American Locomotive Industry

The President and Fellows of Harvard College

Technological Change and the Theory of the Firm: The American Locomotive Industry, 1920-1955Author(s): Thomas G. MarxReviewed work(s):Source: The Business History Review, Vol. 50, No. 1 (Spring, 1976), pp. 1-24Published by: The President and Fellows of Harvard CollegeStable URL: http://www.jstor.org/stable/3113572 .

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By Thomas G. Marx ECONOMIC CONSULTANT

FOSTER ASSOCIATES, INC.

Technological Change and the Theory of the Firm: The American Locomotive Industry, 1920-1955*

ci This study analyzes the differing managerial behavior of the three dominant firms in the steam locomotive oligopoly as diesel locomotives replaced steam.

Professor Richard R. Nelson has suggested that the traditional

theory of the firm may not be appropriate for the analysis of business behavior during periods of rapid technological change. He notes more specifically: 1

In particular there is no case for the assumption that the firm will behave according to the rules the economist calculates as optimal. . . . There is no justification for sliding into the notion of a typical firm in a dynamic environment. Indeed what appears important is that individual firms are unique. In short, the firm cannot be viewed any longer as a competent, easily predictable, interchangeable, clerk working in a well-structured environment on well-defined tasks. Rather, the firm must be viewed as attempting to keep its footing and to make progress in a poorly-structured, changing environment by trying and doing appropriate new things.

Alfred Chandler, in his seminal work on corporate organizational structure, also noted the extra burden that changing technology places upon organizational structure and managerial decision-

making: "As long as an enterprise belonged in an industry whose markets, sources of raw materials, and production processes re- mained relatively unchanged, few entrepreneurial decisions had to be reached. In that situation such a weakness [the centralized

organizational structure] was not critical, but where technology,

Business History Review, Vol. L, No. 1 (Spring, 1976). Copyright ? The President and Fellows of Harvard College.

* The author wishes to thank Professor Oliver E. Williamson and Dr. Jonathan Ogur, who made especially helpful comments; however, all opinions are those of the author.

1 Richard R. Nelson, "Issues in the Study of Industrial Organization in a Regime of Rapid Technical Change," in V. R. Fuchs, ed., Policy Issues and Research Opportunities in Industrial Organization (New York, 1972), 40.



markets, and sources of supply were changing rapidly, the defects of such a structure became more obvious."

This paper is a case study of decision-making during the period of rapid technological transition from steam to diesel power in the

locomotive-building industry.3 This study of transitional behavior

provides extensive institutional material for those, like Professor Nelson, concerned with the need for a richer theory of the innovat-

ing process. Behavioralists, who wish to construct an inductive model of the firm based upon the "real processes by which decisions are reached in actual business organizations,"" should find the

suggested explanations of the observed behavior helpful. Following a brief historical review of the changing technical en-

vironment with which the firms were struggling, the decision-

making of the several locomotive builders is analyzed. Where behavior is inconsistent with profit maximization, behavioral ex-

planations are suggested. A brief summary and conclusions close the study.

TECHNOLOGICAL CHANGE

In the mid-1920s, the railroad industry, faced with increasing competition from other forms of surface transportation, demanded more than ever fast, economical motive power. Larger locomotives with improved fuel economy and easier maintenance were required to meet these demands. The existing locomotive-building oligopoly (the American Locomotive Company and the Baldwin Locomotive Works, each with 40 per cent of the market, and the Lima Loco- motive Works with the remaining 20 per cent) could have re-

sponded to these demands either by improving the efficiency of the steam locomotive that dominated the day, or by pressing the

development of the diesel-electric locomotive. The choice was made in favor of improving the steam locomotive and, indeed, many significant improvements in steam locomotive design resulted.

At this time, application of the diesel engine was largely restricted to marine and stationary employments. Despite its known

2 Alfred D. Chandler, Jr., Strategy and Structure: Chapters in the History of the Amer- ican Enterprise (Cambridge, Mass., 1962), 41.

3 There are many instances of decision-making during periods of rapidly changing markets and technology that demonstrate the inadequacy of the profit maximization model. The experiences of Lehigh Coal and Navigation, International Mercantile Marine Lines, American Car and Foundry (ACF), Curtiss Wright, and Pet Incorporated, among others, are all instructive.

4Fritz Machlup, "Theories of the Firm: Marginalist, Behavior, Managerial," American Economic Review (March, 1967). Reprinted in E. Mansfield, ed., Micro-Economics, Selected Readings (New York, 1971), 102.

2 BUSINESS HISTORY REVIEW



advantages over the steam engine,5 little use was made of it in

railroading. The basic problem with the use of the diesel engine in a locomotive was its great size and weight. The diesel weight- horsepower ratio was sixty pounds per h.p., when twenty pounds per h.p. were required. At ratios in excess of twenty pounds per h.p., the diesel locomotive simply became too heavy for the support- ing roadbed, and could not develop the acceleration or speed required for road service.

The American Locomotive Company (Alco) produced the first diesel-electric switching locomotive in this country for the Central Railroad of New Jersey in 1924. These early diesel-electric switchers, were not designed, however, as substitutes for general yard duty steam switchers. They were too sluggish for general switching duty, and were intended for use only where special circumstances, such as fire and smoke hazards in city terminals and tunnels, prohibited the use of steam power. Alco had also done some work on a light weight, diesel-electric passenger locomotive as early as 1927 and had produced an experimental model in 1929. The lead in diesel-electric development would soon pass, however, to General Motors.

Dr. Charles F. Kettering, Vice-President of Research at General Motors, became interested in the possibilities of using the diesel

engine for locomotive power in the late 1920s. His interest was kindled by the long-recognized advantages of the diesel over the steam engine. The diesel locomotive was also a natural product line extension for General Motors, which had the capability to produce both internal combustion engines and electrical equipment, and which was facing a declining automobile market. At about the same time, the Electro-Motive Company (which designed, mar- keted, and serviced gas-electric railcars) and the Winton Engine Company (which manufactured gas and diesel engines) were rapidly losing their business, as gas power lost its economic advantages over steam power because of the rising of gasoline prices and of locomotive horsepower requirements that increased the rate of fuel consumption. Both firms were thus interested in the development of a diesel locomotive, but lacked the necessary resources to overcome existing weight and metallurgical problems (available

5 The diesel engine is the most thermally efficient engine. It turns more heat energy into work: 36 per cent compared to 18 per cent for the steam engine, and thus exhibits great fuel economies. This was especially true in the earlier period of diesel development when diesel oil was an unwanted by-product of higher-grade oil. The diesel engine also runs cleaner and smoother and is available for service a much greater percentage of the time. Steam engines had to be shut down regularly for maintenance, and to clean out clinkers and ashes.

