of managerial hierarchies

o Many internliaze sales, prodcurument, etc

o There are people in charge of each department

o Organization chart changes By 1910, industrial firms have quite

elaborate industrial hierarchieso In 1860, business is just a common alaogy as being a cloak

for people to do business, a “doing business as” Personal reputation that leads to money lending

o In large corporation, dealing with impersonal organization Dealing with faceless representitives, especially true

on sake of big business with employees Work becomes impersonal drudgery

Internal and external dealings of firm become far too impersonal

These are faceless organizations and resent change in business

Farmers don’t like it, laborers don’t like it, and government doesn’t like it

o 19th century is period of transition

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These changes come at different speeds for different firms Many firms hold out with different types of organizations

o Andrew Carnegie kept his steel firm as a partnership, it was not a corporation

o Edison, in late 1880s, took some stock of the organizations he set up to sell electrical equipment, set up a rats nest of groups selling equipment, needed his organization to be cleaned up

o Emphasize: cumulative effect is dramatic change in economic landscape

There is no industrial corporations in 1860, there are many in 1890

- Big business, and how it came to beo Predecessor: big business and railroad

Railroads are the first non-agricultural big businesses Prior to civil war, largest railroads are much larger than any

manufacturing firm We’re talking millions of assets, larger by factor of 10 or 20 Railroad securities are traded on stock exchange

o Few industrial organizations traded on exchange prior to 1895

Railroads have special characteristics that industrial companies can learn from

Facing problems that industrial firms will face Problems

o Railroads have high fixed costs Track Bridges/tunnels Land Rolling stock Service facilities

Stations Freight yards

o Fixed costs are far more than 50% of costo Railroad is geographically dispersedo Financial transactions are geographically dispersedo Scheduling is crucial

More than track use Workforce needs to me minutely scheduled Maintainece needs to be scheduled Big operation to keep everything scheduled right

o Railroads face problems with market structure Railroads are monopolies in small cities Railroading, in large cities, are oligopolies

In large cities, like NY to Chicago, competition is ruinous

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o They’ll run the price down, get into a price war, go down to point where no one makes money

o Ruinous competition becomes endemic in industry

Railroad industry becomes first industry that becomes victims of widespread pooling

Industrial firmso Aspect of railroad: workforce

Many different occupations, many skilled Target for collective action of workers, Will be foreshadowing fo what happens to dinstrual

firms, like Carnegie Thus, big business is new to industrial firms, but not to American

economy, industrial firms can learno Many managers and organizers come out of railroad

industry Carnegie came out of railroad industry Railroads were first in business, they provided the

school for lots of entrepreneurs who adopted it to branches of industry

Alongside railroad, telegraph Wherever railroad tracks went, so did the telegraph We have a nationwide telegrah system by 1870

o 1876, telephone is invented, but for number of years, Telephone system is small

o 1900, 1.3 million telephones in entire country If a business wants to communicate with HQ,

they’ll send a telegram instead of using a telephoneo Industry to 1895

Roots to bigness Vertical integration

o Sequence of productive operations Within same stream of productive operations Pig iron and bar iron producers merge

Horizontal integrationo On any particular rung of ladder, firms doing the same

operation combine Two pig iron manufactures combine

These are not mutually exclusiveo Firms will intergrate vertically and horizontally

Internal growth, with neither horizontal or vertical integrationo This is uncommono In most cases, by integration

Why do firms do this?o Primarily interested in bigness or marketshare

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o This turns out to be wrong answero Vertical integration, in vast majority of cases, firms

vertically integrate in order for firms to get marketing supplies and output

As firms grew larger, the firms needed steady flow of products to feed business

Perhaps you can’t run based on poor suppliers, you just decide to do it yourself instead of waiting on third parties

o Find iron ore to supply blast furnaceo Marketing needs

Textile producer sells through wholesaler, with established products

What about non-established products Pershibles Technologically advanced goods

o Requires demonstrationo Special skills and ongoing

maintaineceo May require fine-tuning to fit to

factory In other cases, products are dangerous Manufacturer needs to tame measures to

ensure buyer doesn’t kill himself Some products were expensive and

manufactures needs to provide credit Wholesalers do adapt and marketing

forward Electrical companies

Two major utilitieso Edison electrical lighto NYSEG

Isolated plant branch of industryo Where you generate your own

power, this is dangerouso Firms found out they needed to

provide demonstration and instillation not to kill people

These firms intergrated forward After 1900, auto companies forward intergrated

with franchised dealerships Meatpacking

Only way to ship beef was to ship it live, shipped to eastern markets and butchered by eastern cities

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Very inefficient, very inefficient to ship live animals, 50% of weight is waste

o When you ship live animals, many die on way, and you cannot realize economies with central stockyards and meatpacking plants

Beginning in 1870s, refrigerated railcars come into use

o Swift System: Had to set up entire distribution system of refrigerated warehouses throughout country

Purchased live animals, slaughtered in Midwest and sold through warehouses refrigerated throughout country

When someone is successful, people will continue to copy it, phillip armor

United fruit company Wants to sell bananas

o Have to be refrigerated in summer and heated in winter, and needed to be shipped quickly

United fruit had to control distributiono Lent new phrase: “banana republic”o Imperialistic aspects of united fruit

in central America all of these companies often itnergrated backwards

too swift went back to the cow all up to the

refrigeratoro new technologies overwhelms distribution

one example: new process grain mill came in 1880s produced more product than traditional mill when they were used to process oats,

overwhelmed systemo decided to go direct consumero created breakfast cereal industry

put in box with picture to brand

manufacturer has new brand sales industryo last motive for vertical intergration: purely defensive

Carnegie, until late 19th century, did not produce steel products like nails and wire

Sold large chunks of steel to manufactuers

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Carnegie’s customers decided to intergrate backward into steel production

Carnegie, as a defensive measure, decided to intergrate forward until competitive move arouse on part of other firms

Horrizontal combination, in depth Comes about as result of ruinous competition

o Firms don’t; just say, wouldn’t it be great if we controlled the market

Number of manufactuers enter industry, sometimes new industry All try to produce in volume, costly new plants As market nears saturatiuon, begins to vigiourously compete with

one another They lower price to maintain marketshare Everyone’s cutting price, view profit as unsatisfactory

o View as fixed planto Firms in industry try to colludeo Early forms of collusion were called pools and associations

Gentlemen’s agreements Principles of agreement: work out some

arrangement for dividing up market and holding up price

Pool referred to pool of revenue Frequent way to divide up market was to

give each firm quota Divide output from firms to prop up price If produce over quota, need to pay tax to

other firms in poolo Problems with pools

Questions of legality after 1890 with Sherman anti-trust act

They don’t work There’s no formal enforcement mechanism

and there’s a strong incentive for each firm to chizzle

o Tell company to cheat under table and sell above quota

o Everyone does this and they fail Even if the pool is successful, it may attact entry

New firms come in and profit from pool’s high price

You can’t enforce pool Trust

o Legal deviceo Gives trustees control over firmso Two sets of players:

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Trustees Representatives of leading firms of industry,

initiators Stockholders of firms that will combine How does trust work?

