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Economic Theory and the Rise of Big Business in America, 1870–1910

  • Jack High
Abstract

Between 1870 and 1910, big business established itself as a prominent feature of the American economy. American economists paid close attention to its rise and confronted the difficulties of integrating large firms into economic theory. The result was a theory that emphasized the importance of entrepreneurship, that enlarged the scope of competition, that distinguished profit from other forms of income, and that was compatible with large-scale enterprise. The insights of earlier American economists have been lost to modern economic theory, which extols the virtues of small firms.

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1 Stigler, George, “The Influence of Events and Policies on Economic Theory,” American Economic Review 50, Papers and Proceedings of the Seventy-second Annual Meeting of the American Economic Association (May 1960): 40. Stigler writes (p. 37), “At the height of the industrial revolution, when great technological advances were crowding hard upon one another, the main tradition of classical economics treated the state of the arts as a datum. The arts were held to be subject to sporadic improvements, but not of a magnitude comparable to the force of diminishing returns in agriculture. Here, then, the almost overwhelming characteristic of economic life was excluded from economic theory.”

2 Chandler, Alfred D. Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977), 79121, 195–205.

3 For railroad freight rates, see North, Douglass C., Growth and Welfare in the American Past (Englewood Cliffs, N.J., 1966), 111; population and its distribution is given in Chandler, Alfred D. Jr. and Tedlow, Richard, The Coming of Managerial Capitalism: A Casebook on the History of American Economic Institutions (Homewood, III., 1985), 96. The founding dates of companies are given by McCraw, Thomas K., “American Capitalism,” in McCraw, Thomas K., ed., Creating Modern Capitalism (Cambridge, Mass., 1995), 321–23. On the merger wave, see Lamoreaux, Naomi, The Great Merger Movement in American Business (Cambridge, U.K., 1985).

4 McCraw, ed., Creating Modern Capitalism, 320.

5 Porter, Glenn, The Rise of Big Business, 1860–1910, 1st ed. (New York, 1973), 4371; Chandler, The Visible Hand, 209–83.

6 Adams, Charles Francis Jr. and Adams, Henry, Chapters of Erie and Other Essays (New York, 1886), quoted in Porter, The Rise of Big Business, 38. On regulation and antitrust during this period, see Kolko, Gabriel, The Triumph of Conservatism (New York, 1963); Thorelli, Hans Birger, The Federal Antitrust Policy (Baltimore, 1954); McCraw, Thomas K., Prophets of Regulation (Cambridge, Mass., 1984), 156; Young, James Harvey, Pure Food (Princeton, 1991); Coppin, Clayton and High, Jack, The Politics of Purity (Ann Arbor, 1996). For a comprehensive treatment of the effects of big business on law, politics, and the economy, see Sklar, Martin J., The Corporate Reconstruction of American Capitalism, 1890–1916 (Cambridge, U.K., 1988).

7 GDP figures and price indexes are given in Historical Statistics of the United States: Colonial Times to 1970, pt. 1 (Washington, D.C., 1975), 200–31. GDP is expressed in constant 1958 dollars. Total factor productivity numbers are taken from McCraw, ed., Creating Modern Capitalism, 320. On total factor productivity and entrepreneurship, see Harberger, Arnold, “A Vision of the Growth Process,” American Economic Review 88 (Mar. 1998): 132, and High, Jack, “The Roles of Entrepreneurship in Economic Growth,” in Entrepreneurship in the Spatial Economy, ed. Groot, Henri de, Nijkamp, Peter, and Stough, Roger (Cheltenham, U.K, 2004), 4677.

8 Walker, Francis A., The Wages Question (London, 1876), 244–45; Walker, Francis A., Political Economy, 3rd ed. (New York, 1887), 6061, 74–75. See also Walker, Francis A., “American Manufactures,” Princeton Review (Jan.–June 1883). For a summary of Walker's contributions to entrepreneurial theory, see Weber, A. F., “American Economists of Today,” New England Magazine 21 (Nov. 1899): 260.

9 Schumpeter, Joseph A., History of Economic Analysis (Oxford, 1954), 866; Newcomb, Simon, “The Organization of Labor,” Princeton Review 1 (May 1880): 398.

