The Rise of Big Business
Today, the Big Business is one of the main features of the modern economic environment. Big Business refers mainly to corporations, huge economic entities operating for profit and distributing the ownership by the means of stocks. The Big Business started to grow in America after the Civil War, in the 1860s and already reached its peak of strengths by the “roaring” 1920s. Although Big Business faces much social and governmental control nowadays, its power is still enormous.
Large business corporations provide most of economic output, employment places, financial investments, and production output. Politics is also very much influenced by the large corporations and is often forced into pursuing businesses’ strategic interests. Even average citizens get much of Big Business influence through employment, and corporations’ PR campaigns, marketing strategies, and other public policies. David Korten, in his book When Corporations Rule The World, points out that often corporations have more power than a state.
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Korten argues that, “Corporations have emerged as the dominant governance institutions on the planet, with the largest among them reaching into virtually every country of the world and exceeding ost governments in size and power. Increasingly, it is the corporate interest more than the human interest that defines the policy agendas of states and international bodies… “. The impact of the corporations on the society is so great that the economic analytics have even labeled the modern political and economic system as corporate capitalism.
Thus, the contemporary economic environment can be without much doubt considered the world of “Big Business”. Most explanations of the reasons for the rapid growth of business outline three main factors. First, it is the shift from water-powered to coal-powered factories, which nabled manufacturers to locate their plants nearer to markets and suppliers. The new technology also allowed producing bigger quantities of goods at a lower price, while the quality has also risen significantly. Second, the transportation improvements allowed firms to distribute their products to regional or national markets.
A great role here was played by the development of railroad. Instead of only being able to ship goods to a local and regional market, railroads now made it possible for companies to ship and sell their goods outside traditional local markets. But even though the railroad now made it possible for the companies to sell their products to other regions, they had now to find a way of paying for shipping and still being able to reach Break-even point and compete with other regional companies.
Third reason is the development of new financial institutions, such as the stock market, commercial banks, and investment houses, which increased the availability of investment capital. Although these factors create an impression that the rise of Big Business was a rather orderly process, this was actually not the way it happened. The rise of Big Business came largely as a response to the hostility of business environment, where the challenges of competition were compounded by frequent economic contractions or panics, and other features of economic instability.
The most violent contractions happened in the periods of 1873-1878 and 1893-1897. During The rapid corporate growth in America started in the end of 1860s, after the end of Civil War. The first period of Big Business rise, also known as corporate revolution or great merger movement, coincided with important changes in the American society. These were the end of Civil War, abolishment of slavery and several other political reforms, resolution of social tension between the North and the South, and economic recovery of the South, known as Reconstruction.
Unlike the Civil war and Revolution, Rise of Big Business took place without violent political transformation because the preceding historical events already established all the political prerequisites for a peaceful economic change. The expert of politics and economics, Martin Sklar, mentions in one of his works that “… Unlike the great sociopolitical crisis of the 1850s nd 1860s, which was resolved by a national reconstruction that required a civil war and revolution, the corporate reconstruction required neither civil war nor revolution, but rather political reorganization and reform”.
Most explanations of the reasons for the rapid growth of business outline three main factors. First, it is the shift from water-powered to coal-powered factories, which enabled manufacturers to locate their plants nearer to markets and suppliers. The new technology also allowed producing bigger quantities of goods at a lower price, while the quality has also risen significantly. Second, the transportation improvements allowed firms to distribute their products to regional or national markets. A great role here was played by the development of railroad.
Instead of only being able to ship goods to a local and regional market, railroads now made it possible for companies to ship and sell their goods outside traditional local markets. But even though the railroad now made it possible for the companies to sell their products to other regions, they had now to find a way of paying for shipping and still being able to reach Break-even point and compete with other regional companies. Third reason is the development of new financial institutions, such as the stock market, commercial banks, and investment houses, which increased the availability of investment capital.
Although these factors create an impression that the rise of Big Business was a rather orderly process, this was actually not the way it happened. The rise of Big Business came largely as a response to the hostility of business environment, where the challenges of competition were compounded by frequent economic contractions or panics, and other features of economic instability. The most violent contractions happened in the eriods of 1873-1878 and 1893-1897. During one of such panics in the mid-1870s, 47,000 businesses went bankrupt.
