Mr. Wasserman is a systems analyst for a computer manufacturer.
There has been much discussion recently concerning bigness in business. It is not the purpose here to debate whether bigness per se is an evil. The contention, rather, is that the very policies of government designed to protect competition and combat bigness have necessitated and created this prevalent trend, best exemplified by the conglomerate corporation. Among the factors aggravating this trend are: (1) inflation, (2) the exploitation principle, and (3) corporate statism.
By inflation, I refer to an increase in the supply of money or bank credit without a corresponding increase of the gold supply behind the money.¹ It would be very difficult for a large or intermediate size corporation to acquire company after company without large sums of money at its disposal. Inflation by itself, however, while tending to encourage some mergers, would not result in the conglomerates as a major movement in industry as we see it today.
During the inflationary period of the twenties in the United States, while companies did merge with one another, it was usually for the sake of efficiency—that is, for the purpose of increasing productivity and lowering costs in order to expand sales which would result in increased profits. Few companies bought up other companies in unrelated industries as is quite common today.
We shall not go into the issue of inflation in detail here; what’s important is that if money (or bank credit) weren’t plentiful, as during a period of inflation, corporations would find it very difficult to fund their acquisitive ventures.
The Exploitation Theory
The exploitation theory was popularized by Karl Marx.2 The general characteristic of this theory is that all economic goods are the product of labor only; that is, that which gives value to a good is determined solely by the labor that went into it. The worker, who is the sole producer of economic goods, receives only a partial value of what he produces. The reason for this gross injustice is that the capitalist controls the means of production—land, resources, and capital—and uses these factors to exploit the worker. Since the worker will starve if he doesn’t receive some means by which to support himself while he is in the act of production before the product of his labor can be sold or exchanged, he undertakes a wage contract. Under the threat of hunger and the wage contract, the worker is exploited by the capitalist. The wage he receives from the capitalist is a fraction of what he produces, while the remainder of his production—the surplus—goes to the capitalist who need not exert any effort.
The so-called surplus under this theory (rather than rent on land and interest on capital goods) is attributed to two factors—one economic, the other legalistic. The economic factor is the division of labor. Under this system a worker can produce more than he requires for his subsistence, enabling others to share in the fruits of his labor. The legalistic factor stems from the private ownership of land and capital goods. The workers generally do not own these two factors of production—land and capital goods—and consequently, they are forced to enter into a contract with the owners, thereby relinquishing a part of their proceeds. The power which compels them to accept the wage contract is hunger. This exploitation theory has led to two kinds of laws, both of which tend to inhibit competition and maintain the status quo, hindering the entry of new companies into such industries as auto manufacturing or steel characterized by one or more large corporations. In the event that new companies do manage to enter the field, these laws make it very difficult for them to become large enough to pose a serious threat to those corporations that are firmly entrenched.
Intervention by Taxation
The first group of laws are those designed to redistribute the wealth by taxation. These laws rest on the view that the capitalists get rich by exploiting the workers and the workers are poor because they are exploited by the capitalists; taxing the capitalists to pay for certain goods and services for the indigent workers would help to alleviate the gross injustice. Hence, the graduated income tax and high taxes on profits.
These laws, with their high tax rates on higher incomes and profits, make it very difficult for a new company to accumulate the capital for expansion. Try to imagine under present tax laws a "Henry Ford" starting on a shoestring and accumulating the necessary capital to threaten the positions of General Motors and Chrysler. As his profits increase, so do his taxes; instead of plowing his profits back into his business (as did Henry Ford), he would face increased taxes and have nothing left for expansion.
One doesn’t begin a large company, he starts a smaller one; if it is profitable, he expands accordingly. If his profits are high, he has that much more to pump back into the corporation. If his profits are low, he may expand little, if any. Current high taxes on profits diminish the possibility of expansion.
High tax rates on profits also encourage larger companies to seek a tax break by buying marginal companies, those that are barely making a profit or actually losing money. The more money the marginal company loses or the less it earns, the bigger the tax advantage.
