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What Have CEOs Been Doing?

Published online by Cambridge University Press:  03 March 2009

Louis Galambos
Louis Galambos
Affiliation:
Professor of History and Editor of the papers of Dwight David Eisenhower at The Johns Hopkins University, Baltimore, MD 21218.
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Abstract

The author traces and evaluates the major trends in the history and theory of the modern corporation: the literature dealing with market control, the New Business History that emphasizes efficiency, and recent developments by the Chicago School and the theorists of transactions costs. He concludes with an analysis of the recent problems U.S. corporations have experienced in managing innovation.

Type
Papers Presented at the Forty-Seventh Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 48 , Issue 2 , June 1988 , pp. 243 - 258
Copyright
Copyright © The Economic History Association 1988

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References

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5 In her Guide to Business History: Materials for the Study of American Business History and Suggestions for Their Use (Cambridge, Mass., 1948), Henrietta M. Larson noted, “It is significant that there is no business history of any great integrated concern” (p. 166). Between 1948 and 1960 several historians published studies of large integrated firms, but that area of work was just beginning to take shape in the early sixties.Google Scholar

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17 My reference is to the Gary dinners, at which steel industry executives attempted to fix prices (with some success) without violating the antitrust laws (with no success).Google Scholar

18 For an introduction to the general conclusion suggested by this literature, see Galiman's, Robert chapter, “The Pace and Pattern of Amencan Economic Growth,” in Davis, Lance E. et al. , American Economic Growth: An Economists' History of the United States (New York, 1972), pp. 15–60;Google Scholar and Abramovitz, Moses and David, Paul A., “Reinterpreting Economic Growth: Parables and Realities,” American Economic Review, 63 (05 1973), pp. 428–39.Google Scholar See also, Kendrick, John W., Productivity Trends in the United States (Princeton, 1961);Google ScholarKuznets, Simon S., Modern Economic Growth: Rate, Structure and Spread (New Haven, 1966);Google ScholarDenison, Edward F., Accounting for United States Economic Growth, 1929–1969 (Washington, D.C., 1974).Google Scholar

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20 Chandler, Alfred D. Jr, Strategy and Structure: Chapters in the History of the Industrial Enterprise (Cambridge, Mass., 1962).Google ScholarMcCraw, Thomas discusses Chandler's work in “The Challenge of Alfred D. Chandler, Jr.: Retrospect and Prospect,” Reviews in American History, 15 (03 1987), pp. 160–78.CrossRefGoogle Scholar The best guide to the work done in this school can be found in the citations in Chandler, Alfred D. Jr, The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977).Google Scholar

21 Chandler, Strategy and Structure, pp. 11–12.Google Scholar

22 This theme is introduced in Strategy and Structure, developed more fully and forcefully in The Visible Hand, and pressed very close to its limit in the chapters the author graciously allowed me to read from his forthcoming Scale and Scope: The Dynamics of Industrial Enterprise, A History, 1880s–1940 (Cambridge, Harvard University Press).Google Scholar

23 See Marns, Robin and Mueller, Dennis C., “The Corporation, Competition, and the Invisible Hand,” Journal of Economic Literature, 18 (03 1980), pp. 32–63;Google ScholarWilliamson, Oliver E., “The Modem Corporation: Origins, Evolution, and Attributes,” Journal of Economic Literature, 19 (12 1981), pp. 1537–68;Google ScholarWilliamson, Oliver E., Markets and Hierarchies: Analysis and Antitrust Implications: A Study in the Economics of Internal Organization (New York, 1975).Google Scholar Especially important was Coase, Ronald H., “The Nature of the Firm” Economica, n.s., 4 (1937), pp. 386–405;CrossRefGoogle Scholar reprinted in Stigler, George J. and Boulding, Kenneth E., Readings in Price Theory (Homewood, 1952), pp. 331–51Google Scholar

24 The older theory of the firm assumed that all competitors would respond to market signals immediately and without friction; the new theory assumed that some actors would have a better grasp of the relevant universe than others and that the “rationality” of all of the decision-makers would be bounded—“limited” —in ways that would make cooperation among functionally specialized units efficient. Information would be “impacted,” that is, held by one of the parties to a contract and not available to others; impacted or idiosyncratic information has place- and time-related aspects and can thus be known by one organization or individual and not by others. Opportunism has been defined as self-interest with a touch of guile, and it helps explain why economic actors do not all respond to market signals in the same way; it also explains why organizations need leadership in order to achieve coordinated action.Google Scholar

25 In brief, the new version of the theory explained why the transactions costs between the separate firms were likely to be higher than the costs of performing the same functions within an integrated firm. A single firm could, for instance, use its knowledge of the entire production/distribution process to keep inventories at an optimal level. Functional specialization within the firm—an aspect of bounded rationality—would also contribute to greater efficiency. Markets would, then, be less efficient than a hierarchy.Google Scholar

