Vol. XXXVI No. 3

ECONOMICEDUCATIONBULLETINMarch 1996

Published by

AMERICAN INSTITUTEfor

ECONOMIC RESEARCHGreat Barrington, Massachusetts 01230

Big Mistake*

Big Labor felt it first. Caught between surging importcompetition and the progress of factory automation, workersin heavily organized manufacturing industries saw their ranksdecimated during the 1970s and '80s. Steel industry employ-ment plummeted by two-thirds from 512,000 in 1980 to170,000 today; membership in the United Auto Workers hasbeen cut in half, from 1.4 million to 700,000, since 1969.

Meanwhile, as overall manufacturing employment has re-mained more or less flat for decades, employment in themuch less unionized service sector ballooned. As a result,unionization of the private sector labor force has declinedfrom 36 percent in 1953 to only 11 percent today. Next cameBig Business. In the 1960s it was argued, most eloquently byJohn Kenneth Galbraith, that large American corporationswere so powerful that they were effectively immune frommarket forces. Then came the '80s and '90s. One blue-chipgiant after another began hemorrhag-ing red ink. General Motors saw itsmarket share drop from 45 percent to35 percent during the '80s; IBM's stockprice collapsed from $140 to $40 be-tween 1991 and 1993; Sears Roebuckwas forced out of the catalog business.Foreign competition walloped not just ~ " " ¯ ^ ~ —smokestack dinosaurs, but Silicon Valley as well. Restruc-turing and reengineering became code words for middle-management layoffs; while middle managers make up only 8percent of the work force, they accounted for 19 percent ofthe job losses between 1988 and 1993.

Now it's Big Government's turn. Disillusionment withgovernment can be traced back to the grand betrayals andfailures of the 1960s and '70s: Vietnam, Watergate,stagflation, the growth of the underclass. But the currentanti-Washington fervor ignited in the late '80s and was fu-eled by a succession of scandals featuring a sleazy mix ofpublic power and private gain: the Keating Five, the JimWright book deal, the HUD mess, honoraria, the flap overcongressional pay raises, and check kiting at the House bank.Throw in the chronic irresponsibility of deficit spending,

This essay, by Brink Lindsay, is reprinted, with permission, fromthe February 1996 issue of REASON Magazine. Copyright 1995 bythe Reason Foundation, 3415 S. Sepulveda Blvd., Suite 400, LosAngeles, CA 90034.

"The old order now passing from the scenewas less the institutional incarnation ofthe industrial revolution than a tragicmisinterpretation of it."

George Bush's broken "no new taxes" promise, and BillClinton's general recklessness, and distrust of politicians fi-nally appears to have reached a healthy level.

Thus far the new anti-Washington mood has producedtwo electoral spasms: the 19 million votes cast for the bizarreRoss Perot in 1992, and the sweep of Republicans into con-trol of Congress (as well as numerous state houses and statelegislatures) in 1994. The first was a dead end; the fate of thesecond remains unclear. What is clear, however, is that weare far, far removed from the heady days of the New Frontierand the Great Society. Omnicompetent government has lostits luster, and its legitimacy; it is only a matter of time beforeit loses significant amounts of power. One by one, the threegreat institutions of modern American political economy havecome under sustained and furious assault. Those events areinterrelated, and their combined historical significance is pro-

found: A whole way of life is comingto an end. The triumvirate of Big Gov-ernment, Big Business, and Big La-bor—whose rise and ascendancy havedone so much to shape American so-ciety over the course of this century—is collapsing, and something new is

¯~—^~¯¯¯^~~¯¯ emerging in its stead.A lot of ink has already been spilled in describing these

changes. Virtually every popular business book these days isfilled with talk of flattening organization charts, replacingfunctional departments with ad hoc teams, downsizing,outsourcing, speeding up response times and product cycles—in short, breaking up creaky old corporate empires and re-placing them with something more flexible, more dynamic,more market-like. Meanwhile, authors such as George Gilderand Alvin Toffler (and politicians, notably Newt Gingrich)have spied a larger social transformation—from MachineAge to Information Age—and identified its defining featureas, in Toffler's words, "demassification": the decline of massproduction, mass media, and mass politics, and their replace-ment by social institutions less centralized and hierarchical,more individualized and interactive.