AMERICAN LOCOMOTIVE INDUSTRY 3



metals and designs could not withstand locomotive operating pressures and temperatures). Access to the capital market was

impeded by the risk of the diesel project and the severely depressed economy.

General Motors purchased the Electro-Motive and Winton

Engine Companies in 1930. Four years later General Motors (Electro-Motive Division) produced the first diesel-electric passenger locomotives: the "Burlington Zephyr" for the Burlington Railroad and the "City of Portland" for the Union Pacific Railroad. Both these locomotives established nonstop distance and time records for their respective runs. These "sensational" performances greatly altered current opinion of the future potential of the diesel locomotive.6

The following year, General Motors turned its efforts to the production of a much improved, general duty, diesel-electric switcher. The new General Motors switchers, which earned as much as 25 to 35 per cent return on investment through greater availability,7 fuel, maintenance, and other economies, rapidly replaced their steam counterparts.

By the mid-1930s, the advocates of steam power (the steam

locomotive-building and supply industries, many of the railroads, and the various coal interests) had recognized the superiority of the diesel switching locomotive, and reluctantly yielded ground in the relatively small passenger market. But, when General Motors

began developing a diesel-electric road freight locomotive, the steam interests rallied, realizing that the existence of the steam locomotive was threatened (the road freight locomotive represented more than half of the locomotive inventory). The ensuing motive

power controversy was fought more or less theoretically until the first diesel freight locomotive was actually tested in 1939. Until that time, the entire question of the suitability of diesel power for road freight service was hotly debated.

The steam builders argued that the rising horsepower properties of their locomotives (the diesel-electric locomotive generates constant horsepower across speeds) gave it greater tractive force and drawbar pull (measures of a locomotive's ability to start and haul

trains) than the diesel locomotive at road working speeds. They also argued that the cost savings from diesel operation were not sufficient to justify its much higher initial and fixed costs. At the

6 C. J. Allen, Modern Railways (London, 1959), 148. 7 The diesel switcher was available for service nearly 23 hours a day, compared to only

17 hours for steam switchers, which had to go to the roundhouse two or three times a day for fuel and water and which also required more downtime for maintenance.




time, a diesel locomotive cost approximately twice as much per horsepower as a steam locomotive.

The coal interests and conservative railroads also supported steam technology. The coal industry sold, on average, 22 per cent of its bituminous coal production (90 per cent of total coal output) to the railroads between 1937 and 1946.8 The United Mine Workers even went so far as to attempt to prevent the Pennsylvania Railroad from purchasing diesel locomotives by appeal to the state legislature in the early 1940s. Coal was also the railroads' most important freight commodity, providing 15 to 20 per cent of total rail freight revenue. Some eastern railroads obtained as much as 70 per cent of their freight revenue from coal. These lines, being close to the deposits, also obtained their own coal requirements on favorable terms. As might be expected, these lines were the last to convert to diesel.

Many railroads were hesitant to accept the diesel principle -

indeed, any type of change. The economical production of the more costly diesels required unwelcome standardized production techniques in contrast to individually designed and custom ordered steam locomotives. The locomotive crews and mechanical depart- ments, trained in steam technology, resisted the change, especially because the diesel locomotive was labor-saving. Only in recent

years have "firemen" finally been eliminated from diesel locomotive crews.

In spite of these considerations, and other arguments to the con- trary, the operating economies of the diesel locomotive could not be denied. The diesel locomotive was also safer, because of better traction and dynamic braking, smoother riding, and cleaner operation. Because of its multiple-unit design,9 the diesel was also more reliable, as it could operate with one unit shut down, and more flexible, as a double unit could be decoupled to haul separate trains.

The results of the first actual testing of a diesel freight locomotive in 1939 were most impressive. General Motors' "Nr. 103" ran 83,000 test miles in 1939, performing impressively under diverse conditions. It carried a thousand-freight-ton-miles for less than half the fuel cost of a steam locomotive,10 negotiated difficult mountain runs without helpers, and established time and distance standards never witnessed during the halcyon days of steam

8 "How Much Is Diesel Fuel Ousting Coal?", Railway Age (March 8, 1947), 488. 1 The diesel locomotive consists of "A" and "B" units. The horsepower of a diesel locomotive can be increased by coupling a "B" unit to an "A" unit without duplicating all of the operating controls and mechanisms of a full "A" unit. This design feature became extremely important as postwar traffic demands required higher horsepower ratings.

SOF. M. Reck, On Time (Detroit, 1948), 103.




power. However, while the diesel had demonstrated its ability to handle freight service with great efficiency, the cost savings pro- jected under normal increases in freight traffic were not sufficient to justify its much higher investment cost under all conditions. In

particular, the diesel was at a disadvantage where traffic schedules could not sustain high utilization, where coal was relatively in-

expensive, and at high altitudes. A few years of testing were also not sufficient to establish the operating efficiency of the diesel locomotive over its entire twenty-year economic life.

Thus, the future motive power mix was still quite uncertain in the late 1930s and early 1940s, although "Nr. 103" had greatly improved the prospects for diesel power. One scholar concluded from his

study of technological change in the railroad industry: "When we entered W.W. II the diesel locomotive had gained considerable

acceptance for switching and limited acceptance for other pur- poses. .... When the war ended the acceptance of the diesel was

widespread, but few firms expected it to displace the steam locomotive for all types of work." 11 The great uncertainty of the future of motive power was summed up by the Secretary of the Railway Business Association in 1941: "The coming years promise to see the emergence of the type of motive power which can do the work best and cheapest." 12

Alco indicated that it was "definitely" entering the diesel road locomotive market in 1939.13 Baldwin began its first serious efforts at diesel development that same year, following a management change that came as part of a financial reorganization. When the federal government's General Limitation Order L-97 established war production assignments for the locomotive-building industry in 1942, Alco had produced a diesel passenger locomotive, and was

completing new designs for a full line of diesel locomotives; Baldwin had produced a number of switchers, and was working on a passenger design; and Lima had not yet begun a diesel development program.

Under GLO L-97, the locomotive builders were frozen into exist-

ing designs in an attempt to meet huge domestic and foreign demands and to economize on strategic materials, of which the diesel was a large consumer. General Motors was assigned the exclusive production of diesel freight locomotives because it was the only builder with a tested freight locomotive design.

"1 Edwin Mansfield, The Economics of Technological Change (New York, 1968), 114. 12 P. H. Middleton, Railways and the Equipment and Supply Industry (Chicago,

1941), 68. 13 American Locomotive Company Annual Stockholders' Report (1939).




