Big Mistake

When Progressive intellectuals convinced Americans that bigger is best--for business, labor, and government--they corrupted capitalism and dumbed down work. We're finally correcting their error, but at a price.

Brink Lindsey from the February 1996 issue

(Page 2 of 6)

The organizational innovations of the time are less celebrated, but also transformed the world. To give just a few highlights: line-and-staff management (1850s), modern cost accounting (1850-60s), commodities exchanges (1850s), futures markets (1850s), department stores and chain stores (1860s), monitoring of inventory by stock turn (by 1870), continuous-process production (1870-80s), vertical integration (1880s), large-scale trading of industrial stocks (1880-90s), incorporation of industrial enterprises (1890s), R&D departments (1890s), consumer packaging and national advertising (1900s), earnings forecasting and capital budgeting (1900s), moving assembly lines (1910s), market research (1910s), and the multidivisional corporate form (1920s).

As the complexity and intellectual challenges of economic life escalated dramatically, the need for knowledge workers--business managers, engineers, accountants, lawyers, advertising and marketing specialists--rose correspondingly. According to James Beniger in The Control Revolution, knowledge workers as a percentage of the total U.S. labor force made a quantum jump with the advent of mass production: from 4.8 percent in 1870 to 12.4 percent 20 years later, rising to 24.5 percent by the end of the 1920s. Thus the industrial revolution occasioned an unprecedented application of brainpower to and diffusion of brainpower throughout economic life.

At the same time, however, other developments were pushing in the opposite direction. Political and economic institutions were being created that bottled up brainpower, frustrated its exercise, or ignored it altogether. Most dramatically, government's rapid growth encroached upon the blooming, buzzing variety of private action and substituted the inflexible sameness of bureaucratic edict. Meanwhile, the new giant corporations were the instruments of industrial revolution, but they were flawed instruments. In their handling of workers, and their organization of managers, they betrayed their promise and became instruments of industrial counterrevolution.

The Intellectual Counterrevolution

The cephalization of economic life brought about by the industrial revolution was not sui generis. It was, rather, part of a larger historical continuity: the development of capitalism. As opposed to the custom- and coercion-bound feudalism from which it emerged, capitalism is characterized by the systematic encouragement it gives to the development and use of brainpower. By dispersing control over investment decisions, and allowing unsuccessful investments to fail and successful ones to attract first profits and then imitators, capitalism creates a social environment that is powerfully conducive to experimenting with new ideas and new ways of doing things. Friedrich Hayek had this in mind when he referred to market competition as a discovery procedure. Industrialization represented an escalation of that discovery procedure to a new level of intensity.

To contemporaries, however, the marvels of the Machine Age were considered not a testament to capitalism, but a repudiation of it. The leading interpreters of the new economy were dazzled by the productive abundance of the new industrial techniques, but they failed to see that this abundance was inextricably connected to and sustained by the competitive market process. Competition they regarded as wasteful, an anachronism. In one of history's bitterest ironies, capitalism's great achievement--the creation of previously unimaginable wealth--served as the inspiration for its nemesis: the delusion of central planning.

The supposed conflict between competition and the industrial economy was central to the writings of Thorstein Veblen, the iconoclastic economist whose influence was strongly felt among Progressives and New Dealers. (In 1939 the editors of The New Republic conducted an informal poll of "books that changed our minds," and Veblen headed the list.)

Veblen distinguished between "industry," which is motivated by the "instinct of workmanship," and "business," which is motivated by the prospect of pecuniary gain. "[T]he modern industrial system," he wrote in The Theory of Business Enterprise (1904), "is a concatenation of processes which has much the character of a single, comprehensive, balanced mechanical process." However, he continued, "the pecuniary interests of the business men...are not necessarily best served by an unbroken maintenance of the industrial balance."

Veblen believed that the continuation of business rivalry in an industrial economy caused "chronic derangement, duplication, and misdirected growth." In that light, he praised the mergers and consolidations that had been effected by the largest business enterprises: "So long as related industrial units are under different business managements, they are, by the nature of the case, at cross-purposes, and business consolidation remedies this untoward feature of the industrial system by eliminating the pecuniary element from the interstices of the system as far as may be....The heroic role of the captain of industry is that of a deliverer from an excess of business management. It is a casting out of business men by the chief of business men."

Veblen offered no clear political program, but others who shared his dim view of competition certainly did. Prominent among those was Edward Bellamy, whose 1888 utopian novel, Looking Backward: 2000-1887, sold a million copies and inspired the formation of Bellamy clubs that continued around the country for decades. In Looking Backward, Bellamy outlined a future history of the coming socialist millennium, and he saw the giant enterprises of his day as a kind of transitional stage:

"The movement toward the conduct of business by larger and larger aggregations of capital, the tendency toward monopolies, which had been so desperately and vainly resisted, was recognized at last, in its true significance, as a process which only needed to complete its logical evolution to open a golden future to humanity.

"Early in the last century the evolution was completed by the final consolidation of the entire capital of the nation....The nation, that is to say, organized as the one great business corporation in which all other corporations were absorbed; it became the one capitalist in the place of all other capitalists, the sole employer, the final monopoly in which all previous and less monopolies were swallowed up, a monopoly in the profits and economies of which all citizens shared. The epoch of trusts had ended in The Great Trust."

Thus, according to the story, was market competition eliminated, and its fourfold wastefulness: "the waste by mistaken undertaking," "the waste from the competition and mutual hostility of those engaged in industry," "the waste by periodical gluts and crises," and "the waste from idle capital and labor at all times." The example of the large corporations helped to show the way:

"Fifty years before, the consolidation of the industries of the country under national control would have seemed a very daring experiment to the most sanguine. But by a series of object lessons, seen and studied by all men, the great corporations had taught the people an entirely new set of ideas on the subject....It had come to be recognized as an axiom that the larger the business the simpler the principles that can be applied to it; that, as the machine is truer than the hand, so the system, which in a great concern does the work of the master's eye in a small business, turns out more accurate results. Thus it came about, thanks to the corporations themselves, when it was proposed that the nation should assume their functions, the suggestion implied nothing which seemed impracticable even to the timid."

In Veblen's and Bellamy's analysis, the new industrial economy thrived on central control. They saw artisan production swept away by enormous economies of scale. They saw traditions and rules of thumb swept away by organization and system. They saw handicraft and common sense swept away by engineering and technical expertise. They saw these things and concluded that a new world was emerging in which a few experts would tell everyone else what to do.

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