What has been missing, though, is a satisfying explana-tion of why those changes are necessary. Overwhelmingly,the analysis up to now has focused on technology: Our insti-tutions must change because they are technologically obso-

lete. According to this view, the technology of the industrialera was inherently centralizing and homogenizing (the as-sembly line, the skyscraper, broadcast television), while thatof the information age is centrifugal and variegating (thepersonal computer, the fax machine, desktop publishing).The fundamental character of technology has changed, andso economics, culture, and politics must adapt accordingly.

Even as a rough generalization, this view of historicalchange is incomplete at best. Yes, new information and com-munications technologies have changed the workplace, mak-ing it easier to push decision making away from the centerand closer to the customer. And yes, the entrepreneurialrambunctiousness and extravagant productivity of the elec-tronics industry have shown private enterprise at its best justas government's stock has been dropping.

Nevertheless, there is a lot more to the old regime's de-cline and fall than the invention of the microprocessor. Up tonow at least, foreign competition has done more to reshapeAmerican business practices than have computers—particu-larly competition from Japan, a nation much less computer-ized than our own. And in the political realm, primary creditfor the present disaffection from government must be givento two factors: a string of government-caused disasters thathas sapped public faith in statist "solutions"; and set againstthat backdrop, an ongoing war of ideas against collectivismin all its forms.

As to the rise of the old regime, it is fair to say that theconcentration of people and resources begotten by mass pro-duction made` the: case for top-down control more plausible,and thus helpedHts imposition. But the idea, or even theimplication, ¿iat the governmental and economic institutionsnow under attack were appropriate to a certain level of tech-nological development is utterly wrongheaded. Those insti-tutions have been flawed from their inception.

The transformation currently in progress is needed not toupdate the obsolete, but to correct the mistaken. What we arewitnessing around us now is the uprooting of error—falseassumptions and confusion buried so deep at the foundationsof economic and political life that their excavation and re-moval leave the structures built upon them in ruins. Specifi-cally, the old order now passing from the scene was less theinstitutional incarnation of the industrial revolution than atragic misinterpretation of it. Indeed, it is not going too far tosay that this order was the result of an industrial counterrevo-lution.

The Brainpower Revolution

The American industrial revolution represented a blazingefflorescence of creativity, invention, and analytical genius—in short, of brainpower—in the economic realm. The resultwas a radical break in human affairs: New energy sources,new electromechanical technologies, and new forms of orga-nization were combined to increase the capacity for creatingwealth beyond any prior imagining.

Thomas Hughes, in American Genesis, has compared theburst of technical genius during this period to the accom-plishments of Periclean Athens and Renaissance Florence. Itis exemplified by the careers of Bell and Edison, and chartedby the increase in U.S. patents issued annually from 683 in

1846 to 22,508 only 40 years later.The organizational innovations of the time are less cel-

ebrated, but also transformed the world. To give just a fewhighlights: line-and-staff management (1850s), modern costaccounting (1850-60s), commodities exchanges (1850s), fu-tures markets (1850s), department stores and chain stores(1860s), monitoring of inventory by stock turn (by 1870),continuous-process production (1870-80s), vertical integra-tion (1880s), large-scale trading of industrial stocks (1880—90s), incorporation of industrial enterprises (1890s), R&Ddepartments (1890s), consumer packaging and national ad-vertising (1900s), earnings forecasting and capital budgeting(1900s), moving assembly lines (1910s), market research(1910s), and the multidivisional corporate form (1920s).

As the complexity and intellectual challenges of economiclife escalated dramatically, the need for knowledge work-ers—business managers, engineers, accountants, lawyers, ad-vertising and marketing specialists—rose correspondingly.According to James Beniger in The Control Revolution,knowledge workers as a percentage of the total U.S. laborforce made a quantum jump with the advent of mass produc-tion: from 4.8 percent in 1870 to 12.4 percent 20 years later,rising to 24.5 percent by the end of the 1920s. Thus theindustrial revolution occasioned an unprecedented applica-tion of brainpower to and diffusion of brainpower through-out economic life.

At the same time, however, other developments were push-ing in the opposite direction. Political and economic institu-tions were being created that bottled up brainpower, frus-trated its exercise, or ignored it altogether. Most dramati-cally, government's rapid growth encroached upon the bloom-ing, buzzing variety of private action and substituted theinflexible sameness of bureaucratic edict. Meanwhile, thenew giant corporations were the instruments of industrialrevolution, but they were flawed instruments. In their han-dling of workers, and their organization of managers, theybetrayed their promise and became instruments of industrialcounterrevolution.