The war had a tremendous impact on the development and the rate of diffusion of the diesel freight locomotive. In addition to

building diesel freight locomotives, General Motors, in cooperation with the Navy, built over 2,000 LST engines, which were very similar to their "567" freight locomotive engine. The General Motors'

freight locomotive at the end of the war was a vastly improved product."4 The greatly expanded traffic generated huge demands for new motive power. This demand, however, was not neutral as between types of motive power. The extremely heavy traffic en- abled high diesel availability to be translated into high utilization and, of course, the greater the locomotive mileage, the greater the cost savings from diesel power. The heavy traffic also required greater horsepower as locomotives had to haul larger trains. Because of its multiple-unit design, the horsepower of the diesel locomotive could be readily increased; that of the single-unit steam locomotive could not. The steam locomotive became too heavy for tracks, roadbed and bridges, and lost much of its initial cost

advantage over the diesel as it attempted to meet the higher horse-

power requirements with larger units and additional auxiliary equipment.

The postwar inflation, which magnified the importance of operating and maintenance costs, also favored the adoption of diesel power. The Missouri Pacific Railroad reported that steam and diesel operating costs for its freight locomotives were a "Mexican stand-off," until the postwar rise in labor and material prices prohibitively raised the cost of operating with steam power.

In short, the war greatly altered the economics of motive power and, in so doing, ushered in a diesel revolution. The magnitude of the revolution can be seen from the data in Table 1. Whereas diesel power accounted for only 3.7 per cent of the total locomotive inventory in 1942, it represented 79.6 per cent of the inventory in 1955. By 1960, there were less than 300 steam locomotives still in operation.

It was clear by 1946 that the diesel-electric locomotive would be the dominant form of future motive power. That year Alco shifted production emphasis from steam to diesel power (two years later

14Seven of eight railroads responding to an industry questionnaire indicated that General Motors' postwar diesel freight locomotive was a vastly improved product. The list of improvements is extensive. Improvements were made in liners, seals, governors, bearings, rings, pistons, lubrication pumps, oil coolers, and the cooling system. Traction and train control were better; structural improvements had been made; the locomotive exhibited greater reliability and required less maintenance. Of course, Alco and Baldwin conducted experiments during the war, but could not actually produce and road-test locomotives. They obviously could not refine tooling and production methods either.




TABLE 1

LOCOMOTIVE INVENTORY

BY TYPE OF SERVICE AND MOTIVE POWER

(1942 AND 1955)

1942 1955 Change 1942-1955

Service Steam Diesel Steam Diesel Steam Diesel

Pax 6,498 156 776 2,366 (-) 5,772 2,210 Freight 24,659 52 4,092 12,199 (-)20,588 12,147 Frt.-Pax 1,306 20 373 1,117 (-) 933 1,097 Sw. 7,165 1,284 1,078 8,947 (-) 6,087 7,663

Total 39,628 1,512 6,319 24,629 (-)33,380 23,117

Source: Railway Age.

abandoning steam locomotive production altogether), and offered its first diesel road freight designs in the market. In 1947 Baldwin took its first major steps toward producing diesel road locomotives, and the Lima Locomotive Works purchased a diesel engine manufacturer, becoming the Lima-Hamilton Corporation. Lima-Hamilton still saw, however, a secure place for steam power as late as 1948. Lima-Hamilton merged with Baldwin in 1950, creating the Baldwin, Lima-Hamilton Corporation, in an effort to utilize more fully their facilities for the production of non-locomotive, steam-powered equipment.

In addition to the motive power revolution, there were also significant changes in the competitive structure of the industry. General Motors has had an enviable sales record in the postwar market. As can be seen from Table 2, General Motors has not had less than a 50 per cent market share since 1947, and has had less than a 70 per cent market share in only two years since 1955. In 1957 General Motors accounted for 88.7 per cent of total domestic locomotive sales.

General Motors' sales record prompted investigations by the Senate Subcommittee on Antitrust and Monopoly in 1955. Follow-

ing the Senate investigations, the Justice Department initiated its own investigation, which culminated in a criminal indictment in 1961. A civil complaint charging violations of Section 2 of the Sherman Act and Section 7 of the Clayton Act was subsequently issued in 1963. Both were dropped in the late 1960s for lack of evidence.

The current domestic locomotive-building industry consists of

only General Motors and General Electric, which entered the in-




TABLE 2 MARKET SHARES

DOMESTIC DIESEL LOCOMOTIVE INDUSTRY

Total Percentage Market Shares Year Units b G. M. Alco B L H F. M. G. E.

1934 37 26.9% 73.1% - - - 1935 60 16.7 83.3 - - -

1936 77 76.9 23.1 - - - 1937 145 76.6 21.4 2.0% - - 1938 160 83.9 16.1 - - - 1939 249 74.0 21.0 5.0 - - 1940 492 65.7 21.5 12.8 - -

1941 1,104 62.1 20.9 15.0 - - 1942 a 894 58.3 25.0 16.7 - - 1943 a 635 56.9 24.1 19.0 - - 1944 a 680 51.5 27.5 21.0 - - 1945 691 68.3 19.2 10.0 2.5% - 1946 989 47.1 39.7 8.6 4.6 - 1947 2,149 55.0 26.2 7.7 11.0 0.1% 1948 2,661 53.8 25.2 15.5 5.3 0.2 1949 1,782 59.4 25.7 12.5 2.2 0.1 1950 4,736 64.1 21.8 8.0 5.8 0.3 1951 4,038 64.5 21.5 10.5 3.4 0.1 1952 1,829 63.8 21.4 11.8 2.8 0.2 1953 1,923 62.3 24.1 5.6 4.3 3.7 1954 1,020 74.7 13.4 4.3 6.4 1.2 1955 1,402 68.5 21.5 2.2 6.7 1.1 1956 1,271 76.0 16.8 1.1 5.5 0.6 1957 1,312 88.7 9.3 - 1.6 0.4 1958 434 81.5 16.8 - 0.3 1.5 1959 842 77.5 21.8 - - 0.7 1960 440 84.1 13.1 - - 2.8

1961 242 81.0 14.0 - - 5.0 1962 754 83.6 8.9 - - 7.5 1963 806 72.2 12.3 - - 15.5 1964 1,116 71.1 13.0 - - 15.9 1965 1,140 75.4 9.0 - - 15.6

1966 1,394 66.5 11.5 - - 22.0 1967 1,067 74.8 6.5 - - 18.7 1968 1,055 64.2 2.6 - - 33.2 1969 1,263 74.2 - - - 25.8 1970 1,075 80.1 - - - 19.9 1971 1,155 78.1 - - - 21.9

Sources: For total units, Railway Age. For market shares: 1934-1945, "A Study of the Antitrust Laws," Hearings Before the Subcommittee on Antitrust and Monopoly, U.S. Senate, part 8, December 8, 1955; 1946-1960, U.S. vs. General Motors, Indictment No. 61-CR- 356; 1961-1971, calculated from Railway Age. Notes: a Passenger locomotive figures not available.

b After 1948, figures are for units. Before 1948, figures are for locomotives, which may consist of more than one unit.



dustry in the early 1960s, after a long history as an electrical equipment supplier and locomotive exporter. Fairbanks-Morse, which entered the market in 1945, abandoned locomotive production in the early 1960s, not having sold a locomotive since 1958. Baldwin, Lima-Hamilton, which did not sell a locomotive after 1956, was

purchased by Armour and Company, and terminated locomotive

production in 1965, after 134 years in the industry. Alco was purchased by Studebaker-Worthington in 1969, and its locomotive de-

signs and assets transferred to MLW-Worthington of Canada.

