The Rise of the Megacorporation

SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. I’m talking today with Richard Adelstein, Woodhouse Sysco Professor of Economics at Wesleyan University. He’s the author of, most recently, The Rise of Planning an Industrial America, 1865 to 1914. Richie, thanks so much for joining us today.

RICHARD ADELSTEIN: Thanks, Sarah. It’s a pleasure to be here.

SARAH GREEN: So today we’re going to be taking a look back at a period of time that really gave rise to a new kind of American corporation. As you talk about in the book, that era really saw companies get a lot bigger. They didn’t just sort of spring out of nowhere. So give us a sense of kind of what were they the answer to, what problem were they there to solve?

RICHARD ADELSTEIN: That’s a good question. When we look at large scale economic organization today, when we look at big firms or big corporations, they’re such a familiar part of the landscape that we don’t actually think about what a remarkable achievement it is that each of them represent. A large corporation, let’s say one that has 50,000 people associated with it, requires that the work of all of those 50,000 people be coordinated and, in manufacturing firms at least, that very large amounts of materials and products and other kinds of resources be moved in a particular way that makes the operation of the huge expensive machines around which mass production firms are organized possible.

That is, it’s not obvious how you can organize, plan and manage the work and movement of so many people and so many things in conjunction with the operation of these huge mass production machines that were popping up in all parts of the economy, in various parts of the economy, towards the end of the 19th century. The machines themselves couldn’t be profitably operated except at very large scale, and this generally required the coordinated efforts of very large numbers of people.

Organization on this kind of scale prior to 1870, at least economic organization, had largely been done by markets. That is, there were very small firms that were connected with one another through free exchange. And as we all learn in economics courses, the free exchange tended to coordinate and organize the behaviors of these people, even if they pursued their own purposes without reference to any common plan. Now, the firms had to take the activities of five or 10 or 50,000 people and organize them, coordinate these behaviors, without the benefit of flexible prices and within the confines of a particular organization with a particular plan. And to do all of this with the free consent of every participant so that nobody was coerced to do anything.

The key to the solution that they found was the adoption of profit maximization. This was the purpose toward which all that effort and all those resources and production we’re supposed to be directed. And as I argue in the book, profit maximization was a purpose in common, as I call it, amongst all the people who participated in the firm. That’s proven remarkably successful and durable as a way to win the consent of all those people to submit to a single organizational objective and to the discipline that the objective requires.

So the firms themselves were a solution to the problem of coordinating labor and materials and machines on a very large scale. And the solution to the problem that was eventually evolved and adopted was a sole focus on profit maximization as the way to do this.

SARAH GREEN: So to back up I think just a little bit, and to start with the people piece of the puzzle, in the book you talked about the impact of the influx of engineers with an entrepreneurial spirit who had entered the private sector after the Civil War. Just tell us about what made them different, about the impact that they had.

RICHARD ADELSTEIN: OK. I guess a place to start is that it’s important to remember that when these firms began to emerge after the Civil War, no one really knew how to manage large firms. There was no theory of management, there were no business schools generally, and as I suggested before, there was very little precedent. There were very few examples to which the people who are organizing these large companies, very few examples to which they could turn that could suggest to them ways to get the organization that they needed to get done, done.

Now, because the machines of mass production– first, the railroad engines and equipment, and later the production and processing machines around which the new, great manufacturing firms were based– because these machines were so central to the new firms, and the firm’s effectively had to be built around the machines rather than the other way around– which is the way it had always been before– the first managers of these large firms, as Chandler says, tended not to be the owners who knew very little about the machine. Their expertise was primarily in finance or things like that, but they didn’t know much about locomotives or about blast furnaces.

And so the first managers on the factory floor tended not to be the people who owned the companies, but the engineers who understood the machines and who, in many cases, had designed them themselves or studied with the people who had designed them. And they brought to management of firms the same kind of confident intellectual style of thinking that they brought to designing the machines themselves. So they would, for example, they would use the methods of natural science to control people and material in firms in the interest of the firms themselves, just as they’d been so successful at using natural science to control nature for human purposes.

And at the same time, this mechanical view of what firms were and how they were supposed to work suggested the development of a similarly mechanical science of management which developed toward the end of the 19th century, and was epitomized by Frederick Winslow Taylor’s system a scientific management.

SARAH GREEN: Well, I’m glad you mentioned Taylor, because in the book you repeatedly refer to what you call Taylor’s bargain. What is that?

RICHARD ADELSTEIN: Well, Taylor’s bargain was not actually posed by Taylor, but it’s a way for me to summarize what I believe is the principal problem that the book addresses. And that is that industrialization, or modernization, however we choose to call it, not only means the adoption of new methods and new ways of organizing things, but that these also require the sacrifice or the destruction of older traditional ways of doing things.