Thus, the end of the nineteenth century was marked by the rapid merger movement, when many local businesses were Joined together to create large corporations. As a result, a small number of very large companies, which quickly eclipsed their business rivals, emerged in specific sectors. This trend became most apparent in the United States but it also appeared important most developed countries of Europe. Some of the newborn corporate giants were United States Steel, AT & T, American Tobacco, Pennsylvania Railroad New York Life insurance company, and several others.
Most of the mergers took place in the American economy after 1897, when many large corporations in manufacturing, steel and railroads were created. The businesses grew as a result not of production and distribution), but also of horizontal integration (when companies expand into related fields of business). Both types of integration contributed to the emergence of polls, holding companies, cartels, and trusts. As a response to recurring business crises, strong competition, and declining profits, some businessmen made an attempt to create financial stability by formation of ools or cartels.
These were agreements among competitors to divide markets, fix production quotas, and agree on certain price levels. However, pools rarely survived an economic contraction and were too weak to solve the problem of competition because they were voluntary agreements. An alternative to the pools were the trusts. Under trusts, owners of rival firms assigned their stock to a single board of trustees in return for interest-bearing but non-voting certificates. The trustees then fixed prices and marketing policies for all the companies. The famous Rockefeller’s
Standard Oil Company was the first trust, which was followed by trusts created in such industries as manufacturing, machinery, mining, alcohol distilling, and sugar refining. The negative side of the trusts was that they restrained trade and violated corporate charters of the competing firms. That is why trusts faced intense legal resistance and were banned by the Sherman Anti-Trust Act in 1890. Then, trusts were replaced by a new the holding companies, a company with the power to purchase other companies. Holding company was legal according to the law.
Probably, the most famous holding company was General Motors, after it purchased number of smaller automobile manufacturing companies. The new large corporations had a lot of strengths when compared to the small local businesses, which dominated the American Economy until the 1860s. Jeremy Attack mentions that “During the Civil War, the need for manufactured goods of all kinds provided manufacturers with a more autonomous existence. Factories that were built early in the 19th century were frequently small, local monopolies which did not attract much competition because of the general backwardness of transportation” .
These businesses were not directly competing with each other and were still mploying skill craft workers to manufacture products. “The great mass of American proprietors were, at any rate, the owner-managers of very small firms. On the average, each proprietor hired seven workers” . Because of their dependence on local skilled workforce and customers, these companies did not produce a large volume of goods and oriented themselves on the amount that was needed and demanded currently at the market.
So, first of all, local businesses of the middle nineteenth century had a small customer base, which made them very sensitive to the competition and changes in customer’s preferences. Another weakness, small inventory base, was both the consequence and the reason of the limited production. The small businesses, being locally owned and managed, had also small availability of investment and financial resources. The business owners usually borrowed from a local bank to start the company and then typically operated on profits without taking credits. The profits were typically spent at the local communities.
All in all, these businesses were isolated within their local markets. Operating in the conditions of prices. Often businesses had to set high prices in order to break even, as the perating and manufacturing costs were also very high because of little quantities of goods produced. While the local businesses had very tight profit margins and could not afford to operate at a loss for very long. High operating costs, limited access to investment funds, and small size markets, allowed few opportunities for strategic maneuvers, and almost no flexibility.
That is why the local businesses could not compete with corporate giants and often went bankrupt or let themselves be bought out by the rivals. In contrast to the local businesses, large trans-regional corporations had a huge ustomer base, which allowed them to shift from one group of customers to another and vary their marketing strategy; this also secured the companies from the loss caused by change in attitudes and preferences of a particular fraction of customers. Those businesses, which have grown into large corporations experienced significant expansion of the markets.
As mentioned, before the corporate revolution, most businesses operated in a single town from a single office or factory, while the sales were made predominately to customers in the immediate area. But the new orporate enterprises carried out their functions in widely scattered locations. For example, as early as 1900, General Electric had plants in 23 cities. A great role here was played by the development of railroad, which contributed much to the expansion of the markets.
After the railroads linked all the parts of the country together, the companies were able to ship goods not only to local and regional market, but it was now possible to ship and sell the goods outside traditional local markets. According to historian Albro Martin , the impact of railroads was threefold. First, the railroad ndustry reduced the real cost of transportation to a fraction of what it had been. Second, it brought all sections of the country into the national economy, making regional specialization on a grand scale possible.