The Intellectual Counterrevolution

The cephalization of economic life brought about by theindustrial revolution was not sui generis. It was, rather, partof a larger historical continuity: the development of capital-ism. As opposed to the custom- and coercion-bound feudal-ism from which it emerged, capitalism is characterized bythe systematic encouragement it gives to the developmentand use of brainpower. By dispersing control over invest-ment decisions, and allowing unsuccessful investments tofail and successful ones to attract first profits and then imita-tors, capitalism creates a social environment that is power-fully conducive to experimenting with new ideas and newways of doing things. Friedrich Hayek had this in mind whenhe referred to market competition as a discovery procedure.Industrialization represented an escalation of that discoveryprocedure to a new level of intensity.

To contemporaries, however, the marvels of the MachineAge were considered not a testament to capitalism, but arepudiation of it. The leading interpreters of the new economywere dazzled by the productive abundance of the new indus-

trial techniques, but they failed to see that this abundancewas inextricably connected to and sustained by the competi-tive market process. Competition they regarded as wasteful,an anachronism. In one of history's bitterest ironies,capitalism's great achievement—the creation of previouslyunimaginable wealth—served as the inspiration for its nem-esis: the delusion of central planning.

The supposed conflict between competition and the in-dustrial economy was central to the writings of ThorsteinVeblen, the iconoclastic economist whose influence wasstrongly felt among Progressives and New Dealers. (In 1939the editors of The New Republic conducted an informal pollof "books that changed our minds," and Veblen headed thelist.) Veblen distinguished between "industry," which is mo-tivated by the "instinct of workmanship," and "business,"which is motivated by the prospect of pecuniary gain. "[T]hemodern industrial system," he wrote in The Theory of Busi-ness Enterprise (1904), "is a concatenation of processes whichhas much the character of a single, comprehensive, balancedmechanical process." However, he continued, "the pecuni-ary interests of the business men...are not necessarily bestserved by an unbroken maintenance of the industrial bal-ance."

Veblen believed that the continuation of business rivalryin an industrial economy caused "chronic derangement, du-plication, and misdirected growth." In that light, he praisedthe mergers and consolidations that had been effected by thelargest business enterprises: "So long as related industrialunits are under different business managements, they are, bythe nature of the case, at cross-purposes, and business con-solidation remedies this untoward feature of the industrialsystem by eliminating the pecuniary element from the inter-stices of the system as far as may be.... The heroic role of thecaptain of industry is that of a deliverer from an excess ofbusiness management. It is a casting out of business men bythe chief of business men."

Veblen offered no clear political program, but others whoshared his dim view of competition certainly did. Prominentamong those was Edward Bellamy, whose 1888 Utopian novel,Looking Backward: 2000-1887, sold a million copies andinspired the formation of Bellamy clubs that continued aroundthe country for decades. In Looking Backward, Bellamy out-lined a future history of the coming socialist millennium, andhe saw the giant enterprises of his day as a kind of transi-tional stage:

"The movement toward the conduct of business bylarger and larger aggregations of capital, the tendencytoward monopolies, which had been so desperately andvainly resisted, was recognized at last, in its true sig-nificance, as a process which only needed to completeits logical evolution to open a golden future to human-ity.

"Early in the last century the evolution was com-pleted by the final consolidation of the entire capital ofthe nation.... The nation, that is to say, organized as theone great business corporation in which all other cor-porations were absorbed; it became the one capitalistin the place of all other capitalists, the sole employer,the final monopoly in which all previous and less mo-

nopolies were swallowed up, a monopoly in the profitsand economies of which all citizens shared. The epochof trusts had ended in The Great Trust."

Thus, according to the story, was market competition elimi-nated, and its fourfold wastefulness: "the waste by mistakenundertaking," "the waste from the competition and mutualhostility of those engaged in industry," "the waste by peri-odical gluts and crises," and "the waste from idle capital andlabor at all times." The example of the large corporationshelped to show the way:

"Fifty years before, the consolidation of the indus-tries of the country under national control would haveseemed a very daring experiment to the most sanguine.But by a series of object lessons, seen and studied byall men, the great corporations had taught the peoplean entirely new set of ideas on the subject.... It hadcome to be recognized as an axiom that the larger thebusiness the simpler the principles that can be appliedto it; that, as the machine is truer than the hand, so thesystem, which in a great concern does the work of themaster's eye in a small business, turns out more accu-rate results. Thus it came about, thanks to the corpora-tions themselves, when it was proposed that the nationshould assume their functions, the suggestion impliednothing which seemed impracticable even to the timid."