10 Sherwood, Sidney, “The Functions of the Entrepreneur,” Yale Review 6 (Nov. 1897): 233–50; Sherwood, , “Influence of the Trust in the Development of Undertaking Genius,” Publications of the American Economic Association, 3rd ser., 1 (Feb. 1900): 163–76; quotations are from the latter article, 174, 175; see also Newcomb, Simon, Principles of Political Economy (New York, 1885), 101–3; Clark, John B., “The Limits of Competition,” Political Science Quarterly 2 (Mar. 1887): 5253; Ely, Richard T., An Introduction to Political Economy (New York, 1889), 170; Fetter, Frank A., Principles of Economics (New York, 1904), 265–72; Taussig, Frank, Principles of Economics, 2 vols. (New York, 1911), 1: 105–6; 2: 158–71; Davenport, Herbert Joseph, Outlines of Economic Theory (New York, 1896), 151; Commons, John R., The Distribution of Wealth (New York, 1893), 172.

11 Morgan, Mary S., “Competing Notions of ‘Competition’ in Late Nineteenth-Century American Economics,” History of Political Economy 25 (Winter 1993): 563604. See also Leonard, Thomas J., “‘A Certain Rude Honesty’: John Bates Clark as a Pioneering Neoclassical Economist,” History of Political Economy 35 (Fall 2003): 521–58.

12 See High, Jack, ed., Competition (Cheltenham, 2001), i–xvii, 3–84.

13 Hadley, Arthur T., Railroad Transportation: Its History and Laws (New York, 1885), 40, 70–76. Pricing below average cost was often called “cutthroat” competition; see, for example, Fisher, Irving, Principles of Economics (New York, 1910), 317–21.

14 Clark, “The Limits of Competition,” 55–59; Galbraith, John Kenneth, American Capitalism (Boston, 1952).

15 Clark, J. B., The Control of Trusts (New York, 1901), 13, 28; Clark, John Bates, “Trusts,” Political Science Quarterly 15 (June 1900): 186; Giddings, Franklin, “The Persistence of Competition,” Political Science Quarterly 2 (Mar. 1887): 6278. See also Johnson, Alvin S., Rent in Modern Economic Theory: An Essay in Distribution (New York, 1903), 101–2. Robert Dorfman discusses this aspect of Johnson's work in The Economic Mind in American Civilization, 4 vols. (New York, 19461959), 3: 421. In a perceptive essay, Thomas C. Leonard argues that Clark's approach to trusts is essentially neoclassical. See “‘A Certain Rude Honesty,’” 541–48.

16 Henry Carter Adams, “Trusts,” Publications of the American Economic Association, 3rd ser., 5, Papers and Proceedings of the Sixteenth Annual Meeting, pt. 2 (May 1904): 96– 97. Adams developed his ideas on trusts two years before his address to the American Economics Association. In a letter to F. W. Taussig, 5 Mar. 1901, Adams wrote, “The recent movements toward industrial combinations seem to contradict everything that I have held relative to the persistence of competition. I take no stock whatever in Giddings's and Clark's view of this subject. I must therefore, for my own satisfaction, work this subject out.” Box 13, Henry Carter Adams Papers, Bentley Historical Library, University of Michigan (hereafter HCAP). See also the folder labeled “Trusts,” box 25, HCAP.

17 Veblen, Thorstein, The Theory of Business Enterprise (New York, 1904). The quotation is from p. 177.

18 Adams, Henry Carter, “The Relation of the State to Industrial Action,” 1887, reprinted in Dorfman, Joseph, ed., Two Essays: Relation of the State to Industrial Action and Economics and Jurisprudence (New York, 1969), 91120; Davenport, Outlines, 152; Clark, J. B., “The Moral Outcome of Labor Troubles,” New Englander and Yale Review 45 (June 1886): 535; Clark, J. B., “Business Ethics, Past and Present,” New Englander 38 (Mar. 1879): 165–67; Clark, J. B., “Non-competitive Economics,” New Englander and Yale Review 41 (Nov. 1882): 837–47. See also Adams, “Labor and the Monopoly Problem,” box 25, HCAP.

19 Sherwood, Sidney, “Influence of the Trust in the Development of Undertaking Genius,” Publications of the American Economic Association, 3rd ser., 1 (Feb. 1900): 163–76.

20 Jenks, Jeremiah W., The Trust Problem (New York, 1900), 2143. Jenks also pointed out the costs of competition in “Capitalistic Monopolies and Their Relation to the State,” Political Science Quarterly 9 (Sept. 1894): 488–91.

21 Gunton, George, Principles of Social Economics (New York, 1891), 406–10; Davenport, Outlines, 204–5; Hadley, Economics, 159–64; Sherwood, “Influence of the Trusts,” 167.

