Democracy and Big Business

Today, with democracy under heavy fire, any book which throws light on present-day difficulties must be welcome. The four books here under review, through their very names, give a clue to the character of our difficulties: “Big Business, Efficiency and Fascism”; Democracy and Finance”; “Life, Liberty, and Property”; and “The Managerial Revolution.” Each raises and attempts to answer some basic questions about modern corporate industry. Is it efficient? Is it trustworthy? Is it acceptable? Is it changing our society? In their focus, these books correctly recognize that big corporate enterprise is at the heart of the problem of totalitarianism versus democracy. But as we will see in studying them, not one of the books really faces the basic problem which must be solved-—the problem of making democracy and the modern corporation compatible.

In “Big Business, Efficiency and Fascism,” Kemper Simpson makes democracy and economic competition well-nigh synonymous. He refers to “the economy of democracy known as the competitive economy,” and recognizes that such an economy no longer exists. The responsibility for its loss he places on the “selfishness of those who have sought to concentrate economic power in their own hands,” and therefore finds a return to democracy in the break-up of big enterprises and the proliferation of medium and small enterprises. By assuming that democracy is dependent on competition between medium and small enterprises, he leaves no basis for discussing the possibility that democracy and big enterprise can be compatible. The extreme measures of dissolution which he would adopt he justifies on the three grounds that medium and small business can be as efficient as big business, that small and new enterprises are essential to the absorption of the unemployed, and that “the greatest danger to democracy lies in the possibility that big business, having sown the seeds of Fascism, may later feel constrained to nourish them with its resources.” The last of these grounds is supported from the experience of Italy and Germany. The second ground stands only as an assertion. The first is the thesis to which the main body of the book is devoted.

The evidence presented to establish the lack of superior efficiency on the part of big business is, for the most part, a summary of material prepared by the author for the Temporary National Economic Committee. Data purporting to show the lack of superior efficiency in the big companies is presented for a dozen major industries—cement, iron and steel, farm machinery, petroleum, sugar, milk, bread, automobiles, chemicals, and rayon. But the evidence is both confused and confusing. It is confusing because data by size of plant and data by size of company are closely interspersed, sometimes even in the same paragraph, and treated very much as if they had the same relevance to the problem of company efficiency. How the relative efficiency of big as against small plants can throw light on the relative efficiency of large multi-plant companies and small companies is not made clear.

The analysis is confused because the primary conclusion reached in the statistical analysis is not relevant to the problem in hand. For industry after industry reasonably conclusive evidence is presented to show that one or a few medium or small companies have had lower costs than the big companies in the industry and this evidence is taken to establish the lack of superior efficiency in big enterprises. A little thought will indicate that no such conclusion is justified.

The big companies almost invariably operate a number of plants, some old and inefficient, others efficient. The combined production of these plants is likely to constitute a significant part of the total output of the industry. The real question at issue is this: If the output of the big companies were actually produced by a considerable number of medium or small companies, could one expect that it would be produced as cheaply as by the big companies ? Because of the large number of small companies that would be required to do the work of a big company, the comparison would have to be not between the big companies and the most efficient small company, but at the very least between the big companies and the average of enough small companies to take their place. Probably the more reasonable comparison would be between the big companies and the average of medium and small companies, since the figures for the big companies really represent an average efficiency for a wide range of activities. During the 1920’s, roughly a third of our automobiles were produced by General Motors, a third by Ford, and a third by a number of small companies. Several of the small companies were more efficient (in terms of earnings) than either of the big companies. Yet the third of the total output produced by the small companies was very much less efficiently produced than either of the thirds produced by the big companies. If the production of either big company had been broken up among a number of small companies, there is no basis for believing that their average efficiency would be either greater or less than the average efficiency of the small companies already producing a third of the total output. Because of the possibility that a big enterprise might be more efficient than the average of a number of smaller companies having the same aggregate production, even though some of the latter are more efficient, a more discriminating study is needed before we can adequately answer the question of the efficiency of big business.

Justice William O. Douglas, dealing with big business under the title of “Democracy and Finance,” takes a fundamentally different view from that of Simpson on the relation of big business to democracy. He recognizes the dangers of big business—the bureaucracy of complex management, the tremendous power and responsibility in the hands of a few, and the human loss in the impersonality of the big corporation. But he does not look to the break-up of big enterprise as the road to the retention of democracy. Rather he looks in large measure to the “democratization of industry and finance” for the solution of current industrial and financial problems. “The voices of the investor and the worker (not to mention the consumer) have been heard with increasing persistence.” “The danger of the concentration of power is that it is not accompanied by the assumption of social responsibility.” The power in some enterprises is so great that “in fact, if not in law, they become affected with a public interest. . . . This does not necessarily mean that they are enemies of the democratic system.” From this point of view the author’s primary aim is to make big business and finance socially responsible, using government to the extent that is necessary in order to achieve this end.

Against irresponsible “high finance” Justice Douglas levels his sharpest attack. Asking if big corporate finance is trustworthy, he answers with an emphatic negative so far as the past is concerned: “Of the many forces which breed insecurity, perhaps the most dangerous are the exploitation and dissipation of capital at the hands of what is known as high finance.” Yet the main burden of his book is not the castigation of corporate finance, but the development of a code of financial ethics suitable to a socially responsible big business plus a suitably staffed government to insure that an appropriate code is adhered to. In the series of public addresses which make up this book, he considers what social responsibility requires in the field of financial activity. Investment banking, stock exchanges, public utilities, corporate reorganizations, protective committees—all come in for their share of shrewd comment as to what a responsible management will do and how a co-operative government (with a stick in the closet) can aid in the maintenance of financial rectitude.

