Reviewed by Nandini Chandar Case Western Reserve University
Galambos and Pratt provide an insightful and fast-paced account of the growth and development of the American corporate economy over the past century. At a time when American business is yet again in the midst of a crisis, the book is a timely reminder of the value of history in analyzing contemporary problems. Free enterprise and the government have had various relationships over the years: friendly, adversarial, and sometimes both. The authors present in their book a dynamic picture of U.S. business and public policy in the twentieth century, which portrays the flexibility of the American business system and its tradition of successfully adapting to change.
The reader is led from the world of J. P. Morgan at the turn of the century, where a few powerful private investment bankers could control an economy dominated by the entrepreneurial firm to the world of Iacocca in the 1980s, where the power of any individual is subordinate to that of the government. The authors make effective use of these powerful symbols of the American way of doing business during their times.
The framework for analyzing the development of institu-tions over time is their ability to strike a balance between inno-vations, efficiency, and environmental control. The authors also portray the changing role of the government in three major areas over the century: single industry regulation, cross-industry regulation, and government-directed activities.
J. P. Morgan’s era saw the rise of the combine from the entrepreneurial firm of the nineteenth century. The entrepre-neurial firm, with its flexibility to innovate, played a vital role in the nation’s rapid economic expansion during that period. Out of its inability to take advantage of economies of scale and its lack of capital, came the centralized corporate combine. The authors suggest that Morgan and investment bankers, because of their unique role of selling securities to finance the combines, became the chief architects of the system. The authors describe the outstanding record of technical and organizational change and economic growth that characterized the Morgan era on the one hand, and the abuses of power and natural resources and growing tensions between the corporations and society on the other.
The period 1901-1930 was characterized by an expanding public presence, generally intended to limit the power of private interests to manipulate the economy. The development of independent regulatory commissions, the passage of the antitrust laws, and the creation of the Federal Reserve System marked significant turning points in business-government relations. The authors characterize the process of change in these relations as “piecemeal, uneven, and at times, haphazard.” These measures were, the authors claim, “a curious innovation,” and “a political and intellectual compromise.” It was also a “distinctively American approach to balancing public and private interests,” a way to have more government without more politics. The coming of the Federal Reserve signalled the demise of the world of J. P. Morgan.
This was also an era when business consolidated its con-trols. Managers had to learn to balance the firm’s need for innovation against the need for control of its environment, and the need to achieve high efficiency in mass production and distribution. Most of the large firms of this era were created through mergers of competitors. There was a need for administrative controls using more active and systematic forms of management. The results were organizations structured along functional lines, with increased specialization, a changed workplace in response to mechanization, more formalized labor relations, and vertical integration to achieve better control of the environment. The need for innovation and the great expansion of science and engineering at the turn of the century saw the beginnings of research and development and the modern industrial laboratory. Companies took a long-term view. Small business still had its role, transferring/generating innovations, and pro-viding services where economies of scale or system could not be achieved. A new type of political system evolved, where local influence was becoming less important than effective lobbying on the state and national levels. It was an era of “the associative state,” where cooperative forms of capitalism were practiced by trade associations. The general prosperity of the firms and the growing weakness of the labor unions lent support to the idea that a new “corporate-liberal commonwealth” under business control was here to stay.
The first crisis of the new corporate commonwealth was the Great Depression. The SEC was set up to regulate the performance of securities traders, and to provide for disclosure of financial information. Business was afraid that President Roosevelt was driving toward socialism. The authors feel, however, that “what evolved was a set of new public institutions that created a more stable capital economy and a more predictable and profitable environment for business.” Banking reform measures were introduced under the New Deal in the from of the Banking Acts and the creation of the FDIC. One result of this was functional segmentation along commercial and investment banking lines. The authors state that no other nation chose this form of segmentation, but “no other nation’s banking system had become so enmeshed in stock speculation.
The National Recovery Administration, the Reconstruction Finance Corporation and the Federal Jobs Program were attempts to combat the effects of the Depression. The labor policies of the New Deal hastened the emergence of “Big Labor” in the U.S. As a result of the impact of the Great Depression and the New Deal, the life of the CEO changed dramatically: it was increasingly difficult to strike a balance between efficiency, innovation, and control.
The American Era (1940-1969) saw “a process of reconciliation between business and American society.” The war-induced prosperity eased political tensions and focused on the need for efficiency in mass production. The Federal Government’s responsibility for the overall performance of the economy was recognized. Presidents Kennedy and Johnson embraced “new economics,” which consisted of designing packages of monetary and fiscal policies capable of stabilizing and sustaining business growth while maintaining politically acceptable levels of unemployment and inflation.
