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Factory size, economies of scale, and the great merger wave of 1898–1902

Published online by Cambridge University Press:  03 March 2009

Anthony Patrick O'Brien
Anthony Patrick O'Brien
Affiliation:
College of Business and Economics, Lehigh University, Bethlehem, PA 18015
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Abstract

Analysis of census data reveals that the size of the average factory in the United States grew more rapidly during the 1870s and 1880s than during any subsequent decade through the 1920s. While the average factory doubled in size between 1869 and 1889, it increased by only about a quarter between 1899 and 1929. These results support the view that the reaping of economies of scale was not an important motive for the great merger wave.

Type
Articles
Information
The Journal of Economic History , Volume 48 , Issue 3 , September 1988 , pp. 639 - 649
Copyright
Copyright © The Economic History Association 1988

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References

The author is Assistant Professor of Economics, College of Business and Economics, Lehigh University, Bethlehem, PA 18015.

1 The most recent statement of the position that the mergers were motivated mainly by the desire to suppress price competition appears in Lamoreaux, Naomi R., The Great Merger Movement in American Business, 1895–1904 (Cambridge, Mass., 1985), esp. chap. 4.CrossRefGoogle Scholar

2 See the references given below.

3 There is a possibility that economies existed in the late 1890s that could have been reaped by combining several independently owned plants into one firm, without expanding the size of any individual plant. The reaping of multi-plant economies has never been proposed as an important motive behind the merger wave. For instance, the distributional and organizational changes Alfred Chandler sees as important sources of efficiency gains in the evolution of the modern corporation do not require a multi-plant organization. Furthermore, the careful analysis by F. M. Scherer and his colleagues of multi-plant economies in American manufacturing in the post-World War!! period has found them to be quite small. Scherer, F. M., et al., The Economics of Multi-Plans Operation: An International Comparisons Study (Cambridge, Mass., 1975).Google Scholar

4 Weston, J. Fred, The Role of Mergers in the Growth of Large Firms (Berkeley, 1953), p. 103.Google Scholar

5 Livermore, Shaw, “The Success of Industrial Mergers,” Quarterly Journal of Economics, 49 (11 1935), pp. 68–96. There are some curious discrepancies in Livermore's account of the number of firms included in this primary group. On p. 72 the number is given as 157. On p. 75, directly above table 1, the number is given as 159. In the table the number is 156. In appendix A only 155 firms are listed.CrossRefGoogle Scholar

6 Stigler, George J., Five Lectures on Economic Problems (New York, 1950), p. 53 and table 4, p. 62.Google Scholar

7 Scherer, F. M., Industrial Market Structure and Economic Performance (2nd edn., Boston, 1980), p. 68.Google Scholar Calculated from data in Nutter, G. Warren, The Extent of Enterprise Monopoly in the United States, 1899–1939: A Quantitative Study of Some Aspects of Monopoly (Chicago, 1951), table 39, p. 147.Google Scholar

8 Calculated from data in U.S. Bureau of the Census, Census of Manufactures: 1935 (Washington, D.C., 1938);Google Scholar and in United States National Resources Committee, The Structure of the American Economy, Part I, Basic Characteristics (1st edn. 1939; reprinted New York, 1966), appendix 7.Google Scholar

9 James, John A., “Structural Change in American Manufacturing: 1850–1890,” this JOURNAL, 43 (06 1983), pp. 433–59.Google Scholar

10 James's calculations of optimal firm size indicate that economies of scale by 1890 had resulted in natural monopolies or natural oligopolies in distilling, flour and meal, pig iron, and iron-rolling mills, while the chemicals, machinery, meat packing, and soap industries, all of which were concentrated at the end of the century, might have remained competitive. Whatever the accuracy of James's particular estimates, clearly some but not all merger activity had its roots in the ongoing process of capital deepening and increases in optimal plant size. The argument here is that the period of most rapid capital deepening and increases in plant size considerably antedated the merger wave.

11 Chandler, Alfred D. Jr, The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977), pp. 337–38;Google Scholar and “The United States: Seedbed of Managerial Capitalism,” in Chandler, Alfred D. Jr, and Daems, Herman, eds., Managerial Hierarchies: Comparative Perspectives in the Rise of the Modern Industrial Enterprise (Cambridge, Mass., 1980), pp. 28–29.Google Scholar

12 Nelson, Ralph L., Merger Movements in American Industry, 1895–1956 (Princeton, 1959), p. 5. Nelson doubts that scale economies played a significant role in the mergers; see pp. 103–4.Google Scholar

13 Puth, Robert C., American Economic History (New York, 1982), p. 246;Google ScholarNiemi, Albert W. Jr, U.S. Economic History (2nd edn., Chicago, 1980), p. 85;Google ScholarGray, Ralph and Peterson, John M., Economic Development of the United States (revised edn., Homewood, 1974), pp. 338–39.Google Scholar

