Daily Class OutlineDaily Class QuestionsDaily Class Web LinksDaily Class Notes


Question for Discussion:
How did the rise of Big
Business and the growth of a national market
affect American society and culture in the late
1800s?

Reading: Gerster, pp. 38-44, 72-85; Carnegie "The
Gospel of Wealth" (web)

Daily Class Web Links

Wealth and Power in the late 1800s

Industrial Capitalism: Monopoly vs. Free Enterprise

Corporate Power and the
Subversion of Democracy

Corporate Welfare and the
Subversion of Free Enterprise

American Workers and Growing
Income Inequality

The Global Economy and the Haves
and Have-Nots

Daily Class Outline

1. Moving from a nation of small local and regional companies  to national corporations?

2. The Debate between Henry George and Andrew Carnegie

3. Does the growth of national corporations
and concentration of wealth threaten
American democracy?

4. Should the People of Denver pay three-quarters
of the 300 million cost of building a new stadium
for the Broncos in Denver?

5. Global Corporations and the Subversion of American Democracy

6.    Campaign Finance Reform

7. The Growth of the Global Economy and the threat to 
American democratic control over the American economy



Daily Class Questions

1. Why is Henry George concerned about the growing concentration of wealth in America in the late 1800s?

2. Why, according to George, does concentration of wealth threaten American democracy and our democratic institutions?

3. According to George, how do the wealthy really acquire their great wealth?

4. How would George reform American society and economy in order to reduce and limit the power of great wealth?

5. Does George believe that wealth should be the final, real measure of a person's social status and worth in American society?

6. According to Andrew Carnegie, how is great wealth created: How do the rich become rich?

7. What role does profit play, according to Carnegie, in American society?

8. Why does Carnegie believe that the "race for the accumulation of wealth" is good for America?

9. What does Carnegie believe is the role of people with great wealth in American society?

10. What does Carnegie mean when he argues that those with great wealth should be "trustees for the people"?

11. Whose argument do you think is more persuasive: George's or Carnegie's?

12. Does the concentration of wealth in American society inevitably threaten American democracy and democratic institutions?

13. Are the benefits created by the concentration of wealth greater than the threat such wealth poses to American democracy?

14. Would you rather have a more democratic society or a society that allowed and encouraged great concentrations of wealth? Do we really have to make a choice between preserving our democratic institutions and protecting the right of large corporations and the wealthy to amass great wealth?



Daily Class Notes

In order to understand how the rise of Big Business, the rise of large, national corporations, affected American society, we need to briefly compare America in the 1870s with America in the 1920s. America in the 1870s was a nation of small farmers and small businessmen who sold their goods and products to a local and regional market. Americans believed that owning land and owning one's own business gave them freedom. Not being dependent on others' for a job or one's livelihood made American free. In addition, in the 1870s Americans believed that our society and economy was based on free enterprise, free and open competition between small farmers and businessmen in a free market. In such an economy, Americans were guaranteed higher quality goods and products at lower costs. Few Americans in the 1870s could really imagine how quickly their economy and way of life would change by the 1920s.

In the 1920s, America was a nation of large, national corporations, which dominated a national market. The majority of Americans now lived in cities. Instead of owning their own small farms and small businesses, Americans were increasingly employed by large corporations. Instead of buying goods and products from people and companies they knew, and could trust and depend on, Americans were forced to buy goods from large, powerful, dominant corporations, which dominated their industries. In many industries, four or five national corporations dominated the production and sale of goods. Instead of free enterprise and free and open competition in a free market. These dominant national corporations formed trusts or cooperated with each other to ensure higher prices and lower quality goods. This cooperation between giant corporations allowed them to divide up the market for their goods and no longer compete with each other to produce higher quality goods at lower prices. By the 1920s, because these corporate oligopolies--several companies dominate and control an industry--were so powerful they attempted to use their money and influence to shape and control state and federal governments. As a result, many American since the early 1900s have questioned whether we are, in fact, a democracy when such large, powerful corporations and interests can exert more power and control than most Americans.

