Table 1 The Evolution of Production and Its Organization

1. Table 1 The Evolution of Production and Its Organization Production Method Economy Ownership/Control Purpose Scope Production for use Handicraft–hand tools Money Proprietor/Partner Local/Regional P/P Manager > joint stock company Production for sale Regional/National Factory – Machines Money > Credit Industrial – Machine Process National/ International Stockholder–Absentee Owner/ Managerial Credit (Mark I) Capital gains Technological – Electronic Machine Process Credit– Derivatives (Mark II) Stockholder–Absentee Owner/ Managerial Elite Asset Value Manipulation Anational

2. Going Concern Going Concern Going Plant Going “Plant” Real Sector Firms Financial Sector Firms • Transactions • Bargaining • Managerial • Rationing Going Business Going Business Purchase & Sale Finance Machine Process Engineering Purchase & Sale Finance Machine Process Financial Instruments Technical Pecuniary Employments Pecuniary Employments Industrial Employments Pecuniary Employments Financial Efficacy Distributional Management Technological Efficiency Financial Reputation Make Goods Consumers/Serviceability Make Money Producers/Vendibility Invent/Refine Financial Instruments No End Consumer Make Money Producers/ Vendibility 1st degree of separation 2nd degree of separation

3. Transactions • Bargaining • A relation of legal equals • Legal is set by a ruling authority that decides disputes • Results in a transfer of ownership • Managerial • Relation of a legal superior individual or hierarchy of individuals to a legal inferior • May issue commands • Rationing • Relation of a legal collective superior to a legal inferior • Board of directors making up budget • Collective Bargaining • Cartels Seller 1 Seller 2 Employer Employee Buyer 2 Buyer 1 Board of Directors Management

4. “New Institutional Economics”Not so Original • Transactions Cost • Opportunism • Self interest with guile • Example – GM-Fisher bodies • Bargaining Transaction? • Possible only in Managerial or Rationing transactions • Asset Specificity • Flexibility of alternative uses of an asset • Maybe Bargaining or Managerial • What conditions of each

6. New Institutions Continued • Doctrine of Reasonable Value • Supreme Court Decisions • Series of decisions over a period of several years that creates this doctrine • What is it? • Compare to Veblen’s concept of differential value based on ability to extract something for nothing from intangible property • Intangible Property in the Lower Courts Upheld in Supreme Court • Court cases • State of Indiana - Railroad Property • State of Ohio – all businesses • Leads to other problems – institutionalization of intangible property strengthens instability of financial systems offsetting in part some of the gains of previous institutional changes. • Instability

7. Practical and Theoretical Implications of Separation of Ownership & Control • Carnegie Steel Works • Innovation & Control of Cost – trained at Pennsylvania Railroad -- Machine Process • Cutthroat Competition - Steel industry – Andrew Carnegie • J. P. Morgan Financier – trust builder – Business enterprise • Purchase of Carnegie Steel by US Steel – vertical integration and end of competition – control by dominant firm– from competitive market and price clearing, the invisible hand – to managerial hierarchy, the visible hand • Terms of Sale • Replacement cost ( $175 million) • Selling price ($474 million) • Why • Changed nature of property

8. Nature of Property • Tangible – material or physical • Direct Control – via control of process of production • Corporeal – equity • Collateral – ability to produce • The Physical economists • Intangible – immaterial • Indirect Control – via control of finance & reputation • Incorporeal - debt & securitization • Collateral – ability to pay • The institutional economists

9. Business Fluctuations - Theories • Production Cycles • Marx – simple underconsumption • Schumpeter – innovation and increased investment • End of investment opportunities • Lack of creative destruction due to growing firm size and inflexibility • Monetary – Credit Cycles • Keynes -- Both production and Monetary & complex underconsumption • Veblen • Minsky – financial instability hypothesis – will not go into this-- similar to Veblen in some significant ways

10. Keynes – Theory of Employment & Money - and Institutional theory • Fluctuations in economy due to Aggregates – not individuals • Under investment – underconsumption theory of “the trade cycle” • Long term involuntary unemployment • Solution • Government Borrow and Spend • Consequences • Deficit finance – functional finance • Balanced budget becomes part of mythology • Saving is function of income – not interest rate • Changes the concept of necessity to raise interest rate and other incentives to save • Capital (physical) accumulation theory of classical theory obsolete (savings centered theory) • Replaced by knowledge and resource based theory • Resources are a function of knowledge and Become . . . Not “are” • Scarcity is social transcends scarcity as natural

11. Financial and Industrial Instability • Leads to other problems – institutionalization of intangible property strengthens instability of financial systems offsetting in part some of the gains of previous institutional changes. • A look at instability • Q Theory (quotient or ratio)– Keynes & Tobin • If MV > BV then Q > 1, increased investment • If MV < BV then Q < 1, then decreased investment • Veblen’s Q • Ratio of Market value to Book value • If MV > BV then speculation, Q > 1 • If MV < BV then liquidation, Q < 1 • Financial Instability • Stability breeds instability – • Stability leads to comfort and belief that risk is less (example US housing market 1975- 1995) • Expected future income of firm (example , expected 6% average annual increase in US housing prices) • Actual income of firm – realized vs speculative