The influence and power wielded by large corporations in our country has never been more pronounced than it is today. But how did we get here? In a new book published this month (March 27), Woodhouse/Sysco Professor of Economics Richard Adelstein explores the remarkable transformation undergone by business in the U.S. over the half-century following the Civil War—from small sole proprietorships and partnerships to massive corporations possessing many of the same constitutional rights as living men and women. Approaching this story through historical, philosophical, legal and economic lenses, Adelstein presents an original, three-pronged theory of the rise of business firms.
In The Rise of Planning in Industrial America, 1865-1914 (Routledge), Adelstein traces the big business boom to three historic developments: a major managerial achievement within the firms themselves; an ill-conceived and ill-timed attempt by legislators to rein in rapidly expanding firms; and the Supreme Court’s understated—but immensely consequential—decision granting constitutional rights to corporations separate from those of their owners.
The first of the three developments refers to the unprecedented emergence following the Civil War of industrial giants demonstrating successful, consensual central planning at a large scale. For the first time in history, thousands of men and women were organized to work toward large-scale production for the common goal of profit maximization. Previously, only military generals and a few slave masters had succeeded in purposefully coordinating the efforts and interactions of hundreds or thousands of individuals toward a single purpose.
In the 1880s, as the efficiencies brought by large-scale production drove down prices, firms in dozens of industries organized in trade associations, cartels and trusts to keep prices up, output down and marketing territories protected. An anti-monopoly campaign was initiated, but by the time the federal Sherman Act was enacted in 1890, many of the trusts and cartels had already collapsed under their own weight, releasing their small member firms back into the competitive sea. Some of these firms continued to grow much larger by acquiring suppliers and distributors to ensure a steady flow of materials in and product out of their enormous facilities. Consequently, the Sherman Act was of little use in a fight against bigness, which Adelstein argues was the more important problem posed by the great firms, and which only began to become clear to Americans after 1890.
“The Sherman Act was an anti-monopoly law when monopoly was not the problem actually posed by big business,” says Adelstein, describing the second prong of his theory. “It was also ill-timed, in that the real problem—the effects on economic and political culture of transforming very large numbers of Americans from independent artisans and merchants to workers, clerks and managers in large corporations–began to become clear only after the depression of 1893 and the wave of mergers and incorporation it encouraged. By this time, the Sherman Act had set the terms of the political and judicial debate.”
Adelstein acknowledges that “bigness” is not necessarily all bad.
“It enables huge increases in material wealth for ordinary people by continuously making more and more goods available to them at prices they can afford,” he says. “But this bounty comes at a price we can still see today. It means that large numbers of people who once would have had at least some chance to organize and operate a small business now spend their entire working lives in tight hierarchies that limit their initiative and responsibility, and reward attitudes consistent with maximizing corporate profits. Many Americans at the turn of the 20th century feared this would rob the population of its moral and political backbone.”
Adelstein adds, “Bigness means the radical centralization of authority in organizations, and this movement of power from periphery to center seemed to many to be the antithesis of the American experiment in liberty and self-government. Supreme Court Justice Louis Brandeis foresaw that this would produce habits of submission and passivity that would infect political life and coarsen it by replacing responsible dialogue with political theater that separated the people from their government. He believed bigness would turn the active citizens Jefferson hoped for into passive spectators of their own government.”
The third prong of Adelstein’s theory of the rise of business firms addresses corporations’ legal rights, and a game-changing decision made by the Supreme Court. Throughout the second half of the 19th century, the legal identity of corporations continually shifted, with a battle playing out between those who wanted legislatures to strictly regulate the formation and powers of corporations, and the opposing “free incorporationists.” Then, in 1886, the Supreme Court casually declared that corporations were entitled to Fourteenth Amendment rights to due process and equal protection. This meant that government could no longer freely regulate corporations on the ground that they were artifices created by legislatures, but would have to show them and their property the same constitutional respect due to living men and women. This new legal status added still more force to the already considerable political and cultural presence of corporations, cementing their place of power in American society. It was also, as Adelstein puts it, “wrong on the day it was decided, without legal or philosophical justification.”
He argues in the book that the case was decided under a transparently erroneous legal theory by an activist Supreme Court strongly influenced by Justice Stephen Field, who was deeply sympathetic to bigness in general and corporate interests in particular.
“The flaw in the decision is Field’s claim that if corporations are denied constitutional rights, their owners will lose rights with respect to corporate property. This is incorrect, since if a state were to take a corporation’s property unconstitutionally, it would be unconstitutionally taking the property of the corporation’s owners, who could then sue the state to vindicate their rights. Field could not have been ignorant of this,” Adelstein contends. “He apparently did what he needed to get the Court to agree with him.”
Adelstein says much of the power of modern corporations “stems from this single, terrible decision” and the consequences are clearly reflected in today’s controversy over the 2010 Citizens United decision.