Stockholders give to trustees give voting rights associated with stock

o Legal authority to vote stock Trutees give shareholders trust certificate

o Get share of profit of all firmso Give no voting rightso All voting rights reside with trustees,

control firms even though they don’t outright own them

Why would anyone do this? Stockholders feel better if there’s central

control over industry, more profit to be made

Pools are insufficient, so trust is best way to implement central control over group of friends

Trust was invented in 1881 by lawyers of standard oil

Chandler counted 8 trusts By the time trusts took off, there was a better tool:

holding company Trust lent its name to anti-trust leglislation,

Sherman anti-trust act However, the anti-trust laws targeted big

businesses that restrialed tradeo Holding company

1889, new jersey enacted innovative corporation law

Permits coporations operated in new jersey to hold stock in other corporations

Previously, you could not do this unless you got special state leglislature permission

Allows company to purchase assets with own stock Other states copied holding company legislation

Here, there’s three sets of playerso People who set up holding companyo Stockholders in member firmso General public

Stockholders in holding company in response for holding company stock

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o Will give up ABC manufacturing for XYZ manufacturing

Would get preferred stock in holding company and agree often times not sell stock

Holding company shareowners often times want cash

o Where does it get cash? o Sells stock to general publico Lists own securities on stock

exchange, general public buys common stock, buys expected future monopoly profits

Many of these comapneis targeted by anti-trust were holding companies

Companies formed in 1890s were operated essentially as pools

Brought under same umbrella but opertated as individual subsidiaries

Didn’t do much to cut costs of productiono Intergrated business operation

This is the case where a trust or holding company does implement central management

Where all production factors are raitionalized High cost producers are shut down, low cost

producers expanded Many combinations did not expand to this stage

Potential for central control was not simply enough

Did not implement central mangment and many failed

How wide spread up to 1895?o Very common

Many manufacuters use these tools to dominate market

o Merger waves Combination was gradual until 1895 First wave: 1895 to 1904, disappearance of over 3000 indivudal firms into

mergers Annual capitalization of mergers is about 700 million per year

Ways mergers are measured are counting amount of firms going in and seeing how many come out

firms coming out are measured by capitalizations peak years, 1899-1901, well over 1000 firms disappear, and firms

resulting are capitalized at 2 ¼ billion which firms?

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o Household names, standard oil, Eastman Kodak, singer, dupont, international harvester

Lull from 1904-1914 Second wave 1915-1920

Fewer firms participating, but annual capitalization is about 600 million dollars, meaning larger mergers

Who participates Almost every branch of industry Bulk of activity:

o Foodo Chemicalso Petroleumo Metalso Machineryo Few industries account for ¾ of capitalization

disappearances How important are mergers

Ratio of mergers (capitalization) in 1895/1907 Divide by industry (capitalization) in 1904

o Merger activity is standardized by industry For primary metals, this ratio is over 2

o Firms are merging again and again and againo Stream of mergers is larger than industry

In other industries, its as much as 50% Substantial portion involved in merger activity

4-16-09

Big Business- Pre civil war, big business is railroads- After, Industrial companies begin to grow to caps of 10s of millions of dollars- Two paths:

o Vertical intergration Take on a larger range of operations of a larger manufacturing sequence

o Horizontal intergration Buying companies that do the same thing Done due to competition

o Creating market dominance Pools

No way to hold up because people cheat Trust

Invented 1881 Group of promoters of industry are trustees Take voting rights from stockholder and give to trustee

o You don’t give up ownership You get trust certificate, which is a portion of combined claim of all

firms

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Distribute profits according to trust certififcates Collection of forms will make money for any particular owner rather

than if it were operated independelty Holding company

Trusts were invented because holding companies were not yet in existence

When holding companies came about in 1889, truss went out of use Promoters start new Holding company

o Sell stock for cash to publico Trade stock in individual company for that of holding

company, allowing holding company to acquire ito If you don’t want stock, holding company may use cash

If holding company is able to gather enough shares, holding company takes over

Voluntary aspect is gone, and promoters have legal control over firmso This sequence went from 1870s to 1890so Some companies instituted centralized management

They rationalized the firms to maximize production Genuine central management, not just organizational structure However, this was a very rare step

Most holding companies were operated as poolso 1895: merger mania

Number of firms combine, one firm comes out of merger Three firms in, one firm out Way to measure merger is to count disappearances

o Two sorts of mergers Consolidations

Direct dissendents of horizontal intergration Firms voluntarily merge into one entity

Acquisition Firm buys shares in other companies with attempt of gaining

controlling stake to take over In first merger wave, most firms consolidate Second wave, mostly acquisitions

Why?o The easy mergers went first during the first waveo Second wave was buying holdout smaller firms

Where? o New Jerseyo New York o Delaware

Headquartered in most of those stateso How well did merged firms do?

If you invested in these companies, Would you make a lot of money? If you invested in portfolio, you’d make about 7% return If you invested in bonds, 6%

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This was suprising to investors simply because they expected monopoly profit

This is a story heard over and over, land, railroads, etc Monopoly profit didn’t really materialize When looking at common stock return, Many mergers did quite poorly

Of 13 companies, Return over five years, annualized, 5.9%o Four were superstarso Six lost

Profits and company performance? Researcher: As of 1918, of 328 mergers, 49 were successful, meaning

they made normal profitso 9% which were limping successeso 43% were dead

Market share: Peak market share usually after day after merger

o US Steel: 62%, 10 years later 52%, 10 years later 48% o Standard oil, 90%, 12 years later, 80%

Those are the winners, those are the ones that do well There were a large number that did great but disappeared after a short

while: o National Cordage

Formed in 1887 in initial consolidation 1892, controlled 90% of all cordage mills 1893, bankrupt

o National salt Merged in 1899, bankrupt 1902

One more way to look at merger activity Common way to do this, look across all industries in US Of all industries in US, how many have concentration ratios greater

than 50%o C4: output of top four firms divided by output of industry o 1935, concentration in US, measured by same method, 24%o 1992, 26.4%

All these corporations, why don’t they have bigger impact on aggregate structure

o Theres still a massive number of small businesses who chip away at market share

o Its tough to maintain market powero Its tough to maintain 90% of market

Only few instances where dominating market share was successful

Alcoa controlled all the bauxiteo Is there a good economic rationale for merging

Remember, over 50% of merged entities go bankrupt or limp along Economies of scale?

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Often times, not the caseo Belief: Large company will have much lower unit cost

In many industries, this is the not the case, they form diseconomies and have issues producing

Mergers formed where they didn’t have business Barriers to entry?

