by Naim, Moises
At any rate, by the start of the twentieth century, these and other great advances—all generally understood to reflect human progress, science, and ingenuity—were cementing a broadly held consensus about how to accumulate, retain, and exercise power. And by roughly mid-century, big had triumphed; no longer could individuals, artisans, family firms, city-states, or loose-knit bands of like-minded people hold their own against the overwhelming advantages of large organizations. Power now required size, scale, and a strong, centralized, hierarchical organization.
Whether the body in question was General Motors, the Catholic Church, or the Red Army, how to organize to get and keep maximum power was a practical question with an obvious answer: get big.
To understand how the idea of big took hold, we must start with some whirlwind history. In particular, we must spend some time getting to know the American dean of business history, the German father of modern sociology, and the British economist who won the Nobel Prize for explaining why, in business, bigger was often better. Taken together, their respective works illuminate not only how the creation of modern bureaucracy enabled the efficient exercise of power but also how the world’s most successful corporations—as well as charities, churches, armies, political parties, and universities—have used the bureaucratic exercise of power to keep down rivals and advance their own interests.
Historians have identified the germ of modern bureaucracy in systems of government dating to ancient China, Egypt, and Rome. In both their military and administrative practices, the Romans invested heavily in large-scale, complex, centralized organization. Much later, Napoleon Bonaparte and others in Europe, absorbing the lessons of the Enlightenment, would commit to centralized and professionalized administration as the progressive and rational way to run a government. Drawing on that model and adapting American and European examples, Meiji-era Japan assembled a professional bureaucracy—including, above all, its Ministry of Industry, established in 1870—to reengineer its society and catch up with the West. By World War I the nation-state with a unitary government and civil service was the template for the world, including colonies. In India, for example, the British rulers set up the Indian Civil Service, which would carry on after independence as the prestigious Indian Administrative Service, a much-sought-after career path among the educated elite. Whether free-market or socialist, governed by a single party or robustly democratic, nations around the world in the twentieth century shared a commitment to a large central administration—that is, to a bureaucracy.
The same thing happened in economic life. Pushed by technology, the demands of large-scale industry, and new regulations, smaller companies gave way to large, multi-unit, hierarchically and administratively run firms, a species that had not existed before 1840. During what scholars call the first great merger movement in America—a decade-long period from 1895 to 1904—no fewer than 1,800 small firms disappeared in a wave of consolidation. The familiar names of many major brands date back to that era. General Electric was founded, out of a merger, in 1892. Coca-Cola was founded the same year, and Pepsi in 1902. The American Telephone and Telegraph Company (ancestor of AT&T) was founded in 1885; Westinghouse, in 1886; General Motors, in 1908; and so on. By 1904, seventy-eight corporations controlled more than half the production in their particular industry, and twenty-eight firms controlled more than four-fifths.1 Commenting on the upheaval these new organizations represented, a dyspeptic Henry Adams observed that “the Trusts and Corporations stood for the larger part of the new power that had been created since 1840, and were obnoxious because of their vigorous and unscrupulous energy. They were revolutionary, troubling all the old conventions and values, as the screws of ocean steamers must trouble a school of herring.”2
This “managerial revolution,” as the great business historian Alfred Chandler termed it, was also spreading from what he called its American “seed-bed” to the rest of the capitalist world. German industry was increasingly dominated by large firms such as AEG, Bayer, BASF, Siemens, and Krupp—many of them born in the mid-nineteenth century—that were themselves combining into larger formal and informal trusts. In Japan, with a helping hand from the government, the fledgling zaibatsu were expanding into new industries such as textiles, steel, shipbuilding, and railroads. Chandler persuasively argued that the more elaborate use of steam power in manufacturing during the nineteenth century as well as the popularization of electricity and innovations in management led to a second industrial revolution that spawned much larger companies than those that had emerged during the industrial revolution of the previous century. These new industrial plants used vastly more capital, workers, and managers. As a result, growth in scale became the precondition for business success and big became synonymous with corporate power. In his seminal work (aptly titled The Visible Hand), Chandler argued that the visible hand of powerful managers replaced the invisible hand of market forces as the main driver of modern business.3 The power and the decisions of these professional managers who led giant companies, or giant divisions within companies, shaped economic activities and outcomes as much as if not more than the prices determined by market exchanges.
