Political Economics Prof

Tag: Industrial Revolution

  • Introduction and Summary of Economic Theory Posts

    Introduction and Summary of Economic Theory Posts

     



    Adam Smith – Our Founding Father  

    It’s not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.

    Charles Darwin

    Introduction and Summary

    This blog describes and analyzes economic development and economic growth since the start of the Industrial Revolution in the late 1700s. 

    Some writers describe the current economic trends as the Fourth Industrial Revolution. Other observers and commentators believe that information and communication technology and applications have become so central to the economy that we are in the Information Revolution. And others believe that we are at the beginning of the Biotechnology Revolution. This book will concentrate on the ongoing, underlying dynamics of economic change and, for simplicity, will use Industrial Revolution as the historic label. But it will stress the vital role that innovation and information play in economic development and economic growth. 

    The information revolution was an integral part of the industrial revolution. Information, through electronic communication starting with the telegraph in the 1840s, and new internal management and control information systems in the second half of the 19th century, made large and complex economic organizations possible. The expansion of electricity in the early 1900s made the information revolution possible.

    Any economic discussion should describe or explain the dynamics and the resulting organizational structure of the Industrial Revolution. Market structures are commonly oligopolies (concentrated industries dominated by a few large corporations). Within these structures, large, established corporations and innovative newcomers compete in a process of “creative disruption.”

    Different types of information are a part of this process and affect different types of economic decisions. One process is central; new information and knowledge are applied to create new technologies (“useful knowledge”), new products and services, and new types of economic organizations. 

    In a capitalist economic system, corporations attempt to turn the profitable commercialization of knowledge, information and invention into innovation and, collectively over time, economic development. What economics should describe is the continuous application of information and knowledge, summarized as technology.

     

    Technological innovation and organizational innovation developed together; it was the combination of the two that made economic development and growth possible.

    This innovation process is the driver of economic development. Economic development is the dynamic driver of economic growth. Economic growth is the basis for higher standards of living, increases in real income per capita, lower prices, and a greater variety of goods and services.

    In summary, these posts: 

    o  Emphasize the dynamic forces in an industrial capitalist economy and how they lead to economic growth and higher standards of living.

     

    o   Describe and analyze the resulting industry and corporate structures and how they affect competition, market behavior, and prices. They emphasize the central role played by innovation. Feasible strategies of different types of corporations are discussed.

     

    o   Highlight the role of various types of information in the economy and how different types of information influence competition and market outcomes.

     

    Descriptions of market mechanisms are presented. After that, posts discuss a competitive, industrial/informational economy. They attempt to describe and explain the dynamics and structure of an economy dominated by large corporations and subject to ceaseless technological and organizational change.


    In colleges, economic theory and economic history are taught separately. Economic theory is “ahistorical,” supposedly valid over the 250 years of the Industrial Revolution. This is hard to believe given the incredible technological and organizational change that has occurred, and continues to occur. Theories that lead to equilibrium seem inadequate to explain the “permanent revolution” of ceaseless change and disruption. 

     

    Any discussion of economic dynamics – change over time – involves history. Here, economic dynamics and resulting structure are illustrated by case studies from economic and business history.


    Most of this discussion assumes a relatively unregulated, private enterprise, mature capitalist economy.

     

    The Industrial/Informational economy is facing several crises. The core crisis is the exponentially rising social costs of industrial production and consumption such as pollution and climate change. These costs are threatening the long-run survival of the underlying economic system.

     

    Economic growth and development are influenced by underlying long-run trends. Many long-term trends are in the process of slowing or reversing, particularly demographic trends. A stable or declining number of people in the labor force is one cause of the increased investment in capital-intensive and information-intensive production. On the other hand, greater research and investment in biotechnology is partly the result of an aging population.

     

    Macroeconomics focuses on theories and analysis as support for government economic programs such as monetary and fiscal policies. Here, however, I would like to focus on the tensions and stresses between an expanding global economy and a political world of 200 nation-states: in particular, the conflicts between multinational corporations and national governments.  

    My experience as a corporate economist and strategic planning manager, small business manager and director, business consultant, and nonprofit board member has been in the American economy. As a college professor I have taught a wide variety of courses in economics, finance, management, international economics and politics, and economic history.

