Anda di halaman 1dari 57

1

4-7-09
Southern Agriculture
- Ransom and Sutch, the institution of slavery has failed
o Lead to southern poverty
- Problems with the story
o 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 hadnt turned to
sharecropping and country merchant system
o Ransom and sutch institutions are not 100% to blame
The country merchant is not the bad guy they are being made out
o Rehash of the Agrarian discontent story
- Country merchants
o Country merchant wouild not have been able to stick it to farmers if they
didnt 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 profitable
o Potential entrant comes from somewhere else
o 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 dont have the power ransom and sutch have
o 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 marchaqnts 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 much
o further true that indebtedness did not predict crop mix
o 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 merchants
o another argument:
2

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 reversed
o Not forcing the famrer to produce cotton
Bankrolling farmers to gamble on cotton
o A few farmers won
10% of land owned by freedmen
They were making a reasonable decision rather than subsistence
farming
o Lien is not an instrument of coercion, but uses the crop to secure the loan
Initaiatiive is to secure farmers
o 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 power
o No physicial assts, no financial assets
o If you throw this financial description into labor market, what do you think is
going to happen?
o These people wont be fabulously wealthy,
o If you start with nothing, 30 years down the road, many will still have nothing
o 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 freedmens bureau
- There is a grain of truth in Ransom and Sutch, but it is overblown
o it cant carry the entire weight of the institutional story
Upland Farmers
- southern culture is dualistic
- majority of white southern famrers
o only marginally involved in staple production
o those who live in up country and are oriented towards subsistence production
- Upcountry
o main obstacle towards subsistence farming was lack of entry to markets
3

o cotton would grow in these areas but there is no point, since you cant get it
o these shift, after the civil war, into cotton
o 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
Theres 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 up
o 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 areas
o previously, they would not have been able to make
money
o most of these small farmers own assets, they have
money to secure loan
o cotton/corn ratio increases by factor of five in upland areas
increases by factor of less than 2 in cotton belt
The New South
- Period after reconstruction up until WWI
- Expression that became current in 1870s under southern boosters
- New south bootster
o Give it new structure
o More diversified agriculture
o Industrial base
o New system of cities
o Want south to shed colonial relationship with rest of country
Should not need to import technology
Should not neet to borrow from north
Southern owned capital and technology
4

- How did it work out?
o South did dvelop rapidly with industry
o This started from a very low base
o South remained far behind rest of country
o 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
isnt gaining any ground at all
Large southern city in 1860: new Orleans, by 1890, no
southern city is in top 10 in US
o 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 cities
o Coastal Port cities
Southern ports overwhelmingly devoted to cotton
New Orleans
o River port
Memphis
o Exceptions
Richmond
Industrial center
Not a cotton center
o Changes
Articulation of hierarchy of cotton service centers
Cotton service cities:
o In post-war period, cotton cultivation spreads rapidly
o Even the plantation belt is specialized more heavily in
cotton production
o Phosphare fertalizers
o Spread of large commercial cotton gins
5

Previously, all gins located on plantations
o Now in small towns, and accessible by anyone for fee
Introduction of cotton presses
o Cotton-seed mills
o Compressed cotton bales
o Used in conjunction in shipment by rail
o 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 dont have to be anywhere near a river
Much of the cotton in the 19
th
century does go
by rail
o 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
period
o Market of a press of cotton seed mill had 25-50 miles
One press could handle up to 30 gins
o Around a 2
nd
order city, small market towns that had
gins
How does cotton move?
6

o Farm to small town where its ginned, packed into bales
o Goes to second order city where its pressed
Shipped to large city
Large cities
o 29 of them
o Dallas-fort worth
o Houston galiviston
o New Orleans
o Atlanta
o Memphis
o Rest of the cities are waypoints
They are then shipped to big city area
Atlanta
o Small city in 1860
o Moves onto large city list by 19
th
century
New burst of growth
atlanta
Richmond
o Old manufacturing center
Holds on with tobacco, flower, iron and steel
North Carolina tobacco cities
o Durham, Winston
High point
o Becomes known in furniture trade
Tampa
o Center of phosphate and fertilizer production
These industries dont 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 large
o 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
Discrimination in employment in south was primarily in terms of
advancement
Distribution of jobs, there is a clear difference
7