The ascent and dominance of these large industrial companies led Chandler to identify three distinct models of capitalism, each associated with one of the three leading bastions of capitalism at the time of this second industrial revolution: (a) the “personal capitalism” found in Great Britain, (b) the competitive (or managerial) one common in the United States, and (c) Germany’s “cooperative capitalism.”4 In Chandler’s view, even successful large industrial firms in Britain were impaired by the familial nature of the dominant entrepreneurial dynasty that owned and managed them; they lacked the drive, agility, and ambition of their American counterparts. In contrast, the separation of ownership and management that Chandler called “managerial capitalism” enabled American companies to adopt new organizational forms—notably, the multi-divisional, or “M,” structure (M-form)—that were far superior for raising and allocating capital, attracting talent, and innovating and investing in production and marketing. The M-form, which entailed a confederation of semi-independent product or geographical groups within a central headquarters, allowed more efficient handling of large-sized operations and created faster-growing corporations. In turn, the propensity of German companies to cooperate with labor unions led to a system that Chandler labeled “cooperative capitalism,” which eventually became known as “codetermination.” German firms strived to include more stakeholders in the companies’ governance structure beyond shareholders and top managers.
Although these three systems differed in many ways, they had one paramount similarity: in each case, corporate power resided in large-sized companies. Size led to power and vice versa.
Whether we call it Big Business, Big Government, or Big Labor, this triumph of large, centralized organizations validated and reinforced the increasingly common assumption that big was best, and that achieving power in any relevant domain was a task best suited to a certain kind of modern and rational organization that was most effective when centralized and large. And if this idea had the force of received wisdom, one key reason was that it found compelling intellectual backing in economics, sociology, and political science. All such backing proceeded, fundamentally, from the seminal work of a remarkable social scientist: Max Weber.
MAX WEBER, OR WHY SIZE MADE SENSE
Max Weber was more than a German sociologist. He was one of the most remarkable intellectuals of his time, a prodigious scholar of economics, history, religion, culture, and more. He wrote on Western economic and legal history; studies of Indian, Chinese, and Jewish religion; public administration; the life of the city; and, finally, a massive tome, Economy and Society, published in 1922, two years after his death. He was also, as the political scientist and sociologist Alan Wolfe observed, “the leading scholar of questions of power and authority in the twentieth century,”5 and it is in that capacity that we draw on him here. Indeed, Weber and his the
ories about bureaucracy are critical to understanding how power can actually be used.
Born in 1864, Weber came of age in Germany as it was unifying out of an assemblage of regional principalities, under the impetus of the Prussian chancellor Otto von Bismarck, and turning into a modern industrial nation. Weber, though an intellectual, took part in this modernization in multiple roles—not just as an academic but also as an adviser to the Berlin stock exchange, a consultant to political reform groups, and a reserve officer in the Kaiser’s army.6 He first came to public attention with his controversial study of the plight of German agricultural laborers being displaced by Polish migrants, in which he argued that large German estates should be broken up into plots that could be given to workers to encourage them to stay in the area. Subsequently having taken a position at Freiburg University, he again courted controversy with proposals that Germany follow a path of “liberal imperialism” to build up the political and institutional structures needed for a modern state.7
In 1898, after a fiery family argument that precipitated his father’s death, Weber had a breakdown and developed a form of nervous exhaustion that often left him unable to teach. It was during his recovery from one such bout, in 1903, that he was invited by Hugo Münsterberg, a Harvard professor of applied psychology, to join a gathering of international scholars that was assembling in St. Louis, Missouri. Weber accepted, drawn by the lure of the United States and what he considered to be its relatively undeveloped economic and political forms, the chance to delve deeper into Puritanism (his most influential work, The Protestant Ethic and the Spirit of Capitalism, would appear shortly), and a fat honorarium. As the German historian Wolfgang Mommsen later put it, the trip would prove to be “pivotally important to his social and political thought.”8
Visiting the United States in 1904, Weber expanded his lecture invitation into a grand observation and data-gathering tour across much of the country; he would spend more than 180 hours on trains over a period of nearly three months, visiting New York; St. Louis; Chicago; Muskogee, Oklahoma (to see Indian country); Mt. Airy, North Carolina (where he had relatives); and sundry other destinations (meeting with William James, for example, in Cambridge, Massachusetts). Weber was coming from a modern country to one even more so. Indeed, as Weber viewed America, it represented “the last time in the long-lasting history of mankind that so favourable conditions for a free and grand development will exist.”9 America was the most intensely capitalist society Weber had seen, and he recognized that it presaged the future. The skyscrapers of New York and Chicago appeared to him as “fortresses of capital,” and he was awed by the Brooklyn Bridge and by both cities’ trains, trams, and elevators.
