Corporate Dreams: Big Business in American Democracy from the Great Depression to the Great Recession

Chapter 6 - Managers versus Markets

40 Chapter 6 Managers versus Markets Beneath the practical and moral failures of the corporate economy in the Great Depression lay a failure of intellect. Many Americans did not see that the corporate economy had shown that the laissez-faire ideology was not the whole truth. They did not see that the success of the large business corporation proved that, in some circumstances, a free market is inefficient. If the market were always the most efficient system, there should have been no corporations employing large numbers of people. All Americans should have been self-employed, selling their autonomously produced goods and services. But the United States had developed into the world’s richest nation by going in exactly the opposite direction. Instead of working freely in the marketplace, an ever-larger number of citizens were employed by large corporations where they did what the boss said. In other words, America grew rich not just because of the free market but also because many citizens surrendered some of their economic freedom to corporate employers. Corporations might answer to the law of supply and demand. But employees answered to corporate managers. Managers, not markets, became the primary force in the working lives of many Americans. Markets still mattered to business, because even corporate titans sometimes had to compete. Yet the main force in the lives of most corporate employees was not the market but the company, not the customer but the boss. What explains the fact that managers, not markets, increasingly drove the actions of Americans at work during the late nineteenth and early twentieth centuries? Why did many Americans, even if they still espoused Jeffersonian independence on the Fourth of July, subordinate themselves to managers the rest of the year? Why were more and more citizens able to increase their economic well-being by giving up their freedom to work on their own in favor of doing what a corporate boss told them to do? An English economist attempted to answer that question, not just for the United States but for the entire industrial world. Ronald Coase’s answer was so good that his 1937 essay, “On the Nature of the Firm,” won him a Nobel Prize. Coase’s answer to the question of why business firms exist—the question of why everyone does not work for himself or herself—was that top-down managerial power is sometimes more efficient than the free market. Coase still exerts considerable influence today, and his ideas underlie much of what follows in this chapter. In the nineteenth century, new technology in many industries raised managers’ efficiency more than it raised the efficiency of the market. The railroad and telegraph often made it cheaper for managers than for the market to coordinate the flow of goods in the American economy . The result was that many Americans could make more money working for those managers and corporations than they could if they worked freely in the market. The old saying that there is no free lunch applies to markets. Markets have operating costs, especially transaction costs. To buy and sell takes time and money. The railroad and the telegraph saved time and money by enabling corporate managers to reduce the number of market transactions involved in moving goods from one place to another. In the early nineteenth century, for example, it took several costly market transactions to move manufactured goods such as cotton cloth from the east coast to the Midwest. Transportation and communication, often by river, were slow and risky. It was hard for eastern merchants to know what was happening to their goods on the other side of the Appalachians and hard to know what price they might command when they got there. Therefore, eastern merchants and manufacturers sold their goods to middlemen. These middlemen or “jobbers” specialized in the risky business of moving manufactured goods from the east coast into the Midwest and selling them, again, to the region’s general stores.1 These transactions raised the price that farmers paid when they shopped at the general store. After all, the middlemen had to eat. By the end of the nineteenth century the middlemen and their market transactions were gone, replaced by corporate managers in large retailers. For example, Marshall Fields, a big department store in Chicago, Managers versus Markets 41 had managers or “buyers” in the eastern United States and in Europe. Once the Marshall Fields buyer purchased goods in...