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 world
o May pass through south and stay there
Foreign born is lower wages
Cheap labor in south
- Southern industry
o Southern industry is labor intensive
o Low wage, low skill
o Imported technology
- Best known: textile industry
o Have interesting parallels with GB and new England
o In textiles that industrial revolution comes to south just like new England
o 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
New
o Buy equipment from northern textile machinery
producers
o Their northern competetors are using the older
machines
o 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 Couldnt compete with new England insustry
o South was much more successful in exploiting labor
costs
o Helps that textiles are mature technology
Could buy high technology off shelf
Benefit from cheep labor and standardized equipment
o Southern product hierarchy
o Southern firms are smaller
38% size of new England firm
Almost all southern firms incorporate,
8

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

9

NEED NOTES 4-9

10

4-14-09
Big Business in NE
- New organization
o corporation
- Urbanization
o 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 industry
o 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 costs
o Obvious observation:
Larger pools of capital in firms of 19
th
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 creature
o 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
11

In 1860s, fixed costs were small, variable costs
were largest part
If business wasnt going well, simple to shut down
What does this mean? Shop is probably
barn/first floor of house
You dont 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 operations
o 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 window
o 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
12

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, ete
o Hallmark of big business is separation of owners and
operators
Technology of 19
th
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 hierarchies
o 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 dont like it, laborers dont like it,
and government doesnt like it
o 19
th
century is period of transition
13

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 be
o 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
Were 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 cost
o Railroad is geographically dispersed
o Financial transactions are geographically dispersed
o 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
14

o Theyll 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 firms
o 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 learn
o 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,
theyll send a telegram instead of using a telephone
o 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 integration
o On any particular rung of ladder, firms doing the same
operation combine
Two pig iron manufactures combine
These are not mutually exclusive
o Firms will intergrate vertically and horizontally
Internal growth, with neither horizontal or vertical integration
o This is uncommon
o In most cases, by integration
Why do firms do this?
o Primarily interested in bigness or marketshare
15

o This turns out to be wrong answer
o 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 cant 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 furnace
o Marketing needs
Textile producer sells through wholesaler, with
established products
What about non-established products
Pershibles
Technologically advanced goods
o Requires demonstration
o Special skills and ongoing
maintainece
o May require fine-tuning to fit to
factory
In other cases, products are dangerous
Manufacturer needs to tame measures to
ensure buyer doesnt kill himself
Some products were expensive and
manufactures needs to provide credit
Wholesalers do adapt and marketing
forward
Electrical companies
Two major utilities
o Edison electrical light
o NYSEG
Isolated plant branch of industry
o Where you generate your own
power, this is dangerous
o 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
16

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 distribution
o 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
refrigerator
o 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 system
o decided to go direct consumer
o created breakfast cereal industry
put in box with picture to
brand
manufacturer has new brand sales industry
o last motive for vertical intergration: purely defensive
Carnegie, until late 19
th
century, did not produce
steel products like nails and wire
Sold large chunks of steel to manufactuers
17

Carnegies 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 dont; just say, wouldnt 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
Everyones cutting price, view profit as unsatisfactory
o View as fixed plant
o Firms in industry try to collude
o Early forms of collusion were called pools and associations
Gentlemens 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 pool
o Problems with pools
Questions of legality after 1890 with Sherman anti-
trust act
They dont work
Theres no formal enforcement mechanism
and theres 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 pools
high price
You cant enforce pool
Trust
o Legal device
o Gives trustees control over firms
o Two sets of players:
18

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 firms
o Give no voting rights
o All voting rights reside with trustees,
control firms even though they dont
outright own them
Why would anyone do this?
Stockholders feel better if theres 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 trade
o 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, theres three sets of players
o People who set up holding company
o Stockholders in member firms
o General public
Stockholders in holding company in
response for holding company stock
19

