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The Second Twentieth Century
How the Information Revolution Shapes Business, States, and Nations
By Jean-Jacques Rosa
Hoover Institution PressCopyright © 2006 Jean-Jacques Rosa
All rights reserved.
The Race for Size, 1870–1960
The first twentieth century initiates a sharp turnaround from all previous trends. Democratization, free trade, relative peace and small-scale wars, the European balance of powers and the Enlightenment's philosophy of progress are supplanted by imperialism and total war, economic protectionism, state control, a radical rejection of the market, and political totalitarianism. The civilization begot by the scientific, economic and cultural revolution of the eighteenth century takes a dramatic leap backwards.
The Great Cycle starts with the size expansion of all organizations, economic as well as political. Gradually, business firms turn into giant corporations — at least compared to what they were before — while states compete with each other to form the largest colonial empire and, internally, control a growing share of their domestic economy.
Centralization, gigantism, bureaucracy and standardization develop simultaneously in corporations, in the state's organization and politics, and in social and cultural matters. Hence the peculiar style which defines the new century: it is the era of hierarchy, command economy, mass meetings and war economy. It is the Iron Age of reactionary autocracy. The large bureaucratic organization wields a competitive advantage over smaller structures and favors authoritarian and centralizing social and cultural doctrines.
This first phase is characterized by a reinforcement of centralization and command power, reduced economic, political and intellectual freedom, and it defines the general tone of this Iron Age. Undeniably, Stalin was well inspired to choose a pseudonym meaning "steel" in Russian.
The industrial and administrative revolution marked the advent of big firms, while states became addicted to imperialism and dirigisme. Taken to extremes, these new organizational structures result in totalitarianism, the ultimate stage of centralization, and bring about the very particular moral atmosphere of the hierarchical society.
THE SECOND INDUSTRIAL REVOLUTION AND THE EMERGENCE OF THE LARGE CORPORATION
At the beginning of the century, the big issue, as suggested by Lenin in The State and The Revolution, was to transform the whole society into a single firm and a huge factory. This view is shared in a more limited way by Joseph Schumpeter, a former Finance minister and Austrian economist living in the U.S. According to him, private capitalism inevitably turns into socialism given that big companies are more efficient and innovative, and thus concentration is unavoidable. But are very big firms and centralized states essential to secure prosperity? And is it really possible to centralize a whole society just like a big corporation?
The end of the century vindicates the superiority of decentralization celebrated by Ronald Coase and Friedrich Hayek as well as, recently, the new internauts. But it only occurred after seventy years of centralization during which the hierarchical and centralized organization advocated by Ford, Stalin and Hitler was gradually considered as the solution to the society's problems. This revolution is not only political and Russian. It concerns all countries and organizations.
It results from changes to the structure of the commercial and craft society of the late nineteenth century. According to economist Kenneth E. Boulding, it "was mostly a consequence of communicative advances (telephone, telegraph, typewriter, photocopier) and possibly of a strengthening of the managerial structure. All these changes took place in the 1870s and enabled an enormous expansion of organizations, thus giving birth to giants like General Motors, the U.S. department of defense and the Soviet Union, as well as many institutions which were inconceivable before 1870."
Adam Smith's invisible hand, governing trade between individuals on free markets, was thus replaced by Alfred Chandler's "visible hand," that is, the centralized and bureaucratic handling of human affairs. This managerial hand governed the big business companies which first appeared in transportation before spreading to all the other sectors. Bureaucracy replaced both the market and the autarkic farming methods of the pre-industrial system.
The real organizational novelty was to apply to these newly-born business and industrial companies the methods that were until then only used by the state and church to manage things and human beings — but not without substantial improvements. This is the administrative innovation that had been foreseen by Auguste Comte and Saint-Simon, and whose contents were later analyzed by Max Weber.
This is a totally new phenomenon. The First Industrial Revolution — usually dated 1780–1860 — took place in societies where firms were only small craft undertakings. This revolution was "more than industrial" in the sense that it also had repercussions on family, religion and politics.
More than a time of industrial expansion, this was the true birth of factories and companies. Until then, there were hardly more than 1,800 firms or so-called commercial and financial "houses" in Great Britain and production took place at home and mostly in the country.
