Growth and Decline of American Industry

Case studies in the Industrial History of the USA

John F. Wilson, Nicholas Wong, Steven Toms

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9780367024093
• eBook ISBN: 9780429602566
• Topic: Commerce
• Subtopic: Commerce Général

This shortform book presents key peer-reviewed research selected by expert series editors and contextualised by new analysis from each author on how the specific field addressed has evolved.

The book features contributions on the history of government-business relations, regional and local business relationships, the development and formation of Silicon Valley, and the rise and fall of the US machine tool industry after the Second World.

Of interest to business and economic historians, this shortform book also provides analysis that will be valuable reading across the social sciences.

Chapter 1
Trying to keep the customers stratified

Government, business, and the paths of innovation in American railroading and computing

Steven W. Usselman

Historians seeking to shed light upon the murky subject of government–business relations in America face a fundamental challenge. Somehow they must bridge the chaotic realm of politics, which gives rise to regulation, with an assessment of the long-term outcomes such regulation produces. This task has proved daunting, for participants and analysts alike. Those engaged in the politics of regulation must operate within the framework of the American party system. Though ideally suited to the business of campaigning for election and distributing favors, this system has posed severe obstacles for those who seek to provide the sort of sustained management demanded by the challenges of a mature industrial society. Those tasks have fallen on agencies operating at some remove from electoral politics. Students of regulation, meanwhile, find themselves similarly partitioned along disciplinary lines. Political scientists and political historians possess powerful instruments for evaluating voting behavior and interpreting electoral outcomes. Economists and economic historians, on the other hand, tend to concentrate their energies on the task of evaluating programmatic initiatives.¹

The first generations of scholars who studied business regulation generally sidestepped this challenge. Presenting the history of regulation as a series of struggles between competing interests to control the course of legislation, they conflated political victories with regulatory outcomes. For the pioneering historians of the 1930s and 1940s, the establishment of regulatory agencies such as the Interstate Commerce Commission and the Federal Trade Commission provided a priori evidence that liberal democracy (The People) had triumphed over concentrated economic power (Big Business).² Later, a younger generation of historians turned this idea on its head. To these revisionists, the emerging government bureaucracies of the Cold War era appeared less like a source of countervailing power and more like unwarranted extensions of corporate influence into the public arena. Some influential figures, armed with detailed analyses of legislative history, went so far as to claim that the regulatory state had consciously been constructed by big business in a successful effort to close off more radical alternatives.³ Even some historians less inclined to dismiss the achievements of the regulatory community acknowledged that government agencies tended over time to become captive to the industries they ostensibly oversaw.⁴

Arguments that business orchestrated the rise of federal regulation breathed new vigor into the study of business-government relations. One offshoot was a new spate of studies tracing the origins of regulatory statutes at the state and federal level. Many of these works emphasized the conflicting objectives of various interests in the business community.⁵ By portraying business as something other than a monolithic entity, such studies blunted the force of the revisionist argument. The legislative arena now appeared less like a stage for grand conflict between opposing forces and more like a forum for complex negotiation among diverse interests. Legislation itself was read more as evidence of compromise than of triumph. Yet, however subtle their portrayals, these studies remained focused on political outcomes rather than on the actual social and economic ramifications of regulation.

Such was not true in the case of another critic of the revisionist position, railroad historian Albro Martin.⁶ Suggestions that railroads may have benefitted from government regulation, or at least substantially muted its effects, struck Martin as wildly misguided if not preposterous. Hadn’t the newly empowered Interstate Commerce Commission persistently denied requests by railroads for rate increases during the years leading up to World War I? For Martin, the issue was not whether government had established meaningful influence over business, but whether the public had reaped any genuine benefits as a result. Convinced that the public would have derived greater returns from an improved railroad system than from temporarily reduced rates, Martin argued that the refusal to grant the increases undermined the public interest by diverting capital away from railroading. Anticipating arguments that would grow increasingly influential in the seventies and eighties, this vehement defender of laissez-faire thus asserted that government interference had deprived society of the happy outcomes unregulated markets can produce. This sentiment would powerfully inform the movement toward deregulation, including the decisions in 1981 to break up AT&T and to discontinue antitrust action against IBM.