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 public
o 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
Didnt do much to cut costs of production
o 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 billion
which firms?
20

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 Food
o Chemicals
o Petroleum
o Metals
o Machinery
o Few industries account for 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 again
o 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 dont give up ownership
You get trust certificate, which is a portion of combined claim of all
firms
21

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 public
o Trade stock in individual company for that of holding
company, allowing holding company to acquire it
o If you dont 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 firms
o This sequence went from 1870s to 1890s
o 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 pools
o 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 wave
o Second wave was buying holdout smaller firms
Where?
o New Jersey
o New York
o Delaware
Headquartered in most of those states
o How well did merged firms do?
If you invested in these companies, Would you make a lot of money?
If you invested in portfolio, youd make about 7% return
22

If you invested in bonds, 6%
This was suprising to investors simply because they expected monopoly
profit
This is a story heard over and over, land, railroads, etc
Monopoly profit didnt 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 superstars
o Six lost
Profits and company performance?
Researcher: As of 1918, of 328 mergers, 49 were successful, meaning
they made normal profits
o 9% which were limping successes
o 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 C
4
: 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 dont 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 power
o Its tough to maintain 90% of market
Only few instances where dominating market share
was successful
Alcoa controlled all the bauxite
o Is there a good economic rationale for merging
Remember, over 50% of merged entities go bankrupt or limp along
Economies of scale?
23

Often times, not the case
o 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 didnt 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 rationale
o From investor, great rationale
Distinction between successful firms and not successful
Effective central leadership
Even if you have economies of scale, doesnt mean youll exploit
them
In many cases effective central leadership doesnt 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 its 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
theyll be realized
Larger list of potential explanations
Substantive economic changes
o Increase in size of American economy
Late 18
th
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
24

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, theres 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 act
o 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
Youre 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 scale
o Technological change snowballs after civil war
o 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
25

Which goods are we talking about?
o Pershiables and raw materials
o Intermediate products
o 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 track
o 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 descriptions
o 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 immediately
o 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
Some dont even touch good, ship straight to retailer from
manufacturing
26

o Jobber
Merchant who takes legal possession of good
Jobbers are wholesalers who can make more money under new system
They dont worry about inventory, theyre not piling up at these businesses
How do jobbers work?
Set up distribution networks
o 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 departments
o Moving goods from collection of sellers to buyers
o They try to never take physicial possession of goods, they
dont 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 turn
o 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
Dont need wholesalers anymore
Department stores
Often begin as adjuncts to wholesalers
27

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
Woolworths : non grocery
Got a late start, but took off in early 20
th
century
o Ideally suited to automobile and growth of suburbs
o Theres 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
28

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 costs
o More people to whom you can sell to
o Bigger price, total cost
- Technological changes within industrial firms
o Railroad, telegraph
o With industry, in addition to these, are new changes wthin the factory
o 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-put
o In some industries, throughput is ongoing
In other industries, theres 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 use
o Size of vat is constrained
However, after civil war, intorudction of coal increases energy usage
o Petroleum, beer

Mechanical
Operations performed by machinery replace human hands
Textiles replace spinning previously done by peoples hands
Follow distinctive path
o Massive innovation
o Then only small incremental improvements
Textile firms dont expand
o Replicate factory
Dont 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
29

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 small
4-21-09
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 firms
o Flow of materials new problem
In pre-war period, individual producers were small
People carried things by hand
o You cant do that with a bessimer converter, when youre
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 19
th
century, possible to produce sewing machines and repapers in
10,000s/year
Movement to large machines not complete until 1914
o Problems with metal working
First, numerous materials with different properities
Rifle has many different materials
o Iron
o Steel
o 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
30

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 shop
o In late 19
th
century, metal working shops were chaotic
o Lots of different of orders in process in the same time
o Materials would literally get lost
Not just technical in metal working, but scheduling and orders
o Systematic management
- Chandelers take on changes of late 19
th
century
o 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 bottom
o Factory floor was very close to owner
31