DECISION-MAKING IN THE DIESEL-ELECTRIC LOCOMOTIVE INDUSTRY

The problem facing the locomotive builders between the mid- 1920s and mid-1940s was a straightforward application of decision-

making under uncertainty. The locomotive builders had to make initial decisions regarding diesel locomotive development that would locate them strategically with respect to the uncertain future introduction of diesel power by rival firms.

The three steam locomotive builders were symmetrically situated with respect to alternatives and payoffs. Amongst themselves, it was to their mutual advantage not to promote diesel power aggressively during this period. D. F. Turner and 0. E. Williamson

explain: "The interests of established firms in preserving secure market positions may, however, sometimes induce them to under- take activities which will impair entry. They may face a tradeoff between the gains of inhibiting entry so as to increase current

profits and maintain their respective market positions, and the

advantages of participating (in a systems sense) in new product development. Inasmuch as the latter involves both uncertainty and future rather than immediate returns, established firms may sometimes opt for an entry prohibiting policy." 15

The steam locomotive builders needed, however, to protect themselves from the encroachments of potential locomotive builders,

especially General Motors, which did not share their common interests. The steam locomotive builders' decisions in this regard are the focal point of the following analysis. It should be emphasized before proceeding, especially since the steam builders have often been discredited for not developing diesel power more quickly, that the failure of the steam builders to lead the development of

15 D. F. Turner and 0. E. Williamson, "Market Structure in Relation to Technical and Organizational Innovation," in J. B. Heath, ed., International Conference on Monopolies, Mergers and Restrictive Practices (London, 1971), 133.




diesel-electric motive power does not imply poor management, nor lack of profit-maximizing behavior. There are advantages as well as disadvantages to lagging behind rivals with respect to innovation. As Edwin Mansfield has noted, "Pioneering is a risky business: whether it pays off is often a matter of timing. . . . The profitability and risk involved in introducing the innovation at present must be compared with the profitability and risk involved in introducing it at various future dates." 16 Judicious delay affords an opportunity to observe product improvements, obtain additional data on product performance and buyer acceptance, and to minimize the negative effects on cost and sales of existing products. The disadvantages of waiting are the loss of sales to the innovating firm, and the

possibility that part of the new market may be preempted by the innovator.

First-mover advantages in the locomotive industry are significant; thus, the dangers of preemption are real. The most important first- mover advantages stem directly from the complexity of the product. A locomotive is an extremely complex product, requiring years of

testing under actual service conditions to bring it to the point of

general practicability. During this time, problems are identified, product improvements are made, and the locomotive's reliability and performance are confirmed. These factors, and a certain inertia characteristic of railroads, explain railroad preferences for tested and proven products. K. T. Healy concluded from his studies that "It seems to be possible to make a few generalizations regarding the relation of innovation to investment in road and equipment. There is a considerable lag, to be measured in years, between the commercial availability of an innovation and a high rate of investment in it . . . my own observation of a number of roads suggests that this is due to reluctance to give up commitments to old ways and change to new ways of doing things, and to wait and get the advantage of refinements upon the original innovation." 17

The importance of proven reliability extends to post-sales service. Because locomotive downtime (i.e. time when the machine is unusable and awaiting repair) is extremely costly, the availability of good post-sales service is a very important factor in the locomotive purchasing decision. The first-mover, of course, has the opportunity to establish a reputation for reliable service that late- comers must confront when entering the market. The railroads'

16 Mansfield, Economics of Technological Change, 105. 17 K. T. Healy, "Regularization of Investment in Railroads," in Regularization of

Business Investment (Princeton, 1954), 79.




practice of "standardization" (concentrating purchases on a single builder to minimize maintenance, parts inventory, and personnel training expenses) further enhanced the first-mover's position. The accumulation of these advantages was arrested, however, by his-

torically slow diffusion rates, and extremely low sales volume

throughout the Great Depression. Thus, while first-mover ad-

vantages are significant, the conservative attitudes of the railroads and the depressed economy created a period in which a policy of

judicious delay could be profitably exploited. Such was the policy of the American Locomotive Company.

Alco possessed 40 per cent of a stable, profitable steam locomotive market. It was thus neither in need of a new competitive product nor anxious to pursue strategies that might disrupt the

stability of this market in which it fared so well. A "gradual" introduction of diesel power, as product improvements occurred and

existing steam production facilities depreciated, would minimize the impact of the new technology on vested interests. Additionally, the introduction of diesel power might well open the doors to new

competitors, among them General Motors. The continued use of steam power mitigated the risk of new market entry. While it

might not be profitable to innovate, Alco had to be prepared to enter the diesel market in the event that a rival did so successfully, as the diesel locomotive was a direct substitute for steam power. Alco produced the first diesel switcher in 1924, and recognized the

great operating efficiency of the diesel switcher vis-a-vis steam switchers at least as early as 1931.18 However, it did not produce a general duty switcher until 1936, following General Motors' lead. While Alco did not aggressively promote the diesel-electric switcher from 1924 to 1936, it recognized the possibilities of diesel innovation by rivals, especially General Motors, and therefore pursued R&D strategies that would enable it to compete effectively for future locomotive sales regardless of the prevailing form of motive

power. Alco continued developing its diesel switchers and, as early as 1927, began experimenting with lightweight diesel passenger locomotives. In 1929, Alco purchased McIntosh and Seymour Corporation, one of the largest producers of diesel engines, "to enable Alco to play a leading part in diesel development." 19

Because of its developmental efforts, Alco was quickly able to follow General Motors in the production of general duty diesel switchers in 1935. In the six years that followed, sales of diesel-

18 American Locomotive Company Annual Stockholders' Report (1931). 19 American Locomotive Company Annual Stockholders' Report (1929).




electric switching locomotives increased rapidly, and Alco obtained a respectable 31 per cent of the expanding market. Sales of diesel switchers did not reach significant annual rates, however, until 1941.20 Thus, while Alco did not innovate, it did develop and maintain the capacity to enter the diesel switching market on a

timely basis with respect to the advantages and disadvantages of

delay and, in fact, did enter five full years before the market became

significant. The economic superiority of diesel power was not as great in

passenger service as it was in switching. The steam locomotive is at its relative best at high road speeds because its delivered horsepower rises with speed, as compared to the constant horsepower output of the diesel locomotive. Thus, the threat of the diesel

replacing the steam locomotive in passenger service was less im- minent than it was in switching service. The passenger market was also the smallest of the locomotive markets. However, by the mid- 1930s, the "sensational achievements" of General Motors' first diesel- electric passenger locomotives greatly increased the prospects of the diesel playing a large role in passenger service.