May be that the merger has no particular economies of scale, but can keep other firms out

o From economic perspective, not good rationaleo From investor, great rationale

Distinction between successful firms and not successful Effective central leadership Even if you have economies of scale, doesn’t mean you’ll exploit

them In many cases effective central leadership doesn’t happen

o Whats the point of bigness if no central leadership Need to rationalize member firms to maximize productivity

o Why mergers and bigness came? In many cases, no fundamental reason Results from a mania/heard reaction Once a few mergers are done/successful, everyone in sight jumps on band

wagon Pushed forward by predatory promoters Whether or not it’s a successful business This is an explosion of financial activity Consistent of historical context Many investors were looking for monopoly profit and no idea if

they’ll be realized Larger list of potential explanations

Substantive economic changeso Increase in size of American economy

Late 18th century, population grows quite rapidly Incomes are going up quite rapidly Large potential market Large market for mass production

o Transport network completed by 1890 Intergrated network Through shipping with any part of rail network It was convenient and cheep

o Post civil war, distribution system evolved quickly Distribution became much more efficient More convenient and cheaper to use it

o Emergence of highly organized capital market Prior to 1890, very few companies were listed on stock

exchanges

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Very difficult to create holding company without active and liquid stock market

Mergers involved use of stock market, sold stock to general public

Chicken and egg problem Was it the financial institutions that created

mergers Or mergers that warented financial institutions

o 1890, there’s a lot of money that needs somewhere to go American population is looking to invest somewhere Industrial companies offer them an option

o Change in legal environment Anti-trust laws

Intiated in state levels and moves to national levels

One part of merger movement is rush to get in under the wire

Merge before anti-trust actions get under ground

Great deal of confusion with anti-trust EC Knight Case in 1895, brought against sugar

trust Manufacturing corporation is beyond reach of

Sherman acto Sherman act addresses collusion, not

corporations 1899, ruled illegal any explicit agreement

among firms who price fix Early Sherman: big firms are OK, but small firms

colluding are not You’re better off getting merger done now as

one big company instead of colluding One last change: changes in industrial technology

o Specific changes that involve massive economies of scaleo Technological change snowballs after civil waro Many changes are immaterial to bigness

In certain industries, technology requires massive plants to have low unit costs

Focus: Mass Distribution system Only recent that we have something that resembles mass distribution

o Large number of sallers to large number of buyers Firms are coordinating massive flows of products to market Result: attempt to get from factory to consumer much less

o Speed in which goods flow through system is vastly increased From months to days

o Its much cheaper

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Which goods are we talking about?o Pershiables and raw materialso Intermediate productso Finished products

All parts see dramatic change All: external technological progress

Steamships, telegraph, telephone, In manufacturing, the technological progress is within firm itself

o Carnegie steel, besimer progress Wholesalers distribution structure changes

Typical wholesale firm was small, sold one type of good Wholesalers took physical delivery, but only took commission

o Manufacturer gets payment when wholesaler sells goods Consumer products Wholesalers operating out of city

o Retail stores come out Agricultural wholesalers send sellers to countryside These are small firms, few $100,000 per year

What happens after war Wholesalers begin to exploit opportunities from railroad Grain storage

o Elevators around railroad tracko Small, independent grain farmers mixing grain together in

elevator Change from previous way where farmers

indepdnently sold it Needed grain to be standarzied and weighted By 1874: grain standards are nationally standardized

Commodity exchanges use the exact same standards for agricultural products

Standard commodity descriptionso Telegraph contracts

“Grain to Chicago by next Tuesday” Merchants begin to exploit possibilities

o One development: commission business changes to full ownership of products

o Taking ownership from farmers and selling immediatelyo Grain dealer in Iowa may learn price is going up in NY

Using Ny commodity exchange, sells wheat he bought in iowa

o Why did merchants first use commission? Because of long holdover

o Now, its outright purchase because turnover is very quick Other merchants take advantage of quick shipping and improved

communications

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Some don’t even touch good, ship straight to retailer from manufacturing

o Jobber Merchant who takes legal possession of good Jobbers are wholesalers who can make more money under new system They don’t worry about inventory, they’re not piling up at these businesses How do jobbers work?

Set up distribution networkso Extensive marketing organizations

Reverse from traditional wholesaler Retailers would come to him once a year Now, Jobbers go to the retailers

o In addition, they can stay in constant touch, telegraph back orders and understand what they should be pushing/discounting

Sometimes, set up own manufacturing firms Jobbers need to move goods through organization as quickly as possible

Traffic departmentso Moving goods from collection of sellers to buyerso They try to never take physicial possession of goods, they

don’t need a large warehouse If you can do it in one good, say dry goods, you can diversify, to say,

hardware If you learn the tricks to particular trade, add commodity lines Full-lines with respect to general store, sells everything general store

would want to stock 1870, retailer would have made one trip once a year to place order By 1880s, has one wholesaler that shows up to store

Jobbers became very big One of the largest: AP steward, tens of millions of dollars

o Jobbers Hardware firms, in 1890, handled about 6000 different items, and purchased from 1000 different suppliers

Moving goods through organization: stock turno How many times stock turns over in a year

Heyday of wholesaling in 1880s Highest percentage of wholesalers, 1880s

o Mass retailing emergence Department stores Mail order houses Chain stores

Market for retail goods in large cities becomes so large that you can order goods by trainload

Don’t need wholesalers anymore Department stores

Often begin as adjuncts to wholesalers

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Another route to department store: dry good store or clothing store that added more lines of goods

o Business model: large volume at small market Concerned with stock turn, concerned with goods

moving rapidly through business Have large sales organization on floor itself

o Mass retailers use lots of advertising Display advertising Newspapers Grows up alongside dept store Focus on large cities

What about rural customers? Mail order company

o Montgomery ward By 1884 montgomery ward sold 24,000 items Competitor: sears

1891, 138,000 in sales 1905, 3 million in sales Follows same model Large catalogues selling virtually everything to

market Problem: physically controlling flow of products

o Highly mechanized, o Sears had finely tuned system scheduling complex operations

in large facilities 100,000 orders/day in sears warehouse

Chain stores Grew up in small towns and suburbs

o May not have large enough market to buy in one place, but if you have five or six stores in city, its justified

o Chain stores originally sold team diversified into coffee and groceries

A &P Woolworth’s : non grocery

Got a late start, but took off in early 20th centuryo Ideally suited to automobile and growth of suburbs

o There’s some overlap to three kinds Department stores become chains Mail order companies open stores They begin to blur

o Large consumer market begins to cut out middleman Compete with wholesalers Wholesaling on shelf of market goes down

o Distribution system of 1890 looks much different from the one of 1870 Jobbers rather than merchants New types of firms

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Stock turn is much higher in 1890 than 1870 Speed becomes focus of distribution activities Stock turn methods are easily expandable Tend to spread quickly through areas of distribution system

o All of this is important because it reduces distribution costso More people to whom you can sell too Bigger price, total cost

- Technological changes within industrial firmso Railroad, telegrapho With industry, in addition to these, are new changes wthin the factoryo Industrial firms are concerned with speed of materials through factory

Stock turn, in case of distribution firm Analogous turn is through-put

How much paterial moves through physical plant in a given year Key fact in industry is various industries vary dramatically In nature of industry or technological progress

o Oppertunites to increase through-puto In some industries, throughput is ongoing

In other industries, there’s a once-over change and then will level off

o Four types of general industrial processes Refining or distilling

Adding heat Chemical progress

o Petroleum brewing Pre Civil War: Main constraint in industries is amount of energy you

can useo Size of vat is constrained

However, after civil war, intorudction of coal increases energy usageo Petroleum, beer

Mechanical

Operations performed by machinery replace human hands Textiles replace spinning previously done by people’s hands Follow distinctive path

o Massive innovationo Then only small incremental improvements

Textile firms don’t expando Replicate factory

Don’t speed up materials through each spindles Cigarettes

o Dramatic increase in speed in postwar period, but after cigarette machine id developed, small increment