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    Go to Production Function, Cost Curve and Supply, and Equilibrium

  • The Beginning of the Industrial Revolution in America

    The Beginning of the Industrial Revolution in America

     

     

    In the Beginning

    PRECONDITIONS OF THE INDUSTRIAL REVOLUTION IN AMERICA

    Before industrialization began in the 1820s, there was a set of political institutions and cultural values, mostly inherited from England, that encouraged profit-seeking individuals to start new companies.  They included fairly secure property rights, increasing legal limits on monopolies, an independent judiciary that enforced contracts, emphasis on individual rights rather than social obligations, patents, tolerance of markets, and less government regulation of markets than in the past.  Much of this was stated or implied in the Constitution; an activist Supreme Court under John Marshall extended these trends. The Constitution also helped to create a national market and reduce transaction costs by mandating a national currency and limiting states’ ability to make economic policy that favored their own residents.

     

    What America did not inherit from England was important. Unlike England, the new United States did not have a king and a landowning nobility to siphon off capital. Settled by members of dissenting sects and persecuted religious minorities, there would be no state-supported national religion. As a consequence, capital would not be diverted to royal palaces, aristocratic castles, or cathedrals.

     

    Economists interested in economic development often advocate land reform in a traditional agricultural society as a necessary first step to modernization. This breaks the power of the conservative landlord class. America did not have to go through this step. Laws were passed even before the Constitution that made free and cheap land available to everyone. America began as a nation of landowning farmers. Thomas Jefferson saw independent farmers as the foundation of a democratic society.

     

    By winning the American Revolution, the new United States retained from England the political policies and ideas that would encourage individual economic “striving” and reject most of the English institutions opposed to progress and change. America was fortunate that it created a political structure, a democratic society, and an ideology that would support the coming Industrial Revolution. 

     

    In the early period of industrialization (1820-1870), a rapidly growing population (from 3 million in 1790 to almost 10 million in 1820 to 30 million in 1860) created an increased potential demand for new consumer products. Western expansion generated an agricultural surplus of commercial crops that were exchanged for cash to buy manufactured goods. Exports of cotton helped pay for imports of machinery, locomotives and manufactured goods.

     

    These conditions together could encourage economic growth but not necessarily industrialization, the large-scale production of capital goods (machinery) and consumer goods using inanimate power (steam engines and waterwheels) to drive faster, more powerful machinery. For that to happen, mechanics, tinkerers, investors, and entrepreneurs had to invent, innovate and organize new finance, production, distribution and marketing methods. Economic development drove economic growth.

    THE BEGINNING OF THE INDUSTRIAL REVOLUTION IN AMERICA

    A key factor explaining why America industrialized so early and so quickly was the country’s continuing ties with England after the American Revolution. Americans quickly understood the profitable opportunities of the new production methods being created in England. Americans also had access to much of the scientific and technical knowledge being created and applied in England. Ambitious Englishmen with technical knowledge, like Samuel Slater the founder of the American textile industry, came to America because they had more opportunity here to get rich. Americans read English scientific and technical journals; often, American like Robert Fulton went to England to see the new methods and machinery. The future Baltimore and Ohio Railroad sent an engineer over to England to find out about English railroad technology even before England had completed its first general purpose railroad. American mechanics and engineers quickly adapted English railroad technology to the American environment.

    One reason industrialization spread was the association of entrepreneurs with investment capital looking for new profit opportunities with mechanics interested in designing and developing new power-driven machinery, especially metal-working machinery.  In the beginning, many of the machine tools and power-driven machinery could be built using traditional craft skills, using traditional materials like wood and hand (or foot) operated tools. The power sources to drive the machinery were not a problem. Waterwheels had been used for hundreds of years in Europe; steam engines could be imported from England. They would soon be designed, improved and produced in America.

    America’s wealthy merchant class was more willing than England’s merchant class to invest in new industrial ventures.  The exception was railroads. There were speculative railroad investment booms in England in the 1840s and 1860s. 

