Business: The American Way

“This is not a punitive investigation,” declared Senator Joseph C. O’Mahoney, chairman of the joint Congressional-Executive Monopoly Investigation, last week. Whereupon the committee began planning its probing of the steel, rubber, cement and milk-marketing industries, and many a Big Businessman felt none too sure of the literalness of Chairman O’Mahoney’s assertion. This week, something of a sedative for nervous executives was administered by the Brookings Institution in Washington, which published the fifth volume of its famed series of studies of the basic economic maladjustments in U. S. industry. The first four volumes* completed the analysis of the troubles, suggested a remedy, and were hailed by Walter Lippmann as “incomparably the most useful economic study made in America during the depression.” Other commentators were less complimentary and the Institution has now elaborated its remedy in 308 highly readable pages.

The first four volumes produced the following thesis: The U. S. normally utilizes only 80% of its productive capacity, largely because only 8% of the populace have annual incomes big enough to permit purchasing more than basic essentials. That these 8% put a large amount of their money into savings instead of buying consumer goods is theoretically of no consequence since the savings are available for investment and consequent increased creation of capital goods. But for the past 20 years the volume of U. S. savings thus available for industrial expansion has exceeded the public’s capacity to purchase goods. This situation can best be remedied, according to the Brookings theory, not by reducing production or by sharing the wealth, but by increasing the public ability to buy. This in turn can best be done, not by taxing the rich and subsidizing the poor, not by Governmental spending, not by raising wages, but by a sustained industrial policy of cutting prices. Price reductions, say the Brookings books, are a basic part of the capitalistic formula—but for one reason or another in the last 20 years have fallen into disrepute and neglect with most capitalists.

In short, the Brookings thesis holds that industrial management has not progressed as fast or as far in its price policies as it has in its technological skill. Cynics claim that this was because Big Business designed its price policies primarily for monopolistic and profit-hogging reasons. The new Brookings book, Industrial Price Policies and Economic Progress, therefore took as its theme the factors that entered into an executive’s choice of certain prices for his company’s products. Lion’s share of the credit for the first four volumes went to the Institution’s president, bald, vigorous Harold G. Moulton. Actually the concept was as much the creation of its Institute of Economics director, tall, distinguished-looking Dr. Edwin Griswold Nourse (rhymes with “course”) and the latest book is published over his name and that of Horace B. Drury. Brother of Novelist Alice Tisdale Hobart (Oil for the Lamps of China), Economist Nourse went to Brookings with Dr. Moulton in 1922 after teaching in a number of colleges. His latest work gives a readable history of general prices, lists numerous reasons why price policies have erred, also lists numerous examples of progress in corporate pricing, concludes with a balanced judgment which reads almost like a Republican benediction.

Facts and Figures— “Mass production demands mass marketing” but as soon as demand slackens, says Dr. Nourse, the industrial executive cuts operations, lays off workers, increases promotion, tries installment selling—anything rather than cut prices. There is obviously a flaw in a system under which industry works only at part capacity, as it generally does. Dr. Nourse believes that if industry always operated at full capacity, the U. S. economic problem would be solved. The industrialist reluctant to cut prices as a means to this end might take a leaf from the farmer’s book. Unable to limit his production so quickly, the farmer lets his output seek its own price level.

A favorite plea, particularly of heavy industries such as steel and cement, that some sort of price stabilization : needed to prevent local monopolies (TIME, July 11). Maybe so, concedes Dr. Nourse but this cannot be justified in the long run for it means conducting industry in the interest of the inefficient and disregarding the advantages of technological progress.

In support of his general thesis, Dr. Nourse quotes facts and figures:

¶ Between 1870 and 1936 prices came down and wages went up so that the amount of goods a wage-earner could buy with his week’s wages was multiplied two and a half times, though working hours were meanwhile cut by one-third.

¶ In 1888. William M. Wood took over the management of certain textile mills belonging to the Ayer interests which had operated on part time for three years at a loss; he put all mills at full capacity, cut prices to the bone, soon made so much money that the company expanded into the vast American Woolen Co.

¶ From 1921 to 1929 total industrial net profits rose sharply, but the price index dropped from 109.2 to 100.

¶ By specializing in toilet tissue, developing its technology steadily, and leading the industry in price-cutting, Scott Paper Co. increased its dollar sales 19-fold between 1910 and 1937.

¶ Price-cutting in reverse—i.e., improving a product without raising the price— is equally to the public’s good. An example is the electric refrigerator industry.

In 1934, a mail-order house began selling a much bigger refrigerator than the old line manufacturers offered at the same price; result has been price reduction all along the line and increased volume which has maintained the profit margin.

Competition Made Easy. There have been two periods of growth of giant corporations—one at the turn of the Century, the second in the 1920s. Dr. Nourse reviews the familiar stories of Standard Oil, the tobacco and glass trusts and the Aluminum Co. of America as proving the equally familiar theme that these great centralizations of business at the turn of the Century aimed chiefly at monopoly and profit-hogging. This, he argues in the major conclusion of his book, is not true of today’s Big Business. Yes, the “giant” corporation of 1929 dominated 40% of U. S. industry, about the same proportion as did the vicious “trusts”‘ of 1904. But of the 200 U. S. corporations with assets of more than $90,000,000 apiece in 1932 only 21 did not have one or more close rivals in their fields. And their policies have been notable for an acceptance of competition.

Where price policies err today, finds Dr. Nourse, they do so largely through executive stupidity, timidity or docile following of old-time shibboleths.* Talk of the competitive system being dead and Big Business needing to be pulverized is uninformed, he says; what is needed is an improvement in industrial price theory. He quotes Capitalists Henry Ford, Alfred P. Sloan, Lammot du Pont, and E. M. Queeny on duty of Big Business to the public and holds that “larger units are demanded by economic as well as technological considerations.” Abuses of such power no longer threaten as they did in 1904 because technological advances have made competition too easy—i.e., Aluminum Co. of America may make all the aluminum in the U. S. but if it charges too much for its products the consumer will use light-weight steel.

Ignoring the fact that the U. S. through one agency or another is now investigating monopolistic practices in aluminum, cement, farm-equipment, radio, telephones and automobile financing, Dr. Nourse declares: “The greatest promise of realizing the economic progress of which our people are capable is through the free action of far-seeing executives . . . ‘the American Way.’ … It is the distinctive achievement of capitalism that it has made available more efficient techniques and equipment to the labor force. It has been its chief shortcoming that it has not fully succeeded in finding ways of administering the pecuniary part of the system so that labor shall be able at all times to apply itself as fully as it wishes to the satisfaction of its wants. But if this more courageous and imaginative type of price-making can be generalized, this limitation upon capitalistic production will disappear. We shall have restored the self-subsisting quality of the simpler economy while still retaining the enormously added efficiencies made available through technological and organizational development. . . .”

*AMERICA’S CAPACITY TO PRODUCE, Edwin G. Nourse & Associates; AMERICA’S CAPACITY TO CONSUME, Maurice Leven, Harold G. Moulton, Clark Warburton; THE FORMATION OF CAPITAL, Harold G. Moulton; INCOME & ECONOMIC PROGRESS, Harold G. Moulton.

*Dr. Nourse is not so naïve, however, as to maintain that all price mistakes can be thus explained. As an example of “the way in which, under modern methods of finance capitalism, the business policies of companies may be warped by forces remote,” he cites the participation of National City Bank and Anaconda Copper Mining Co. in the famed campaign to peg copper prices artificially high in the late 1920s in order to grab extra profits from sale of securities. Inevitable result was chaos in the industry and the price broke from 24¢ a lb. in 1929 to 4.8¢ in 1932.