Metal making Iron and steel, copper

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Metal working Requires typically a number of distinct processes Large number of individual operations involved in producing a gun

Each of the firms is relatively small4-21-09

Big Business- Metals

o Bessimer converter By 1870s, with introduction of besismer process, which convert iron into

steel, iron mills convert themselves When new iron works developed, intergrated iron and steel factories

designed from ground up Flow of materials was fundamental concern when designing

massive firmso Flow of materials new problem

In pre-war period, individual producers were small People carried things by hand

o You can’t do that with a bessimer converter, when you’re dealing with many tons of molten metal

Technological change comes after civil war and its dramatic In early 1870s, as these changes are happening, big blast furnace

makes 70 tons a week 20 years later, 1000 tons a week

o Edgar Thompson works: 9 furanances- Metal working

o Great many problems in metal working solved only gradually Mass production is only coming into sight by the end of the century

o By later 19th century, possible to produce sewing machines and repapers in 10,000s/year

Movement to large machines not complete until 1914o Problems with metal working

First, numerous materials with different properities Rifle has many different materials

o Irono Steelo Brass

Second, Numerous different operations Casting, milling drilling Many of the machines required high precission, difficult to make

close tolerances machines Most products of metal working required assembly

o Gun has three separate assemblies with different components

o Have three flows of materials, then those have to come together to build uniform product

Ideas evolved fairly slowly

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Individual machines were obsticles in themselves Required high percission Turn out intercately shaped metal pieces Almost endless possbilbies

o Electric machines could be rebuilt with new materials, new sources of power

New materials affect new machines, Opportunities for rearranging in factory floor

Originally, floor organized based on function Metal working firms began to sequence machines based on

material o Once they start doing that, fine tuning of machines process

Imcramental changes in factory design and fine-tuning

Each of the changes present obsticles Not until 1914 does the American system present

the last assembly One further difficulty that is less conspiricus

Organization that coordinates in metal working shopo In late 19th century, metal working shops were chaotico Lots of different of orders in process in the same timeo Materials would literally get lost

Not just technical in metal working, but scheduling and orderso Systematic management

- Chandeler’s take on changes of late 19th centuryo Emergence of big business is associated with technological changes and with

mass distribution Many people focus on technology

o Chandler has different approach Chandler takes technological changes were exogenous

They were the given Trying to explain emergence of modern, multi-functional corporation Bigness mostly failed Success in bigness was rare Why does bigness work?

Combining mass production and mass distribution Doing this in industry with large economies of scale Requires installing appropriate management structure

o Modern structure Bigness is given, bigness working is not

o New modern strcture Steady flow of correct materials Intergrated functions Hierarchical management structure

Before, just the people at the top and people at bottomo Factory floor was very close to owner

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Pool: headquarters had general managementso Headquarters didn’t do anything

Modern: o Org chart, top management, junior management specialized

by function People who manage firm no longer talk to shop

foremeno Group that provides information to top management, HR,

accountingo Thinks of modern industrial establishment as corporation

This was not necessarily the case Carnegie steel was a partnership until end of 19th centiry Ford was private until 20th century

From partnerships to corporationso Chandler, looking back, focused on technological changes

Gave opportunities for people to put together appropriate activities This applies to minority of firms in early 20th century Many become big and fail, some never become big at all

o The change, however, are very pronounced According to chandler, the changes should occur in industries with

massive economies of scale and with large transport costso This Is what chandler says, and it mostly works out

Big business thrives in industries predicted by chandlero Survivor principle

Case 1: Biggest firm in 1870 is the same in 1895 However, smallest firms of 1870 drop out

o Economies of scale realized 20 years later Larger firms are more efficient

Smaller firms drop out because they cannot intergrate economies of scale

This is NOT what chandler perdicted Case 2:

Same distrubutuon in case one, small to medium firms By 1895, small and medium firms are gone, only big firms left What happened? Technolgical changes in industry in interim

o New technoligcal changes new economies of scaleo These are industries that are explained

What gets and makes it to bignesso Technological change having economies of scaleo Firms exploiting the possibilitieso Setting up approipate management strucute which is the

new norm for the technology- Scientific management

o Many firms were having internal problems, problems keeping everything together

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o Development of new processes Systematic management Scientific management

o Bigness is newo Systemic management

Attempts to build up sets of operating procedures to ensure coordinated efforts to reflect and keep management goals

Keeping everything together Allows management to project goals for firm

Goals of systematic manamgnet Emiminate confusion and waste Make mangment more systematic and methodical Reestablishment of top management control

In practice Some of the firms produce standardized product

o Large number of copies of same modelo Some make customized good

It was this type of firm where orders come in and the processing of each order has to be individually planned

Management needs to figure out sequence of operations

If there are a lot of different orders, it becomes an issue figuring out how to fit order into workflow of factory

o Indications of problems in particular factory Work essentially getting lost in factory Inventories, work in progress when it leaves

workshops lost, workshops can’t doing work Managmnet spent much of time figuring out where

work in progress waso In economic terms, equipment in factory was underutilized

Material was being piled up somewhere else along the way

Work has inventory that is piling up because cannot do work

Top management is wasting time, fixing mini fires throughout factory

o What are the solutions to this? Systematic management was not that systematic Designed toolbox that mangment could use

Bits and pieces Systematic management developed control systems

o Planning group developed plan for factoryo Big board explaining order of products, where they were

Shop order systems were big paper trail

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Workshops could continue to send up paper back and forth between central planning office

When work was done, sent back and forth between central planning office

Innovation Use cost accounting as planning device Previously, accounting was used as

historical record, prime costs, labor and materials

From 1890s on, use accounting as way to project forward

o Systematic accounting is flow back and forth between central management

Systematic maangment, remember, is a toolbox, not a scheme Another tool used in systematic management is pay scheme

o Interest in performance of specific workshop and entire factory

o Gain sharining Minimum pay and then gain in share attributed to

performance- Scientific management

o Looks much more closely at individual operationso Looks at individual shops

It is a system Systematic management was a toolbox Scientific management is system of management restrictions

Who designed scientific management? Fredrick Taylor:

o Scientific management also known as Taylorismo Spent time at Midvale Steel, didn’t make steel, but steel

materials Type of firm that systematic management was

initially interested in Taylor moved to bethlemen steel and became efficiency expert

o Spread “gospel of efficiency” Large part of workers effort is wasted

As is a substantial portion of raw material that a worker deals with Wasting factory owners material Taylor hated waste

Taylor figured that there would be one best way to minimize waste material

Why is there waste?o Taylor thinks waste is attributed to:

Poorly motivated workers Use inefficient rules of thumb

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Unconvential ways of doing things, whether it makes sense or not

o Even if they were motivated, they would not be ble to do the job properly

o Managers don’t know how to manage properlyo Glaring lack of motivation and of knowledgeo Taylor believed men were doing as little as they can

If they were to do his best, he would be abused by his co workers if he ruined the curve

Why do workers soldier?o Lazinesso Belief efficiency causes unemployment

Taylor sees this as a fallacy If efficiency increases, pay increases, and there is

no need for factory unemployment Thus, he sees scientific management as good for

workers and employers Everone with a stake can benefit from

greater efficiency Definition involves a proper days work

You can’t see a proper days work because everyone is soldierng

o Taylor believes you can break industrial operations into fundamental movements Attacking proper days work to three individual movements