    There were inspired geniuses like James Watt in England and Oliver Evans in America who greatly improved the steam engine, which had been in use in England since the early 1700s. Then modifications and adaptations of existing power-driven machinery and machine tools like lathes often led to large increases in productivity of particular products. In one early example, an American axe manufacturer hired a mechanic to design and development a die forging machine to produce axe heads. His machine increased the productivity of a single skilled striker and an assistant from 12 to 300 axe heads per day. It was these kinds of innovations that drove the Industrial Revolution.

    Americans often surpassed the English in their ability to mass-produce products at a lower cost. American products were generally not as good as English products but their lower cost, plus constant improvement, led to a great deal of innovation and high growth rates. Americans developed a reputation of making it fast, making it cheap today and improving it tomorrow. 

                                                                                                                 
    LABOR

    There was no labor shortage for the factories and mines because of high birthrates, high rates of population growth, open immigration, and the use of women in the industrial workforce. This was also a high quality labor force with high literacy rates among native-born workers. Also, there were no entrenched guilds of craft workers to discourage introduction of new production techniques or influence the organization of work in the factories.

    ADVANCES IN RAW MATERIAL PRODUCTION

    The Industrial Revolution would have been a limited affair if not for the huge increase in the production of metals, especially iron. The new steam engines, machine tools, and machinery were made out of iron and other metals. Fortunately, much of the new production technology – smelting iron ore with anthracite (hard) coal or coke and puddling pig iron to reduce the carbon content for forging – had been worked out in England and Wales in the 1700s. Americans had access to or knowledge of this technology when the demand for iron skyrocketed after 1820. Entrepreneurs built larger furnaces, brought over the new Welsh technology of smelting iron ore with anthracite coal, installed steam engines to heat and blow air into the furnace, and recycled waste heat to raise temperatures. The result was a big increase in iron production at a lower cost per ton. The increasing production of iron for casting and forging eliminated a potential bottleneck to rapid industrialization.

    Large amounts of iron would be vital to the development of the railroad industry.

    TRANSPORTATION COSTS

    The single largest transaction cost at the beginning of the Industrial Revolution was transportation costs. High overland transportation costs because of long distances and rugged terrain limited the size of markets and made products expensive.

    These high costs were first attacked on a large scale with the building of canals, inspired by the spectacular success of the Erie Canal (fully opened in 1825). Overland transportation costs fell by about 80%. At the same time, steamboats on Western rivers reduced costs and permitted upstream navigation. America had the largest navigable river network in the world. Then, starting in the 1830s, came railroads, another new technology developed in England. Within two years, American mechanics and engineers were modifying English designs to match America’s harsher conditions. American companies began producing locomotives and other rolling stock. American railroad companies figured out how to lay down track quicker and at a lower cost than the better built railroads of England. This was an early example of the American business ethos – build it fast, build it cheap, get it up and running, generate revenue, then fix and improve it.

    Compared to canals and steamboats, railroads offered huge increases in total carrying capacity, year-round operation, lower cost, greater flexibility and reliability, and big savings in time moving goods, people, and information. The explosion of needed information to run a large railroad created serious management problems, to say nothing of trains crashing into each other. The problem was partly solved by the creation of the telegraph. Railroads financed many of the early telegraph lines, often strung alongside railroad tracks. 
    Railroads also pioneered the decentralization of operations management into divisions that suggested the organizational structure for later industrial corporations.

    Throughout the Industrial Revolution, America had by far the largest railroad transportation system in the world. It overcame large distances and supported western expansion. Railroads moved agricultural goods to urban markets and ports, and manufactured goods to rural areas. They were vital to the creation of a national market.

    THE SPREAD OF THE INDUSTRIAL REVOLUTION

    The thinking of Francis Cabot Lowell, a Boston merchant, was indicative of a new kind of mentality that was crucial to the success of the Industrial Revolution in America. He was a newly rich merchant looking for new investments. Lowell saw cotton textile production as an integrated system in one factory. He thought about how the different production steps could be coordinated in one, large mill to reduce handling costs and increase overall productivity. Lowell raised the investment funds from fellow Boston merchants to pay for the high upfront capital costs of constructing large buildings and textile machinery. He was the founder of America’s first large-scale manufacturing industry – cotton textiles. He is also famous because he went to England to steal the designs of power-driven looms.