The attempt to hold regulatory performance up to a standard of economic efficiency has become a hallmark of many of the best recent studies of government–business relations. In his important study Prophets of Regulation, for instance, historian Thomas K. McCraw used the economic analysis of business historian Alfred D. Chandler as a yardstick against which to measure some of the key figures in the history of regulation.⁷ Chandler had built a strong prima facie case that large business units can achieve extraordinary economies in certain types of industries, such as railroading. McCraw chided Louis Brandeis, who represented small shippers against railroads in the famed Eastern Rate Case of 1910, for failing to consider how consumers might ultimately have benefitted from lower prices had railroads received the income necessary to provide more efficient service. McCraw found more to admire in the thinking of Alfred Kahn, a guru of deregulation who introduced competition into the airline industry during the Carter administration. While acknowledging the power of market competition to drive out inefficiency, Kahn recognized that large business enterprises often faced distinctive cost calculations and other special circumstances that caused them to behave differently, but not necessarily less efficiently, than small firms. His reforms sought to introduce a brand of competition that acknowledged the distinctive features of large-scale enterprise and preserved the advantages it could provide, while keeping an eye on the welfare of consumers.

By emphasizing the interplay between economic structure, government policy, and consumer welfare, McCraw has assembled perhaps our most sophisticated sustained analysis of business regulation across the span of American history. His work helps reorient our thinking, shifting attention away from specific political struggles and focusing it instead on the persistent issue of economic performance. Yet despite its obvious contributions, one might well question whether this analysis captures the full complexity of the story. With its stress upon the Chandlerian framework, which accentuates the importance of high-volume throughput and economies-of-scale, McCraw’s interpretation encourages us to frame our consideration of regulation narrowly in terms of efficiency and low prices. In recent years, business historians have questioned whether Chandler’s account neglects important features of the corporate economy. Some have documented the persistent role of smaller firms and of economic sectors that fall outside the core of mass producers, settings where competition typically involves efforts to provide distinctive products rather than just low prices.⁸ McCraw might well respond that such sectors have never attracted significant regulatory activity, precisely because market competition has functioned as an effective watchdog for consumer interests. But business historians have also come to appreciate that Chandler’s portrayal of the corporate sector itself is not without flaws. His powerful interpretation is far too static. It does not account for the contining attention to innovation that has characterized most successful corporations of the twentieth century. Nor does it explain the continuing furor big business has generated in policy circles and in politics over matters that cannot, in the end, be reduced to questions of economic structure and prices.⁹

This paper seeks to meld this more dynamic conception of the corporation with the literature on government–business relations. It examines and compares the experiences of two “Chandlerian” industries – railroading and computing – during their first half century under federal regulation. The paper suggests that in both cases business managers and the regulatory community persistently wrestled with the difficult task of balancing the benefits of efficiency, which typically derived from routine and system, against the potential dynamism of innovation, which was typically aimed at meeting the needs of diverse customers.¹⁰ In both industries, moreover, a key aspect of this struggle involved questions of institutional boundaries and markets. Through a combination of private actions and public policies, railroading and computing each evolved toward dualistic structures. One group of firms, often highly coordinated and perhaps even dominated by a clear industry leader, provided the basic platform. In the case of railroads, this platform consisted of the infrastructure of rails, stations, and shipping facilities as well as the rolling stock, which for technical reasons could not easily be disassociated from the infrastructure. In the case of computing, the basic platform exists not so much in the form of physical artifacts (though in its early years the industry did rely on tight physical coupling of central processors and peripheral devices into a technical system somewhat analogous to a railroad network), but as a set of rules governing logical design and programming (the latter known, suggestively, as the operating system).¹¹

Both of these platforms offered ample opportunities for sustained improvement that would yield greater efficiency. Consumers would reap the benefits in the form of greater power (measured in tonnage transported or data processed) at lower cost. Many of those benefits resulted from relentless pursuit of standardization. Uniformity yielded economy, in the true sense of the word.