But Weber also found much to lament in the United States. He was shocked at labor conditions, the lack of workplace safety, the endemic corruption of city officials and labor leaders, and the insufficient ability of civil servants to regulate the whole mess and keep up with the dynamic economy. In Chicago, which he called “one of the most unbelievable cities,” he wandered through stockyards, tenements, and streets, watching its residents at work and play, cataloguing the ethnic pecking order (Germans were waiters, Italians were ditch-diggers, and the Irish were politicians), and observing local customs. The city was, he observed, “like a human being with its skin peeled off and whose intestines are seen at work.”10 Capitalist development was moving rapidly, he further noted; everything “opposed to the culture of capitalism is going to be demolished with irresistible force.”11
What Weber saw in America confirmed and strengthened his ideas about organization, power, and authority—and he would go on to produce a massive body of work that would earn him the reputation of “father of modern social science.” Weber’s theory of power, laid out in Economy and Society, began with authority—the basis on which “domination” was justified and exercised. Drawing on his encyclopedic command of global history, Weber argued that, in the past, much authority had been “traditional”—that is, inherited by its holders and accepted by the holders’ subjects. A second source for authority had been “charismatic,” in which an individual leader was seen by followers to possess a special gift. But the third form of authority—and the one suited to modern times—is “bureaucratic” and “rational” authority, grounded in laws and wielded by an administrative structure capable of enforcing clear and consistent rules. It rests, Weber wrote, on the “belief in the validity of legal statute and functional competence based on rationally created rules.”
And so, Weber believed, the key to wielding power in modern society is bureaucratic organization. Bureaucracy to Weber was far from the dirty word it has become today. It described the most advanced form of organization humans had achieved and the one best suited for progress in a capitalist society. Weber enumerated bureaucratic organizations’ fundamental characteristics: specific jobs with detailed rights, obligations, responsibilities, and scope of authority as well as a clear system of supervision, subordination, and unity of command. Such organizations also relied heavily on written communications and documents, and on the training of personnel according to each job’s requirements and the skills it needed. Importantly, the inner workings of bureaucratic organizations were based on the application of consistent and comprehensive rules for everyone regardless of socioeconomic status or family, religious, or political links. Therefore, recruitments, responsibilities, and promotions were based on competence and experience—not, as in the past, on the basis of family connections or personal relationships.12
Germany had been at the forefront of European efforts to create a modern civil service, beginning with Prussia in the seventeenth and eighteenth centuries. In Weber’s day, that process intensified, with parallel developments in other countries that reduced the scope for patronage. The UK’s Civil Service Commission, established in 1855, is one such example; another is the US Civil Service Commission created in 1883 to control entry into the Federal service. And 1874 saw the first step toward an international civil service, with the formation of the Universal Postal Union.