Third, it gave birth to a host of other industries for which it became an indispensable input or from which it derived the huge quantities of materials and equipment called for by railroad investment. The invention and advance of communication systems, such as telegraph and telephone made it possible to coordinate the work of businesses in the descent markets, allowing better interregional management. In fact, companies providing communication have also grown into large corporations operating on the continent wide markets. For example, this happened with American Telephone & Telegraph (AT&T).
In the expanded markets, the big cities, which have developed into giant metropolises, became the main arena for corporate activity. The industry, finance, and administration was centered in metropolises, much due to the fact that corporations attempted, first of all, to expand to the cities and establish there their economic strategic base, and then, to reach from there the regional markets. This idea is pointed out by David R. Meyer, “explanation is proposed based on role of metropolises as controllers and coordinators of exchange.
Manufacturing concentrated increasingly in metropolises because they dominated regional markets. Metropolises specialized in some national market industries, but their industrial growth based on these industries simply kept pace with national growth” . Jeremy big cities. The historian proposes that this trend was closely connected to the advance of water transportation system and creation of canals: “Canals had radically eshaped trade flows in America, intercepting freight in far-distant hinterlands and diverting it to the port cities which they served.
As a result, these cities grew at the expense of those that lacked such connections. In the competition for trade, more than city prestige was at stake” . Though the railroad and communication systems now made it possible for the companies to sell their products to other regions, they had now to face a challenge of paying for shipping, and after that, still being able to at least reach break even point. The companies found the solution of the problem in the large scale production, hich allowed large producers to reduce the cost per unit. This approach received the name of “economies of scale”.
The companies tried to reduce the cost of production by saving where possible on inputs and by maximizing the quantity of output. Thus the ratio of fixed costs to the profits declined, which helped big corporations to survive. The big corporations, unlike small local businesses, were able to purchase the new efficient equipment and start the mass production. Another factor allowing the mass production for Big Business was the expansion of markets, discussed previously. Now corporations oriented on the cost effectiveness and production capacity rather than on current demand on a particular regional market.
The small local businesses, being unable to sink costs due to the economies of scale, had almost no chance to fght in the price war with nationwide corporate giants, who were enabled to charge lower prices by the profits received from the volume of sales. Besides the savings in manufacturing, for the Big Business, it was also cheaper to transport and store the products because very often companies got discounts based on sheer size of the order. For the Big Business, it was also much easier to access the investment funds and raise capital; because of its size it could borrow money at cheaper interest rates.
Furthermore, large companies had the supplemental source of investment: going public and selling the shares. Besides the economies of scale and cost effectiveness, corporations profited from their reputation and well known on the different markets brands. Lastly, corporations often used their economic power to receive government subsidies and special tax breaks. After the rise of corporations, the whole American economy was dramatically transformed. After years of instability following the Civil War marked by high unemployment and large numbers of business failures, business began to consolidate into progressively larger economic units.
The economy received a push towards further development, and the level and the quality of life increased significantly. However, there was much criticism concerning the way corporations conduct business, and the way they may misuse power. Generally, the debate regarded three questions: whether wealth come from exploitation or from patience, frugality, and virtue; whether bigness was the result of conspiracy or of pressures of lind economic forces; whether men of wealth and power be free to use their riches as they wishes or whether they should be taxed to support the public good.
While business titans made all Americans better off through their innovations in management, finance, and production. Ideally, corporate capitalism is considered merely a positive outcome of historic development of mankind. For instance, Colin Koopman argues that corporations are a rather progressive form of property ownership: “in corporate capitalism owners control capital only through the means of socially-developed processes. Ownership thus does not directly translate to control…
Corporations embrace the tensions between our social and individual lives that individual property systems and socialist property systems both neglect” . Koopman follows with the view that in future corporations can become the securing power of democracy. According to Koopman, this concept is ” the source of their (corporations’) democratic viability. It is obvious that corporations and governments are the two dominant centers of power in our world today. Corporations, I suggest, can become exemplars for ethical practices of democracy and capitalism” .
Other critics argue onsider the lords of industry monopolists and robber barons, who monopolized blocked the road to success for those who tried to compete with them. Anyway the rise of Big Business has brought both good and bad effects on the American society. The thing one can be sure of is that they played a dramatic role in the historic development of the country by bringing economic acceleration, technological and ideological innovation, and new understanding of business. Basically, corporate capitalism can work for the good of the nation, given that the economic freedom, governmental control, and public involvement are balanced.