Government spending for national security added to the potent economic impact of war. The authors suggest that it was the war expenditure and not the New Deal that pulled the country out of recession. There was, however, concern over the growth of this “military-industrial complex.” Defense took over significant portions of the nation’s resources and creativity, and affected two other areas of government investments: highway building and space programs. The American Era also witnessed a spectacular growth in science and technology, largely as a result of federal support.
The performance of regulated industries in this era was generally favorable. There were lower pressures from cross-in-dustry regulation.
The American Era saw “the modern firm in triumph.” To take advantage of favorable conditions, diversification, together with decentralization, became important. By the end of the 1960s, there were large numbers of “conglomerates” and the rationale of “synergy” began to appear. Decentralization enabled quick postwar expansion into overseas markets with devastated economics. In this scenario, “strategy flowed out of structure.” The multinational firm accompanied America’s political involvement abroad. “Business normally followed the flag.
The authors suggest that this era saw “the corporate com-monwealth at its peak.” With federal and monetary policies stabilizing aggregate demand, they felt that “by that time, America seemed to have discovered the proper way to harness corporate capitalism without seriously injuring the market-oriented process at heart”.
By the late 1960s, there were increasing tensions at home and abroad, “as the fundamental conditions under the American Era started to shift.” As the U.S. was preoccupied in containing Communism, new competition emerged from Europe and Japan. Governments of raw materials-producing nations asserted national interests. America and its competitors ignored growing evidence of the need for change and “were victims of their own success.” Regulatory agencies became inflexible when the economic setting began to change and when there was mounting inflation.
U.S. business faced internal problems due to lack of creativity, taking a short-term view, being conservative about innovations and overly concerned about stability. Government policies toward business did not work as well in the shifting international economy. Not until international competition began to intensify in the 1970s did “the foundations of the corporate commonwealth visibility begin to crack.
The authors suggest that the period 1970 to the present marks “the second crisis of the corporate commonwealth.” The nation had grown accustomed to international economic suc-cess and could not easily make adjustments. “The American Era was certain to end.” Suggestions made in panic that America should borrow ideas from other nations to solve its problems, slighted the inherent strengths of the corporate commonwealth and ignored the barriers to rapid, basic change.
There were “new misdirections in the public sector” as the government tried to grapple with the change. The problems of the weak domestic economy were compounded by rising energy prices. “Something was wrong, but the experts could not agree on the diagnosis or the cure.” The government could not control spending for defense and welfare. New areas of government regulation provided added pressures on businesses’ ability to compete. Expenditures for R&D dropped off sharply, as corporations began to take a short-term view.
In this new era of international competition, reconstruction began. The authors state that the late 1970s saw “the beginning of a process of reconstruction that demonstrated convincingly the single most important strength of the U.S. corporate com-monwealth: its responsiveness over the long-term to the forces of change.” The authors claim that the most obvious shortcom-ing of the corporate order “was the lack of effective integrative institutions that would enable the United States to recognize the interrelated nature of its problems and to implement intelligent, system-wide solutions.
Strategies in the private sector to cope with this new era included de-conglomeration and scaling down, in an effort to improve efficiency and innovativeness in the markets they still served. There was a belief that small is innovative. New con-cepts of labor relations emerged in response to the challenges posed by labor-management relations. Yet, according to the au-thors, “in no area does the historian’s search for useful prece-dents in our past produce less evidence for optimism.” There has been a strong surge in deregulation in the face of increased international competition. Deregulation fostered competition, and, to some degree, innovation.
The Reagan programs attempted to reduce social security spending and cross-industry regulation “to give U.S. companies a breathing space in which to adapt to increased international competition.” Reagan’s supply-side economics did not produce “the miracle cure” and the budget deficit kept mounting. De-regulation increased takeovers and the unanticipated results were crises in the financial and airline industries, accompanied by a rash of bankruptcies.
The authors present their personal analysis of the current crisis and suggest measures for speeding up reconstruction.
Some of their suggestions include significant changes in the public sector, reducing the deficit through reduced defense spending, the judicious use of protectionist measures either through tariffs or quotas, and direct aid to strategic firms by setting up narrowly focused independent agencies.
Galambos and Pratt have provided a well-researched, well-written analytical perspective of the growth of American capitalism, and the interaction of American business and public policy. The book is invaluable to students and leaders in business, and those who wonder how and why “the American Century” lasted only 25 years.