Job analysis Time study First-class man

o These three are the centerpiece to scientific management Job analysis:

Figure out elemental operationso Once unnecessary movement is removed, there is the best

way to do tasko What the worker wants to do is immaterial

What the worker wants to do is not the best way Any deviation is not allowed The worker does not know how to do job, and so

worker should adhere to that always Time study

How much work should be done in a day?o Figure out standard job time for task

Standard job time has three components:o Machine timeo Handling timeo Reasonable allowances

Certain amount of slout

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Suppose task is to consider two holes in piece of metalo Drill five seconds to drill each hole, 10 seconds of machine

timeo 2 seconds to pick up materialo 5 seconds to position under first, 2 under secondso Allow these times, adding a few extra seconds if the worker

fumbles, to drill in piece of metalo 27 seconds, for instanceo Central planning office would record this, an index,

First class man Is the man suited to best job

o Has no inherent superiority over another person However, with respect to particular job, he’s better suited to do job

than he is Explination of first class man with respect to pig iron handling:

o One of the very first requirements is that he be so stupid that he resembles oxen

o Must be trained to be pig iron handlero Taylor: you need to be sufficiently stupid in order to not

getting sick of your jobo Only 1/8 of pig iron handlers are first class

First class pig iron handler, moves 47 tons a day Very unfortunate choice of words Pay schedule set under what a first class man can do for a

sustainable time over a period of years without deteirment to worker

o These are the core of taylor’s thinkingo If you persue the implications of time study, job analysis

and the first class man, gives manamgnnt much greater control over the factory

o How the job is to be performed and how the job is going to take

You should know exactly how long it will take to fill the order Implication of taylorism:

As he did time studies, factories are very poorly designedo Moving machines in better sequence and spacing, lead to

better arrangements of job and factory Taylorism creates new information demands

Time requirements for each jobo Updating them, increase demands for planning work

Taylor was aware for planning work after he designed job study and first class man

These three central components Scheduled Index cards

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Used shop order system to implement flow of information to central planning office

o Inspection systemo Temptation to go through motions and shirk workstationso To do every motion as prescribed, inspection systemo As work progresses, quality of work is analyzed

Work is extremely distastefulo Perhaps before they had some interest in what they’re

doing o Completely gone under taylorismo In order for people to put up, incentive pay

People should get paid well if they play by rules Differential piece rate system, move to taylor

standard If you didn’t play by rules, show up with

reduced rate of output and your pay would fall accordingly

o Another idea is individual foreman is highly specialized Worker would respond to inventory, operation, etc. Foreman would no longer be a generalist

Functional foreman Taylor believed in order for system to work, you’d have to adopt

everything If taylor was hired to taylorized shop, everything would be adopted

o Spread of taylorism Taylor becomes efficiency expert selling taylor system Becomes president of American society of mechanical engineers

Used as forum to grow taylroism Taught at tuck school, at Dartmouth Taught scientific management at Harvard

o Deciples who would implement taylor system Watertown arsenal, carl Barth

Management education was just taking off in US Tuck school taken off in 1900 1920, 10 schools 1930, 35 Taylor now has school that sold gospel of efficiency

o It was a tough sell Not all firms implemented all perscriptios

Idea of knowing how much time is required for each task was appealing

Rationalizing factory layout, minimizing total time Some firms implemented central planning office

Lots of other pieces not faithfull implemented Research instuutes found that taylorism in picking and choosing,

but not systematic implementation

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Taylorism spread widely beyond industry Military

o Minimal training to repair complex weapon system This was appealing to military

Aborted attempt to apply to universitieso Physics departments

Excessive management by committee Pay based on longevity Tenure Inbreeding

Marketingo There’s one best way to sell vacuum cleaner

Some are good, some are lousy If you can identify first class seller, you can make a

script and replicateo Taylorism made quite a splash

Formally by hiring efficiency consultant, or informally

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NEED NOTES, 4-23

38

4-28-09FINAL EXAM: TUESDAY, 5/12,7P,URIS G-01

- Entrepeneurship and innovationo Not well developed study in economic history

It does not lend itself to formal modeling and statistical testing Main method of study is case-by-case

o Looked at US Steel and Carnegie Examined Carnegie’s path to bigness, vertical intergration, marketing

methods Carnegie was the first person who truly understood steel industry Understood economics, Given economies of scale, lower marginal unit cost Doesn’t matter if you dump large quantity into market, as long as

competitor is undercut Carnegie was master at understanding economics of steel industry

Master marketer - Enterprise/innovators

o Role of RR/Telegrapho Mass Distrubutuiono Economiesof Scaleo Paths to bignesso Systematic/scientific managemento Linkages

- Electrical equipmento Brand new consumer industry

Penetrated households that want to buy lighting Changed lifestyles

With electric motors, mode of power With electric lights, more productivity during the evening Uses for things that were Inconceivable before the advent of

electricityo New development of factories

Each tool could use its own power instead of relying on one single mechanic water wheel or steam engine

o The industry: Main phases 1878,British, Commercial Arc-Light System 1892 Edison, Commercial Incandescent 1886, Westinghouse,AC system 1887,Sragne, Streetcar system 1893, GE, First Electric Textile Mill

o Arc Lighting Used in open spaces, street lighting, park

Two electrodes, that spark

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The spark is the light Not suitable for indoor use for variety of reasons

o Could not produce it in small scaleo Its also an open spark, flammable

Became commercially feasible in 1870s Economics:

Idea of commercial lighting comes back further than electricity Gas companies before civil war, early 1870s, mostly provided

street lighting, some provided for residences and companies as well

Companies that were granted lighting When arc lighting came around, thought that it would replace gas

companies, electricity was cheepero Arc light has problemso Charles Brush solved technical problems by 1880s

Lighting san Francisco with arc lights Immediate problem with arc lighting: you can’t sell individual

lights, you had to sell entire systemo Brush was not interested in running systems he builto Brush developed a model that was widely used by electric

companies Get local investors to form local illuminating

company Investors would go to city to get liscence to build

arc lights, Investors would put up all of the money and Brush

would sell them equipment Used model repeatedly,

If there was not enough money, took shares of illuminating company

o By 1881, 5,000 arc lights in operation Arc Lighting is not Patentable As a result, there was entry into the market

o About 50 different firms entered into the marketo Of the companies that entered, most gained very small

marketshareo Thomson-Houston did very well

Particular market strategy: technical expertise They developed better lighting system They made known their technical superiority

Bought up competing firms Focused on quality of systems

1889, brought up Brush’s company Diversified:

Went into electric motors, incandescent lighting

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Numerous technical experitise Evnetually merged with Edison electric to form into

General electric 1890s, Thompson Houston, with acquired

companies, controlled over 2/3 of market Why did arc lighting grow so quickly?

o Replaced gaso Central system

Needed underground wires and massivesystemo Manufacturers Active promoterso System is simple, didn’t require whole lot of development