In Veblen's and Bellamy's analysis, the new industrialeconomy thrived on central control. They saw artisan pro-duction swept away by enormous economies of scale. Theysaw traditions and rules of thumb swept away by organiza-tion and system. They saw handicraft and common senseswept away by engineering and technical expertise. Theysaw these things and concluded that a new world was emerg-ing in which a few experts would tell everyone else what todo.

The problem, in their view, was that the new world hadnot yet fully supplanted the old. The old traditions of privateownership and competition still refracted the logic of themachine; engineering remained subservient to profit. As aresult, much of the productive power of the new industrialprocesses was wasted in either idleness or duplication; more-over, production was too often diverted from serving theneeds of the many in order to satisfy the extravagances of aparasitic few.

This then was the goal of collectivism: to render industryless wasteful and more equitable by extending the principleof central control. Power would be stripped from variousindustrial fiefdoms and vested in the true center: the state.There it would be exercised, not for private gain by business-men, but for the common good by public servants.

The logical extreme of such a program was the full-fledgedsocialism preached by Bellamy, but such radicalism nevertook firm hold in mainstream American public opinion. Inthe United States, the collectivist spirit was expressed morein proposals to reform private ownership through regulationand government spending than in plans to eliminate it alto-gether.

While the ambitions of radicals and reformers may havevaried, their driving social vision was the same: to take the

triumph of planning and organization at the factory level andapply it to society as a whole—in short, to engage in "socialengineering."

It is commonly imagined today that the regulatory re-forms of the Progressive Era and the New Deal were staunchlyopposed by Big Business. All too often, however, leaders ofthe new corporate giants saw no room for competition in theindustries they ran, and welcomed government intervention(short of expropriation). Judge Elbert Gary, the first chair-man of the board of U.S. Steel, held weekly dinners withother steel executives to set prices. Gary defended this "co-operative plan," stating that "the law does not compel com-petition; it only prohibits an agreement not to compete." Ifsuch "friendly association" did run afoul of the antitrust law,Gary had another idea: "I would be very glad if we had someplace we could go, to a responsible governmental authority,and say to them, 'Here are our facts and figures, here is ourproperty, here our cost of production: now you tell us whatwe have the right to do and what prices we have the right tocharge.'"

Precisely this approach was adopted in industry after in-dustry—frequently with the support, and sometimes at theinstigation, of the businesses involved. Thus, AT&T's presi-dent Theodore Vail reacted to AT&T's falling market shareby lobbying for regulated monopoly status. Such a move, heargued, was necessary to ensure universal access: "It is notbelieved that this can be accomplished by separately con-trolled or distinct systems nor that there can be competitionin the accepted sense of competition."

In the midst of the Great Depression, confidence in mar-ket competition was at a low ebb in the business communityas elsewhere. In 1931 Gerard Swope, president of GeneralElectric, put forward a plan for the cartelization of industry,to be administered by trade associations: the U.S. Chamberof Commerce and the National Association of Manufactur-ers endorsed similar proposals. In 1933, in the famed first100 days of the New Deal, the National Industrial RecoveryAct put such cartelization into effect. Henry Harriman, presi-dent of the Chamber of Commerce, praised the new law as a"Magna Charta of industry and labor": laissez faire, he con-tended, "must be replaced by a philosophy of planned na-tional economy."

Ignoring Ignorance

The rejection of market competition, and consequent em-brace of government-led social engineering, represented amisreading of industrialization at the most fundamental level.The social engineers simply assumed away the root problemof economics: the problem of ignorance, of figuring out whatto make and how to make it. They assumed that these werepurely technical issues whose solutions were already withinthe grasp of engineering. Accordingly, they believed that themost important economic problem was putting the peoplewith that knowledge in charge and having them tell everyoneelse what to do. On those assumptions, private ownershipand competition did indeed seem a hindrance.

What they failed to see was that the question of what to dois in fact enormously complicated, and cannot be answeredwithout reference to what millions of consumers actually

want. In particular, they did not understand that the despisedpecuniary considerations of price and profit are indispens-able in communicating those wants to producers, or that com-petition among producers—for both customers and invest-ment capital—is the best way of ensuring that better answersto the question of what to do are occasionally concocted.

