by Daniel Bell
CHAPTER
4
* * *
The Subordination of
the Corporation: The
Tension between the
Economizing and
Sociologizing Modes
IN the post-industrial society, as the previous chapters have indicated, there will be an enormous growth in the “third sector” the non-profit area outside of business and government which includes schools, hospitals, research institutes, voluntary and civic associations, and the like. Yet with all that, the business corporation remains, for the while, the heart of the society. About 55 percent of the Gross National Product originates in the corporate sector; about 9.5 percent of Gross National Product is invested annually by non-financial corporate firms for new plants and equipment.1
When we speak of the corporation in any familiar sense, we usually think of the industrial giants and of the “magic number” 500 that Fortune magazine has popularized. And there are clear reasons for this focus. Actually, there are, in round numbers, about 1,500,000 corporations in the United States. But if we break down the total, they are distributed in this fashion:
Retail and wholesale trade—450,000
Finance, real estate and insurance—400,000
Services—200,000
Manufacturing— 195,000
Construction—115,000
Agriculture and mining—45,000
If we take the manufacturing sector as the prototype of industrial America, we find that these 195,000 corporations have about $500 billion in assets. But about 192,000 corporations (or 98 percent of the total) are under $ 10 million in asset size, and this group of 98 percent of all corporations owns only 14 percent of all industrial corporate assets. Slightly more than 500 firms, with more than $25 million in assets, account for 83 percent of all corporate assets; 200 firms, each with more than $250 million in assets, account for 66 percent of all industrial assets, while 87 firms, each holding more than a billion dollars in assets, account for 46 percent of the total $500 billion assets.
These 500 industrial corporations, which, in 1970, employed 14,600,000 workers, or more than 75 percent of all employment in manufacturing, symbolize a degree of power which has been a source of recurrent concern for public policy. This concern is evident, once again, today; but for reasons far different than those, say, of thirty years ago, when a firm such as General Motors would spend millions of dollars for thugs, tear gas, and guns to fight the violence of labor organizing. Corporate power, clearly, is the predominant power in the society, and the problem is how to limit it. The concern for public policy, summed up in the phrase “social responsibility,” derives from the growing conception of a communal society and the controls which a polity may have to impose on economic ventures that generate unforeseen consequences far beyond the intentions, or powers of control, of the initiating parties.
Over the last few years, there has been a notable change in public attitudes toward the corporation. Only fourteen years ago, writing in Edward S. Mason’s magisterial compendium on The Corporation in Modern Society, Eugene V. Rostow could comment:
In reviewing the literature about the current development of [the large, publicly-held] corporations, and about possible programs for their reform, one is struck by the atmosphere of relative peace. There seems to be no general conviction abroad that reform is needed. The vehement feelings of the early thirties, expressing a sense of betrayal and frustration at a depression blamed on twelve years of business leadership, are almost entirely absent.2
The reason for that tolerant and even benign attitude toward the corporation in the 1950s is not hard to find. Apart from the general sense of social peace induced by the Eisenhower administration (a peace maintained, in part, by the mobilization of the sentiments of society against an external enemy), a new and seemingly satisfactory conception of the role of the corporation in the society had arisen.
For seventy-five years, going back to 1890 when Congress passed the Sherman Antitrust Act, the corporation had been viewed with populist suspicion because of its size. Size, in the American lexicon, means power, and the bigness of business was perceived as both an economic and political threat to democracy. Economic size was equated with market power, or the ability to control (within limits) the price of products offered for sale. Large-scale assets were equated with undue influence, either in a local community or state, or in the nation itself.
But in the more than half century’s experience with antitrust, a new economic sophistication had been developed. One was the important distinction between size and market control, and the realization that the two are not completely related. The two biggest manufacturing companies today are Standard Oil of New Jersey and General Motors, with $20.5 billion and $18.2 billion respectively in assets. GM has about 55 percent of United States’ automotive production; but Standard Oil, though larger than GM, has only about 9 percent of domestic oil refining and an even smaller percentage of production.
Size, clearly, is not a good predictor of market control. Market control is measured by “concentration ratios,” i.e. the sales of the largest four companies, in a product line, as a percentage of total product sales. But it seems reasonably clear that, since the turn of the century, the concentration ratios have gone down considerably and that, in most industries, there is not increasing concentration but rather a ceaseless flux.3
But the more important shift was a change in ideology. The idea took hold that “size” was less relevant than “performance.” Performance itself is an elusive criteria. It embraces the idea of receptivity to innovation; willingness to expand capacity (one of the chief charges by liberal economists in the 1940s against such “oligopolistic” industries as aluminum and steel was that they were unwilling to expand capacity); the reflection of increased productivity in better quality, higher wages, and steady, if not lower, prices; and similar indices of responsiveness to the needs of the society.
