The Rise Of Big Business

Ben Braaten Hist 1234 The Rise of Big Business The Rise of Big Business was the culmination of a transition from an agricultural based economy with isolated markets to an integrated industrial based urban economy driven by science and technology. The transition started first with the rise of commercial farmers, the expansion of railroads, more urban markets and the development of demand for industrial capital with the addition of rising demand for consumer goods. What we label as, “Big Business” cannot rise magically out of a semi-industrial primarily agriculturally based economy. A farmer does not decide, nor is able to walk off the field, hop on the train and go off and start Standard Oil, or US Steel. It is instead a process with a series of building blocks culminating in firms such as Standard Oil or US Steel. The railroads spread across the American West, provided incentive through land grants and the guarantee of markets and the therein profit. The railroads in turn allowed the rise of commercial farming and big business by enabling greater integration of markets through lower transportation costs. Not only the rise of expansion of the railroads, but the availability of better equipment, financing options and social pressure led to commercial farming which in turn led to a more urban society. The expansion and existence of the railroads created and expanded the demand for industrial capital. Railroads required far more resources and components than household products. This increased demand created an extraordinary profit and therefore an increase in suppliers and supply. This supply in turn was able to supply industry with needed industrial capital; Industrial capital to be utilized by the newly urbanized workforce to produce consumer goods (Chandler

8.) Consumer goods to be sold to the new industrial workforce via local and faraway markets enabled by the above described occurrences The just described processes spread the seeds of big business through the formation of markets and industries. The processes may have spread the seeds but they grew due to the opportunity to enter markets seeking extraordinary profits. Every gardener knows many seeds will grow into seedlings which will crowd each other out and create the need for thinning. Likewise the many companies started crowding each other enough for those at the helm of firms to see the need for thinning. The thinning took the array of smaller firms and transitioned them into a few large firms of the familiar oligarchy structure consisting of big businesses. Thinning out came in the form of mergers and consolidation. These mergers and consolidations could either be vertical or horizontal. Vertical was seen in instances such as US Steel, where a single firm maintained control via the supply line. In contrast there were horizontal consolidations where firms competing firms will join forces and combine operations. Horizontal and Vertical mergers and consolidations were done for various reasons with differing affects on the characteristics of big businesses. Vertical integrations guaranteed the availability of needed natural resources and other inputs with the added addition of keeping those inputs from competitors. In contrast vertical integration was used to consolidate operations enabling economies of scale and other efficiencies. In addition a consolidated firm could attempt to utilize the dominate firm strategy by setting it’s price and production to levels which allow for the smaller independent firms are forced to operate under the conditions of perfect competition, operating as price takers at full production. (Lamorsaux 121.)However, in order for the dominant firm strategy to be successful there needs to be the

absence of extraordinary profits. Thus, once in awhile the dominant firm will cut its prices below its costs of production removing both the extraordinary profits and forcing out competition absence of any producer surplus. Yet the power of the invisible hand and the incentives to enter the market would be too strong for the dominant firm at times to hold the dominant firm strategy. The next step if you are a firm unable to maintain the dominant firm strategy is to follow International Paper and US Steel in organizing your competitors into a cartel to maintain a preferable price. The cartel strategy too did not always work with their always money to be made allowing for more than a few of the large firms to be overcome by competition (Lamorsaux 135.) Added it to the difficulties of retaining a dominant market strategy was the advance of technology and its new marriage to industry. What firms sought was stability, consistency, both of which are non-characteristic of industries feeling the rapid change of innovation and technology. Management guru Peter Drucker has stated that the rate of change during the Industrial Revolution is equal to or surpassing of what we have seen presently with the Internet Revolution. You cannot maintain the dominant-firm strategy or a cartel if both the context and your industry are fluid and diverse. This marriage had gone through its honeymoon and early years during the rise of big business, after craftsman and University researchers gave it its birth. The marriage between science and industry started in the electrical chemical industries and then spread to their cousins elsewhere. The effects of technology and science on competition and monopoly power are as David noble stated, “In all of these industries the systematic introduction of science as a means of production presupposed and in turn reinforced industrial monopoly. This Monopoly meant

control not simply of the markets and productive plant and equipment but of science itself as well.”Nobles went on to say that originally this was control of patents, but then transitioned into control of the process of industrial research before evolving into control of social frameworks from which knowledge and knowledge workers emerged from and the integration of both into the corporate world (Nobles 52.) The significance in that unlike knowledge, control over science, the processes of science and most importantly the social frameworks from which the marriage of science and knowledge began are not easily replicable. They are intangible and created by experience, not merely snooping or tinkering. As you can imagine this was quite a powerful tool in maintaining a monopoly. However, I disagree with Nobles on that since the process and social framework are intangible, they cannot be controlled. You cannot lock ideas in a vault for them to never get out. You cannot stop others from making parallel discoveries, or making discoveries beyond your own with more effective frameworks. Although I do see a role of science in monopoly power, it is not as easy as it sounds. The actions of Westinghouse and General Electric showed this. They had patents and control of scientific processes but still saw the need to take action in the form of consolidations. Thus, the rise of big businesses was a process with differing aspects and features which go beyond those I have mentioned here. It was part both the cause of and caused by the wider context of change and industrialization and general change. It involved mergers and consolidations, and the mastery of technology. Society may have given rise to big business many years ago, but big business is still learning and evolving today.