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SOSC 4043 - OCTOBER 2ND READINGS

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Department
Social Science
Course
SOSC 4043
Professor
Sonya Scott
Semester
Fall

Description
SOSC 4043 – FALL TERM BOOK NOTES October 2 , 2013 American Industry Incorporates Why large socially capitalized industrial corporations, which virtually did not exist in 1890, came to dominate the economy by 1905? - Chandler states, “markets and technology determined whether the manufacturer or the market did the coordinating within an industry” o They had a far greater influence in determining size and concentration in American industry than did the quality of entrepreneurship, the availability of capital, or public policy - By early 1890’s, the institutions of finance capital provided the vehicle for regulating relationship among putative owners - The American Tobacco company used its power to gain control of all branches of the tobacco industry - The international paper company nearly monopolized the production of newspaper until newspaper publishers financed a rival - Through these above companies, we can see how factors other than technology and markets shaped the process of socializing capital into corporations - The immediate factors that shaped the transformation to large, socially capitalized manufacturing corporations were: o 1) the ability of businessmen producing a product to act collectively; o 2) the elimination of forms of collective governance other than corporations o 3) the networks that gave some industrialists access to corporate capital which they could use to secure dominance within their industry o 4) the ideology that dictated that competition was basically destructive and that monopoly was necessary for sustained profit o 5) the collapse of the American railroad industry precipitated by the 1893 depression, freeing massive amounts of capital for industrial corporations o 6) the process of organizational institutionalization that made the creation of large corporations a “rational” and “timely” activity Tobacco - Before 1880s, manufacturers tended to specialize in one type of tobacco product o Originally the work of manufacturing was cutting, curing and packaging o During 1880s some branches began to adopt machines to do more of the work - In 1890 ATC asserted their position in the industry through aggressive competition and acquisition of surrendering companies o Succeeded in monopolozing all branches except cigars - Technology interacts with property - The capital structure enabled the ATC to compete as successfully as it did, to develop its productive capacity ahead of demand, and to develop the demand that made the new technology profitable - ATC began as a producer of cigarettes, and was not created to meet an inherent need to supply America, but continued stimulating demand o Offered financial backers prospects of monopolistic profits - ATC created the American Cigar company o Never dominated market or market conditions and never was as profitable as other branches, but was the nation’s largest producer primarily because of financial power Cigarettes - Chandler: James Duke’s special talent was to take advantage of the new machinery to create large-scale production units while instituting new distribution organizations that could effectively reach the consumer o His success resulted from his realization that the marketing of the output of the Bonsack machine required a global selling and distribution organization o He was the first to build an integrated enterprise - In contrast, some believe that the ATC dominated the industry because of its unfair methods of competition -- buying up the competition - Chandler: the massive output by continuous process machinery caused and indeed almost forced the creation of a worldwide integrated organization - Historically, ATC’s marketing strategy constructed the market that sustained the industry o Marketing structure made the industry when the innovative advertising strategies created the demand for cigarettes - ATC was one of the first companies to heavily promote brand names, use all media for advertising, and employ such devices as distributing matches featuring advertisements - ATC grew to dominate the entire industry more due to power rather than efficiency - If ATC’s dominance was based solely on technological superiority and greater efficiency, it should have been able to easily outcompete other companies – but, their market share declined - ATC was able to regain some of the market share, mainly through using financial power to purchase independents more than through winning customers with good products and low prices o It used standard monopolistic competitive practices, selling in targeted areas below cost, making exclusive contracts with jobbers, and gaining control of raw products - Since other capitalists shared the ideology of monopoly, they knew that ATC would be willing to pay premium prices to eliminate competition, and they moved quickly to form companies primarily to sell them to ATC - Clear flaws in the efficiency argument: that economies of scale engendered by advertising do not imply efficiency, the unwillingness of the ATC to depend on higher productivity or economics of scale to outcompete the independents, and the fact that despite greater resources for advertising and a monopoly over the Bonsack technology, ATC failed to sustain its market share Plug Tobacco - Plug output was three to four times as large as cigarettes - Acquisition of the plug companies had one major effect on ATC: o Brought into the central leadership a group of financiers that thereafter shared power with the tobacco manufacturers, solidifying the link between manufacturing and finance capital - Bureau of Corporations concluded that ATC had prevailed, not because of superior technology or organization or even size, but because it had access to financial resources that others lacked o Its strategy to achieve monopoly made it vulnerable o The plug tobacco branch of the industry came under the control of the same large corporation that dominated the cigarette business because of economic power, especially financial power - History of these companies also illustrate how the manipulation of corporate securities can create control and profit for strategically placed individuals with the use of other people’s money - Actual operation of corporate capitalism has concentrated control in fewer hands and created colossal individual fortunes - Rights, entitlements, and responsibilities of ownership are divided among the different types of securities defining new relationships among owners and creditors - The new ATC operated both as a holding company and as an operating company o The new organization further concentrated control in the hands of the inside group and simplified the organization o The preferred stocks had no voting power in the new company, which meant that power was even further concentrated in those who controlled the common stocks Cigars - Cigar industry is a prime example of a business that lacked all the fertile conditions for large- scale corporations but still gave birth to a corporation that did not greatly prosper, but did survive - When it moved into the cigar business, the ATC and