For all of their fondness for engineering and scientificmetaphors, the devotees of technocratic central planning aban-doned the essential humility of the scientific method. In-stead, they claimed that a small group of people had all theanswers. Just at the time that industrialization was delegatingbrain work throughout the economy to an utterly unprec-edented extent, an immensely powerful intellectual move-ment sprang forth which sought (albeit unwittingly) to re-strict sharply the amount of brainpower applied to economiclife.

The movement changed the country in waves: the Pro-gressive Era and the New Deal, the mobilizations of the twoworld wars, and finally, the calamitous reign of "the best andthe brightest" in the 1960s. As a predictable result, the coun-try has been saddled with a set of rigid, unresponsive, anddysfunctional government policies, from the original sin ofthe Interstate Commerce Commission to the current bloated,sclerotic, $1.6 trillion a year mess. And of course, America'ssuffering at the hands of would-be social engineers has beenmild compared to many other places in the world—mostnotably the former Communist bloc.

Dumbing Down Work

As the misplaced faith in top-down control altered thelarger American economy, so its effects were replayed inmicrocosm in the development of the internal structure of thenew large corporations. Nowhere were those effects moredestructive than in the area of management-labor relations.

In the early decades of industrialization, what happenedon the factory floor remained largely outside the purview ofowners and managers. How work was to be divided up, whatprocedures to follow, what tools should be used, who shoulddo what, and what pace was appropriate—all of these weredecided by the workers themselves (or, less idyllically, bytheir often brutal and domineering shop foremen).

That state of affairs was not conducive to high productiv-ity. In an era of highly complex production operations andaccelerating technological change, rules of thumb and re-ceived craft wisdom needed to give way to more systematicanalysis of how work should be organized. Moreover, aslong as workers controlled factory output, they could be re-lied upon—as normal, self-interested human beings who weretypically working long hours under miserable conditions—to take it easy on themselves.

In the last decades of the 19th century and first decades ofthe 20th, owners and managers asserted and ultimately gainedcontrol over the production process. They did so under thebanner of "scientific management," and their victory did in-deed produce enormous gains. Management consultant PeterDrucker refers to this period as the "Productivity Revolu-tion," and credits scientific management—or to use his terms,"the application of knowledge to work"—with the surgingrise in living standards over the course of the 20th century.

This cause and effect can be most readily seen in HenryFord's development of the moving assembly line in 1913,and his inauguration of the $5.00 work day the followingyear.

Management's victory, though, was the result of a bitterlycontested and often bloody struggle with labor. This conflictseparated management and labor into opposing camps, andpoisoned their relations with animosity and distrust that con-tinue to this day. Consequently, the potential for even greatergains in productivity and living standards was wasted.

No doubt labor resistance to reorganization of the factoryfloor would have been considerable under the best of cir-cumstances. Tension between management and labor wasunavoidable given the harshness of much of the work;America in those days was a desperately poor country bycurrent standards, and brutality in the workplace was oneexpression of that backwardness. Furthermore, the labormovement was imbued with collectivist antibusiness senti-ment, and was highly unlikely ever to cozy up with what itregarded as its class enemy.

Nevertheless, a great deal of the continuing acrimony be-tween labor and management can be blamed on the top-down arrogance of the scientific management movement.This was particularly evident in the writings and career ofFrederick Winslow Taylor, the founder and leading propo-nent of scientific management.

Taylor's contempt for the mental ability of the Americanfactory worker was profound. He used the example of han-dling pig iron, "the simplest kind of human effort.... A mansimply stoops down and with his hands picks up a piece ofiron, and then walks a short distance and drops it on theground." That said, he continued: "I can say without theslightest hesitation that the science of handling pig-iron is sogreat that the man who is fit to handle pig-iron and is suffi-ciently phlegmatic and stupid to choose this for his occupa-tion is rarely able to comprehend the science of handling pig-iron."

In line with such thinking, Taylor set forth the followinggoal for sound management: "All possible brain work shouldbe removed from the shop and centered in the planning orlay-out department." Professionally trained managers, armedwith Taylor's famous time and motion studies, should deter-mine "the one best way" of doing every single task in thefactory, and order the workers to do it that way and no other.The role of workers in this system was, according to Taylor,"to do what they are told to do promptly and without askingquestions or making suggestions." When questioned by work-ers, Taylor would commonly reply, "You are not supposedto think. There are other people paid for thinking aroundhere."