    What mill managers and mechanics subsequently learned from experience was that whenever they increased the productivity in any part of the production system it created bottlenecks elsewhere in the system. Better, faster machines would then have to be designed for other stages of production. This would create new bottlenecks; the process was one of continuous improvement in the production flow.

    Back to the axe example. When die-forging machines made many more axe heads per hour, this created a serious bottleneck problem in the milling (or grinding) of the head into the right shape.  New power equipment was invented to plane (or sand) the heads faster than the old technology. This, in turn, put pressure on the methods to temper (or harden) the heads; innovative new specialized ovens were designed to increase the product flow and improve quality. This same process worked in all successful companies in all industries that adopted power-driven machinery.

    Americans like Thomas Jefferson, Eli Whitney, and the technically trained officers of the army realized early the potential of the mass production of interchangeable parts that could be fitted together quickly by unskilled labor to produce and repair guns. Interchangeable parts, when fitted together with other interchangeable parts, eliminated the slow and expensive need for hand filing and fitting to make metal parts fit together. It took over 30 years to make the system operational. It made possible the mass production of new metal products such as sewing machines, typewriters, and automobiles. This new manufacturing process was so radical that English engineers called it the American System of Manufacturing.

    The cumulative effect of this industrializing process was increasing productivity, higher volume of output, better quality and lower unit cost. This trend spread to other industries with the application of general-purpose machine tools to new uses. Itinerant mechanics adapted their knowledge and experience to modernize the production of new products. Techniques developed in one industry were often transferable to new industries. Success in one industry inspired entrepreneurs to apply the same methods in other industries.  This is how the Waltham Watch Company got started; the founder was inspired by a visit to the Springfield Armory, famous for the mass production of rifles. Sometimes this occurred in the same company; Remington went from producing guns to producing sewing machines to producing typewriters.

    At first, industrial products were familiar products just produced at a lower unit cost by power-driven machinery in factories. Examples included cloth, shoes, paper, nails, clocks, and guns. Lower prices had the same effect as higher income; consumers had money left over to buy more of other products. But as production technology advanced – new and more specialized machine tools, the mass production of steel and the ability to work new materials – it became possible to design and produce new, complicated metal consumer and producer durables. New production techniques developed, such as the stamping rather than the grinding of parts. This led to the mass production of the automobile.===============================================================

    For a general discussion of American history between 1789 and 1860, see


    A New Nation, American History from 1789 to 1860


    Compare the American experience with that of England:

    The Beginning of the Industrial Revolution in England


    For the limits of Adam Smith’s thinking in explaining the origins of the Industrial Revolution, see

    Adam Smith’s Pin Factory


    For an excellent example of an entrepreneur at the beginning of the Industrial Revolution in England, see


    Josiah Wedgwood, the Wedgwood Pottery Company, and the Beginning of the Industrial Revolution.

    For the story of how England lost its economic leadership, see 

    A Cautionary Tale:  England and the Industrial Revolution.

    For a list of all posts, see List of Posts by Topic.


  • Josiah Wedgwood, the Wedgwood Pottery Company, and the Beginning of the Industrial Revolution in England

    Josiah Wedgwood, the Wedgwood Pottery Company, and the Beginning of the Industrial Revolution in England


    Wedgwood Anti-Slavery Cameo

    A better introduction to the beginning of the Industrial Revolution than Adam Smith is the history of Josiah Wedgwood and the Wedgwood Pottery Company.


    This is how one company actually ushered in the Industrial Revolution.


    The revolutionary generation that first adopted steam engines saw the following trends and changes:


    Manufacturing was being modernized by a small group of entrepreneurs. Much of the new raw material processing and manufacturing was concentrated in a small area in the middle of England, away from London. These modernizing entrepreneurs formed a new economic, intellectual and social network.


    Modernizing entrepreneurs like Wedgwood tended to be members of Dissenting sects (like Quakers) or Nonconformist churches (not members of the Church of England), Whigs (liberals) in politics, and believers in “progress.” They were optimistic about the future, influenced by the ideas of Hume, Rousseau, Locke and Adam Smith. They believed their society could be reformed and they were active agents for improvement.