14 See, for instance, Posner, Richard A., Antitrust Law: An Economic Perspective (Chicago, 1976);Google ScholarBork, Robert H., Antitrust Paradox: A Policy at War with Itself (New York, 1978);Google ScholarPeltzman, Sam, “The Gains and Losses from Industrial Concentration,” Journal of Law and Economics, 22 (04 1979), pp. 191–208;Google Scholar and Brozen, Yale, Concentration, Mergers, and Public Policy (New York, 1982).Google Scholar

15 Brozen, , Concentration, pp. 11, 65 (emphasis in original)Google Scholar. In making this assertion Brozen relies on a 1929 National Industrial Conference Board study. This study shows that for 16 industries in which significant consolidations had taken place, wholesale prices fell by an average of 13 percent between 1900 and 1913, while for 17 industries in which no important consolidations had taken place, wholesale prices rose by an average of 11 percent. Brozen interprets the price declines as resulting from the cost reductions made possible by merger. A more likely interpretation is that they represent the erosion over time of the supracompetitive prices the consolidations had been able to charge. The latter interpretation is consistent with the work of Darius Gaskins on dominant firm pricing. Gaskins, Darius W. Jr, “Dynamic Limit Pricing: Optimal Pricing under Threat of Entry,” Journal of Economic Theory, 3 (09 1971), pp. 306–22.CrossRefGoogle Scholar

16 See James, “Structural Change.”

17 See, for instance, U.S. Bureau of the Census, Ninth Census of the United States: 1870 (Washington, D.C., 1872), p. 381;Google Scholar or U.S. Bureau of the Census, Twelfth Census of thL United States: 1900 (Washington, D.C., 1902), pp. xcvi–cii.Google Scholar

18 The only data on employment available for each census are for wage earners.

19 Kendrick, John W., Productivity Trends in the United States (Princeton, 1961), p. 465.Google Scholar

20 The ranking is based on the size of the regression coefficients reported in table I of Cain, Louis P. and Paterson, Donald O., “Factor Biases and Technical Change in Manufacturing: The American System, 1850–1919,” this JOURNAL, 41 (06 1981), pp. 341–60. It should be noted that because Cain and Paterson make use of census capital stock data, their estimates are suspect.Google Scholar

21 Using the group of 171 industries described below.

22 The rank correlation is 0.477, which is significantly different from zero at the 5 percent level.

23 See, for instance, U.S. Bureau of the Census, Twelfth Census of the United Stales: 1900, vol. 7, p. lxii.Google Scholar

24 “Establishments engaged in the so-called neighborhood industries and hand trades, such as blacksmithing, harness making, and tinsmithing, in which little, if any, power machinery is used, and which usually do only a local business.” U.S. Bureau of the Census, Fourteenth Census of the United States: 1920 (Washington, D.C., 1923), vol. 8, p. 9.Google Scholar

25 There is no way to construct a sample of industries with fully comparable data across all census years. In the absence of the manuscript returns for every census, there is no way to eliminate from the pre-1914 data establishments with production worth less than $5,000.

26 The shipbuilding industry was excluded because the large increase in its average establishment size in 1919 was clearly due to World War 1. Including this industry would change the results as given in the table as follows: 1869 1879 1889 1899 1904 1909 1919 10.95 15.69 21.88 23.12 25.88 24.62 31.06

27 Constructing the index using only the data for the 171 industries yields about the same results: 1869 1879 1889 1899 1904 1909 1919 48 69 95 100 112 107 126

28 The index shows that average factory size doubled between 1869 and 1899 and increased by about 25 percent between 1899 and 1919, contrary to the assertions by Niemi, Puth, and Gray and Peterson that factory size was roughly constant prior to 1900.

29 The distribution of census industries among current two-digit level classifications is consistent with the categorization in Niemi, Albert W. Jr, State and Regional Patterns in American Manufacturing: 1860–1900 (Westport, 1974).Google Scholar

30 The industries referred to are: food processing, chemicals, petroleum, primary metals, machinery, and transportation equipment; see Chandler, , “Seedbed of Managerial Capitalism,” pp. 28–29;Google Scholar and Cain, and Paterson, , “Factor Biases,” p. 354, fn. 24.Google Scholar In most of these industries factory size actually increased faster between 1889 and 1899 than between 1899 and 1909. Thus, even Chandler would seem to have overestimated the efficiency gains from the merger wave; see Chandler, , The Visible Hand, pp. 331–39.Google Scholar

31 In Chandler's view, these innovations include continuous-process machinery, which allowed for mass production, and refrigerated railroad cars, which allowed for mass distribution. Chandler also discusses purely organizational innovations, such as the meat storage and retail delivery systems set up by Gustavus Swift.

32 Williamson, Harold F. and Daum, Arnold R., The American Petroleum Industry: The Age of Illumination, 1859–1899 (Evanston, 1959), pp. 252–63, 273–75.Google Scholar

33 Except where noted, this paragraph is based on material in Chandler, , The Visible Hand;Google ScholarClark, Victor S., History of Manufactures in the United States. Volume 2: 1860–1893 (1st edn. 1929; reprinted New York, 1949);Google Scholar and George, Peter, The Emergence of Industrial America: Strategic Factors in American Economic Growth Since 1879 (New York, 1982).Google Scholar