Money tends to flow to those investments which offer the highest rate of return—interest and profit. The higher the potential risk, the greater the potential return needed to compensate for that risk. A newer company would have to offer a potentially higher profit as an incentive to attract investment capital, since the investment risk would be greater than that of an established company. The stiff taxes on profits would, of course, reduce the potential profit and add to the difficulty in starting a new company. So, the income tax makes it difficult to start a new company of any appreciable size or to expand an existing on. The result can be observed in the decrease in competition in those industries with large established companies. New companies are discouraged from entering the field. Established companies may lack the pressure for innovation, tending to become bureaucratic and stagnant.
Competition encourages innovation and change for the sake of improvement. A large company, even though it may enjoy a large proportion of the market, must continue to improve old products and introduce new ones in order to keep pace with competition. Consider, for instance, the case of the Ford Motor Company. In the early 1920′s, Ford had 55 per cent of the market. That lead had dwindled in five years to about a third; consumers valued other automobiles more, even though they cost almost twice the price of a Model T. Henry Ford’s competitors were offering a closed sedan in a variety of colors, while the open-topped Model T came in, to quote Henry Ford, "any color you want so long as it’s black."
With the possible exceptions of the utilities and public transportation, there is in the United States today no company holding a competition-excluding (coercive) monopoly. This being the case, there is still some innovation and improvement in the products being offered for sale. But the growth of bureaucratic structure, independence, and innovation have diminished.
The stagnation and bureaucratization can be observed in the structure of large companies, not only at the corporate level, but at the departmental level as well. Just try to find someone to listen to an idea that would alter the power structure appreciably or diminish any of the "spheres of influence" in the company.
Many managers, instead of encouraging innovation, prefer to play it safe. A common rule in business today: "Don’t rock the boat." Recently, a former vice-president of GM was hired by the Ford Motor Company to make changes in that company from the top down to increase their share of the market; he only succeeded in getting himself fired because his suggested changes seemed to intrude into other executives’ "spheres of influence."
Privileges for Unions
The second group of laws which grew out of the exploitation theory were those designed to protect and promote labor unions. The arguments advanced for "protective labor legislation" centered on the issue of the wage contract and the hunger of the workers versus the greed of capitalists. "The only thing that the capitalists care about," it was argued, "is their profits; as long as they can increase profits by exploiting the hard-working laborers, they will do so."
Supposedly, the worker needed some defense, some way to correct the unfairness and alleviate his suffering. Legislation such as the Norris-La Guardia and the Wagner Acts strengthened the bargaining position of the unions and led to the powerful position which they enjoy today—not the power derived from efficiency and excellence of performance in competition, but power to exclude competitors by government-like coercion.³
The unions acquired their coercive monopoly through laws which remove labor disputes and union violence from the jurisdiction of the courts and place them in the hands of a special and sympathetic National Labor Relations Board.
When a group of laborers organize and strike, they can prevent the company’s hiring other men to take their places and also can and do resort to violence or threat of it to keep all workers off the job.4 This, of course, makes it difficult for a company to win in a dispute with a union.
The excessive wages and benefits demanded by these unions make it difficult for a new company to get off the ground as a going concern trying to accumulate capital for expansion.
It can readily be observed that for manufactured items it costs more per unit to manufacture the first one than the second, and as the quantity increases—up to a certain point which varies according to product and production method—the unit cost goes down. This being the case, smaller companies have to be more cost-conscious than their larger competitors; the larger companies, having a bigger share of the market, produce more items over which to spread the cost.
Both the prolabor legislation and the tax laws, by protecting the larger and established companies, bring about a lessening of competition. This reduction in competition encourages stagnation and leads toward bureaucracy in industry, and eventually toward the corporate stat.
Because of the expansion of government and its increased control over industry, two separate but interwoven trends become discernible, both contributing to the bureaucratization of business. The first is the spectacle of American industries vying for government contracts; the second finds businessmen fawning upon government officials with their complex edicts and laws.