Didn’t take much from basic to perfected systemso Incandescent Lighting

Associated with Edison Suitable for indoor use

Arc lighting is limited Problems with building incandescent lamps

Building vacuumso Good vacuum pumps only became available until middle

19th century Edison

Telegraphero Early inventions centered around telegraphy

Early inventions made no money Before you waste time, think about the market

o First big invention: Improved stockticker, age of 22 in 1869

o Took profits from stock ticker and opened up lab in Menlo Park

Took up various inventive projects in 1870s As problem of incadessent lighting became focus, looked at

commercial potentialo First, concerned with commercially practical light bulbo Concerned with system behind light bulb

Need people to install appropriate systems to sell light bulbs

o This approach to marketability lead to practical incandessant bulb

Market is offices and homeso Need to have lamp that will work indoors, and will replace

gas lighting systemso Has to be low-voltage system

Can’t have customers killing themselveso Has to be low current

Need to keep costs of wiring low

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o Needs to operate in parallel, not in series Switch needs to turn on one bulb, not all of them

Thousands of models tried Settles on carbonized bamboo filament

o Long lastingo It works

Designed system behind lightbulbo Direct Current iterationo Designed central station that powered bulbs in parallelo First station existed in Menlo park only for experimento First commercial station existed in 1882

Business Problemso Money

Costs 500,000 due to all the iterations Ford: 28,000for motor company

Edison was well off, but had to fund raise for inventing acvitity

Telegraph people Small banks

Starts company: Edison electric light company Edison assigns all of his inventions relating

to electric lights to company Company’s role is to finance incandescent

light design and hold patents Not manufacturing company

o System Have to market entire system Edison takes different route than brush

Edison will set up first power station Example of incandesant illuminating

companyo Formed company: Edison electric

illuminating company Developed central station and

transmits power to customers\

Power station not up until 1882o How do you sell eclectic power

Sees that he has to sell electric lighting so that its similar to gas lighting

Amount of lighting you deliver will equal what they’re getting now

Need to wire building Edison did it free of charge Edison ran wire right next to gas lines Same lamp size

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3 months of electricity free You won’t notice the difference Even the billing system was copied from

gas, in billing hours For subsequent systems, Edison copied brush model

Get liscense from Edison electric to use equipment

Get liscence from city How does he build all these systems?

When Edison has problem, starts new company

Edison Lamp company: manufactured lamps Need more than lamps, need switches, sockets, etc

Entered into another partnership: Bertman, fixture company

Need generators: Edison machine works

What about wiring? Electrical tube company

o Produces underground power transmitting conduits

Large market for electric power outside central stations

They only reach out one mile. Need to buy isolated plant

o Isolated plant business even larger than central station until 1887

Isolated Plant company Edison has gotten himself enmeshed into rats nest of companies

Edison knew what he wanted to do: Low cost lighting into homes and offices Template: gas lighting

o Based on template Businesses, not very innovative Twist to businesses:

o Edison had controlling interest in Edison electric lighto He needed money every time he needed to start his new

companies, sold of part of electic lighto He lost control of patents in 1885, lost control of interest in

electric lighto Edison withdrew from active interest in1886

Rats nest of Edison companies consolidation begins in 1887 1887, yet another manufacturing company is formed: United

Edison Manufacturingo United Edison was onwed by manufacturing companieso Acted as the agent for all manufacturing

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1889, Merger of Spraighe and all Edison companieso Forms Edison General Electric

Mergers are ineffective unless they are rationalized 1890, Edison General Electric Rationalized

All manufacturing operations intergrate into one company

Regional sales offices Later 1880s, rats nest of company centralized

operations 1892, formation of General Electic, with merger of Edison General

Electric and Thomson Houston Why was GE formed?

o Main motivation seems to be patentso Thompson Houston was technical leader in industry

Accumulated companies with valuable patentso By 1892, Edison and TH had patents but neither could do

what they wanted to do They decided to pool all patents into one company

Westinghouse George Westinghouse made huge fortune making air brake from

railroading 1884, became interested in electrical equipment 1886, took off in novel direction: said that electic systems should

use AC instead of DCo DC power was not economicalo There could not be one central station and pipe it into cityo Its more economical to generate it in distant place and

moving it into city Numerous technical and marketing problems

o Much of those gone by 1886o Westinghouse installs first system in buffalo

Orders followed AC used 1000 volts for transmission, and 50 volts for households

o Able to transmit further, but low service voltage so people don’t zap themselves

Marketing problemo Westinghouse has to show its better than DCo Its success

World’s fair in 1893 Held in Chicago Wanted to use Electricity

o Edison Bido Westinghouse Bid

Westinghouse won Didn’t expect to make money

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Illumination of fair was success, Westinghouse had orders pouring in

System was taken apart, pieces were sold, entire demonstration was about 20,000

Established superiority of AC Niagara Falls power

Westinghouse wins bid to build generators in Niagra Falls

Successo Successfully transports 25-30 miles

Electro-chemical industry grows in niagra falls due to needed electicity

o Westinghouse grows quickly Spraigh

His approach is analgous to Edisono First large-scale electic street car system in Richmond, VAo Wanted to show that he had workable system, didn’t really

care to make money, demonstration Established him leader of electric streetcar industry

o Horse drawn streetcars were problems Edison missed boat on electic traction

o After GE bought spraigh, Spraigh didn’t work for GEo Goes out and developed elevated railroad, started new

company o AC power

Arc lighting and Edison system were Direct Current Systems, and were limited due to limitations of DC power

Westinghouse introduced AC system, which replaced DCo Electric Motors

First used in urban streetcars Needed new system to transmit power remotely to streetcars

o First electric factory Textile mill in 1893

o By 1919, more than half the mode of power electricity Displaced gas, electric lamps, and arc lamp

- Motor Vehicles, USo New industry

Motor vehicles, like incandesant light bulbs, will be marketed to consumer Like electricity, motor vehicles have pervasive implications foe economc

structure andchangesin landscapeo Motor vehicles are important because first industry where mass production for

metal working industry is perfected Assembly line occurs in motor vehicle industry

o 1893-1907 Early phase, experimental Early production 1890s, people were thinking about other sorts of power

45

Once internal consumption was available, spate of innovation France leader in motor vehicle production In US, various people monkeying around with motor vehicles First company that sees first commercial success is 1897, Olds

Motor Works Many other companies are established: Winton, Geoffery, Cadilac,

Buick, Ford by 1903 Still competition, even with internal combustion engine, between

steam and electricity In 1903, as late as 1907, not clear what car should look like

o Whats the market? At least 500 companies started to produce motor vehicles, at least

330 produced carso Very small production company

o 1908-28, Development of mass production Ford was established in1903 1908 Ford standardized on standardized model: Model T

Whats special about model T? Couple of characteristics that were decided on by henry ford

o Among the nine models tinkered with, it was the cheapest car

o Ford decided that he wanted to produce an inexpensive car so that the great multitude can afford to buy it

o To make a car to sell at a low price, needed to produce at large quantity

o To produce car at large quantity, it has to be single design, Low unit cost

o Need to have one model to produce in large quantiteso Needs to be utilitarian, needs to be simple to operate and

repairo Needs to fit family in ito Needs to have small engine, but has to be light

Ford wants to steel market awayo Needs to be very good product, high quality, good design,

percissiono People will need to want Ford Carso Ford was first to understand market for motor vehicles

Original producers were aiming for upper reaches of market

Most companies thought this was market for motor vehicles

o Henry ford went way down scale Has crucial insight into low end of market Demand for lower market, its price inelastic