Again, while Alco did not lead the field despite its early work, it did keep in close contact with technological developments and market trends, declaring in 1933: "The company is fully prepared and thoroughly equipped to design and manufacture steam or diesel streamlined high speed locomotives for use in fast passenger service." 21 Alco did not manufacture a commercial diesel passenger locomotive until 1940, six years after General Motors produced the first successful diesel passenger locomotives. However, because of the small dimensions of this market, the depressed economy, and the slow industry diffusion rate, only 103 of these passenger locomotives had been sold during the interval, and orders did not reach

significant annual rates until 1946.22 Thus, Alco was in the market before very many railroads had purchased a diesel passenger locomotive, and six years before sales were appreciable, even though it followed a deliberate "lagging" policy. Between 1946 and 1954, Alco obtained 22.4 per cent of the small diesel passenger market.

The decisions regarding diesel freight locomotive development were more critical to the firm's survival because of the technological

20 For several years following the introduction of each of the diesel locomotives (switcher, passenger, and freight), sales were very low. There then occurred a sharp break, with sales trebling or more, and continuing at this higher annual rate. For the diesel switcher, this "break" occurred in 1941, six years after its introduction. See Healy, Regularization of Business Investment, 175.

n American Locomotive Company Annual Stockholders' Report (1933). 22 Healy, Regularization of Business Investment, 177.




complexity of this locomotive and the size of the market. The diesel

freight locomotive represented approximately 60 per cent of the locomotive inventory, and even more in dollar value, since freight locomotives were the largest and most expensive units. Thus, the risk of being caught at a serious technological disadvantage, and the

consequences of such a lapse, were much greater. Alco attempted to limit the diffusion of diesel freight power by

improving the competitiveness of the steam locomotive. However, it also maintained market-entering capabilities as a hedge against rivals. Alco altered its strategic mix of steam and diesel development in response to changing economic and technological conditions. Alco promoted steam power through the early 1940s; however, when the test results of "Nr. 103" became available in 1939, Alco

quickly stepped up its diesel program, declaring that same year, before the first commercial diesel freight locomotive was on the tracks, that "we have entered definitely into, the diesel road locomotive field." 23

By the end of the following year, Alco had completed the design and engineering of a complete line of new diesel passenger and

freight locomotives. At this time, only 179 such locomotives had been ordered. Before Alco began production of these models, however, it was frozen into existing product designs by the War Production Board. Under GLO L-97, Alco was assigned the production of diesel switcher and steam road locomotives. Conse-

quently, it was 1946 before Alco finally produced its first diesel road freight locomotives.

By this time, General Motors had sold 1,084 diesel freight loco-

motives, and had made significant improvements in its earlier

designs. Sales had reached significant annual rates in 1942, and the rate of diffusion was proving to be the fastest of any major innovation in the railroad industry with the single exception of air con-

ditioning.24 Alco obtained only 13 per cent of this large market between 1946 and 1955. By 1955, the move to diesels was 80 per cent complete, with the bulk of new and replacement sales going to General Motors, because of its early sales and established tech-

nological superiority in the freight locomotive market. Alco finally exited from the locomotive building industry in the late 1960s.

Undoubtedly, Alco's disappointing postwar sales record is largely responsible for the charges of poor management frequently leveled

against it. The above review, however, does not support such

23 American Locomotive Company Annual Stockholders' Report (1939). a Healy, Regularization of Business Investment, 177.




charges. It was clearly shown that Alco developed diesel locomotive production capabilities well ahead of the market as a defensive

strategy, even though it was not in its private economic interest to innovate ahead of rivals. As a result of its advance planning, Alco was able to follow rivals and to enter the diesel switching and passenger markets well ahead of demand; and it was virtually prepared to begin production of diesel road freight locomotives, before fewer than 200 of these locomotives had been ordered, when it was

placed under war production controls. The Baldwin Locomotive Works did less well than Alco.

Both Alco and Baldwin were among the largest 200 corporations in the 1930s, ranked by sales, and both possessed 40 per cent of the steam locomotive market. Baldwin was a Debtor in Possession For

Reorganization between 1935 and 1938, because its working capital was not sufficient to cover operating expenses and fixed charges. The Great Depression struck Baldwin worse than its competitors because in the late 1920s it had completed a move from Philadelphia to the newest and most modern steam locomotive production facility in the country (Eddystone). Of course, this was just in time for the bottom to fall out of the locomotive market. Undoubtedly, this recent heavy investment in steam production equipment affected Baldwin's thinking in the 1930s. The diesel challenge was surely unwelcome at this time. Nevertheless, good management is expected to generate rational responses to adversity.

With the completion of the reorganization proceedings in late 1938, Baldwin underwent an extensive managerial change. A new president, two new vice-presidents, and seven new directors were installed. The directors were elected by the voting trust, established as part of the reorganization proceedings. This trust held the voting rights to all outstanding common stock for a ten-year period starting in 1935. In 1940, long-time Board Chairman Samuel Vauclain died, making the managerial change virtually complete.

The management that controlled the Baldwin Locomotive Works until the completion of the financial reorganization in late 1938, because of its recent heavy investment in steam production facilities and financial position, was even less interested in diesel innovation than Alco. However, unlike Alco, Baldwin did not develop a diesel production capacity to protect itself against the possible introduction of diesel power by rival firms. Indeed, Baldwin did little with diesel power. Baldwin's bitter opposition to diesel technology sur- faced with the first diesel development efforts. Speaking in 1930, Chairman Vauclain, while acknowledging the advancement of the




diesel engine, expressed his complete, almost cultic, devotion to the steam locomotive, and his belief that it would be the dominant form of motive power for at least another fifty years: 25

The development of the Diesel locomotive is having the attention of engineers and railway officials throughout the world, and it is progressing well. ..

But notwithstanding all these substitutions for the steam locomotive, it is my judgement that we are just beginning to realize what actually can be done with the steam engine in the way of continuous performance, economical performance, and reduction in maintenance that will continue it in service, so that it can be more ably discussed in the year 1980 than it will be at this convention in 1930. I have not lost interest in this greatest of all human devices, and will continue in the future as in the past to be its advocate and builder.