Pool: headquarters had general managements
o Headquarters didnt do anything
Modern:
o Org chart, top management, junior management specialized
by function
People who manage firm no longer talk to shop
foremen
o Group that provides information to top management, HR,
accounting
o Thinks of modern industrial establishment as corporation
This was not necessarily the case
Carnegie steel was a partnership until end of 19
th
centiry
Ford was private until 20
th
century
From partnerships to corporations
o Chandler, looking back, focused on technological changes
Gave opportunities for people to put together appropriate activities
This applies to minority of firms in early 20
th
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 costs
o This Is what chandler says, and it mostly works out
Big business thrives in industries predicted by chandler
o 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 scale
o These are industries that are explained
What gets and makes it to bigness
o Technological change having economies of scale
o Firms exploiting the possibilities
o 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
o Development of new processes
32

Systematic management
Scientific management
o Bigness is new
o 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 model
o 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 cant doing work
Managmnet spent much of time figuring out where
work in progress was
o 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 factory
o Big board explaining order of products, where they were
Shop order systems were big paper trail
33

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 operations
o 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 Taylorism
o Spent time at Midvale Steel, didnt 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
34

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 dont know how to manage properly
o Glaring lack of motivation and of knowledge
o 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 Laziness
o 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 cant 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 operations
o Once unnecessary movement is removed, there is the best
way to do task
o 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 time
o Handling time
o Reasonable allowances
Certain amount of slout
Suppose task is to consider two holes in piece of metal
35

o Drill five seconds to drill each hole, 10 seconds of machine
time
o 2 seconds to pick up material
o 5 seconds to position under first, 2 under seconds
o Allow these times, adding a few extra seconds if the worker
fumbles, to drill in piece of metal
o 27 seconds, for instance
o 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, hes 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 handler
o Taylor: you need to be sufficiently stupid in order to not
getting sick of your job
o 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 taylors thinking
o 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 designed
o Moving machines in better sequence and spacing, lead to
better arrangements of job and factory
Taylorism creates new information demands
Time requirements for each job
o 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
Used shop order system to implement flow of information to
central planning office
o Inspection system
36

o Temptation to go through motions and shirk workstations
o To do every motion as prescribed, inspection system
o As work progresses, quality of work is analyzed
Work is extremely distasteful
o Perhaps before they had some interest in what theyre
doing
o Completely gone under taylorism
o 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 didnt 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, youd 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
Taylorism spread widely beyond industry
Military
o Minimal training to repair complex weapon system
37

This was appealing to military
Aborted attempt to apply to universities
o Physics departments
Excessive management by committee
Pay based on longevity
Tenure
Inbreeding
Marketing
o Theres 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 replicate
o Taylorism made quite a splash
Formally by hiring efficiency consultant, or informally

38

NEED NOTES, 4-23

39

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

- Entrepeneurship and innovation
o 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 Carnegies 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
Doesnt 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/Telegraph
o Mass Distrubutuion
o Economiesof Scale
o Paths to bigness
o Systematic/scientific management
o Linkages
- Electrical equipment
o 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
electricity
o 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
40

The spark is the light
Not suitable for indoor use for variety of reasons
o Could not produce it in small scale
o 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 cheeper
o Arc light has problems
o Charles Brush solved technical problems by 1880s
Lighting san Francisco with arc lights
Immediate problem with arc lighting: you cant sell individual
lights, you had to sell entire system
o Brush was not interested in running systems he built
o 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 market
o Of the companies that entered, most gained very small
marketshare
o 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 Brushs company
Diversified:
Went into electric motors, incandescent
lighting
41

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 gas
o Central system
Needed underground wires and massivesystem
o Manufacturers Active promoters
o System is simple, didnt require whole lot of development
Didnt take much from basic to perfected systems
o Incandescent Lighting
Associated with Edison
Suitable for indoor use
Arc lighting is limited
Problems with building incandescent lamps
Building vacuums
o Good vacuum pumps only became available until middle
19
th
century
Edison
Telegrapher
o 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 potential
o First, concerned with commercially practical light bulb
o 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 homes
o Need to have lamp that will work indoors, and will replace
gas lighting systems
o Has to be low-voltage system
Cant have customers killing themselves
o Has to be low current
Need to keep costs of wiring low
o Needs to operate in parallel, not in series
42