46

If you lower the price enough, the quantity demanded of ford cars goes up

If you pare this sort of demand, you have an economies of scale money machine

o Ford was extrodinarily successful in doing thiso Stayed in production from 1908 to 1927o Over 15 million were sold

Most spectacular successes in American industry Exactly like ford said he was going to produe

o By 1911, 500 dollarso By 1924, 260 dollarso Ford had lower end of car market to himself

1908, GM founded Acquired large number of parts suppiers and companies

o Buicko Pontiaco Oldso Chevroleto Cadillac

Big company by buying up small oneso 1929- Flexible mass production: o Ford:

1903: FMC 1908: Model T 1910: Highland Park 1913/14, Assembly linbes 1920s, River Rouge 1929 ModelA

o GM 1897 Olds 1903 Buick 1908, GM (Olds,Buick) 1909,GM Acquires Cadillac, Pontiac 1911 Chevy 1916 GM Acquires Cbevy

4-30-09Exam Tuesday 5/12, 7PM Uris G-01, Exam Covers: Weiman in IV, B THRU VIOffice Hours: Next Week, Tue/Thurs, 10-12:15, Monday 5/11: 1-3:30PM, Tuesday 5/12, 2-5

Big Business and Entrepreneurship- Look at Edison and Westinghouse

o Edison always had his eye on the commercial potential o However, Edison resisted innovation

Case of AC power

47

Had monopoly on central stations, but did not go along with conversion to AC

GE had to play catch up for a whileo Missed out with electric traction

Electic motors and street cars missed boato Edison had a good eye for the market, in certain cases he missed the boato GE was combination for edison companies

GE itself grew through merger, other leaders in electric business Spraigh Thomson Houston

Motor Vehicles- Vast majority of vehicles are passenger cars sold to households- Ford dominates industry with model T in 1908

o Ford produced one model from 1908 to 1927o Model T changed continually in that better parts were developed, better processeso Basic design of the car, however, did noto Parts/body lines were changed occasionallyo Ford produced one more or less unchanging product over this time

- Ford made a lot of money, initial investment in Ford, 28,000o 1903, one investor put 100o 1919, Henry Ford bought out everyone

The one investor who put 100 dollars cost 252,000o No additional shares were soldo Ford never borrowed, except when he bought out other investorso Henry Ford was one of the first billionaireso How did Ford go to dominate the market?

Ford originally never knew more anything about auto manufacturing than anyone else

Initial plan was to buy off the shelf parts and build them in a craft shop and sell the product on a piece basis

Between 1903 and 1908, ford had nine models on the market In 1908, implemented insight to build one standardized model in massive

quantities How do you produce massive quantities of motor vehicles

Great deal of experimentation Ford surrounded himself with smart people Many of Ford’s innovations were not Henry Ford’s, they were

from people he brought in Some of the most famous ford engineers were from other

companies that Ford acquired for the people The Model T and the oppertunites for Mass production: the

innovations were an implementation of American systemo Highly standardizedo Complete interchangabilityo Specialized machine tools

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Ford had in-house tool department that specialized machine tools

Had machine tools built to ford specifications, or built in-house

These are elaborate tools One tool that drilled 45 holes for engine

blocks in Model Ts coming at four different ways

It is Not general purpose Paid attention to plant layout

Very little movement of parts if necessary Mechanical handling of parts and materials

In 1910, ford outgrew its factory, and build one from the ground up To do this, hired best industrial architect of the day

o Also like Carnegie, not afraid to throw away of the oldo Numerous iterations, get rid of old machine tools if

necessary Ford carefully monitored supply inputs

Constant pressures on suppliers Leverage on suppliers due to massive purchases For main supplier, best machine shop in the Detroit area

o Dodge brothers, investors in ford motor companyo Has interest in seeing that parts are on time and done right

Ford begins to intergrate backward into materials, from 1910 to 1920s 1920s factory produced steel, lumber, and coke from coal Like Carnegie, integrates backwards Very persice control over materials and parts

o Materials don’t pile up at ford What happens when something goes wrong?

Ford Motor company created occupation: shortage chasero Person’s job is to run down supply and find alternitives

o Innovation associated with Ford: assembly line Assembling motor vehicles became bottle neck

When putting together hundreds of thousands to millions of vehicles, it makes sense

How are motor vehicles assembled? Initially, done on a craft-basis Next step up, large batch assembly

o Each car was build from floor up at one work stationo 100 assembly stations in factoryo 6 people at each assembly stationo 5 were assemblers, one was runnero Start on the floor, runner would bring parts for frameo 100 cars simultaneously building

4 cars could be built per day 2 shifts

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12 ½ man hours to buildo They got pretty good: o At any point in time, they’re all at the same point

Next step: moving workerso Previously: Each group of five people built carso Workers specialize, each puts one thing on each of 100 carso This was faster, but still wasn’t all that good

Still took time to built them Next step: assembly line

o Isn’t all that clear as to how it came to beo Numerous stories on how assembly line began

Flywheel magneto, but it was small Each person did one little operation and moved it

on, vast improvement Man hours for assembly dropped considerably

o In late 1913, someone figured out it could be used for chase assembly

o Originally, workers walked with chaseo As they experimented with parts and intervals

Improvement: 6 hours per chaseo Now, workers are completely stationary, but work is

always in motion This was extremely successful: In 1915, after introduction of this assembly labor

time was cut to 93 minutes from original 12 ½ hours

Subsequent refinement to improve speed at which it can be done

o One massive factory producing partso So successful, replicated assembly lines at factoryo Replicated assembly lines in 35 different cities across

country Ford solution to mass production was one central

location for producting parts and then many factories with assembly lines building final product

Ford’s definition of mass production: Mass production is not nearly quantity production nor is it machine

production, mass production is focusing on manufacturing product of mass of system, continuity and speed.

With mass production , ford completely dominates lower end When he’s cut his costs to a few hundred dollars per car, no one

would be able to compete with him Ford’s market share peaks in early 1920s

Has well over 50% of market 1925, 40% of market

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1927, 9% of auto market because he shut down much of the year How do you go wrong?

Model T did not significantly change for 20 years Its obsolete, even by early 1920s Many innovations, some extremely appealing, like ectric starter,

that were not built into model T Some cars going to eight cylinder, however, ford still at 4 cylinders More modern transmission The market for vehicles changed dramatically

o You can buy brand new model T or buy older chevy People are better off

o Those who could only buy model T could now build chevy Other auto markers perceive changes in market but ford doesn’t

changeo Like Edison, resists changes

- Ford Timeline o 1903 FMCo 1908 Model To 1910 Highland Parko 1913/14 Assembly Lineso 1920s rougeo 1928 Model A

- GMo GM champ playing to new market conditions

GM aimed to provide car for every consumero A Car for every taste and pocketbooko GM Timeline

1897 Olds 1903 Buick 1908 GM (Buick Olds) 1909 GM Acquires Cadillac, Oakland 1911 Chevy Motor Car Co 1916 GM Acquires Chevy

o GM had a product strategy People could move up the ladder organized from low end to high end back then, very different cars, very little overlap in design of vehicles GM targeted ford

Chevy became GM’s ford killero Recduced price margin between ford and Chevroleto Self-starter, six cylinder engineo Couldn’t compete on price, but came closeo Chevy stole market away, became market leader