But it is in fact the second wave of technological breakthroughs, the Second Industrial Revolution, that lays the durable foundations of the twentieth century. Although it is built on the same determinants that gave birth to factories and manufactures, the second revolution radically amplified the new organizational advances. Centralization accelerated, hierarchical structures deepened and the workforce soared, while the managerial staff increased sharply in order to control growing production flows. And as markets expanded rapidly, their own growth simultaneously determined a huge development of private bureaucratic pyramids.
To understand the causes of this transformation, it is necessary to explain why factories supplanted industrial subcontracting, especially as it is the same centralizing factors that transformed with an increased intensity both business firms and public administrations during the Second Industrial Revolution.
The Birth of the Corporation
Before 1750, there was no clear distinction between the company and the family. Since the invention of farming in the Neolithic age, the family cell had remained the basic framework of production in all societies. Companies often consisted of a tradesman who subcontracted work to home workers or to independent craftsmen who worked in their own workshop and sold their products on markets or in small shops. During the first half of the eighteenth century, the production of cotton fabrics was the first major non-farm activity. It was usually organized on a small scale and financed by tradesmen/manufacturers, who subcontracted the spinning and weaving of raw cotton to farmers/workers working at home. The production unit was thus very small and based on family work. Spinning wheels and weaving shuttles provided work for a couple and its children. Some tradesmen had thus thousands of people under them and owned hundreds of weaving looms scattered in the country without directly supervising everyone's work. Besides, the equipment investment per worker remained very low.
Admittedly, there were already large joint-stock companies before the Industrial Revolution. A good example is the companies in charge of overseas trade in the United Kingdom or big pre-industrial firms such as Chatham's naval dockyard or London's Whitbread brewery. Joint-stock companies had already been quite successful in France in Law's time but the great commercial or manufacturing units belonged to the state, like for instance the royal manufactures, the naval dockyards and the big naval trading corporations. Before the mid-nineteenth century, the largest organizations were the first bureaucratic state bodies. In the Caribbean Islands and in America, the great sugar or cotton-growing slave plantations had a rather impressive labor force, which was subjected to an extremely tight control that foreshadowed totalitarian systems.
As Leslie Hannah noted:
Although there were big-sized firms before the beginning of the industrial revolution, it was the introduction of new mechanical techniques and the application of the steam machine to the industrial process which, from the late 18th century, radically transformed the nature of the capitalist company and created an economy where factories employing hundreds (and sometimes thousands) of workers became the standard form of production units.
It is only during the Industrial Revolution that all the workers started being concentrated in a same factory, the English "mills" which were referred to as "satanic mills" in the Socialist literature of the time. This new organization of work was made possible by falling transportation costs, economies of scale thanks to the development of centralized energy sources and innovations such as the introduction of gaslight in cities which enabled longer work in winter.
But this revolution was mainly due to the use of new and cheaper energy sources, such as coal and steam power. This changed radically the production process and made transportation much easier with its introduction in the shipping, and especially, the railway industries.
Szostak suggests that the changes in transportation techniques and means, especially in Great Britain, during the decades that preceded the First Industrial Revolution were the decisive causal factor. At the time, various legal initiatives were undertaken to create shipping corporations, lease the construction of toll roads and build or renovate canals. At the dawn of the Industrial Revolution, Great Britain — already favored by its geographical advantage — had the best waterway and road network in the world. It followed that transportation became cheaper and quicker for goods and passengers and the domestic market became more united as it was given a new national dimension.
The growing markets generated by this transport revolution in turn led to an organizational revolution. Indeed, the substantial increase of the trade of goods and commodities soon determined major changes. To solve the control and organizational crises caused by these suddenly amplified flows, administrative centralization was undertaken. This very ancient technique, first used in ancient Egypt and Mesopotamia during the agricultural revolution in the beginning of structured societies, proved a much better way to deal with mass production than geographically dispersed subcontracting.
Factories reduced substantially transportation needs as they avoided the first stage in the production process, which consisted of fetching the goods at the subcontractor's workshop before delivering them to the client. Instead of spending his time on the road as a traveling salesman, the company head could focus on organizing production and supervising its employees with the help of permanent executives. As a consequence, productivity and the work pace increased, while cheating and petty theft decreased. Stocks of commodities and goods could now be reduced, while costly machines and tools could be used almost continuously, thus improving depreciation and allowing an increase in investment. Employees could get about more easily. They came from farther away and ate for cheaper at lunchtime as food transportation costs decreased.