22 Smith, Richmond Mayo, “American Labor Statistics,” Political Science Quarterly 1 (Mar. 1886): 45.

23 Walker, Francis A., “The Wage-Fund Theory,” North American Review 246 (Jan. 1875): 86119; Walker, Francis A., The Wages Question (London, 1876); Taussig, F. W., “The Employer's Place in Distribution,” Quarterly Journal of Economics 10, no. 1 (Oct. 1895): 6794; Taussig, F. W., Wages and Capital: An Examination of the Wages Fund Doctrine (New York, 1896). Fetter, Frank A. criticized Taussig in Political Science Quarterly 12 (Mar. 1897): 146–51.

24 Clark, John B., “The Possibility of a Scientific Law of Wages,” Publications of the American Economic Association 4 (Mar. 1889): 44, 49; Wood, Stuart, “A New View of the Theory of Wages I,” Quarterly Journal of Economics 3 (Oct. 1888): 6086; Wood, Stuart, “A New View of the Theory of Wages II,” Quarterly Journal of Economics 3, no. 4 (July 1889): 462–80; Wood, Stuart, “The Theory of Wages,” Publications of the American Economic Association 4 (Mar. 1889): 535; Wood, Stuart, “A Critique of Wage Theories,” Annals of the American Academy of Political and Social Science 1 (Jan. 1891): 426–61; Clark, John B., “Distribution as Determined by a Law of Rent,” Quarterly Journal of Economics 5 (Apr. 1891): 289318. Clark came very close to articulating marginal productivity theory in 1883 in Recent Theories of Wages,” New Englander and Yale Review 42 (May 1883): 359–61; Carver, Thomas Nixon, “The Theory of Wages Adjusted to Recent Theories of Value,” Quarterly Journal of Economics 8 (July 1894): 377402 (quotation on p. 399).

25 Davenport, Herbert, Value and Distribution (Chicago, 1907), 439–79.

26 Veblen, Thorstein, “Industrial and Pecuniary Employments,” Publications of the American Economic Association, 3rd ser., 2, no. 1. (Feb. 1901): 190235. Quotations are from p. 229.

27 Veblen, Thorstein, “On the Nature of Capital,” Quarterly Journal of Economics 22, no. 4 (Aug. 1908): 518, 525. This aspect of Veblen's thought is emphasized in Hodgson, Geoffrey M., How Economics Forgot History (London, 2001), 149.

28 Veblen, Thorstein, “On the Nature of Capital: Investment, Intangible Assets, and the Pecuniary Magnate,” Quarterly Journal of Economics 23, no. 1 (Nov. 1908): esp. 116–20.

29 Fetter, Principles of Economics, 205–25; Fisher, Irving, Elementary Principles of Economics (New York, 1916), 440–44; Seligman, Edwin R. A., Principles of Economics (New York, 1905), 411–19; Taussig, F. W., “Outlines of a Theory of Wages,” American Economic Association Quarterly, 3rd ser., 11, no. 1 (Apr. 1910): 136–56; Schumpeter, History of Economic Analysis, 939.

30 Clark, The Distribution of Wealth, 411–12; Clark, “The Possibility of a Scientific Law of Wages,” 53, 61.

31 Clark, “The Possibility of a Scientific Law of Wages,” 61–62.

32 Taussig, F. W., “The Employer's Place in Distribution,” uarterly Journal of Economics 10, no. 1 (Oct. 1895): 93; Clark, J. B., “The Moral Outcome of Labor Troubles,” New Englander and Yale Review 45 (June 1886): 533–37; Clark, “On What Principles Should a Court of Arbitration Proceed in Determining the Rate of Wages,” Publications of the American Economic Association, 3rd ser., 8, no. 1 (Feb 1907): 2328; Hadley, Economics, 359–60; Ely, Richard T., The Labor Movement in America (New York, 1886), 92119; Arthur Hadley, Economics, 354–55; Newcomb, Simon, A Plain Man's Talk on the Labor Question (New York, 1886), 130–31; Walker, Political Economy, 372.

33 Walker, “The Wage-Fund Theory,” 86–119; Walker, The Wages Question.

34 See the following by Clark, John B.: “Profits Under Modern Conditions,” Political Science Quarterly 2, no. 4 (Dec. 1887): 603–19; Distribution as Determined by a Law of Rent,” Quarterly Journal of Economics 5, no. 3 (Apr. 1891): 289318; The Statics and the Dynamics of Distribution,” Quarterly Journal of Economics 6, no. 1 (Oct. 1891): 111–19; and The Distribution of Wealth: A Theory of Wages, Interest, and Profits (New York, 1900).

35 Walker, Francis A., “The Doctrine of Rent, and the Residual Claimant Theory of Wages,” Quarterly Journal of Economics 5, no. 4 (July 1891): 437.