GM has annual model changes Used to changovers, diversity of products

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o Ford for 20 years has produced one model and has done this with highly specialized equipment,

o They are screwed when they go to next modelo They have to basically start overo Caught with any good plan from changover to post-model

To Have to close down factory

Six months when designing, Model A Tooling up for Model A Model T was universal car Model A was next universal car

More or less the same over long period It would be an updated model T, car for

everyman Only lasted four years

No longer could you do the unchanging thing any longer

Consumers have moved beyond mass produced vehicle

Replaced with flexible mass production Consumers wanted more choices

o Henry Ford: You can have any color, so long as its black

GM could do that Various choices for engine and color Ford couldn’t do that

Even Chrysler beat out Ford in some years with Plymouth

Ford’s rise based largely on mass production innovations Also innovated in mass distribution Close ties with dealer network, wholesale distribution network

Ford analogue with Edison Ford losing out to flexible mass production Standard object with motor vehicle has to be changed to consumer

- Robber Barronso Successful entrepreneurs

Carnegie Edison/Westinghouse Ford/GM

o General approach has to been to place them in paths to bigness, etc and to associate them with entrepreneurs

o Associated with new business historyo Generally takes favorable view of entrepreneurs

General approach to challenges that entrepreneurs face to respond to challenges

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Solutions that Carnegie comes up with compared to failures of competetors

o New business history views them as creative entrepeneus Entrepeneurship had a much larger meaning Broader, functional definition

Certain things: o Innovatingo Typically means combining ingredients into new recipeso Entrepenur puts them together in novel wayo Ingredients may be new, but not necessarily soo Entrepreneurs do new stuff, possibly new combinations of

familiar ingredientso Entrepreneur is a pioneer innovator

Function of entrepreneur is risk takero Not risk loving, o Carnegie hated risko This is typicalo Entrepreneurs are willing to gamble, but in a calculated

way Willing to take risks, when there’s a new basis for

thinking they could make Entrepenrus are strategic decision makers

o Where they will leado They are dogged in imposing vision

They know what they want to do and they do it They lead not just in the sense of coming first, but

dragging alongo Another view of entrepenurship:

Shumpiter: creative destruction How do you know great entrepreneur, leaves

destruction in his wake Look at Andrew Carnegie, we look at

carnegie’s success, bessimer steel process commercialization

o In making his company successful, he drove out other companies

o Any firm that stuck with old way would fail

o Primary means by which capitalist system moves forward

Entrepenur is guy who makes it necessary to die off and change to new

Compete on carnegie’s terms or lose outo Robber barrons

Entrepreneur

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Subscribe to entrepenrurs in very unfavorable light View entrepreneurs as diry tricksters More concerned with equity with any contribution to any

economic growth Classic examination: “The Robber barrons” book Point: we’ve taken very favorable view

However, there is alterntive point of view that condemens power in hands of few

- Labor Movemento labor movement in early 19th century didn’t amount to much

Why? Whiped out very small clinetelle

o people worked for themselveso very few people worked in industrial establishments pre-

civil war Union viewed as hostile

o many legal devices brought against unionso Labor movement: organization of workers into unions

Broader sense unions used Improved conditions of working people, whether it was brought to union Frequently concerned with obtaining government action

Length of working day Occupational safety and health Social security

o Focusing on Labor Organizations- Labor Organizations

o Big business is only on horizon in 1865 No surprise labor unions are not big in 1865

Most unions are trade unions Cigar workers in New York city Leather workers in Philadelphia

Largest unions had umbrella national organizations Shoe Makers Union

o 50,000 memberso This is the peak of success in the 1860so First organization that goes beyond:

National labor union: 1866 Gives workers national voice and moves them beyond local issues Concerned with more than basic union issues Length of working day

o National labor union had as one of its objectives eight hour day

National labor union became deeply involved in politicso Getting directly involved in politics is frequently a bad

move

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o National labor union, due to picking losers, basically disappeared in 1870s

o Thinking back to agrarian unrest, this is a familiar patterno Kinghts of labor

Orignally secret society, went public Everyone could originally join knights of labor except bankers, lawyers,

liquor distrubors Strong national organization Uplifting unskilled indidividuals from bottom of national hierarchy Made larger demads regarding child labor, pay for equal women

Employer, employee ownership What made knights successful?

They struck railroads and won Two strikes in 1884 and 1885, won both of them Membership in knights of labor skyrocketed 1886, hit peak membership of 730,000 members

By early 1890s, down to 100,000 By turn of century, gone

What happens? o Stopped winning strikes

They kept losing strikeso Workers had no interests in broader concerns

When you’re not delivering on bread and butter complaints, will not put up with broad concerns

o AFL In the wake of the Knights Goes back to basics

Organized on trade basis Organizes people with craft skills AFL grows out of union of cigar markets AFL is firmly rooted In bread and butter issues AFL had an explitit strategy of accumulating stike funds and

striking to win What workers want is success delivering on bread and butter issues AFL also rewards political friends Sticks to working class leadership

o No big intellectual plans Pre-Eminent leader, Samuel gompers

Leads it for almost 40 years, 1886-1924 Gompers focused on issues Had particular way of working with employers of union members

o Business unionism Idea was that union had something to trade If employer recognizes union, we will regognize

your right to make money and be a capitalisto Issues associated with the knights gone

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AFL moved to Washington, government could be a valuable ally AFL participated in something called “national civic federation”

o Addressed problems of the day with various groups Favored peaceful negitions to labor issues

Problem with AFL Confederation of craft and trade unions

o They are skilled workers doing job that cannot be replaced However, more skilled and semi-skilled workers being replaced by

assembly lines AFL hesitant to organize these groups

Unions leave AFL CIO, organized around industrial

o Trade based AFL and industrial based CIO merged in 1955- Timeline

o National Labor Union 1866- c 1878

o Knights of Labor 1878- c1900

o AFL 1886-1955 Merged With CIO

o CIO 1935-1955 (merged with AFL)

o AFL-CIO 1955-

- Weapons used by labor and capital o Unions used

boycotts Blocked access to which they had some complaints Used secondary boycotts

o Block Access to businesses who do business with company in question

Strikes Threats of physical violence Used leglislation

o Capitalists used Blacklists

Troublemakers won’t be able to find work Blackouts Hiring of scabs Armies of spies

Ford was notorious for using spies in workplace Private armies

Numerous restructions of contracts that workers signed If you engaged in labor organization, you can no longer work for

employer

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Government typically sided with employers when courts issued injunctions that required them to return to work

Railway strikes, government inerevened to move US mailo Haymarket protests

Bombing Eight people were convicted, seven of whom were sentenced to hanging

o 1890s, massive violence and bloodshead Usually hundreds, maybe thousands of strikes per year Carnegie Steel Strike

Homestead was large factory Carnegie bought, when he bought it, he was stuck with it

Strike in 1892o Laborers turned it into fortresso Carnegie steel hired private army to attack own factoryo Outright war fare

Injuries and deathso Governor of PA ordered in national guard

Very common for strikes to be ended by government, in favor of employer Done frequently by sending in troops and obtaining injunctions against

laborerso 1940s, labor movement takes off

Widespread acceptance of unions takes off

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