Labor's reaction to Taylorism was understandably indig-nant. Samuel Gompers's assessment was typical: "So thereyou are, wage-workers in general, mere machines—consid-ered industrially, of course.... Not only your length, breadth,and thickness as a machine, but your grade of hardness, mal-leability, tractability, and general serviceability, can be as-certained, registered, and then employed as desirable. Sci-ence would thus get the most of you before you are sent tothe junkpile."

But in the end, the labor movement did cede control of theproduction process; it moved its focus to organizing the workforce on an industry-wide basis and improving wages andworking conditions through collective bargaining. The tri-umph of scientific management, though, had forced a sharpcleavage between white collar and blue. As a result, therewas a near total abdication of responsibility by the latter forimproving the work of the company.

As industries became unionized in the 1930s and '40s,labor relations settled into an uneasy adversarial standoff, inwhich uncompetitively high wages were used to bribe thework force into accepting their mindless role. Ironically, aslabor unions sought standardized seniority-based wage scales,they ultimately came to out-Taylor Taylor, insisting on aByzantine structure of work rules that confined the responsi-bilities of workers within the narrowest possible limits.

Big Labor's surly accommodation with Big Business inthe postwar period was a gilded prison. The pay was good,too good; it bought acquiescence in a work life that other-wise would have been intolerable. Consider these excerptsfrom The End of the Line, a compilation of interviews withworkers at Ford's Michigan Truck Plant outside Detroit:

• "Intelligence didn't come into play unless you wereon salary; you weren't really part of the decision-making process. The management made all the de-cisions; you had no responsibility."

• "It was like a war between management and the work-ers. For one side to get the other to do something,they had to bring out the guns and hold them to theirheads. You would sometimes see sabotage.... Weused to have a breakdown once a week for a halfhour because some guy would stick a tool in theline."

• " [I] f there was something I wanted from the supervi-sor and didn't get, I would let trucks go by withoutdoing my job. I was no angel. Like everyone else, Iwould get away with whatever I could."

• "That first week I must have quit at least twenty timesin my head. I wouldn't want to walk out in themiddle of the day, so I would try to make it toquitting time. The next morning I always came back.It was the money."

Thus did scientific management and Big Labor squanderthe dispersed intelligence, skill, and experience on the frontlines of production. The competitiveness of American indus-try certainly suffered: so did the souls of workers who wererequired every day to check their brains at the factory gate.

It was left to the Japanese, rebuilding from the wreckageof World War II, to find a better way. The Japanese junkedthe old topdown Taylor system for a bottoms up approach,one that uses workers' heads as well as their bodies.

In the Taylor system, managers determined the "one bestway" once and for all time, incorporated it into product speci-fications and standard operating procedures, and then rammedit down workers' throats. In the Japanese kaizen (continuousimprovement) system, workers are integrally involved,through "quality circles" and the like, in monitoring the workprocess statistically and adjusting it to make it run better—

making incremental improvements as workers discover bet-ter ways of getting the job done. Thus, in the Taylor systembrainpower was concentrated at the top, and used once (or atbest episodically); in the Japanese system, brainpower is dis-tributed, and used continuously. Ironically, the Japanese de-vised their new system under the tutelage of Americans W.Edwards Deming and Joseph Juran, prophets roundly ig-nored in their own country.

White-Collar WasteIn addition to wasting the potential of their workers, the

new large corporations created hierarchical management bu-reaucracies that too often squandered their white-collar tal-ent. Those bureaucracies became increasingly rigid and dys-functional over time, choking off information flows so thor-oughly that the people running the company often had noidea what they were doing, and skewing incentives so badlythat rational action within the organization was frequentlyimpossible. All the ills typically associated with Soviet com-missariats could be found—in a much less malignant variety,to be sure—in America's great corporate headquarters.

In understanding what happened, it's important not to getcarried away with bureaucracy-bashing. Bureaucracy, in itsplace and properly structured, is a wonderful thing. The fabu-lous burst of wealth creation brought about by industrializa-tion was due not just to new energy sources and technolo-gies, but new forms of organization. In the pre-industrial era,economic activity consisted of relatively simple tasks, andthe business enterprises that conducted them were accord-ingly simple in structure: single proprietorships or partner-ships, managed according to personal knowledge and judg-ment.