Switch needs to turn on one bulb, not all of them
Thousands of models tried
Settles on carbonized bamboo filament
o Long lasting
o It works
Designed system behind lightbulb
o Direct Current iteration
o Designed central station that powered bulbs in parallel
o First station existed in Menlo park only for experiment
o First commercial station existed in 1882
Business Problems
o 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
Companys 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
company
o Formed company: Edison electric
illuminating company
Developed central station and
transmits power to
customers\
Power station not up until 1882
o 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
theyre getting now
Need to wire building
Edison did it free of charge
Edison ran wire right next to gas lines
Same lamp size
43

3 months of electricity free
You wont 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 light
o He needed money every time he needed to start his new
companies, sold of part of electic light
o He lost control of patents in 1885, lost control of interest in
electric light
o Edison withdrew from active interest in1886
Rats nest of Edison companies consolidation begins in 1887
1887, yet another manufacturing company is formed: United
Edison Manufacturing
o United Edison was onwed by manufacturing companies
44

o Acted as the agent for all manufacturing
1889, Merger of Spraighe and all Edison companies
o 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 patents
o Thompson Houston was technical leader in industry
Accumulated companies with valuable patents
o 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 DC
o DC power was not economical
o There could not be one central station and pipe it into city
o 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 1886
o 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
dont zap themselves
Marketing problem
o Westinghouse has to show its better than DC
o Its success
Worlds fair in 1893
Held in Chicago
Wanted to use Electricity
o Edison Bid
o Westinghouse Bid
Westinghouse won
Didnt expect to make money
45

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
Success
o 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 Edison
o First large-scale electic street car system in Richmond, VA
o Wanted to show that he had workable system, didnt 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 didnt work for GE
o 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 DC
o 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, US
o New industry
Motor vehicles, like incandesant light bulbs, will be marketed to consumer
Like electricity, motor vehicles have pervasive implications foe economc
structure andchangesin landscape
o 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
Once internal consumption was available, spate of innovation
46

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 cars
o 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 quantites
o Needs to be utilitarian, needs to be simple to operate and
repair
o Needs to fit family in it
o Needs to have small engine, but has to be light
Ford wants to steel market away
o Needs to be very good product, high quality, good design,
percission
o People will need to want Ford Cars
o 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
If you lower the price enough, the quantity
demanded of ford cars goes up
47

If you pare this sort of demand, you have an
economies of scale money machine
o Ford was extrodinarily successful in doing this
o Stayed in production from 1908 to 1927
o Over 15 million were sold
Most spectacular successes in American industry
Exactly like ford said he was going to produe
o By 1911, 500 dollars
o By 1924, 260 dollars
o Ford had lower end of car market to himself
1908, GM founded
Acquired large number of parts suppiers and companies
o Buick
o Pontiac
o Olds
o Chevrolet
o Cadillac
Big company by buying up small ones
o 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
4-30-09
Exam Tuesday 5/12, 7PM Uris G-01,
Exam Covers: Weiman in IV, B THRU VI
Office 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
Had monopoly on central stations, but did not go along with conversion to
AC
GE had to play catch up for a while
48

o Missed out with electric traction
Electic motors and street cars missed boat
o Edison had a good eye for the market, in certain cases he missed the boat
o 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 1927
o Model T changed continually in that better parts were developed, better processes
o Basic design of the car, however, did not
o Parts/body lines were changed occasionally
o Ford produced one more or less unchanging product over this time
- Ford made a lot of money, initial investment in Ford, 28,000
o 1903, one investor put 100
o 1919, Henry Ford bought out everyone
The one investor who put 100 dollars cost 252,000
o No additional shares were sold
o Ford never borrowed, except when he bought out other investors
o Henry Ford was one of the first billionaires
o 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 Fords innovations were not Henry Fords, 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 system
o Highly standardized
o Complete interchangability
o Specialized machine tools
Ford had in-house tool department that specialized
machine tools
Had machine tools built to ford specifications, or
built in-house
49

