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Best Business Books: Economic History

Insights from Hindsight: What the Past Teaches about the Future

(originally published by Booz & Company)

My grandmother’s brother Abraham Lowenhaupt — Uncle Abe, we called him — got his education when human capital really flourished in America. Raised in a rural Indiana town, he migrated to St. Louis as a young man and read about law as an apprentice at a law firm. He had a knack for math, and when the 16th Amendment to the Constitution authorized the income tax in 1913, Uncle Abe, putting math and law together, soon became the city’s most successful, most erudite corporate tax lawyer. The firm he established survives to this day, taken over in turn by his son and grandson. Neither achieved Uncle Abe’s prominence, despite their Ivy League schooling.

Alfred D. Chandler, Jr., an economic historian, would have loved my Uncle Abe. He would have been a wonderful example for Chandler’s classic history The Visible Hand: The Managerial Revolution in American Business (1977). The book is filled with achievers, most of whom, without the benefit of higher education, responded resourcefully to the circumstances of their time. The modern corporation is essentially the invention of tens of thousands of Uncle Abes who exploited the business opportunities that materialized in America between 1880 and 1925, railroads and the telegraph having finally tied the nation together, creating the world’s first mass market.

The new companies that arose — DuPont, GE, and Sears Roebuck, to cite several examples — were true pioneers. They invented mass production, mass distribution, and mass marketing. How could they resist? How could Anheuser-Busch, a local brewer in Uncle Abe’s hometown, refrain from multiplying production many times over when the railroad and refrigerator car allowed the brewer to ship its beer to distant markets?

A unique hierarchy of managers, distributors, and outside experts, like my Uncle Abe, developed to operate these increasingly complicated companies. It was expensive to hire all these managers, but the economies of scale that came out of mass production and mass marketing generated more than enough in revenues and profits.

They still do. The paradigm has not changed. Despite all the alternatives that the New Economy seems to offer, today’s most successful companies thrive by achieving economies of scale. Chandler continues the story of the modern corporation in Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Industries (2001), a sequel to The Visible Hand. “Talk about economies of scale,” Chandler told me in a telephone interview. “IBM’s first PC had 200 clones. But everyone [who bought a PC] had to purchase an Intel chip and a Microsoft operating system. That is real scale.”

How can a corporate manager protect himself or herself from the beguiling idea that the New Economy or any marvelous new technology represents a radical departure from the past?

Well, start by throwing out the countless books published in recent years heralding the everything-is-different-and-better nature of the Information Age, then take a look at the past. History is rarely on the curriculum at the graduate business schools that prepare executives for their futures, and in this do-it-yourself exercise, Chandler’s two books are a good starting point for the otherwise well-schooled corporate manager. Two more books round out your crash course in history: Robert L. Heilbroner’s The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (1953) and Jared Diamond’s Pulitzer Prize–winning Guns, Germs, and Steel: The Fates of Human Societies (1997). They will illuminate your slot in history and sharpen your intuition and skepticism as a top executive.

Reading the Terrain
If only The Visible Hand had been available in the 1960s to David Sarnoff and his son Robert, RCA might still be the king of consumer electronics, replicating its great successes in radio and color television. Instead, the Sarnoffs, particularly Robert, converted RCA into a different paradigm — a paradigm out of sync with its time, Chandler argues in Inventing the Electronic Century. RCA became a conglomerate, wasting resources to acquire the car rental company Hertz and other alien operations.

From the late 1930s into the 1960s, no company matched RCA’s prowess in bringing new consumer electronics products to the mass market. Color television was a spectacular technological breakthrough and a very profitable commercial success for the company. But in the mid-1960s, RCA tried to get into computers, going up against the corporate establishment in that field, above all IBM. This new push came at the expense of consumer electronics, which got less funding just as Japanese companies were achieving breakthroughs in the field, particularly in video recording.

By the 1970s, the Sarnoffs had lost sight of their place in history. As innovators in consumer electronics, they had reaped huge profits from economies of scale in marketing these products. They then put the profits back into research and more innovation. But, “as Robert Sarnoff took command [in 1968], he was persuaded by Andre Meyer, a member of the RCA board of directors and senior partner at Lazard Frères and one of the most respected investment bankers of his day, to embark on a second strategy of growth. That was one of product diversification through acquisition of companies whose businesses were only distantly related, if related at all, to [RCA’s] learned technical, functional, and managerial capabilities,’’ as Chandler tells the story in his new book.

How could the Sarnoffs have known that becoming a conglomerate, for all its dazzle, was a doomed route for them to take, and that RCA would disintegrate? They could not have known, of course. But a greater acquaintance with history would have made them more aware of RCA’s potential problems. Plow through Chandler’s sometimes dense and often anecdotal prose, and you come away with a sophisticated appreciation of the historical forces that shape outcomes. Not answers, but an awareness that, in the Sarnoffs’ case, might have saved them from the advice they got on Wall Street.

As Peter Cappelli, a management expert at the University of Pennsylvania’s Wharton School of Business, put it in an interview: “What you are trying to develop in a manager is a kind of inductive skill in reading the terrain; of knowing intuitively when the paradigms are about to change or bust up — or endure.”

Insights of History
Like Chandler, Robert Heilbroner is an economic historian, but a far better writer. He offers wonderful anecdotal biographies of the great economists, starting with Adam Smith, and in the process takes the reader almost painlessly through Western economic thought. His message is blunt: The seminal economic theories sprang from the times in which they were conceived. When circumstances changed, every generation or two, so did economic theory. But not entirely. Each new worldly philosopher built on the theories of his predecessors.