The Vice-President and Director of Sales at Baldwin reiterated this unswerving faith in the supremacy of steam power as late as

September of 1937: "Today, light-weight trains and Diesel locomotives are in service on a number of prominent roads, and some enthusiasts would have the public believe that the steam locomotive had run its course. Yet over the years certain fundamental principles continue to operate. Some time in the future, when all this is reviewed, it will be found that our railroads are no more Diesel- ized than they are electrified." 26

After reviewing the alleged advantages of diesel power in a 1937 motive power study, and evidently discounting the fact that diesel

power had already made substantial inroads into switching and

passenger service, Baldwin executives concluded: "Nevertheless, modern steam power must continue to be the mainstay of railroad

operations for the indefinite future." 27 [Emphasis added.] This unshakable faith in the steam locomotive was in marked contrast to the thinking of the new management ushered in by the reorganization proceedings the following year.

In their 1939 Annual Stockholders' Report, the new Baldwin

management expressed its doubts about the future of steam power, and indicated that it was making a "serious effort" to enter the diesel field. Redesigned switchers were already in the mill, and development plans for diesel road locomotives were begun. Despite these immediate efforts, the new management could not overcome the

m "Address by S. M. Vauclain to the American Railroad Association," Railway Age, vol. 88, No. 250 (June 25, 1930), 1548D144.

6 Baldwin Locomotive Works Surveys the Motive Power Situation in America (Phila- delphia, 1937), 61.

2 Ibid., 20.




disadvantages imposed upon it by its predecessors' development policies.

When General Motors placed its first diesel road freight locomotive on the rails for testing in 1939, Baldwin had not even developed a competitive diesel switcher. By 1939, Baldwin had sold only fifteen diesel switchers in a total market in excess of 500. The full effect of its neglecting diesel development, even as a defensive strategy, is appreciated only when it is recognized that the

development and production of diesel switching and passenger locomotives is a crucial step toward the production of the larger, more complex freight locomotives.

Baldwin did not do badly in the diesel switcher market, obtain-

ing 24 per cent of the market between 1934 and 1955. The diesel switcher was, of course, the easiest locomotive to design, but Bald- win was aided here by the WPB's assignments, which practically excluded General Motors from the switcher market during the war. Baldwin obtained its highest shares of the diesel switcher market - 37 per cent - in 1943 and 1944. The past managerial decisions, however, proved disastrous in the diesel road service markets. Baldwin obtained only 6 per cent of the diesel passenger market, 5 per cent of the road freight market, and 7.3 per cent of the road switcher market through 1954. Overall, Baldwin obtained only 10.5

per cent of total diesel locomotive sales, and even less in terms of dollar volume, since it obtained its largest sales in the relatively low-priced switcher market between 1934 and 1955. Baldwin did not sell a diesel locomotive after 1956, and finally went out of the locomotive business in 1965. The third member of the steam locomotive oligopoly did even less well than Baldwin.

The Lima Locomotive Works accounted for the remaining 20 per cent of the steam locomotive market. Lima's decision-making throughout the diesel-development era, like Baldwin's, was extremely poor, and its lack of vision acute. Lima made no effort to acquire diesel locomotive production capabilities prior to 1947, gambling completely on the success of steam power in the road service fields.

In 1947, Lima finally purchased a diesel engine manufacturer (becoming the Lima-Hamilton Corporation), and the following year tested its first diesel-electric switchers. This initial testing thus occurred thirteen years after the first diesel-electric switchers had proven successful, and nine years after General Motors had tested the first diesel road freight locomotive.

Even after Lima began developing diesel switchers, however, it




continued to forecast substantial demand for steam locomotives. This opinion was not shared by Alco, which had noted the complete lack of steam locomotive demand two years prior, and had abandoned steam production altogether in the same year that Lima was

stating: "There is substantial inquiry for steam locomotives, and we believe that there is definitely a place for steam equipment. We will continue to build these locomotives and therefore our facilities in this regard are being well maintained." " It is difficult to find

support for Lima's forecasts. Domestic steam locomotive sales as a per cent of total domestic locomotive sales had declined steadily from 30 per cent in 1940 to 2 per cent in 1948, when Lima was

forecasting its "substantial" demand. Nor were there prospects for

significant foreign demands for steam locomotives at that time. The war-created export demand for U.S. steam locomotives fell rapidly with the termination of hostilities. Foreign steam orders declined

continuously from 2,291 in 1945 to fourteen in 1949. Lima's own total steam sales reflected these market trends, declining from 250 in 1945 to thirty-one in 1949.

Lima's vision improved considerably the following year, 1949, when it announced that there was no demand for steam locomotives. In 1950, the Lima-Hamilton Corporation merged with Baldwin. The primary purpose of the merger was to enable both firms to utilize more effectively their existing steam locomotive production facilities for the production of non-locomotive, steam-powered equipment.

DECISION-MAKING: A BEHAVIOR ANALYSIS

This transitional period from steam to diesel motive power provides an excellent opportunity to observe patterns of decision-

making during a period of rapid technological change. It will prove instructive to seek explanations of the observed behavior through gradual retreat from the profit maximization model. The steam locomotive builders were sufficiently insulated from product market

competition, and freed from capital market controls, to be able to entertain managerial-discretion utility functions.29 Thus, it may be

2• Baldwin, Lima-Hamilton Corporation Annual Stockholders' Report (1948), 2.

9 The steam locomotive-building oligopoly, noted for its market sharing "agreements," was insulated from potential competitors by excess capacity, high capital entry costs, and

strong buyers' preferences for established products. The capital market exerts profit- maximizing pressure through funds-metering, incentive, and management-displacement mechanisms. None of these controls is particularly effective, however. Oliver Williamson has summarized the disadvantages under which the capital market operates. See O. E. Williamson, Corporate Control and Business Behavior (Englewood Cliffs, N.J., 1970): "Surveillance from the capital market surely bounds the opportunity set within which the




assumed that the managerial objectives were not pure neo-classical profit maximization, but rather the joint maximization of profits and diverse preferences for status, pecuniary rewards, and the existing steam technology, among others. The preference for the existing motive-power technology reflects vested interests in established production and marketing methods, including security and achieved status.

Management may allow its technology preference to reduce profits below the maximum level obtainable; however, it cannot allow profits to decline below the minimum level required to avoid stockholder action against the incumbent management. Thus, management's objective is the joint maximization of profits and its technology and other preferences, subject to the constraint that profits be greater than or equal to the minimum level required to satisfy stockholders.

Ignoring managerial preferences other than that for the existing motive-power technology, the amount of profit realized depends upon the technology preference and the state of the economic environment defining the maximum profit opportunities available to the firm. Realized profits decline with increases in the technology preference, and increase with improvements in the economic environment, other things being equal. When few changes in technology are occurring, the management preference for the existing technology does not exact a high cost, measured as the difference between realized and maximum possible profits. However, as technological advances occur, the cost of the technology preference increases and thus the preference must be reduced to maintain profits above the critical minimum level. At the theoretical limit, competitive pressure forces the total abandonment of technology and all other managerial preferences, because a pure profit maximizing posture is required even to realize the minimum level of acceptable profits under perfect competition.