    In 1787, Wedgwood produced a ceramic medallion to support the abolition of slavery. It had a chained African pleading, “Am I not a man and a brother?” This was in the country that became rich by dominating the African slave trade and raising Caribbean sugar with slaves working under brutal conditions. 


    They believed in studying and understanding the material world through reason, data, experience, and experimentation. They had personal ties with scientists and intellectuals. 


    Like Wedgwood, many came from poor backgrounds. Because of their backgrounds and dissenting religious beliefs, they could not attend Oxford or Cambridge. They were cut off from the traditional avenues of social advancement – government official, army officer, and the Church of England. 


    The Industrial Revolution gave them opportunities for economic success denied them under the pre-industrial society. Entrepreneurs could develop these opportunities because of a long political struggle in England to establish the rule of law, individual rights, property rights, patents and limits on governmental power. It also helped that they were largely ignored by the king and the landowning aristocracy.


    The Industrial Revolution was a radical break in history. But in England, many of the preconditions were already in place, as can be seen by the history of the Wedgwood company.  


    Josiah Wedgwood came from a family of potters. He founded the famous Wedgwood pottery company in 1759. 


    Wedgwood and many of his business associates and acquaintances were modernizing entrepreneurs. Wedgwood and others built large factories recruited and industrial labor force, and understood the division of labor. They were constantly looking to improve their businesses – better machines, larger and more efficient production, new and improved products, new materials and marketing.


    A limiting factor was power to run the machinery. Waterwheels were inefficient, with not enough power to drive the larger, faster, heavier machinery. English rivers were flat, sluggish, and sometimes dry because of droughts. The solution – Watt’s steam engine, which was first manufactured in 1775.

    


    James Watt invented and patented a more efficient steam engine but it was Matthew Boulton, a friend and sometime business partner of Josiah Wedgwood, who partnered with Watt and built the factory that produced Watt’s steam engines. Boulton heard about Watt’s engine through a mutual acquaintance in his network of correspondents. Boulton, a successful manufacturer, established and ran a new company (Boulton and Watt) that dominate steam engine production and marketing for a generation. Watt concentrated on improving his steam engine and inventing related technology. Like many later industrial companies, Boulton and Watt was the combination of a businessman and an inventor/mechanic.


    Innovation at Wedgwood was based on science and experimentation. Josiah Wedgwood carried out thousands of experiments in his lifetime analyzing all aspects of pottery manufacturing and decoration, and record the results in detailed notebooks. He read chemistry books and knew and corresponded with the foremost chemists of his day. He tried to reduce the traditional hit or miss methods of producing pottery to more scientific measurement and control. (This tradition of careful observation and scientific understanding of the natural world was passed on to Josiah Wedgwood’s grandson, Charles Darwin.)


    Josiah Wedgwood used power-driven machinery and early assembly line techniques to mass-produce pottery. He was the first manufacturer to install a Watt steam engine.


    Wedgwood was always on the lookout for new styles, better machinery (lathes and kilns) and new production methods. He believed in retaining employees and training them to become increasingly productive. To keep employees, he provided housing and retirement benefits. Wedgwood cooperated with other manufacturers he knew to introduce new materials and new processes into the production of pottery.

    


    Wedgwood expanded sales and profits by selling in foreign markets. He provided a large amount of specially designed pottery to the English and Russian royal families. Wedgwood turned a luxury product for royalty and the very rich into a mass market product for the expanding upper middle class. In addition to European countries, Wedgwood made a special effort to sell to the American colonies. He designed different styles at different price points for different markets. Today we would call this market segmentation.  


    His experiments with new materials and production methods led to the creation of new styles of pottery, which he believed were necessary to increase sales. Wedgwood changed styles every few years, backed by innovations in marketing such as showrooms and branding that were to become standard in the selling of consumer goods.


    In summary, he exploited new production technology and combined it with scientific production control and management. His innovative design and selling strategies became standard for future consumer goods companies.


    ==============================================

    See the related post, Adam Smith’s Pin Factory.