How then was the American economy transformed from a nation of small farmers and businessmen to a nation of powerful, dominant corporations who threatened to undermine free enterprise and the free market and American's democratic control over their government and society? Why didn't Americans choose to remain a nation of small producers, serving local and regional markets? The answer lies in the same forces that are now transforming the American national economy into a global economy in which giant global corporations are threatening to undermine national companies and national governments' control over their own economies.

But let's start with America in the 1870s. In order to understand the rapid growth of the national economy we need to look at a specific industry, let's say shoe companies, for example. In 1870, there were small shoe companies that produced shoes for the New England, upper Midwest, the South, and the Western markets. These companies weren't directly competing with each other. They were still making shoes using skill craftsmen to make and finish the shoes. As a result of their dependence on skilled craftsmen and their dependence on local and regional customers, these shoe companies did not produce a large volume of shoes. They produced as much shoes as their customers needed and demanded. Given the success of these regional shoe companies, why did some of them decide to try to expand their market from their region to other regions in the 1870s and 1880s?

In the 1870s and 1880s, the railroads linked the country together. Instead of only being able to ship goods to a local and regional market, railroads now made it possible for shoe companies to ship and sell their goods outside their traditional regional markets. Even though the railroad now made it possible for these shoe companies to sell their shoes to other regional markets, they would have to find a way of paying for shipping their shoes and still be able to sell their shoes at or below the costs of shoes charged by their other regional competitors. How would these companies manage to still compete with their regional competition in price and quality for shoes and pay for shipping and transportation?

The larger question we must now ask is this: Why would these regional shoe companies want to go through the bother of expanding their market and competing with other regional shoe companies? They would have to produce more shoes and find a way of paying for the additional costs of shipping their shoes? Why didn't they simply refuse to take the risk and continue to make and market their shoes for their regional customers? The answer lies in the promise of increased profits and control over the market for shoes. Those businessmen who took the risks believed that they could make a lot of money by expanding their market for shoes.

Having decided to take the risk, what would the New England shoe company have to do to expand its market for shoes to include the Midwest and Southern regional markets for shoes? The first thing the company would have to do is to greatly expand its production of shoes? Should they hire more skilled craftsmen? No, because skilled craftsmen were very expensive, and the New England shoe company couldn't compete and pay such high salaries. Instead, the company buys builds new factors, buys new machinery, and hire unskilled workers to mass-produce shoes on the assembly line. As you might guess, in order to expand their markets for shoes, the New England company depended not only on the railroad but on the new steam engines that now could power and run assembly lines for production of shoes. But in order to build these new factories, buy new machines, and hire large number of workers to run the assembly line, the New England shoe company needs a good deal of money. Where is the company going to get the money and capital to invest in these new factories and machinery?

In the 1870s and 1880s, American companies begin to aggressively take their once privately-owned companies public and sell stock, or shares in their company, to investors. In this case, the New England shoe company is going to sell thousands of shares of stock to investors and borrow thousands of dollars from banks. But selling stock and borrowing money from banks is risky. The New England shoe company now not only has to pay the interest on the money it borrowed, it must guarantee profits for its stockholders who invested in the company expecting a good rate of return on their investment. In order to pay off its debts and make a profit, the New England shoe company is going to have to rapidly expand its market for shoes, trying to sell shoes to customers in the Midwest and the South who have traditionally bought shoes from regional companies. In order to attract new customers, the New England shoe company is going to have to try to sell its shoes for less than its competitors, offer higher quality shoes, and spend thousands of dollars advertising its shoes to new regional customers who have never bought shoes from them before.

There is, however, another problem facing the New England shoe company: What will it do if its competitor, let's say, the Midwestern shoe company, builds new factories, invests in new machinery, and expands its production of shoes? Can the New England shoe company expand its market for shoes in the face of stiff competition from other expanding regional shoe companies? It is at this point that the New England shoe company must pause and rethink its strategy. For the most part, its new investment in factories and machines have allowed it to expand and out compete other, smaller, more regional competitors who haven't tried to expand their operations. As a result, the New England shoe company is now faced with three or four other expanding, national shoe companies, all eagerly trying to expand their market for shoes in order to pay off their debts and increase their profits in order to keep their investors happy. What should the company do? Should it borrow even more money, buy even more advanced equipment, and produce even more shoes, trying to drive its competition out of business? It is at this point that the New England shoe company must reassess the increased costs of competition. What happens its competitors decide to do likewise and invest in even more advanced equipment? This ruinous competition between expanding, increasingly national shoe companies could make it difficult for any of the competing companies to profit and pay off their debts.