We now think more explicitly and more consciously in newly developing countries of the clash that’s created when new technology, new ways of organizing things economically– we didn’t have a theory of development economics in 1880 or 1890– and people, I don’t think, really understood clearly, or at least as clearly as we now think we do, what was going on around them. But they did see not just the creation of very much more material wealth– which was one consequence of the great industrialization– but they also saw and experienced, in a very short time, the destruction of traditional ways in which production had been carried on.

Which tended to be in much smaller units, in which people were much more equal to one another than they were in the large hierarchical structures that were required by the large machines in the big firms, and where there was a much greater opportunity for individuals to exercise not just control over the workplace where they happened to spend their days, but also in the whole less capital intensive environment. It was easy for people to start a business themselves and, therefore, become more adept, more experienced through success and failure at self governance and, therefore, as Jefferson thought, better citizens and better able to govern themselves democratically.

But the large firms threatened all of this. They threatened the decentralization of production, they threatened the more equal distribution of power over the workplace, they threatened traditions of personal responsibility and business, and so on. I summarize all of the traditional ways of doing things that had to be sacrificed for the material wealth that could be brought by business. I summarized these things as autonomy.

And I say that Taylor’s bargain was to present the Americans with a choice, as it were. A choice over which they could, in fact, exercise their will if they could figure out what it was to be decided and how they wanted to decide it. They were faced with a choice of accepting the new industrialization and the material wealth that it produced. And thereby sacrificing the elements of autonomy, which many of them had cherished and which many of them believed was the animating value of the American experiment in responsible self government.

So Taylor’s bargain is a way of expressing what would have to be given up in order to enjoy the material cornucopia of wealth that the mass production machines and firms were producing. And it’s to emphasize that people actually thought about this at the time, that there were voices at the time from people like Louis Brandeis and John Marshall Harlan and Rufus Peckham on the Supreme Court of the United States, William Jennings Bryan in the political arena, who actively encouraged Americans to think about what they were giving up– what Brandeis called their birthright of autonomy and responsibility– what they were giving up in order to enjoy the greater material wealth that the new firms could produce in large scale hierarchical organizations.

So Taylor’s bargain is a way of suggesting that this was not something that just happened to people over which they had no control, but it was something about which people were arguing in imperfect language with imperfect concepts at the time, and that, as a result, one can say that the people did in fact make a decision to accept the sacrifice of the older ways for the newer ways. And to tell modern readers at the same time that this is something that happened once, and that it’s possible for Americans collectively to consider these kinds of problems and to make a difference in how they evolve over time.

SARAH GREEN: That brings up a sort of interesting question, I think, about the political environment that we’re in and how that’s changed. Because if I were going to oversimplify vastly, I would look at this period of time and say, well, we’ve gone from the famous trust busting, a period of anti monopolistic actions, to a period of time where big companies are largely seen as too big to be allowed to fail. Is that too much of an oversimplification? What else is going on in the kind of political environment that all these companies are operating in?

RICHARD ADELSTEIN: Well, I think one thing that has changed is– and I’m certainly not the only person who suggested this– is that, for a variety of reasons, some of which I think have to do with the advent and emergence of these large corporations themselves, people’s desires, people’s political objectives and political aspirations have tended to change. So William Jennings Bryan famously said at the Democratic Convention of 1896, I believe, when he was discussing this general problem he said, I don’t think that we should worry so much about what will make Americans rich. We should worry about what will make them good and strong and great and so on.

And, of course, he thought, as many of the figures in the book that I discussed thought, that people were trading away things of real value in the pursuit of material wealth through the acceptance, as it were, of the large scale industrialization and the organization that emerged from the end of the 19th century. Brandeis argued that people being organized in large organizations would rob them of their initiative and, therefore, make them irresponsible in a kind of literal way.

That is, since they had never had the experience of being in charge and responsible for the operation of an enterprise, that they would adopt different kinds of attitudes about government, different kinds of attitudes about work, different kinds of attitudes about economics, and so on, than they would have developed had they had that opportunity. And if large numbers of people are working in corporations, he feared, the political quality of the entire electorate would change for the worst, that people would become much more materialistically oriented, and they would become spectators in their government rather than participants in it.

Brandeis was, in the words of one of his biographers, a Jeffersonian for the 20th century. And I think that sort of thing captures it. And I believe, in large measure, that these guys were right. That is, I think that America is now a much, much more materialistic country than it was even 120 years ago.

We are much, much more concerned with maximizing the gross national product than we were, than we could have been in 1930, before the idea of a gross national product was developed by Keynes into the idea that we can control the operation of the economy as a whole. Where before, it was possible to talk more about values that compete with the pursuit of material wealth, or values that may be moderating to the growth of material wealth. So I do think that things have changed and that the political environment has changed.

SARAH GREEN: Well, Richie, this has been a really interesting conversation. Thank you again for taking the time.

RICHARD ADELSTEIN: My pleasure. Thanks for having me.

SARAH GREEN: That was Wesleyan economics professor Richard Adelstein. His book is The Rise of Planning in Industrial America. For more, visit hbr.org.