The clearest mark of performance was growth. The fear of the 1930s, after all, was stagnation. Liberal economists such as Alvin Hansen had predicted, in fact, that the economy had achieved such a state of “maturity” that there was no longer the possibility of expansion. The facts belied these fears. New technological frontiers opened up after the war; and the large corporations took the initiative.
A vigorous, large company could present its case to the public that size was immaterial, so long as the corporation displayed those hallmarks of dynamism that added up to “performance.” In fact, as J. K. Galbraith argued in his book, American Capitalism, size was an asset because it enabled the large corporation to underwrite technological progress.
It is admirably equipped for financing technical development. Its organization provides strong incentives for undertaking development and for putting it into use.... The power that enables the firm to have some influence on price insures that the resulting gains will not be passed on to the public by imitators (who have stood none of the costs of development) before the outlay for development can be recouped. In this way market power protects the incentive to technical development. (Italics in the original.)4
Here was a strong and sophisticated defense of bigness by the criteria of performance. And, to a considerable extent, the ideology of American business in the postwar years became its ability to perform. The justification of the corporation no longer lay primarily in the natural right of private property, but in its role as an instrument for providing more and more goods to the people. Because the corporation seemed to be performing this role adequately, criticism of it did, indeed, become muted, so that by the end of the 1950s the corporation had established a new legitimacy in American life.
The New Criticism
Today that legitimacy is being challenged, or at least the tolerant and benign attitude toward the corporation has receded. The paradox is that the ground of the new criticism is no longer size or bigness (though some old populist echoes persist), but performance itself. A feeling has begun to spread in the country
that corporate performance has made the society uglier, dirtier, trashier, more polluted, and noxious. The sense of identity between the self-interest of the corporation and the public interest has been replaced by a sense of incongruence.
Any issue that becomes ideological becomes distorted. The facts of spoliation of countryside and the reduction of various amenities are obvious; the reasons less so. One evident cause is the sheer increase of numbers of persons in the society and a change in social habits. Take, for example, the national parks: in 1930, the number of visitor-days (one person staying twelve hours) was 3 million in a population of 122 million; by 1960, it was 79 million, in a population of 179 million; and in 1968, there were 157 million visitor-days in a population of 200 million. The results are described vividly in an account in The New York Times:
Yosemite, only a day’s drive from San Francisco and Los Angeles, is generally considered the most overcrowded park. Congestion reaches its peak on major holidays and this Labor Day weekend was no exception.
The constant roar in the background was not a waterfall but traffic. Transistor radios blared forth the latest rock tunes. Parking was at a premium. Dozens of children clambered over the rocks at the base of Yosemite Falls. Campsites, pounded into dust by incessant use, were more crowded than a ghetto. Even in remote areas, campers were seldom out of sight of each other. The whole experience was something like visiting Disneyland on a Sunday.
Moreover, if we take pollution of the air and water as the criterion of social ill, then clearly all sections of the society are at fault: The farmer who, by seeking to increase food production, uses more nitrate fertilizer and thus pollutes the rivers of the country; the individual automobile owner who, seeking greater mobility, spews noxious gas into the atmosphere; the Atomic Energy Commission which, in seeking to expand nuclear power, may be responsible for thermal pollution of the waters; and the corporation whose smokestacks emit smog-creating gases in the air, or whose waste products pollute the lakes.
But if one takes the attitude that everyone is to blame—and simply ends with the moral exhortation for each person to restrain his behavior—then one misses the important point. Such a situation itself points to the fact that the allocative mechanism of society, the proper distribution of costs and resources, is not working. In a free society, the socially optimal distribution of resources and goods exists where the market reflects the true economic cost of an item. But where private costs and social costs diverge, then the allocation of goods becomes skewed. When the owner of a factory has no incentive to take account of costs to others of the pollution he generates because these costs are not charged to him, factory output (or automobile mileage in the case of a car owner) will be at a higher level than is socially optimal.
The growing problem for modern society is this increasing divergence or private costs and social costs (what economists call technically an “externality,” because such costs are not “internalized” by a firm in its own cost accounting). But along with this awareness there arises, too, the question whether the strict conception of costs—and return on investment—that is the rationale of the accounting procedures of the firm is at all adequate today. In other words, perhaps the older definition of “performance” is too narrow. The question that then arises involves, not just the “social responsibility” of any particular corporation, but the “rightness” of the broader pattern of social organization and of the social goals of the society. And, to the extent that the corporation has been the institution integral to the existing pattern, it becomes the starting point of a new inquiry.
Perhaps we can see the quite radical difference between these two perspectives by setting up two models, which I shall call the economizing mode and the sociologizing mode, as polar extremes within which the actions of the corporation can be estimated and judged.