It is at this point that the New England shoe company decides to try to make a deal with the remaining three or four large, national shoe companies. It will go to them and try to convince them that further competition could ruin them all. Instead of this ruinous competition, the remaining four or five companies should get together and make a deal; they will agree to divide up the national market for shoes, selling shoes at a higher price and at average quality, and not try to further encroach on each others' markets. In the late 1800s and early 1900s, American companies in the oil, the meat, grain, tobacco industries did just this. They formed "trusts" and agreed to limit their competition with each other. As a result, we get the rise of the oligopolies that have dominated American industry and business ever since. Because they don't compete on the basis of price or quality of goods, these companies compete with each other by using advertising to establish brand name loyalty. And, of course, their power and size as well as their advertising dominance prevents other regional or start-up companies from challenging these companies domination of an industry.

By the 1890s, many Americans worried about the increasing power of these trusts and dominant companies to control the American economy. They worried that free enterprise and the free market were increasingly things of the past. But in response to their critics, Corporate giants such as John Rockefeller argued that the trusts were more efficient, and could produce more goods at a cheaper price than smaller, more competitive companies could. Rockefeller claimed that the giant corporation would pass on its ability to produce goods more cheaply and efficiently to the consumer in terms of lower prices. But is this true?

Let's look at an example of an American industry dominated by an oligopoly. After World War II, the American auto industry was increasingly dominated by four companies: General Motors, Ford, Chrysler, and American Motors. By the 1960s and 1970s, the big three or big four collectively set prices for cars and together set quality standards. By the 1970s, facing increasing costs for energy and materials to manufacture cars, the American auto industry began to make high priced cars of very little quality, using advertising to try to sell these cars to the American consumer. It worked for a while, American were forced to buy low quality, high-priced cars. But then something happened. By the mid-1970s the Japanese and German auto companies began to flood the American market with lower priced, higher quality cars. These foreign companies began to directly challenge the oligopoly created by the American auto companies.

At first, the American auto companies tried to use advertising and patriotism--telling their customers to buy American, but this didn't seem to work. Because the American companies didn't rise up and compete with these foreign competitors, one of them, Chrysler, nearly went bankrupt. However, the government bailed out Chrysler by lending it billions of dollars, fearing the political consequences of losing hundreds of thousands of American jobs. By the early 1980s, the American auto industry was pressuring the federal government to restrict the importation of Japanese and German cars into the United States. Owing to their political and economic power, the American government put strict limits on imported cars. But by the late 1980s and 1990s, Japanese and German car companies had discovered away around this maneuver by the American companies to try to maintain control of the American automobile market. Japanese and German companies began to build manufacturing plants in the United States and started producing hundreds of thousands of cars in the United States. This development finally forced the American auto industry to once again compete freely on the basis of price and quality. They could no longer use their combined power to dominate the American auto market and undermine free enterprise and free competition. As a result, Americans now could buy less expensive, higher quality cars.

But the story doesn't end here. Just as the growth of a national market caused many smaller, regional companies to fail and go out of business, costing workers thousands of jobs, the growth of a global economy is threatening to undermine many national companies, who don't have the money or power to compete with global corporations. The movement of Japanese and German auto companies to the United States is a larger example of the new threat caused by globalization and increased global competition. The larger problem facing America is this: If larger, national corporations threatened free enterprise and the democratic control of the economy and society, how will giant global corporations threaten American democratic control of their economy, society, and culture? Is globalization the inevitable result of the same competitive forces that caused the growth of national markets and industries dominated by national oligopolies? Americans have been debating whether large national and global companies are a benefit or a threat to our society and economy throughout the twentieth century.

 



© 2002 by Chris H.  Lewis, Ph.D.
Sewall Academic Program; University of Colorado at Boulder
Created 7 August 2002:  Last Modified: 13 Sept. 2002
E-mail: cclewis@spot.colorado.edu
URL:    http://www.colorado.edu/AmStudies/lewis/2010/business.htm
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