The above review of decision-making showed that Alco was either always governed by strict profit maximization with respect to discretionary preferences for technology, or was able to switch from utility maximization to profit maximization as the environment shifted. Thus, at a minimum, Alco pursued maximization principles that, under sufficient competitive pressure, merged into management of an oligopolistic firm feels free to operate. At the same time, however, it is important to note that the external control relationship that the capital market bears to the firm severely limits the extent to which capital market controls can be expected to be efficacious. . . [The capital market is not very effective] for three reasons: its external relation to the firm places it at a serious information disadvantage; it is restricted to non- marginal adjustments; it experiences nontrivial displacement costs" (103, 109).




profit maximization. Baldwin and Lima clearly were not able to switch from utility maximization to profit maximization with the

changing technical environment. The explanation of their behavior thus requires an analysis of the switching process. This takes us from managerial-discretion models and the maximization calculus to behavioral theories of the firm. What is required is an explanation of why Baldwin and Lima could not switch postures in response to the changing environment. Psychological studies of the formation and change of aspiration levels provide a general theoretical framework for the analysis. The following propositions are relevant.30

1. When performance falls short of the level of aspiration, search behavior (particularly search for new alternatives of action) is induced.

2. At the same time, the level of aspiration begins to adjust itself downward until goals reach attainable levels.

3. If the two mechanisms just listed operate too slowly to adapt aspirations to performance, emotional behavior - apathy or

aggression, for example - will replace rational adaptive behavior.

Baldwin and Lima sought the joint maximization of profits and steam technology preferences. However, increasing technological competition from the diesel-electric locomotive limited achievement to simple profit maximization. The question is why these firms failed to adjust their aspirations to attainable achievement levels, i.e., why they failed to abandon the technology preference so as to prevent earnings from declining below the minimum level acceptable to stockholders.31

30 H. A. Simon, "Theories of Decision-Making in Economic and Behavioral Sciences," American Economic Review (June, 1959). Reprinted in Mansfield, ed., Micro-Economics, 87.

31 The decision-making problem can be modeled as follows. Assume a partial managerial utility function of the form U = U(P, S), where P = reported profits, and S = the preference for existing steam technology.

The utility function can be generalized by interpreting S as a preference for the existing technology. S is measured as the amount of profit that is sacrificed to entertain the technology preference. Let PO = maximum obtainable profits, and Pm = the minimum amount of profits that must be reported to avoid stockholder opposition to the incumbent management. Thus, S assumes values in the range 0 S-X where X = P* - Pm.

The objective of management is to maximize U = U (P, S), subject to P Pm. Re- ported profit is a function of the technology preference and the economic environment, which defines profit opportunities. Thus, P = P (S, E), where DP/3S < 0, and DP/3E > 0.

During periods of technological stability, the value of S is near the lower limit. How- ever, as new technologies rise to challenge existing techniques, S increases until it reaches the upper bound (X). At this point, the firm must abandon its preference for the existing technology, and adopt a technological posture, S < S, more consistent with emerging technical progress. At the limit, the firm must accept technological posture S*O= 0, i.e., the firm must switch from utility maximization to profit maximization as competitive pressure reduces P* to Pm.

Baldwin and Lima sought to maximize U; however, technological competition from diesel motive power limited achievement to the maximization of P. Thus, the question is why Baldwin and Lima could not adjust aspirations downward to the level of achievement




In general, it would be expected that adjustment would be more difficult, the greater the physical and psychological magnitude of the required adjustment. Mansfield has noted that the rate of diffusion of new innovations is also faster, the less new knowledge or new behavior it requires.32

The physical magnitudes of the technological change were extensive. The diesel-electric locomotive required a completely new technology. Steam locomotive engineers' experience with electricity "was limited to the headlamp on the steam locomotive." The stag- nant technological and competitive history of the industry also made adjustment difficult. Baldwin and Lima had grown complacent in their secure markets. Steam power drove the first locomotives, and had dominated the rails for a hundred years before the diesel appeared: "We of the rail realm knew not the sailor's wrenching shift from sail to steam, or the farmer's more compliant change from mule to tractor. What made those steel wheels roll was steam... steam so big and so logical and so wondrous that it would last for a thousand years." 33

Baldwin was not even visibly disturbed when its total sales revenue in 1934 fell to 15 per cent of its 1924 level: "Mr. Samuel Vauclain, Baldwin's Board Chairman, once made an often quoted remark about not being worried even if the grass grew 6 inches high in the Baldwin premises." 34 After all, as one reporter noted: "What could be better than being a high quality supplier to the railroads; the backbone of American Industry." 35

Not only could Baldwin always count on a resurgence of locomotive demand, but it could also count on obtaining its market share. Writing about Alco in 1935, one author noted: "The Locomo- tive Company has benefited from the fact that the locomotive building industry has changed so little in the past 34 years. Except in abnormal periods, there is plenty of room for American, Baldwin and Lima to exist in brisk but not vicious competition and to avoid any undignified scramble for business." 36

In addition to his argument that the diffusion of new innovations is slower if the innovation requires new kinds of knowledge or behavior,37 Mansfield noted that diffusion is slower if it requires

attainable, i.e., why they could not adopt technological posture S* = 0 to avoid stockholder opposition or business failure.

32 Mansfield, Economics of Technological Change, 122. m* D. Ball, Jr., Portrait of the Rails (Greenwich, Conn., 1972), 1-3. 4 "A Locomotive Cost $100,000," Fortune, vol. 12 (October 1935), 112. M "The Dropouts," Forbes 100, No. 6 (September 15, 1967), 161.

36 "A Locomotive Cost $100,000," 112. 37 Mansfield, Economics of Technological Change, 123.




changes in socio-cultural values.38 The steam locomotive represents an important part of Americana. The following comments make it clear that the passing of the steam locomotive represented a deep cultural loss to those with strong emotional attachments to the "Iron Horse":

Oh Lord, but it will take some doing for America to get that adventure out of her soul! Longer to remove its meaning. Casey Jones and Com- modore Vanderbilt, Altoona and Pocatello, 20th Century Limited and Orange Blossom Special.

A confession is in order here. We train watchers foresaw not, never

thought of, made no preparation for . . . the diesel. We underestimated the works of General Motors. Because it never dawned on us that anything would endanger, much less eradicate, the rule of the force that had made the railroad a commercial undertaking in the first place, across the Atlantic and a century before. What had always been would always be, like the

flag, the dawn, the Mississippi, the calendar.