The Economizing Mode
Beginning little more than 150 years ago, modern Western society was able to master a secret denied to all previous societies—a steady increase of wealth and a rising standard of living by peaceful means. Almost all previous societies had sought wealth by war, plunder, expropriation, tax-farming, or other means of extortion. Economic life, in the shorthand of game theory, was a zero-sum game; one group of winners could benefit only at the expense of another group of losers. The secret mastered by modern Western society was productivity, the ability to gain a more than proportional output from a given expenditure of capital, or a given exertion of labor; or, more simply, society could now get “more with less effort or less cost.” Economic life could be a non-zero-sum game; everyone could end up a winner, though with differential gains.
In the popular view, productivity was made possible by the introduction of machinery or, more specifically, the discovery of new forms of power, mechanical or electrical, hitched to an engine. Clearly much of this view is true. But productivity, as a concept, became possible only through a new “supporting system” which dictated the placement of machines in a new way. To put the matter less abstractly, modern industrial society is a product of two “new men,” the engineer and the economist, and of the concept which unites the two—the concept of efficiency. For the engineer, the design of a machine and its placement vis-à-vis other machines is a problem of finding the “one best way” to extract maximum output within a given physical layout. The economist introduces a calculus of monetary costs, within the framework of relative prices, as a means of finding the most appropriate mix of men and machines in the organization of production.
Modern industrial life, in contrast with traditional society, has been revolutionized by these innovations. The new sciences have introduced a distinctive mode of life. We call it economizing. Economizing is the science of the best allocation of scarce resources among competing ends; it is the essential technique for the reduction of “waste”—as this is measured by the calculus stipulated by the regnant accounting technique. The conditions of economizing are a market mechanism as the arbiter of allocation, and a fluid price system which is responsive to the shifting patterns of supply and demand.
Economics itself, over the past one hundred years, has developed a rigorous and elegant general system of theory to explain the relative prices of goods and services and of the factors in production, the allocation of those factors to various uses, the level of employment, and the level of prices. With economics, comes a rational division of labor, specialization of function, complementarity of relations, the use of production functions (the best mix of capital and labor at relative prices), programming (the best ordering of scheduling of mixed batches in production, or in transportation), etc. The words we associate with economizing are “maximization,” “optimization,” “least cost”—in short, the components of a conception of rationality. But this conception of rationality, it should be pointed out, was intended by its utilitarian founders as a rationality of means, a way of best satisfying a given end. The ends of life themselves were never given; they were seen as multiple or varied, to be chosen freely by the members of society. Economics would seek to satisfy these choices in the “best way,” i.e. the most efficient means possible in order to “maximize” satisfaction.
For an understanding of the economizing mode, this distinction between rational means and a plurality of ends must be emphasized. Modern industrial society, being a liberal society, has never felt the need to define its ends or to establish priorities within some set of ends. It has always eschewed such collective decision-making. No conscious social decision was made to “transform” society two hundred years ago. No conclave met, as in a French constituent assembly or an American constitutional convention, to declare a new social order. Yet it is quite clear what the new goals of the new industrial society were to be—the ends that became “given” all involved the rising material output of goods. And other, traditional modes of life (the existence of artisan skills and crafts, the family hearth as a site of work) were sacrificed to the new system for the attainment of these economic ends.
Commonplace as this history may be, the singular fact needs to be emphasized. Unlike political change, no one “voted” for these decisions in some collective fashion, no one assessed (or could assess) the consequences of these changes. Yet a whole new way of life, based on the utilitarian calculus or the economizing mode, gradually began to transform the whole of society.
The Corporation: A New Social Invention
Productivity is a technique, steadily rising output of goods is an end; for the two to be realized they have to be institutionalized in some renewable system of organization. That institution was the corporation.
Much of economic history and some of economic theory has focused on the entrepreneur as the singularly important person who, sensing new opportunities, breaks the cake of custom and innovates new areas of economic life. Much of contemporary sociological theory has dealt with the manager as the faceless technocrat who runs a routinized operation. But to understand the corporation, one has to turn not to the entrepreneur (and the myths about him) or the manager (and the caricatures that are drawn of him), but to a figure historically and sociologically intermediate between the two—the organizer.
The church and the army have been the historic models of organizational life. The business corporation, which took its present shape in the first decades of the twentieth century, was the one new social invention to be added to these historic forms. The men who created that form—Theodore N. Vail who put together AT&T, Walter Teagle of Standard Oil of New Jersey, Alfred P. Sloan of General Motors—designed an instrument which coordinates men, materials, and markets for the production of goods and services at least cost with the best possible return on capital investment. They did so by introducing the idea of functional rationality, of economizing, as a new mode of ordering social relations.