With the coming of high-energy, high-speed, mechanizedproduction, economic activity vaulted to a superhuman scale.The complexity of production processes, the number of peopleinvolved, the geographical extent, and the speed of raw ma-terial and finished good flows all exceeded the managementcapacity of traditional business enterprises. What was neededwas a new complex form of business organization; whatemerged, as chronicled by Alfred Chandler in his magisterialThe Visible Hand, was the modern corporation, run by pro-fessional managers. Work became superhuman in structureas well as scale; in other words, it became bureaucratized.

The problem with the new large business organizations isthat they failed to incorporate within their administrativestructures the very features in the ambient market economythat gave rise to them in the first place: decentralized deci-sion making, ceaseless experimentation, feedback loops thatensure good ideas from whatever source are copied and badones abandoned. Instead, they created management struc-tures that were the opposite of the marketplace: rigid chainsof command, narrow channeling of information flows, resis-tance to new ideas from unexpected sources. As a result,while American corporations were relatively good at imple-menting plans concocted at the top, they were much lessgood at improving those plans, or changing those plans, basedon new information that came from outside the top ranks ofmanagement.

The deficiencies in American management were not ap-

parent, or at least not pressing, in the early days of industrial-ization. In the industries where the potential for mass pro-duction existed, the adoption of the new techniques gener-ally meant a phenomenal increase in productivity. Accord-ingly, management systems that could implement and ad-minister those techniques competently and reliably repre-sented an enormous advance.

What evolved were management structures in which in-formation flowed from the bottom up in prescribed channels,and directives then flowed back down. For their time, thenew organizational forms were a considerable achievement:They coordinated economic activity at a scale and level ofcomplexity previously unimagined. Despite their latent flaws,these organizations were thus still good enough to allow thenew giant corporations to outperform anything that had comebefore.

And indeed, during the turbulent early decades of indus-trialization, American management was restlessly improv-ing itself. Between the 1880s and the 1920s, a series of inno-vations did help to increase the brainpower of large corpora-tions: R&D departments were established specifically to gen-erate new useftil knowledge; the intensification of advertis-ing and market research increased the interaction betweencompanies and their business environments; reorganizationalong multidivisional lines dispersed responsibility by giv-ing full operational autonomy to product group managers.

Nothing fails like success, though, and the success of thenew corporations bred a pervasive "if it ain't broke, don't fixit" mentality within the ranks of American management. Bythe 1920s, as the conversion to mass production was consoli-dated, further evolution more or less stopped. Efforts to makethe corporation more open to change and new ideas—morelike the marketplace—tailed off.

Instead, corruption set in. Corporations broke down intointernal empires; information flows, and all too often trust,stopped at the departmental or divisional border. The "notinvented here" syndrome rendered businesses perversely hos-tile to opportunities that arose from developments outsidethe corporation. Companies grew unimaginative about newways to create consumer value as they lost touch with theconsumer: marketing and salesmanship were too often treatedas substitutes for paying attention to what consumers likeand want. Management "by the numbers" treated financialmanipulation, not creation of consumer value, as the key tocorporate success.

This corruption plagued many of America's great indus-tries, and none more so than the automotive industry. Resis-tance to innovation is well illustrated in an example fromDavid Halberstam's The Reckoning. Ford Motor Companydeveloped a new rust-proofing paint process called E-coatback in 1958; the process was expensive to install, however,and rusting often occurred after the company's warrantieshad expired. Ford's institutional obsession with cutting costsblinded it to an obvious opportunity to create value: "Themen who had developed E-coat and the plant men who pushedfor it considered it the key to a great increase in quality.Unfortunately, there was no way to quantify that improve-ment in terms of sales.... How, after all, asked one of itsproponents, did one put a price on a happy customer?" As a

result, despite well-known problems with rusting cars, it tookuntil 1984 until all Ford plants were equipped with E-coat.

The auto industry was also bedeviled by internalempirebuilding and the lack of cooperation across depart-mental lines. In Rude Awakening, Maryann Keller describeshow it was at General Motors: "General Motors did not oper-ate as one cohesive organization but, rather, as seven sepa-rate and distinct operations, each with its own insulated em-pire. It took three separate organizations—a car division,Fisher Body, and GMAD [General Motors Assembly Divi-sion]—to build a single car. And at no time did they inter-face, except through the president. They were entirely verti-cal organizations." Thus a car division would design a newmodel, Fisher Body would then engineer it, and finally GMADwould assemble it—without anyone ever talking to each other.It was a system practically designed to generate delays anddefects.

