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CHAPTER XIII

BUSINESS COMBINATION: ITS CAUSES AND FORMS

THE phenomenon of combination of entrepreneurial units, even to a point little short of complete monopoly, is perhaps the most characteristic feature of modern industrial organization. This movement, which became important about the middle of the last century, has been experienced in all the industrial countries of the world; but it has been most pronounced in the United States, Germany and Belgium and less so in England, France and other European countries. In the United States it is found to exist and to flourish in practically all of our basic industries, and it is now making its appearance in the field of trade, even including retailing. We find it among our railroads, ocean transportation companies, public utilities, the mining, steel, and petroleum industries, construction, manufacture of automobiles, chemicals, powder, tobacco, sugar, electrical equipment, etc., as well as in the meat packing industry, horticulture, lumbering and fishing. In fact, there are but few industries in this country in which the phenomenon of combination is absent or where attempts to introduce it have resulted in failure, as for example, in the manufacture of cotton yarn and textiles, starch, malt, rope and twine and in the production of table salt.

It is this movement toward combination that has induced Congress to enact the Interstate Commerce Act. of 1887, and the Sherman Anti-Trust Act of 1890, and subsequently to strengthen them with supporting legislation. The several states also attacked the movement with

anti-combination, anti-pool and anti-trust laws. But the economic forces back of it have been so strong that most of the great combinations existing in this country today have been formed in the face of these laws, though some of them have been held by the courts to be in violation of the statutes against monopolies, combinations in restraint of trade and conspiracies to raise prices, and were ordered to dissolve.

Causes of Combination and Concentration. To enter into an exhaustive treatise on the forces that make for combination and concentration of the business units in modern industry is somewhat without the purview of this work whose prime purpose it is to describe the present day types of ownership organization. However, without a brief survey of some of the more important causes lying at the bottom of this phenomenon, the picture would be lacking in completeness. We may summarize them as follows: (1) The economy of large-scale production; (2) the advent of periodic maladjustments in the relation of supply to demand; (3) the tendency for competition to force prices below the cost of production; (4) the immobility of economic capital represented by industrial plants, etc.; and (5) the pouring of surplus investable funds into saturated industries through the activities of professional promoters.

A perfect balance between the factors of supply and demand can scarcely ever exist throughout all fields of industry. It has been the world's experience with the present industrial system that the demand for goods will exceed the supply over a period of years that is characterized as a period of rising prices and that, sooner or later, the supply of goods will exceed the demand, ushering in a period of declining prices. Thus, a period of true normal growth of both demand and supply is indeed a rarity. It exists largely as a theoretical concept. The laws of nature

are not subject to human control, and so long as this is the case, it is extremely difficult for man to make the supply of goods balance his needs. He aggravates the forces behind this lack of balance still more by the methods of production and distribution that he has introduced into his economic life.

The modern technico-mechanical method of production is characterized by its large-scale producing units. Minute division of labor, accompanied by highly specialized machinery, has made the modern industrial enterprise one that can produce profitably only by producing in large masses of like units. The cost of production per unit is lowest when a machine is operated at its maximum rated capacity. This, coupled with the fact that each succeeding stage in the process of manufacture is dependent upon its immediately preceding stage, tends to keep the whole system keyed up to a capacity that will approximate the maximum for the units worked. However, the system is insufficiently elastic to permit of contraction of supply in conformity to a slump in demand. Not only is it difficult in many industries to make a uniform cut of ten per cent in the total finished product, but such a cut involves a relative increase in the cost per unit as prices fall because of the overhead charges for invested capital.

This situation is made clear by assuming that a corporation operates three small steel mills, located respectively in Pittsburg, Chicago and Scranton. Each plant is equipped with two blast furnaces which furnish the raw material for further manufacture. The demand for the products of this concern now falls off uniformly to three quarters of the productive capacity of the plants. The company cannot operate a blast furnace at less than its rated capacity without sustaining an enormous loss, and it continues to operate them as before. The same is true of its converters and open-hearth furnaces. The individual production

centers of its plants are not so rated in their capacity as to make two lines of sequence each performing the same processes as the other. One bessemer converter might be sufficient to meet its requirements in that direction, while three open-hearth furnaces complete the steel making equipment. These can just take care of the full product of the two blast furnaces. Such a plant is obviously not a multiple of like units linked together into two or three complete chains of production centers that can produce the finished product independently of each other. It is itself a single producing unit. Consequently the company will continue to operate it at its full capacity, at which point the cost of production is lowest, until the continued oversupply of steel products has brought prices down so low that it will entail less loss to the company to shut down completely. To reduce its output, the corporation must close one of its plants; for under competitive conditions of production, it cannot operate all three at much less than capacity without increasing its cost of production to the point of destroying its market.

While most of our great fundamental industries are thus confronted with this necessity for capacity production, there are others in which the multiple duplication of mechanical devices, as for example in the cotton textile industry, gives a relatively greater degree of elasticity to the rate of production. In others again, such as the shoe manufacturing industry, there is no direct capital investment for machinery, but merely a fixed charge per pair of shoes; hence, here also the overhead charges do not increase greatly with the reduced output.

In considering the demand side of the equation we must bear in mind first of all that the factor of demand itself is influenced by numerous other factors, such as the capacity for consumption in a given community of a given article at a given price, and what influence an over-pro

duction exerts upon the demand. None of these factors is stable, neither does any one progress at a uniform pace. Any large, unanticipated increase in a nation's general supply of goods must reflect itself in the form of relatively lower prices, and tends, thus, to increase the general demand for goods. This, however, does not always mean that those entrepreneurs whose enterprise has been blessed with the unexpected increase in quantity of product will receive a greater profit. A bumper grain harvest, or cotton crop, may so reduce the price of these commodities as to prevent any financial benefit from accruing to the farmers and planters who grew it. It may even mean a direct loss to them since the cost of producing it may have exceeded the price that it will bring on the market. Such, for instance, was the condition of the growers of these crops, in 1920, when quantities far in excess of market requirements were produced.

However, such an excess harvest, because it does result in a general lowering of prices in these goods, tends to cause a general speeding up of industries that use them as raw material. It tends to lower the cost of living, to bring down wages and to widen markets. Railroads must be equipped to handle the crops, mills to grind the wheat into flour, and others to work up the cotton into consumable goods. All take on greater activity. In this way the whole industrial organization tends to increase its productive capacity, while new establishments spring up to share in the increased prosperity.

It is at once clear that a series of large harvests, or an excessive demand for goods arising from war or other causes, raises the productive capacity of industry above the normal requirements and draws new competitors into fields. that under normal conditions might be considered to be already fully equipped to meet normal demands. Capital is constantly being attracted to industries in which a profit

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