The Growth of Government
The growth of government contracts also is rooted in the exploitation theory. If the capitalist would exploit his workers as workers, wouldn’t he also exploit them as consumers of goods and services? The belief that he would has led to public schools, government assisted medical care, farm subsidies, and innumerable other welfare programs.
Once the government begins to provide goods and services to some at the expense of others, each step of such intervention and subsequent taxation tends to disrupt the economy and lead to more and more regulation until the whole market structure collapses into total government control, as in Italy and Germany between World Wars I and 11.5
How Bureaucracy Is Controlled
There are two ways in which a bureaucracy is controlled—the first is the law; the second, the budget. If a bureau doesn’t spend all the funds allocated to it, its budget for the following year is reduced. Hence, to get more money the following year, the bureau must spend all that was allocated to it.6
This increase in spending has in many instances led to a proliferation of government programs. One need only look at the public assistance programs, at the increase in both the amount spent and the number of programs today compared with ten years ago to see the application of this principle.
This increase in government supplied goods and services naturally increases the number and dollar value of contracts being offered to industry. The vying for government favors in the form of contracts encourages industry to hire ex-bureaucrats as executives because of their influential contacts in the government; a certain result is bureaucratic management in industry.
Bureaucratic management doesn’t measure performance by profits, but on how well a department follows the laws or rules and stays within its budget. A department that makes profits can measure performance by its profits and make rewards accordingly, but how is one to measure performance in a bureaucracy? In a bureaucracy one is normally promoted by one of two standards —seniority or personal friendships and influence. Neither of these standards encourages independence or initiative.
Performance and Profits
The method of promotion which does encourage innovation and independence is by performance; and performance is measured by profits. While profits naturally serve as an incentive, they also serve as a form of economic calculation which can be used to demonstrate to the entrepreneurs the demands of the consumers. If an entrepreneur is successful in forecasting the demands of the buying public, he earns a profit; if not, he takes a loss. This is the market manner in which the most urgent wants of the individuals in society are satisfied?
A manager under the profit system can determine whether or not his subordinates are performing well by the extent of black ink shown on the ledger of that department. If the department does well, its manager is rewarded accordingly. If a department manager is rewarded for successful performance, it behooves him to reward those individuals under him who contributed most to the success of his department to encourage increased innovation from them and to serve as incentive to others to do better than before.
How Bureaucracy Grows
Bureaucratization in industry is aggravated by a complexity of the laws, causing many large companies to hire a staff of lawyers and tax accountants whose performance can’t be gauged by normal industry standards—profits. This necessarily leads to the application of bureaucratic techniques to that department or group. There is no method by which to gauge the performance of the lawyers and accountants whose job it is to interpret and suggest methods to avoid lawsuits from interventionist measures and tax laws.
One can’t determine success in negative terms of the lawsuits and tax suits not brought against the company. How is one to know how many lawsuits or tax suits might have been instituted against him? But he can know the amount of his profits or losses resulting from a particular policy or from the production of a certain product. Thus, the lawyers and accountants who apply and interpret interventionist and tax laws add to the expansion of bureaucratic techniques in industry.
Since bureaucracy represents power, it follows that just as the Federal bureaucracy continues to expand, so will corporate bureaucracy. Bureaucracy in government has a vested interest in new laws and new bureaus to expand its power. In industry the vested interest lies in the acquisition of other companies. Thus, the arrival of a new phenomenon—the conglomerate corporation.
Reasons for Mergers
Conglomerate mergers are of two general types: (1) the bureaucratic-power-structure type, and (2) the tax-avoidance type. The former will supply the management for the newly acquired company, while the latter usually leaves the acquired company as before, with respect to both the management and operation.
It isn’t mere coincidence that the conglomerate merger and the bureaucratization of industry recently have arrived together on the economic scene. These two—bureaucratization and conglomerates—have the same relation as germ and disease. It is the growth of bureaucratization in industry toward an increase of its "sphere of influence" that encourages the absorption of other companies. The bigger a company, the greater its "sphere of influence"; the greater its "sphere of influence," the more power it has.