    For the rise of England as a global economic and political power in the 1600s, see

    England in the 1600s:  The Beginning of England’s Rise to Global Power and Wealth

    These posts analyze the factors behind the start of the Industrial Revolution in England and America.  Pre-conditions were important. They illustrate some of the reasons why, in the long run, America was able to continue industrializing better than England, why England fell behind.


    The Beginning of the Industrial Revolution in England


    The Beginning of the Industrial Revolution in America


    Innovate or Fall Behind. A Cautionary Tale – England and the Industrial Revolution

    Some related posts:




  • Innovate or Falll Behind. A Cautionary Tale – England and the Industrial Revolution

    Innovate or Falll Behind. A Cautionary Tale – England and the Industrial Revolution

    The Rocket – Famous Steam Locomotive


    England, more than any country, started the Industrial Revolution in the late 1700s. And for over 150 years, England continued to discover new products and technologies. Yet England eventually fell behind the United States and Germany in industrial technology, commercial innovation, production efficiency, and economic growth. What happened?


    The seeds of England’s relative economic decline were there right at the beginning. Producing cotton cloth was England’s first big industry. But millwrights, mechanics with specialized knowledge of how to build wool and cotton mills and their machinery, felt frustrated because they seldom became part owners and couldn’t find financing to start their own mills. Some illegally emigrated to the United States and France. Much of the early American textile mill technology was due to English immigrants and English technology. The first cotton spinning mills were designed by an English millwright financed by a Providence, Rhode Island merchant. Much of the early venture capital for the industry was provided by Boston merchants.

     

    The rapid mechanization of the textile industry displaced British exports as British firms failed to switch from the jenny or mule to the new, faster and cheaper technique of ring-spinning. By the end of the 19th century, the average American cotton spinning mill’s labor productivity was 30% higher than the average English mill. England would eventually lose one of its largest export industries.

     

    The inability to constantly improve machinery and production processes were part of England’s long term problem. An English company named Platt’s invented and produced an automatic loom for weaving cloth. Platt’s failed to find buyers in the home market but exported the new automatic looms to Japan and other countries. A new Japanese company named Toyoda bought Platt’s looms and began improving their design. By 1930, Toyoda had improved Platt’s technology to the point where Toyoda was exporting power looms to England. Toyoda later changed its name to Toyota.  


    England (actually, a Scot named James Watt) developed a much more efficient steam engine. Later, the improved high pressure steam engine was developed at almost the same time in England and the United States (by Oliver Evans). This engine was critical to the development of the railroad locomotives, steamboats, and later steamships. Steam engines were quickly adopted in the U.S. to propel steamboats on the Hudson River (Robert Fulton) and the vast Mississippi River system.


    The first general purpose railroad was developed in England in 1830. The first railroad locomotives in America were imported from England. Within two years, American engineers and mechanics were modifying the English locomotive, making it more flexible and powerful. American railroad companies developed cheaper and faster ways to lay track. By 1860 over half the world’s track was in the United States and America was exporting railroad expertise and equipment.

     

    Coal mining was a major industry in England but productivity began to fall until output per head in British coal mining was only half of that found in the American coal industry by 1914.

     

               Richard J. Evans, The Pursuit of Power:  Europe 1815-1914, 

              300.


    Already in the 1850s, English engineers were alarmed by superior American production techniques, including the new technology of interchangeable parts. They called it “the American System of Manufacturing.” 

    England began to fall behind the United States and Germany
    in the 1870s, at the start of the “Second Industrial Revolution.” Part of the
    problem was the inability of England to stay ahead in the new industries it helped to create.


    England invented the two ways to produce large amounts of cheap steel. But rather than just building steel mills, the inventors licensed the processes to both English and foreign companies. One purchaser was Andrew Carnegie, a Scottish immigrant in America. Within thirty years, America was the world’s low-cost producer of steel and produced over half the world’s steel. Germany produced about the same amount of steel as England, France and Russia combined by 1910.


    This had profound economic consequences. Large amounts of cheap steel were crucial to the development of better machine tools, better machinery, better railroads including steel rails, skyscrapers and automobiles. Also military consequences; at the beginning of World War I, German companies including Krupp were the world’s largest producer of heavy artillery.