Adam Smith, of course, described the dynamics of the Industrial Revolution starting all around him. Karl Marx, building on Smith, witnessed the unfolding plight of the new industrial work force and tried to give workers as important a role as capital in the new market system. As a byproduct, Marx was the first economist to describe a business cycle and to perceive that business cycles were inherent in capitalism. And so the evolution of economic theory continued. John Maynard Keynes explained the Great Depression to our parents, and  Joseph Schumpeter became known for his descriptions of “creative destruction” in a market system — a bit of consolation for the bankrupt.

“The worldly philosophers,” Heilbroner writes, “taught us to see the evolution of society as a drama whose meaning could be grasped by individuals who would otherwise have felt themselves merely swept along by overmastering and incomprehensible forces. The ultimate objective of their economic thinking was social understanding.”

That, in the end, is Chandler’s value to America’s corporate managers, and Jared Diamond’s, too. Although he earned a Ph.D. in physiology, Diamond is a polymath, and his book draws on many fields of scholarship in telling the story of humankind’s innumerable responses to innumerable changing circumstances over the past 13,000 years.

Almost always the responses are optimal, given the circumstances. Or certainly they seemed so at the time. Indeed, with the benefit of hindsight, Diamond suggests that the Chinese might have colonized Africa and the Americas before the Europeans did, and even Europe itself. The Chinese had the technology. By the early 15th century, they had built hundreds of ships up to 400-feet long, and they had sent them “across the Indian Ocean, as far as the east coast of Africa, decades before Columbus’s three puny ships crossed the narrow Atlantic Ocean to America’s east coast,” writes Diamond. Those ships could have crossed the Pacific to colonize America, or they could have proceeded “around Africa’s southern cape westward and colonize[d] Europe, before Vasco da Gama’s own three puny ships rounded the Cape of Good Hope eastward and launched Europe’s colonization of East Asia.”

Why did China fail to capitalize on its technological superiority? As Diamond explains it, a power struggle erupted between two factions at the Chinese court; the one that opposed oceangoing ventures won. In China’s top-down, rigidly unified political and social structure, the voyages were stopped, and shipbuilding ceased. This outcome was probably inevitable: Given the power of political and cultural forces, China missed its empire-building opportunity.

In contrast to the Chinese, the Europeans emerged from the Middle Ages independent, adventuresome, and competitive, particularly the merchants in the growing cities. Embracing technologies born in China and the Middle East, the Europeans gave birth to the Industrial Revolution, improvising as they went and dominating commerce until the late 19th century. From England, in particular, came the concept of the factory and the first high-speed industrial machinery.

All this industrial activity quickly crossed the ocean to America, and then the Americans added the missing ingredient: people. The Europeans had the technology, the same unifying railroads and telegraph as the Americans. But Europe’s numerous national borders and tariffs meant there could be no single mass market. In America, in contrast, a huge, energetic consumer population, swollen with immigrants and spreading westward, was ripe for the picking by the end of the Civil War.

In response, the modern corporation and its management techniques came to life, first in the railroad industry, then in the fields that new technologies made possible, particularly the telephone, electric motor, and gasoline combustion engine. Only after World War II did Japan and Western Europe become mass-production powerhouses. Increasing world trade, falling tariffs, instantaneous communication, and rapid, inexpensive transportation gave their corporations access to a global marketplace. America finally had to share its windfall.

Today, the United States struggles to regain its global economic preeminence and, ignoring the insights that history offers, focuses on minor shortcomings. For example, policymakers wring their hands over the poor reading and math skills of so many young Americans, as if that were somehow the problem. We insist that if only we could hit on the right formula for repairing the schools and sending more children to college, enhanced human capital would revive the golden days.

That is not the way education has worked for America. For Uncle Abe and his generation, education was not a cause; it kicked into gear as a natural and enthusiastic response to the new circumstances that arose in the late 19th century. The first mechanical engineers did not think of themselves as educated men. Forced to build new machines and to constantly modify older ones for the ever-evolving factories, they wrote about their achievements in new professional journals with such names as American Machinist and Engineering News. Colleges and universities then trained subsequent generations in the accumulated engineering knowledge, “although many mechanical engineers continued to preach that the shop apprenticeship was of more value than formal book learning,” writes Chandler in The Invisible Hand. American capitalism in its formative years, particularly with the rise of the giant corporation, forced education on the populace. So, for that matter, did the electronic age. The modern computer engineer evolved (from the garage) much as Uncle Abe and the mechanical engineers evolved: opportunistically, in response to the prevailing circumstances. While colleges trained engineers, an expanding secondary-school system provided a necessary basic education for millions of production workers. By 1950 a high school education had become nearly universal.

After the war, the GI Bill met the training needs of a surging peacetime economy. Scientific research also flourished, in response to the Cold War and the Soviet Union’s launching of the first Sputnik in 1957. E-mail and the Internet had their beginnings in this research.

But today why should Americans push themselves to become engineers or skilled workers when corporations are relocating operations to Asia or Mexico, where these workers are abundant and inexpensive? American-owned auto and engine plants in northern Mexico, for example, are state of the art, staffed by thousands of engineers and skilled workers trained in the colleges and vocational schools that have multiplied in that country in response to new circumstances, particularly that mass production and mass marketing now belong to the world.

We cannot know the next link in history’s chain of events. But from Chandler, Heilbroner, and Diamond come insights that will bring corporate managers’ decisions and reactions closer to the mark.

Louis Uchitelle,
Louis Uchitelle has covered economics for the New York Times since 1987. He has written on a wide range of economic issues, with emphasis on national trends, business and labor, technology and productivity, and Federal Reserve policy. In the early 1990s, he spent more than 20 weeks in Russia and Ukraine, reporting on the former Soviet Union’s plunge into capitalism. In the late 1990s, he was the Times’s lead writer for a seven-part series on downsizing. He has taught journalism at Columbia University.
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