The effects of this kind of mismanagement were con-cealed for decades. Despite all its faults, this corrupted ver-sion of 1920s-style management persevered by default. Com-petition from the outside world was cut off, first by traderestrictions and depression in the interwar years, and then bythe destruction of most of the rest of the world's industrialcapacity by World War II. American industrial might domi-nated a ruined world; people mistakenly assumed that thiswas because and not in spite of American management.

Albeit from a dissident's perspective, John KennethGalbraith's writings typified this misperception. In 1967, hecelebrated the unrivaled efficiency of the American corpo-rate "planning system" in his bestselling The New IndustrialState: "The mature corporation has readily at hand the meansfor controlling the prices at which it sells as well as those atwhich it buys. Similarly it has means for managing what theconsumer buys at the prices which it controls. This controland management is required by its planning. The planningproceeds from the use of technology and capital, the commit-ment of time that these require and the diminished effective-ness of the market for specialized technical products andskills."

Galbraith wrote those words just as the Japanese wolf wasapproaching the door. In the aftermath of World War II,Japanese corporations developed new management systemsthat stressed continuous product improvement over financialmanipulation, and cross-department cooperation over turfconsciousness. Those systems were combined with, as de-scribed above, a new way of dealing with labor—one thatdid not ignore workers from the neck up. What followed, inthe 1970s and '80s, was a competitive rout of Americanmanufacturing.

The American corporation has been forced by this com-petitive challenge into a thoroughgoing restructuring alongmore market-like lines. This restructuring was much neededand will be highly beneficial over the long term; however, it

should not be forgotten that the necessity for restructuringhas exacted a heavy toll in wasted resources and dislocatedlives. Those are the costs of arrogance and error.

The Open EconomyThe new technologies and institutions of the industrial

revolution opened up vistas of human experience that werepreviously all but unimagined. They created, for the firsttime in history, a society of widespread material abundance,They offered unprecedented opportunities for intellectualchallenge in work. Brainpower, and its material effects, weretransforming the world.

By current standards, however, conditions in the earlydays of industrialization were still primitive. Many moderncomforts did not exist, and the existence or threat of realprivation hung over large sections of the populace. Evenwith the new machines, production required great amountsof punishing manual labor. The factory floor was a roughplace, occupied by rough, uneducated men. In the office,much of the work was routine and clerical. In the largereconomy, cost structures often allowed profitable productiononly at a massive scale, thus favoring consolidation and con-centration over vigorous competition. Those same cost struc-tures frequently yielded standardized, least-common-denomi-nator products.

The logic of market development, however, was hostile toall of those shortcomings; over time it has brought signifi-cant, sometimes sweeping, amelioration. Yet that progresshas been seriously impeded by the imposition of topdowncontrol in both the political and economic spheres. The repu-diation of market forces and principles was once consideredprogressive; its true effect, however, was reactionary, retard-ing the diffusion of brainpower throughout society that in-dustrialization initiated.

The embrace of top-down institutions can thus be seen asa kind of industrial counterrevolution. The legacy of thiscounterrevolution was to magnify and prolong the harshestand least attractive features of the industrial economy, andsquelch its most benign and hopeful ones. We have movedaway from the rough edges of the early industrial era in spiteof, not because of, the grand designs of social engineers andtechnocratic elites.

Now, however, this reactionary order is passing from thescene, and the information revolution is upon us. The revolu-tion is not, as some claim, that information has now becomethe source of all wealth. That has always been true; what isrevolutionary is that we finally realize it. Seeing informationat the center of things means seeing our own ignorance as thecentral challenge of social action. It means rejecting the no-tion that a few of us have all the answers. It means rejectinginstitutions that were founded on that notion, and embracinginstitutions that encourage experimentation and openness. Inshort, it means believing in freedom again.

Economic Education Bulletin (ISSN 0424-2769) (USPS 167-360) is published once a month at Great Barrington, Massachusetts, by American Institutefor Economic Research, a scientific and educational organization with no stockholders, chartered under Chapter 180 of the General Laws of Massachu-setts. Second class postage paid at Great Barrington, Massachusetts. Printed in the United States of America. Subscription: $25 per year. POSTMASTER:Send address changes to Economic Education Bulletin, American Institute for Economic Research, Great Barrington, Massachusetts 01230.

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