It is in the cotton-oriented textile industry that the old workshops were first transformed into modern, highly-mechanized, capital intensive factories and firms. With several innovations in the cotton production processes, and later on the use of steam machines, it became crucial to control more tightly the workers and centralize production. This was the only way to benefit fully from the economies of scale resulting from the use of modern equipment and steam engines.
As soon as 1784, Sir Robert Peel's Bury-based calico company employed 7,000 people. However, the average textile firm used to employ a few hundred only. Indeed, in 1822, textile companies in Manchester were composed of 100 to 200 workers with a capital of 50 to 90 pounds per employee, that is 5,000 to 18,000 pounds per firm. But in the 1830s this amount rose to 80,000 pounds, reflecting the sharp increase in the capital intensity of the new fabrics.
However, faced with the consumption boom, companies first multiplied instead of increasing their size as the efficient size of each firm was probably strictly limited. The integration of production within factories eventually started in the 1820s and 1830s, but factories were still rather small-sized.
Although the centralization of production units early in the nineteenth century was an organizational revolution, we must keep in mind that the number of employees per company was still much lower than nowadays. The "Representative Firm" mentioned by Alfred Marshall, whose celebrated Principles of Economics was the reference text in economics at the beginning of the twentieth century, was still closer to what we would now call a small- or medium-sized company.
But industrial concentration accelerated sharply during the second half of the nineteenth century and paved the way for the radical changes of the first twentieth century.
Mass Production, Distribution and Consumption
While firms were born in Great Britain during the 1780–1860 Industrial Revolution, the large modern corporation first appeared in the United States during the Second Industrial Revolution, the era of mass production, distribution and consumption. According to Alfred Chandler's reference study, the advent of big firms took place in the U.S. during the 1840–1920 period, when the existing farm economy was replaced by a mostly urban and industrial economy.
Factory production only really took off when coal became available in large quantities in the mid-1830s, as the United States lagged behind Great Britain from this point of view. With the availability of coal and steam power, the whole production process changed. It became possible to use new machines, develop the steel industry and build railways. This created a need not only for rails, wheels, mechanical parts but also glass, leather work and rubber. Thanks to cheap energy and heating and new fast, high-capacity transportation means, factories spread in the 1840s and 1850s.
In the mid-1840s, the price of coal fell from 10 to 3 dollars a ton. The railway network spread to all eastern states. Transit and travel became 3 to 10 times faster within a decade, while for centuries the speed of transportation had depended on draft animals' walking pace. Steam-powered railways supplanted river and sea transportation and this increased even more the volumes transported, as railways could be used all year long unlike canals which were impassable in winter and in times of flood.
Coping with Faster Production Flows
Factories' turnovers rose substantially as the harnessing of energy also enabled the industry to mass produce at unprecedented rates. And this mass production could be distributed to a great number of remote markets through the railway network. The industrial process's overall speed increased significantly.
The organization of the production process and the architecture of the capitalist system were transformed by the acceleration of production flows. This is the central insight of Chandler, who viewed this mutation as the origin of the "administrative revolution," which drove the most industrialized countries into the first twentieth century, some three decades before 1900. This analysis was taken up and completed by James Beniger in a remarkable review of what he calls the "control revolution."
Since the beginning of human history, the speed of transportation of material goods had always depended on draft animals' walking pace or on wind speed. But suddenly, within a few decades, these standards became obsolete as everything accelerated. Production increased substantially in the factories and was sent across the world from one continent to another. For the first time ever, production flows almost exceeded the human capacity of control. This is why in the mid-nineteenth century some companies were faced with a control crisis which then spread to the whole U.S. material economy during the following decades.
At that time, the society lacked the technical and organizational means to manage flows that big and quick. These required constant, abundant and very precise information. Such a degree of coordination had never been seen before, except maybe during the Napoleonic Wars, after the French Revolution of 1789 which had resorted to mass conscription and tremendous execution speed in military matters. As specialists often underline, war is basically a question of logistics and this is exactly the kind of problem the big firms of the New Industrial Revolution suddenly had to tackle.
Excerpted from The Second Twentieth Century by Jean-Jacques Rosa. Copyright © 2006 Jean-Jacques Rosa. Excerpted by permission of Hoover Institution Press.
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