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 old
o 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 company
o 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 dont pile up at ford
What happens when something goes wrong?
Ford Motor company created occupation: shortage chaser
o Persons 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 station
o 100 assembly stations in factory
o 6 people at each assembly station
o 5 were assemblers, one was runner
o Start on the floor, runner would bring parts for frame
o 100 cars simultaneously building
4 cars could be built per day
2 shifts
12 man hours to build
o They got pretty good:
o At any point in time, theyre all at the same point
50

Next step: moving workers
o Previously: Each group of five people built cars
o Workers specialize, each puts one thing on each of 100 cars
o This was faster, but still wasnt all that good
Still took time to built them
Next step: assembly line
o Isnt all that clear as to how it came to be
o 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 chase
o As they experimented with parts and intervals
Improvement: 6 hours per chase
o 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
hours
Subsequent refinement to improve speed at which it
can be done
o One massive factory producing parts
o So successful, replicated assembly lines at factory
o 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
Fords 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 hes cut his costs to a few hundred dollars per car, no one
would be able to compete with him
Fords market share peaks in early 1920s
Has well over 50% of market
1925, 40% of market
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
51

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 doesnt
change
o Like Edison, resists changes
- Ford Timeline
o 1903 FMC
o 1908 Model T
o 1910 Highland Park
o 1913/14 Assembly Lines
o 1920s rouge
o 1928 Model A
- GM
o GM champ playing to new market conditions
GM aimed to provide car for every consumer
o A Car for every taste and pocketbook
o 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 GMs ford killer
o Recduced price margin between ford and Chevrolet
o Self-starter, six cylinder engine
o Couldnt compete on price, but came close
o Chevy stole market away, became market leader
GM has annual model changes
Used to changovers, diversity of products
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 model
o They have to basically start over
52

o Caught with any good plan from changover to post-model
T
o 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 couldnt do that
Even Chrysler beat out Ford in some years with
Plymouth
Fords 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 Barrons
o 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 history
o Generally takes favorable view of entrepreneurs
General approach to challenges that entrepreneurs face to respond to
challenges
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
53

Certain things:
o Innovating
o Typically means combining ingredients into new recipes
o Entrepenur puts them together in novel way
o Ingredients may be new, but not necessarily so
o Entrepreneurs do new stuff, possibly new combinations of
familiar ingredients
o Entrepreneur is a pioneer innovator
Function of entrepreneur is risk taker
o Not risk loving,
o Carnegie hated risk
o This is typical
o Entrepreneurs are willing to gamble, but in a calculated
way
Willing to take risks, when theres a new basis for
thinking they could make
Entrepenrus are strategic decision makers
o Where they will lead
o 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 along
o 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
carnegies 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 carnegies terms or lose out
o Robber barrons
Entrepreneur
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: weve taken very favorable view
54

However, there is alterntive point of view that condemens power in
hands of few
- Labor Movement
o labor movement in early 19
th
century didnt amount to much
Why?
Whiped out
very small clinetelle
o people worked for themselves
o very few people worked in industrial establishments pre-
civil war
Union viewed as hostile
o many legal devices brought against unions
o 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 members
o This is the peak of success in the 1860s
o 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 politics
o Getting directly involved in politics is frequently a bad
move
o National labor union, due to picking losers, basically
disappeared in 1870s
o Thinking back to agrarian unrest, this is a familiar pattern
o Kinghts of labor
Orignally secret society, went public
55

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 strikes
o Workers had no interests in broader concerns
When youre 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 capitalist
o Issues associated with the knights gone
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
56

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 wont 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
Government typically sided with employers when courts issued
injunctions that required them to return to work
Railway strikes, government inerevened to move US mail
o Haymarket protests
Bombing
57

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 1892
o Laborers turned it into fortress
o Carnegie steel hired private army to attack own factory
o Outright war fare
Injuries and deaths
o 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
laborers
o 1940s, labor movement takes off
Widespread acceptance of unions takes off