There was more to these industries, however, than sustained accomplishment along well-defined axes of limited criteria. For in each case, improvements in the basic platform also opened possibilities to perform entirely novel operations. In the case of computing, such novelties typically have occurred in the readily recognizable form of applications software. All of us who have experienced the steady stream of upgrades in our word processing programs over the past two decades well understand that technical change in computing involves new features rather than a mere increase in speed. The computer software and services industries have long emphasized product differentiation and customized installations.

Opportunities for novelty of this sort were not nearly so rich, of course, in the case of railroading. The basic platform was far more rigid, and though the rail lines achieved impressive productivity gains during the late nineteenth century, improvements such as steel rails and more powerful locomotives offered nothing like the extraordinary gains in cost-performance ratio that the solid state revolution has made possible in electronic computing.¹² Nevertheless, railroading did open the door for a wide range of novelty in the form of specialized transport services. The Pullman Company, operators of fleets of “palaces on wheels” featuring standard service of hotel quality, ranked fourth among the world’s industrial corporations in 1912. Swift and Armour, whose meatpacking empires depended on special trains of refrigerated rail cars, occupied positions thirty-two and sixteen, respectively, in the same ranking. Westinghouse Air Brake, providers of specialized safety equipment deemed highly desireable by passengers and safety reformers, stood in the twenty-first position.¹³ Railroads also serviced a number of express companies and tank car lines that were privately held.¹⁴ All of these enterprises thrived at least in part by turning the utilitarian railroad toward a customized service; in that sense, they are analogous to software companies and service providers in the computer business.

To the extent that innovation of this sort involves customization, it necessarily exists in some tension with the pursuit of uniformity and routine that generally characterizes the behavior of those responsible for the basic platform. Not surprisingly, the push for novelty generally comes from outside, in the form of requests from particular consumers who bring distinct needs to bear upon the system. Providers of the basic platform often attempt to suppress such particularist interests and keep demand as homogenized as possible. It is no coincidence, for instance, that railroads permitted many of the service-oriented activities mentioned above to fall into the hands of outside concerns. Firms such as Pullman, Swift, and Westinghouse achieved success only after overcoming considerable resistance from railroads, which generally perceived the specialized services these businesses provided as too disruptive.¹⁵ Evidence of similar tension runs through the history of the computer industry, where users have always been a primary source of innovation.¹⁶ Dominant suppliers such as IBM and Microsoft persistently faced accusations that their standards placed unnecessary constraints upon those wishing to perform customized operations. Not coincidentally, both firms reluctantly gravitated toward so-called “open architectures” capable of facilitating a wide variety of specialized applications devised by numerous independent suppliers.

As these brief comments suggest, a key element in the ongoing tradeoffs between uniformity and novelty involves the interface between platform providers and firms concerned with accommodating the specialized needs of particular consumers. Seldom has this boundary been sharply drawn. Technological interdependencies draw firms and consumers together in complex ways, and business strategies frequently converge. On many occasions, the critical interface has formed within the platform providers themselves, as their managers made trade-offs between the relative merits of pursuing further standardization versus the possibility of capturing greater returns by offering premium services. Even in these circumstances, however, the choices have always been made within a larger framework of public policy. Using instruments of rate regulation and antitrust, government has functioned as a watchdog, monitoring the critical boundaries that mediate the choices between uniformity-enhancing routine and product-differentiating innovation. Though government has hardly been unfailingly consistent or clear in its objectives, its focus has recurrently turned to the same fundamental challenge. Politicians and the regulatory community, like the firms they monitor, have struggled in their thinking and in their policies to conceive of the market not merely as a homogeneous mass seeking standard per...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Contents
• List of contributors
• Introduction
• 1 Trying to keep the customers stratified: government, business, and the paths of innovation in American railroading and computing
• 2 Webs of productive association in American industrialization: patterns of institution-formation and their limits, Philadelphia, 1880–1930
• 3 Electronic component manufacturing and the rise of Silicon Valley
• 4 Too many bends in the river: the decline of the Connecticut River Valley machine tool industry 1950–2002
• Index