36 Hawley, Frederick B., “The Fundamental Error of ‘Kapital und Kapitalzins,’” Quarterly Journal of Economics 6, no. 3 (Apr. 1892): 283. See also by Hawley, : “The Risk Theory of Profit,” Quarterly Journal of Economics 7, no. 4 (July 1893): 459–79; and Enterprise and Profit,” Quarterly Journal of Economics 15, no. 1 (Nov. 1900): 75105.

37 Clark, The Distribution of Wealth, 411–12. See also Seager, Henry, Introduction to Economics (New York, 1904): 488; Seligman, Edwin R. A., Principles of Economics (New York, 1906): 95, 329. For an analysis of profit theory in the U.S., see Hopkins, William S., “Profit in American Economic Theory,” Review of Economic Studies 1, no. 1 (Oct. 1933): 6066.

38 Carver, Thomas Nixon, The Distribution of Wealth (New York, 1913), 266–67.

39 Andrews, E. Benjamin, “Trusts According to Official Investigations,” Quarterly Journal of Economics 3 (Jan. 1889): 117–52.

40 Jenks, Jeremiah, “The Development of the Whiskey Trust,” Political Science Quarterly 4 (June 1889): 296319; and The Michigan Salt Association,” Political Science Quarterly 3 (Mar. 1888): 7898. Sklar, Martin J., The Corporate Reconstruction of American Capitalism, 1890–1916 (Cambridge, U.K., 1988), 6061, summarizes Jenks's views on trusts.

41 Clark, John B., “Experience of the Sugar Monopoly,” The Review, 18 Feb. 1892; “The Linseed Oil Trust,” The Review, 25 Feb. 1892; “The Whiskey Trust,” The Review, 25 Feb. 1892; “The Lead Trust,” The Review, 10 Mar. 1892; “The Cordage Trust,” The Review, 17 Mar. 1892; “Standard Oil,” The Review, 7 Apr. 1892; John Bates Clark papers, Rare Book and Manuscripts Collection, Columbia University, folder 1886–94, box 16. I have been unable to locate the publication in which Clark's manuscripts appeared.

42 Jenks, “Whiskey Trust,” 297.

43 Jones, Edward D., “The Manufacturer and the Domestic Market,” Annals of the American Academy of Political and Social Science 25, Business Management and Finance (Jan. 1905): 120. The quotation is from p. 7.

44 Morgan, “Competing Notions of ‘Competition’ in Late Nineteenth-Century American Economics,” 563–604; Leonard, “‘A Certain Rude Honesty,’” 539–40.

45 Veblen denied the validity of marginal productivity theory, but he explicitly acknowledged that some activities of large businesses were productive; “It is not hereby intended to depreciate the services rendered to the community by the captain of industry in his management of business. Such services are no doubt rendered and are also no doubt of substantial value.” Veblen implicitly relied on some theory of productivity, which is why we may look on his exploitation theory as complementary to the entrepreneurial theory developed by Walker, Clark, et al., even though Veblen himself was somewhat dismissive of those theories. Veblen, Thorstein, “Industrial and Pecuniary Employments,” Publications of the American Economic Association, 3rd ser., 2, no. 1. (Feb. 1901): 213n.

46 See Foss, Nicolai J., The Austrian School and Modern Economics: Essays in Reassessment, Copenhagen Studies in Economics and Management (Copenhagen, 1994), 149; Foss, Nicolai J., “The Theory of the Firm: An Introduction to Themes and Contributions,” in The Theory of the Firm: Critical Perspectives on Business and Management, ed. Foss, Nicolai J., vol. 1 (London, 2000). Knight, Frank H., Risk, Uncertainty, and Profit (Chicago, 1971; 1st ed. 1921).

47 Chandler, Alfred D. Jr., Amatori, Franco, and Hikino, Takashi, Big Business and the Wealth of Nations (Cambridge, U.K., 1997), 26. As suggestive as Jones's analysis was, it did not earn him a mention in Joseph Dorfman's encyclopedic Economic Mind in America, the third volume of which covers from 1865 to 1918. Jones went on to consider economic organization in detail in Jones, Edward D., The Administration of Industrial Enterprise (New York, 1916).

48 Fetter, Frank A., “The Next Decade of Economic Theory,” Publications of the American Economic Association, 3rd ser., 2, no. 1 (Feb. 1901): 243. The quotation marks paraphrase Sklar's The Corporate Reconstruction of American Capitalism. Sklar's work is primarily about policy, but he clearly recognizes that big business brought about changes to economic theory. See pp. 57–78, 247–56.

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