On his American journey, Weber also witnessed a parallel revolution in methods and bureaucratic organization among the new pioneers in business. In Chicago’s stockyards, whose packing plants were at the forefront of assembly-line mechanization and specialization of tasks that allowed management to substitute unskilled labor for craft workers, Weber was agog over “the tremendous intensity of work.”13 Yet even amid the “wholesale slaughter and oceans of blood,” his observer’s mind was engaged:
From the moment when the unsuspecting bovine enters the slaughtering area, is hit by a hammer and collapses, whereupon it is immediately gripped by an iron clamp, is hoisted up, and starts on its journey, it is in constant motion—past ever-new workers who eviscerate and skin it, etc., but are always (in the rhythm of work) tied to the machine that pulls the animal past them. . . . There one can follow the pig from the sty to the sausage and the can.14
For managers, large-scale industrial production in an increasingly international market required the advantages of bureaucratic specialization and hierarchy, or, as Weber listed them: “precision, speed, unambiguity, knowledge of the files, continuity, discretion, strict subordination, reduction of friction and of material and personal costs.”15 What was good for cutting-edge government was also good for cutting-edge commerce. “Normally,” Weber wrote, “the very large, modern capitalist enterprises are themselves unequalled models of strict bureaucratic organization.”16
Deploying a range of examples, Weber would ultimately show that rational, professionalized, hierarchical, and centralized structures were ascendant in every domain, from successful political parties to trade unions, “ecclesiastical structures,” and great universities. “It does not matter for the character of bureaucracy whether its authority is called ‘private’ or ‘public,’” Weber wrote. “Where the bureaucratization of administration has been completely carried through,” he concluded, “a form of power relation is established that is practic
ally unshatterable.”17
HOW THE WORLD WENT WEBERIAN
One of the catalysts for the spread of bureaucratization was the outbreak of World War I, a conflict that Weber initially supported but came to bitterly regret. The mass mobilization of millions of men and millions of tons of materiel required managerial innovations on the battlefield and the home front. Given the stationary nature of trench warfare, for example, the supply of ammunition became arguably the most critical constraint on operations. As just one facet of the organizational challenge this represented, consider the French production of 75-millimeter artillery shells. Prewar planners set a production goal of twelve thousand shells per day. Shortly after the outbreak of hostilities, they increased it to a hundred thousand per day—still only half the level that production eventually reached to meet demand. By 1918, more than 1.7 million men, women, and youths (including prisoners of war, mutilated veterans, and conscripted foreigners) were working in French munitions plants alone. As the historian William McNeill observed, “Innumerable bureaucratic structures that had previously acted more or less independently of one another in a context of market relationships coalesced into what amounted to a single national firm for waging war”—a process that played out in every combatant nation.18
Weber died of a lung infection two years after the war ended. But everything that happened for decades after his death only confirmed his insight about the fundamental superiority of large-scale, bureaucratic systems. Weber had been keen to show the effectiveness of such systems in organizations beyond the military and business, and this indeed proved to be the case. The managerial model soon took hold in philanthropy, for example, as the same great industrialists who pioneered modern business created foundations that would dominate charitable work for a century. By 1916, there were more than forty thousand millionaires in the United States, up from just one hundred in the 1870s. Tycoons like John D. Rockefeller and Andrew Carnegie teamed up with social reformers to endow universities and create free-standing institutes such as the Rockefeller Institute for Medical Research, which became a model for similar institutions. By 1915, the United States had twenty-seven general-purpose foundations, a uniquely American innovation, with in-house experts conducting independent research on a variety of social problems and putting programs in place to ameliorate them. By 1930, that number had swelled to more than two hundred. The rise of independent endowed foundations was accompanied by the advent of mass philanthropy, especially in areas such as public health, where reformers harnessed community giving for broad social goals. In 1905, for example, no more than five thousand Americans were donating time and money to the fight against tuberculosis, a scourge that accounted for up to 11 percent of all US deaths. By 1915, led by organizations such as the National Association for the Study and Prevention of Tuberculosis (created in 1904), there were as many as five hundred thousand donors, many of them involved in the popular “Christmas seals” campaign, a Danish innovation popularized in the United States by the reformer Jacob Riis.19