26 The Chicago School's critique of the antitrust studies can be seen as a defense of horizontal combination comparable in some regards to Williamson's establishment of a rationale for vertical integration. But what the Chicago School developed was a critique, not a new theory or rationale for the large corporation. Weston, J. Fred and Ornstein, Stanley I., eds., The Impact of Large Firms on the U.S. Economy (Lexington, 1973);Google ScholarBrozen, Yale, ed., The Competitive Economy: Selected Readings (Morristown, 1975).Google Scholar See also the comment by Martin, David Dale, “Industrial Organization and Reorganization,” in Samuels, Warren J., ed., The Chicago School, pp. 295–310. In my judgment this debate merely confirmed the conclusion suggested by the New Business History: over the long term the negative allocative effects of concentration and market control (whatever they were) have been less significant to the economy than the operational efficiencies achieved by large corporations.Google Scholar

27 These themes are developed at greater length in Galambos, Louis and Pratt, Joseph, The Rise of the Corporate Commonwealth: U.S. Business and Public Policy in the Twentieth Century (New York, 1988). The best evidence that the results have, on balance, been favorable is provided by the growth and productively studies previously cited.Google Scholar

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34 Ibid., pp. 55–80; Hollander, Samuel, The Sources of Increased Efficiency: A Study of DuPont Rayon Plants (Cambridge, Mass., 1965). Here too there were trade-offs.Google Scholar For discussions of explicit trade-offs between market control and innovation, see Cheape, Family Firm to Modern Multinational;Google Scholar and Reich, Leonard S., “Industrial Research and the Pursuit of Corporate Security: The Early Years of Bell Labs,” Business History Review, 54 (Winter 1980), pp. 504–29.CrossRefGoogle Scholar

35 Lawrence, Paul R. and Dyer, Davis, Renewing American Industry: Organizing for Efficiency and Innovation (New York, 1983), esp. pp. 1–16, 238–90.Google Scholar

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37 Richard S. Rosenbloom and Michael A. Cusumano emphasize “strategic consistency,” organizational stability, and leadership by “senior executives with high levels of theoretical understanding …,” in accounting for the success many Japanese firms have achieved in managing innovation; “Technological Pioneering and Competitive Advantage: The Birth of the VCR Industry,” Calfornia Management Review, 29 (Summer 1987), pp. 51–76.Google Scholar The best introductions the internal politics of innovation in a large corporation are Wise, George, Whitney, Willis R., General Electric, and the Origins of U.S. Industrial Research (New York, 1985);Google ScholarReich, The Making of American Industrial Research; and Graham, RCA and the VideoDisc.Google Scholar

38 The portfolio managerial style left the traditional concept of innovation out of the entrepreneurial function, much as Chandler had when he transformed the Schumpeterian theory. For a popular critique of portfolio management, see Peters, Thomas J. and Waterman, Robert H. Jr, In Search of Excellence: Lessons from America's Best-Run Companies (New York, 1982).Google Scholar

39 See, for example, Ouchi, William G., Z, Theory: How American Business Can Meet the Japanese Challenge (Reading, 1981);Google ScholarSato, Kazuo and Hoshino, Yasuo, eds., The Anatomy of Japanese Business (Armonk, 1984), esp. pp. 246–74, on “Productivity and Quality Control: Case Studies”;Google ScholarThurow, Lester C., The Management Challenge: Japanese Views (Cambridge, Mass., 1985), pp. 18–28.Google Scholar

40 See, for instance, Lawrence and Dyer, Renewing American Industry, esp. pp. 40–51, 82, 270–74.Google Scholarlacocca, Lee (with William Novak), lacocca: An Autobiography (New York, 1984), pp. 175–76, 236–38, 303–13, 321–22.Google Scholar

41 See, for example, Kolko, Gabriel, The Triumph of Conservatism: A Reinterpretation of American History, 1900–1916 (New York, 1963);Google Scholar and Railroads and Regulation, 1877–1916 (Princeton, 1965).Google Scholar

42 See, for example, Caves, Richard E., Air Transport and its Regulators: An Industry Study (Cambridge, Mass., 1962);Google ScholarNoll, Roger G., Peck, Merton J., and McGowan, John J., Economic Aspects of Television Regulation (Washington, D.C., 1973);Google ScholarBreyer, Stephen, Regulation and Its Reform (Cambridge, Mass., 1982);Google ScholarNoll, Roger G. and Owen, Bruce M. et al. , The Political Economy of Deregulation: Interest Groups in the Regulatory Process (Washington, D.C., 1983).Google Scholar The literature is reviewed, briefly, in Derthick, Martha and Quirk, Paul J., The Politics of Deregulation (Washington, D.C., 1985), pp. 8–13, 19–27, 35–39.Google Scholar

43 See, for instance, Brock, Gerald W., The Telecommunications Industry: The Dynamics of Market Structure (Cambridge, Mass., 1981), esp. pp. 12, 20;Google ScholarMacAvoy, Paul W., The Economic Effects of Regulation: The Trunkline Railroad Cartels and the Interstate Commerce Commission before 1900 (Cambridge, Mass., 1965), pp. v, 201, 204;Google ScholarBreyer, Regulation and Its Reform, p. 10.Google Scholar