In the tax-avoidance type of conglomerate merger the goal is the absorption of smaller companies which report operating losses or very low earnings, thus affording the parent company a tax break. In this type of merger, the parent company usually leaves the absorbed company intact, including its management structure. If the trend toward conglomeration continues, the theory upon which rests our complex and contradictory antitrust laws8 will be proven accurate, namely, Karl Marx’s Concentration Theory. This theory states that companies will grow and grow by absorbing other companies, and competition will diminish until a "General Bull-moose" emerges who will control everything. This, Marx goes on to say, will finally break down and a communistic state will emerge from the ruins. This theory seems to describe today’s trend toward fewer companies controlling a greater and more diversified production of goods and services. The mistake by Marx in this context is that he attributed the trend to the unhampered free market, whereas it stems in reality from the very controls Marx advocated.
The Mixed Economy Is Unstable
The grave danger in the merger trend is that the underlying structure is inherently unstable and leads to further government intervention in the economy and a further erosion of freedom. This unstable mixture of freedom and controls necessitates further intervention and inflation to support and maintain it. An example here may help to illustrate how these controls lead to still further controls, and so on until the economy collapses into total collectivism.
"Milk costs too much for poor people to pay; let us set a ceiling on the price of milk to lower it to a level which they can afford," argue the bureaucrats. This does lower the price, but it also has the further effect of lowering the profits of the milk producers. These lower profits drive out of business the marginal or least efficient dairy farmers, resulting in a decrease in the supply of milk. Next, the bureaucrats suggest, "Let us pay a subsidy to the dairy farmers to encourage the production of a sufficient supply of milk." This tends to encourage producers from related industries to shift their resources and energies to the production of milk. This increases the quantity of milk which tends to drive down the price, again to the detriment of the marginal producers. So the bureaucrats in typical fashion increase the amount of the subsidy. Increasing the supply of whole milk also may decrease the supply of butter, cheese, and related products, which leads to intervention in those areas, and so on ad infinitum. How such intervention is accompanied by inflationary boom and eventual collapse need not be detailed her.9 If this trend is to be reversed and freedom regained, it will have to be through an understanding of moral issues, specifically the morality of freedom and its consistency with the nature of man and the practicality of the free market.
Coping with the Problem
To cope with the problem of the conglomerates, it is necessary to try to understand and attack the root causes. One doesn’t reverse statism by fighting specific laws nor cure a disease by fighting the symptoms. To reverse statism, one must get at its roots. Since the root of any political system is the moral code upon which it rests, that moral code must be understood and challenged.
But simply understanding the moral code of statism, security and dependence, is not sufficient; one must understand and practice the moral code of capitalism, freedom and independence. The best way to prove a point is by demonstrating it; the best way to prove the validity of a moral code is by practicing it. The place to begin is with self-education and demonstration.
¹ See What You Should Know About Inflation by Henry Hazlitt (Princeton, N. J.: Van Nostrand, 1960).
2 See The Exploitation Theory by Eugen Böhm-Bawerk (South Holland, Illinois: Libertarian Press, 1960).
³ For further discussion of monopoly power, see Man, Economy and State by Murray N. Rothbard (Princeton, N. J.. Van Nostrand, 1962) and Human Action by Ludwig von Mises (New Haven: Yale University Press, 1949).
4 For documentation see the reports by Dr. Sylvester Petro: The Kohler Strike (Chicago: Regnery, 1961) and The Kingsport Strike (New Rochelle, N. Y.: Arlington House, 1967).
5 For further discussion of the inherent instability of "the mixed economy," see Socialism by Ludwig von Mises (London: Jonathan Cape, 1969).
6 For further insight into bureaucratic behavior refer to Bureaucracy by Ludwig von Mises (New Rochelle, New York: Arlington House, 1969).
7 Profit and Loss by Ludwig von Mises (South Holland, Illinois: Libertarian Press, 1951).
8 See Ten Thousand Commandments by Harold M. Fleming (New York: Prentice Hall, 1951).
9 See America’s Great Depression by Murray N. Rothbard (Princeton, N. J.: Van Nostrand, 1963).