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The Evolution of Production & Its Organization

The Evolution of Production & Its Organization Plant Economy Ownership/Control Purpose/End Scope Handicraft (hand tools) Money Proprietor/Partner Production for use Regional

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The Evolution of Production & Its Organization

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  1. The Evolution of Production & Its Organization Plant Economy Ownership/Control Purpose/End Scope Handicraft (hand tools) Money Proprietor/Partner Production for use Regional Factory (machines) Money > Credit P/P Manager > joint stock Production for sale Regional/National Industrial Credit Stockholder -- Absentee Owner Capital gains National/International (Machine Process) Managerial

  2. New Institutions The Interstate Commerce Commission (1887) End to cutthroat competition Legalized Cooperation The end of Utopian Capitalism New Technologies brings more regulation Food and Drug Administration Federal Power Commission Civil Aeronautics Board Securities & Exchange Commission Preservation of Competition Sherman Anti-trust Act (1890) Clayton Act ( 1914) Federal Trade Commission Act (1914)

  3. Cases and Law • Standard Oil Trust (ExxonMobil) • Found to be in violation of Sherman Act (1911) • Rule of Reason (SOT unreasonably restrained trade) • Divestiture into 33 companies • Restricted in region • Led to new forms of organization (joint ventures) • Attempt to reestablish market control of firm/industry • Unites States Steel (USX) (1920) • Found not to be in violation of Sherman Act • Did not unreasonably restrain trade • Technologically efficient/scale and integration • Recognition of Firm Control of Market

  4. The Evolution of Production & Its Organization • Plant Economy Ownership/Control Purpose/End Scope • Handicraft (hand tools) Money Proprietor/Partner Production for use Regional • Factory (machines) Money > Credit P/P Manager > joint stock Production for sale Regional/National • Industrial Credit Stockholder -- Absentee Owner Capital gains National/International (Machine Process) Managerial • Separation of Ownership and Control

  5. Nature of Property -- Evolution of an Institution • Solidification of Separation of Ownership & Control • Solidification of Scientific Management and separation of doing & thinking • End of Market Control of Firms • Old idea Markets create firms • The Invisible Hand • New idea Firms create markets • The Visible Hand • Administered or Managerial Capitalism • Firms are not explained by markets – markets are explained by firms

  6. Practical an Theoretical Implications of Separation of Ownership & Control • Carnegie Steel Works • Innovation & Control of Cost – trained at Pennsylvania Railroad -- Machine Process • Cutthroat Competition • J. P. Morgan Financier – trust builder – Business enterprise • Purchase of Carnegie Steel by Morgan to form US Steel – vertical integration and end of competition –example of 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

  7. Nature of Property Tracing economists from Locke to 1930’s shows they held two conflicting views on the meaning of wealth 1) as a material thing 2) as the ownership of that thing, but no theory of the non-material • 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 – expected profit – actual profit • Accounting for Intangible Property– Goodwill • Goodwill as property – asset • Veblen’s Q • The Institutional Economists

  8. Nature of Property– Continued • Doctrine of Reasonable Value • Supreme Court Decisions • Series of Supreme Court decisions since 1890 create the concept of Reasonable Value • RV turns on definition of intangible property • What is it? Intangible property is “right to fix prices by withholding from others what they need but do not own”. • Intangible property for Veblen ended in exploitation—concept of differential value based on ability to extract something for nothing • For John Commons it ends in Reasonable Value • Intangible Property in the lower courts upheld in Supreme Court • Court cases • State of Indiana - Railroad Property • State of Ohio – all businesses • Model of firm and degrees of separation • Going Concern is a joint expectation of beneficial transactions kept together by working rules and control of the changeable strategic or limiting factors  expected to be controlled by others • When such expectations cease the Going Concern stops as does production

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