    An English chemist discovered the first synthetic dye for cloth. But the development of the synthetic dye industry occurred in Germany. It was the basis for the world dominant German chemical industry. German companies went on to discover and develop new chemical products, including high explosives that gave Germany a decided edge in artillery in World War I.

    Germany and the United States developed the new technologies of electrical equipment. America dominated the global production of automobiles by 1913; America was the world’s largest producer. While Henry Ford was developing the mass production of automobiles, the English car industry still concentrated on producing a small number of expensive automobiles for the wealthy. 

    By 1900, the United States had replaced England as the largest economy in the world. Germany caught up by 1914; Germany was able to build a modern navy that challenged England’s naval superiority.


    The radio was invented and first exploited by an Italian immigrant in England (Marconi). Improvements were quickly made by American inventors. The radio industry’s full commercial potential was developed in the United States by a Russian immigrant (David Sarnoff) using the financial resources and patents of four of America’s largest corporations. Using radio vacuum tubes, it was a short technological step to develop television and early computers. 


    In World War I, England first developed and deployed the tank. But its further development, and a strategy for modern warfare built around the tank, was done in Germany. In 1927, the English army spend more money on hay for horses than fuel for tanks. In 1940, England paid the price as German tanks destroyed the English army and its inferior tanks.


    Before and during World War II, England discovered or developed a host of important new technologies – penicillin, radar, computers, jet engines. But England did not have the resources or industrial technology to develop, improve and mass produce these products. Knowledge of all four was shared with American companies during World War II and became the basis for large new American industries and American companies like Boeing, IBM and Pfizer.

    Losing technological leadership can have serious consequences for a country’s political and military power.


    The structure of DNA was decoded in England. Yet there were no English equivalents of early developers of drugs based on the new knowlege like the American companies Amgen and Genentech. There are now hundreds of American biotechnology companies creating one of the dominant industries of the 21th century.


    Inventing a new product or process does not lead to economic leadership or long-term economic growth if the country does not have the human, production, organizational, financial, and entrepreneurial resources to develop and continually improve them. England did not start engineering, scientific and technical schools on a scale as did the U.S. and Germany; there were no English equivalents of MIT or the German scientific research universities. Engineers (lumped together with mechanics) and entrepreneurs (often from dissenting religious groups or minority groups) were considered social inferiors, and “venture capital” (except for the railroad investment craze in the 1840s) went into trade and overseas investment.


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    Go back to the Guide to Posts by Topic.


  • A Historical Example of Bilateral Oligopoly: Baldwin Locomotive Works

    A Historical Example of Bilateral Oligopoly: Baldwin Locomotive Works

    Baldwin Locomotive

    Baldwin, the largest producer of steam locomotives in the                 nineteenth century, faced problems typical of a dominant company in a bilateral
    oligopolistic industry.  Almost everything that               happened at Baldwin
    was conditioned by a highly cyclical, almost   unpredictable competitive
    environment.  A high level of business       risk followed from sudden, large fluctuations in demand. This         meant that Baldwin
    often had excess capacity with substantial         fixed investment, leading to a
    strategy based on economies of scope and not economies of scale.  Baldwin also depended
    on a skilled       labor force with firm-specific knowledge and experience that was    exposed to sudden and massive layoffs followed by the company’s   attempts to
    rehire the same workers.  It is hard to
    imagine a more    challenging competitive environment.                                                    



    Baldwin was a large and dominant
    firm, accounting for approximately one-third of all steam locomotive
    production.  The buy side of the market
    was dominated by a small and increasingly concentrated number of railroad
    companies, which were some of the largest corporations in America
    in the nineteenth century.  The sources
    of market power of the locomotive builders were their specialization and flexibility
    in production, although some of the larger railroads – Baldwin’s
    largest customers – also built locomotives in their own machine shops.  The sources of market power of the railroads
    were their large purchasing power, technical knowledge of their “master
    mechanics” who ordered equipment, and knowledge of the optimal mix of equipment
    for their particular company.  In such an
    environment, Baldwin had market power because of its
    size and assembly expertise, but never enjoyed the market control of a mass producer
    of standardized products.  Market power
    based on marketing to final consumers was not feasible; railroad customers did
    not demand that railroads use Baldwin engines.