For government, Justice Douglas lays down a major role: “It holds great promise of not being a bureaucratic blight but an energizing and directive influence. It can supply a co-ordination to divergent forces. It can give to states and the nation a cohesive and unifying quality which will defy any foe from within or without.” The great challenge is to man government with men capable of handling the new problems created by big business and its financial accompaniment.

Constructive as it is to build such a new set of ethics and foster them as a member of the Securities Exchange Commission, the author’s answer to the problem posed by big business is essentially that of a lawyer. He would convert big business into a trusteeship. But would that solve the basic problem?

Still another approach to the big corporation is that of Alfred Winslow Jones in “Life, Liberty, and Property.” His is a brilliant pioneer study of the attitudes found in the community towards corporate property, and worthy to be compared with the Lynds’ “Middletown” as an outstanding piece of social research. He chose to focus his study on the modern corporation “because it is at the center of things and because of the various different economic relations to it— with the expectation that if differences in attitudes are to be found anywhere in our culture, they are to be found here.”

The study is centered in Akron, Ohio, and the basic data were gathered in the winter of 1938-39 through interviews with some 1,700 citizens of the town. The interviewers began by relating to the citizen events affecting corporate property on the one hand and the personal fate of a considerable number of individuals on the other, and then the citizen was asked for his attitude to the action of the individuals in the story. Thus the mining of coal from idle mines by unemployed miners would be described and the citizen would be asked what he thought of the miners’ action. Each of the stories was built around a struggle or antagonism in which one side was working to protect the interests of corporate property and the other was defending some personal interest so that each answer reflected the individual’s attitude toward corporate property. On the basis of a series of stories, an individual’s attitude toward corporate property could be given a score, and the main results of the study consist of such scores for various economic groups combined with the supplementary comments induced by the stories.

Fully recognizing that the results of such a study of attitudes can have meaning only in the particular matrix in which the attitudes develop, Mr. Jones gives in the first part of his book a description of the industrial development and social relationships of Akron. Here the conflicts of interests and rights between different economic groups are clearly brought out, In the second part, the attitudes toward these conflicting rights are studied for such diverse groups as farmers, magnates, rubber chemists, girls in offices, teachers, clergy, “little business men,” rubber workers, and W.P.A. workers. The rich diversity of reactions to the series of conflict stories provides as interesting a human document as can be found, but of greater importance are the statistical results, which need to be studied in detail if their full worth is to be determined.

The more general results of the study confirm certain expectations, such as that the business leaders are strong in supporting corporate property rights as against individual rights in such matters as sit-down strikes, bootleg coal, and the foreclosing of farm mortgages, whereas the reverse is the case for industrially organized workers. Most striking was the large number of persons in a middle or “slightly left of center” position with respect to corporate versus human rights and the widespread willingness to have corporate earnings in part diverted away from the stockholders. The final conclusion of the book is so full of importance for the future development of corporate relationships that it deserves to be quoted in full:

What we can finally say must be qualified, since we have studied only one community and at one particular time. It is fairly clear, however, that public opinion would, in its confusion, block a destructive attack upon corporate property, as long as such an attack appeared in any way even vaguely to be a threat to property in general, which occupies a firm position as a value. Public opinion, however, would welcome any change in, or even the abolition of, corporate property rights if it were made obvious that corporate property is a very special form of property in general, and if the changes would make life, liberty, property and the pursuit of happiness demonstrably more secure.

James Burnham in “The Managerial Revolution” goes deeply into the basic political or power characteristics of the modern corporation and the new characteristics of the state which it has engendered. He finds that, under modern developments, managers are displacing the capitalists as the controlling group in our society, much as capitalists displaced the feudal lords at an earlier time. In developing this thesis the author draws a fourfold distinction between individuals directly concerned with corporate enterprise, These include: managers, the production men responsible for actual operations; executives, who are responsible for profit-making; finance-capitalists, who are concerned with financing and financial manipulation; and stockholders. He properly shows that Berle and Means, in pointing out the separation of ownership and control in the modern corporation, did not distinguish between control by managers, executives, or finance-capitalists. With control likely to rest finally in the hands of one or another of these groups, the author expects it to gravitate to the managers because they will exercise the most direct and essential control over the instruments of production. “The managers tend to think of solving social and political problems as they coordinate and organize the actual process of production; the non-managerial executives think of society as a price-governed, profit-making animal; the finance capitalists think of problems in terms of what happens in banks and stock exchanges and security flotations.” It is this expected shift in control from capitalists to managers which would constitute the managerial revolution into which the author believes we are well launched.

There is much basis for thought in this thesis. The possibility that we are in the process of such a shift is very real, but what it would mean in social organization is far from clear. Like most authors setting forth a new and significant thesis, Mr. Burnham shows considerable confusion in detail. Nevertheless, there can be no question that the thesis should be further studied and its implications developed.

Just how far do these books go in throwing light on the really basic problem of democracy and big business? The question of big business efficiency remains to be determined; corporate finance should wash behind its ears; people are willing to apply different standards to corporate property rights and private property rights; the managers may be the ruling clan of the future. But will the future be a democracy? Are the modern corporation and democracy compatible? What does democracy mean in an economy of big businesses? How can such an economy work? What are the conditions which must be met if our resources are to be used effectively? And, above all, how are human values to be strengthened? These are the questions which must be raised if we are to discuss big business, Fascism, and democracy in a serious fashion. And because big business is likely to be with us for a long time to come—the emergency production requirement of defense necessarily strengthens its position— these are the questions which we must answer as protectors of private property and seekers after life, liberty, and the pursuit of happiness.