its subsidiaries controlled only a little over 2% of the market but assumed techniques that succeeded for cigarettes would work for cigars - Advertising, acquiring new companies and promotional campaigns were disastrous, leading to three straight years of major losses - These forms of manipulation were only possible within the corporate system o Partnerships can be owned by the same individuals and assets can be transferred at nonmarket values o Techniques that corporations use are presumably temporary fixes - Those who control corporations can gain enormous short-term profits from new capital infusions from outside investors - Efficiency theory holds that organizations arise or adapt to more effectively meet existing needs - Cigarette industry created its demand by advertising and promotion o If the product had never existed, nobody would have missed it o It is implausible to hold that the process of creating demand through advertising meets any need but that of profit - if the efficiency account is correct, supply and distribution should have followed demand, not created it - even if efficiency explained the formation of ATC to manufacture cigarettes, there is no necessary reason why the corporation would aggressively take over other branches - in both sugar and tobacco industries, different parts of the industry were transformed into the property relations of socialized capital by integrating them into corporations that dominated their entire industries - Chandler: large corporations were established for a variety of motivations, but maintains that they persisted only where the technological and market conditions made them appropriate Paper - Cooperation between suppliers and distributors enhances the success of new corporations and that outright ownership effectively secures their cooperation or their subordination - It is challenged that the relationship among suppliers, manufacturers and distributors is determined by the objective needs of production and distribution - It was the social relationships that determined whether integration was actually achieved - Paper industry illustrates that corporations could be effectively integrated into the social institutions of corporate capitalism, thoroughly changing the social definition of ownership, with little active involvement of investment bankers - Each branch had a traditional and established social basis that greatly facilitated its governance - The largest and best-organized branch was newsprint, which spawned the International Paper Company - Competition was spirited, but hardly reckless - Another indication that the competition was not ruinous was the number of companies doing business - Overproduction had driven gentlemanly competition into reckless rivalry o Prices were falling from 1880 to 1897, but there was no evidence that reckless competition was qualitatively any different from “natural” competition - No single company or personality dominated - IPC was a more egalitarian consolidation than many, formed to take advantage of a new institutional system rather than to solidify a victory of a dominating force o Was taking advantage of an institutional structure rather than constructing one - The largest source of profit would be from the securities market, not the direct profit of making and selling paper o This came at the price of losing privileges of ownership, especially authority to make strategic decisions - 33 manufacturers formed the American Writing Paper Company - A part of the industry even less economically suited than newspaper spawned a major corporation based on social cohesion, taking advantage of a maturing institutional structure of corporate capital - Strawboard was the industry’s largest branch o Its product was a simple one with no recent technological advances, no inherent demand for great capital, and no economics of scale - Continental Wall Paper Company o Enmity produced by cutting out the jobbers was a major factor in share of business falling o Without this link with the customer, manufacturers could not sell their product o Labor costs were also a factor The Biggest Merger of All: Finance and Industry Consolidate - The social organization of enterprise under any economic system is constrained by the social organization of property - The relationships among owners in the market and the relationships that constitute the relations among different owners of the same enterprise are property relations - What types of relationships will be legitimated and enforced by the state thus constitute the nature of the economic system and structure how it operates - The availability of capital means the existence of not only an aggregate amount of capital in the economy but, at least as important, the institutional structures to mobilize that capital and make it available in an accessible form - The specific institutional form that the new property took was corporate capital – capital organized and administered through the specific institutions of investment banks, stock markets, and brokerage houses – which investors then invested in socially capitalized large corporations - As capital was socialized, the forms of capital were changed in at least three ways: o 1) when corporations combined productive units, they changed ownership into a more liquid form that was much more easily transferred from one person to another o 2) process created new capital that achieved its value less out of physical assets than by socially legitimated agreement o 3) mobilized new capital from outside the party of owners and promoters, from other individuals and organizations - Preferred stock gave the possessor a prior claim on profits; common stock gave the possessor the right of control - Securities that represented no physical assets were known as watered stock - It is pointless to distinguish between securities that represent “real” value and those that represent fictional value or “water” o In terms of the social relations of property, this distinction is essential - Bonds was the new capital that often provided the funds for new equipment, new factors, or new distribution facilities - When the railroads ceased to be as dependable as previously believed, investors were willing to invest in industrial securities - Two debates concerning the role of finance capital in the American economy: o 1) causal direction of the relationship between the size of the firms and the movement of finance capital into the industrial sector o 2) whether the power of financiers relative to that of other economic actors was transitional, a temporary stage of finance capital between family capitalism and managerial capitalism, or a fundamental feature of corporate capitalism that persisted after the passing of the prominent financiers gave way to the anonymous managers who administer most of today’s corporations - The consolidation movement in industry could not have happened without the prior development of large firms and some of the technologies that facilitated large firms - Industry after industry simultaneously adopted the corporate form, indicating a process of institutionalization, not a process of adaptation to factors like market expansion or efficiency- enhancing technologies The New Order
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