    Every large railroad developed its own specifications and
    demanded customized equipment from Baldwin.  In addition, there was continuous
    technological improvement of the basic steam locomotive, often innovated by
    railroad technical staff.  As a
    consequence, Baldwin could never control the pace of
    design change.  The company could not totally
    incorporate mass production techniques because of constantly-changing
    customized design and finish.  On the
    other hand, by working closely with its customers over a long period of time, Baldwin
    probably had lower transaction costs than if its sales were arms-length market
    transactions.



    This mutual dependence, along with railroads’ credible
    threat of internal production, usually gave the railroads a bargaining
    advantage when negotiating design customization and price with Baldwin.  But working closely with its largest
    customers, particularly the Pennsylvania Railroad, also increased the
    probability of Baldwin’s long-run survival. 



    This symbiotic relationship between steam locomotive
    builders and the railroads worked as long there was no fundamental innovation
    in engine design and both sides benefited from continuous improvement in the
    steam locomotive.   The bilateral
    relationship would be much different in the later market for diesel engines in
    which General Motors controlled the technology and forced railroads to buy
    standardized products.



    Baldwin’s management objectives were
    to minimize risk and maximize operating flexibility by sharing risk with
    suppliers through subcontracting out much of its parts production.  Since production was to order, Baldwin
    managed a “just-in-time” parts inventory system that minimized working capital
    requirements. When times were bad, Baldwin could delay
    payment to its suppliers and thus use them as a major source of working
    capital.  This was one way the company
    dealt with severe cash flow problems in economic downturns.



    The company countered the potential loss of skilled workers
    after massive layoffs with high wages, skill development through apprenticeship
    training for employees and sons of employees, and the hope of higher income for
    long-term employees through a system of internal promotion and inside
    contracting.  Inside contracting, usually
    managed by long-term employees, put pressure on contractors to keep labor costs
    down.  This led to much more cooperative,
    less confrontational labor relations policies than those of other large-scale
    employers like Carnegie Steel.


    Horace L.Arnold – “Modern Machine-Shop Economics.” in Engineering Magazine, 11. 1896


    Because of the complex nature of its production, Baldwin
    needed sophisticated internal systems to keep track of parts, subassemblies,
    and final production schedules.  The
    company substituted detailed cost and internal job flow information for
    management control bureaucracies.  While Baldwin
    did little internal product development, it was very quick in applying advances
    in product design and production technology. 
    But the company never “bet the ranch” on internal development of a
    radically new design of steam locomotives.


    The long-term success of
    Baldwin, under highly uncertain market conditions,
    raises the issue of the limitations of the multidivisional form of
    organization.  Multidivisional
    corporations often do not stay focused on production of key product lines and
    the development of core competencies. 
    Rather, they are prone to the danger of more diversification than they
    can efficiently manage, with the related danger of diseconomies of scale.


    When diesel locomotives
    became less expensive to operate and maintain than steam locomotives,     Baldwin tried to adjust but its technology and skill
    base was too specialized to adopt the new technology.      Baldwin did
    innovate, designing and producing more powerful and efficient steam engines.  But to no avail.      Baldwin was
    doomed, another victim of “creative destruction.”


    COMPANIES SIMILAR TO BALDWIN

    A suggestive line of inquiry might be the similarities between
    Baldwin’s strategies and those of Japanese companies to
    minimize risk and maximize innovation in a highly uncertain and changing
    environment. Large Japanese companies
    followed similar strategies in the early phases of their industry growth. A big difference was that zaibatsu risk was reduced by the actions
    of the Japanese government and related financial institutions.



    Probably the current companies most similar to Baldwin
    are capital goods companies that sell large, complicated systems.  Another suggestive analogy might be the
    similar strategies adopted by organizations such as financial software
    companies that build large, complex systems, such as SAP
    or Oracle.     Any company that relies on
    employees with firm-specific skills and experience, including knowledge of the
    requirements of large customers, face many of the challenges that Baldwin
    did.