Humbug Novelty, we said. (Never mind that he didn't need round-

houses, dropped no ashes and exhaled no cinders, and could run as fast as rails went without breathing hard.) Blat-blat went his horn, and anything that cleared grade crossings in that manner was an affront to the gods of

high iron and the spirit of Commodore Vanderbilt, and couldn't, wouldn't last.39

Alco was formed by a group of businessmen who put together a series of mergers at the turn of the century; Baldwin, however, traced its history back to a business founded in 1832 by Matthias W. Baldwin. Matthias Baldwin had built one of the very earliest and most famous locomotives in this country, "Old Ironsides." Thus, Baldwin had a hundred years of distinguished steam locomotive

production history when the diesel engine first arrived. The Baldwin

management during most of the critical diesel development period was intrinsically linked to this heritage. Samuel Vauclain, the

designer of the Vauclain Compound steam locomotive, was the Chairman of the Board from 1929 to 1940, after serving as President from 1919 to 1929. Samuel Vauclain's father had worked with Matthias Baldwin on "Old Ironsides," and Samuel had come to work for Mr. Baldwin in 1883.

Samuel Vauclain spent his entire life as a steam locomotive en-

gineer, designer, builder, and executive. The title of his autobiog- raphy is appropriate: Steaming Up. At the beginning of the diesel

development era, Vauclain was seventy-four years old and in poor health. There were also no changes in the presidency or two vice-

presidential positions at Baldwin between 1929 and 1938. 38s Ibid. :3 Ball, Portrait of the Rails, 2.




Like Baldwin, Lima-Hamilton was an old company with deep roots in steam technology when the diesel locomotive first appeared. The Lima Locomotive Works had been founded in the 1870s (the Hamilton Machinery Company, in 1945). The executives were mature steam designers and inventors. Mr. S. G. Allen was suc- cessively Vice Chairman, Chairman, and President and Chairman of the Board. This lack of managerial turnover, coupled with the age, deep roots, and specialized backgrounds of top management, also made change from steam technology extremely difficult.

These managerial and industry characteristics and the magnitude of the technological transition combined in a complex, interdepen- dent manner to render Baldwin and Lima unable to re-align technological aspirations with technological realities. The importance of the managerial profile is underscored, as this is the most significant point of departure between Alco and the other builders. The importance of the human factor is also underscored by the marked contrast in the policies of the new Baldwin management, which obtained control in the late 1930s.

The theory of "optimum stress" pulls together the analysis of this section, and would appear to be an excellent starting point for the construction of a richer theory of the firm in a dynamic technological environment: "Innovation will be most rapid and vigorous when the 'stress' on the organization is neither too high nor too low. By stress is meant the discrepancy between the level of aspiration and the level of achievement. According to this hypothesis, if achievement too easily exceeds aspiration, apathy results; if aspiration is very much above achievement, frustration or desperation results with consequent stereotypy. In the first case there is no motivation for innovation; in the second case, neurotic reactions interfere with effective innovation." 40

Baldwin and Lima's behavior in the steam era could be classified as apathetic, and stereotypy certainly described the behavior of these giant industrial corporations in the diesel era. This study has attempted to isolate those personal and structural conditions that prevented the harmonization of aspirations and achievement and led to the behavior reported.

CONCLUSION

This analysis of a significant era in the locomotive industry has emphasized the factors generating pressure for technological change

40 J. G. March and H. A. Simon, Organizations (New York, 1958), 184.




and the individual company responses to these pressures, as well as the consequences of the transition from steam to diesel motive-

power for individual firms and for the competitive structure of the

industry. The study points to the need for a richer theoretical framework for the analysis of the process of technological change, and indicates the substantial economic impact of World War II and related government policies upon the industry.

The analysis of managerial decision-making during this period of

rapid technological change in the diesel-electric locomotive building industry provides institutional support for Nelson's perceptive criti- cisms of economic theory. The analysis demonstrates that the pure, profit-maximization assumption may conceal many important aspects of dynamic economic behavior, and suggests that studies of the innovative process in both competitive and monopolistic industries - which customarily assume profit-maximization unhesitatingly - are one research area that would benefit from a richer theory of the firm under technological pressure. This study also suggests the

possible use of a behavioral theory in circumstances in which profit- maximization is clearly unsatisfactory.

The study demonstrates the substantial long-run economic impact of government policies on the locomotive building industry. The production assignments issued under GLO L-97 in 1942 significantly affected the fate of the individual builders and the status of com-

petition in the postwar period. While Baldwin and Lima may have

largely precluded themselves from the postwar diesel market because of poor decision-making, it is probable that Alco would have been a substantial competitor in the diesel era, without the war production controls that assigned General Motors the exclusive production of diesel freight locomotives during the war. Of course, policies and decisions that affect the long-run competitive structure of an industry have significant implications for consumer welfare, which relies

largely upon the protection of the "invisible hand" in the nonreg- ulated sector.

It is not suggested that the War Production Board could have better accommodated long-run economic considerations under the extreme supply pressures created by the war. However, most public policy is not formulated under such stress. This study indicates the

magnitude of the impact that public policy decisions can have on an

industry, and the consequent need to consider seriously the long-run economic implications of public policies formulated in response to a broad array of domestic and international socio-political problems.




SPRING 1976 FEATURED IN THIS ISSUE

* American Locomotive Industry, 1920-1955

* The NAM and Public Relations in the 1930s

* Innovation at the Johnson Company, 1883-1898

* West Virginia Mine Wars

* EDITOR'S CORNER

* BOOK REVIEWS

•.. . .. ? .-:?: :i.,

t~

PUBLISHED BY THE HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION



EDITOR

GLENN PORTER Assistant Professor of Business History Harvard University

ASSOCIATE EDITOR

HELEN FREY ROCHLIN

Harvard University

ADVISORY BOARD

FRED BATEMAN

Professor of Business Economics Indiana University

JAMES P. BAUGHMAN

Professor of Business History

Harvard University

ALFRED D. CHANDLER, JR. Straus Professor of Business History

Harvard University

FRANCOIS CROUZET Professor of History

University of Paris, Sorbonne

STANLEY ENGERMAN Professor of Economics University of Rochester

LESLIE HANNAH Lecturer in Economics

University of Essex

ELLIS W. HAWLEY Professor of History University of Iowa

DAVID HERLIHY Professor of History Harvard University

RALPH W. HIDY Professor of

Business History Harvard University [Emeritus]

THOMAS P. HUGHES

Professor of the History and Sociology of Science

University of Pennsylvania

ALBRO MARTIN

Associate Professor of History American University

THOMAS K. MC CRAW

Associate Professor of History University of Texas, Austin

FRITZ REDLICH

Harvard University [retired]

ERIC H. ROBINSON

Professor of History University of Massachusetts,

Boston

s. B. SAUL Professor of Economic History

University of Edinburgh

PAUL USELDING Associate Professor

of Economics University of Illinois

HAROLD D. WOODMAN Professor of History Purdue University

KOZO YAMAMURA Professor of Economics University of Washington

HONORARY MEMBER

HENRIETTA M. LARSON Professor of

Business History Harvard University [Emerita]

?8 *

COVER: Emblem of antebellum savings bank. See pp. 287-311.

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