Martin J. Sklar's Corporate Reconstruction of American Capitalism 1890-1916

Martin J. Sklar. The Corporate Reconstruction of American Capitalism: 1890-1916: The Market, the Law and Politics. Cambridge: Cambridge University Press. 1988. 484 pages.

One of the joys of being an academic is that I can read great books, and Martin J. Sklar's Corporate Reconstruction is one of them. Sklar targets academics as his primary audience. The book is brilliant, thorough, deep and penetrating. I would argue that all business Ph.D. students should be required to read this book. It explains the American business system in a way that is much more accurate, convincing, and forthright than almost any other.

Sklar begins by reviewing the intellectual foundations of Progressivism, then moves into a detailed analysis of anti-trust law and the two key Supreme Court interpretations of the Sherman Anti-trust Act that led to the Standard Oil and American Tobacco Decisions in 1911. Sklar shows how the courts' interpretation of the Sherman Act as applying to all combinations rather than just unreasonable ones led to increasing demand for a Progressive political transformation. The Standard Oil and American Tobacco decisions led to a Progressive consensus. In President Taft's interpretation, aggressive enforcement of the Sherman Act was sufficient to eliminate unreasonable or unfair restraints of trade. In Wilson's interpretation, a degree of regulation as reflected in the Clayton and Federal Trade Commission Acts were integrated with judicial enforcement. Sklar goes into various political and regulatory reform movements that were associated with Progressivism and that led to passage in 1914 of the Clayton and Federal Trade Commission Acts. He finishes this carefully written, detailed book with a discussion of the leading politicians of the era, Roosevelt, Taft and Wilson.

Sklar argues (p. 20) that the Progressive era resulted from a conflict between the proprietary-competitive stage and the corporate-administered stage of market capitalism. A key part of Sklar's argument is that (p. 22) corporate capitalism could integrate interests of small business, the working class and professions. Perhaps he overstates the importance of corporate capitalism, for the professionalization of medicine, for example, was proceeding in tandem with other aspects of Progressivism and it may not have been affected either way by corporate capitalism. Nancy Cohen argues that the Mugwumps were already establishing professional interests in the late 19th century and this likely was independent of corporate capitalism.

Sklar argues (p.22):

"In its very centralizing and standardizing characteristics, corporate capitalism was inclusive of social diversity in a way that proprietary capitalism-competitive capitalism could not be. Its partisans, accordingly, called corporate capitalism progressive."

Thus, in Sklar's view, (p. 30) capitalists had made a transition from debtor to investor and there was a "consensus" in favor of a regulated market and central banking.

The antitrust debates and the antitrust law (p. 33) were critical to the debate about progressivism because many argued that all corporations ought to be illegal under the Sherman Anti-trust Act. Corporations did not assume their final modern form until circa 1890, and the debate about Progressivism was intimately connected to the 25-year-long debate (1889-1914) about the degree to which corporations should be permitted to exist and the degree to which they should be regulated. Sklar argues that the debate was ultimately decided in favor of the idea that society should have "supremacy over the state", but this question was up in the air. There were serious quesions (p. 34) whether anything besides small producer capitalism was compatible with American society and whether big business ought to be permitted. Corporate capitalism favored administered markets and regulation but rejected socialism. I would add that I have yet to find any evidence in the historical literature that a laissez faire corporate capitalism could not have succeeded. There is certainly plenty of evidence that contemporary businessmen disliked laissez faire which leads me to question how the advocates of statism managed to depict laissez faire as a business ideology. It was in fact a profoundly anti-business ideology but one which left more savings in the hands of the average American.

It is certain that big business executives and their friends in the Republican Party disliked the idea of laissez faire because it meant lower profits and fewer advantages and supports to big business. Sklar (p. 35) argues that corporate capitalism was a "cross class" ideology. This may be true in terms of the public debate, which like any deliberation is based on imperfect information. However, the results of corporate capitalism as opposed to laissez faire was in the interest of corporate managers. Sklar argues that because labor unions supported corporate capitalism, corporate capitalism must have served the interests of labor (as opposed to union leadership) as well. Professor Sklar does note (in a footnote on p. 44) that savings rates were much higher in the 1880s and 1890s, the era of supposed unemployment, overproduction and vicious competition, then they were in the "Progressive" era.

The three major schools of thought concerning corporate capitalism reflected the ideas of the three Progressive presidents, Roosevelt, Taft and Wilson. Roosevelt's was the most statist; Wilson's was a "center left" approach and Taft's was a "minimalist-regulatory corporate liberalism on the center right" that sounds most like today's Republicans. Sklar doesn't trace the relationship between Taft and later conservative movements in America, but it seems to me that Barry Goldwater's laissez faire ideology had to represent a minority current in the Republican Party for the 58 years between 1908 and 1964.

Theodore Roosevelt (p. 38) would view the entire large corporate sector of the economy as monopolistic and would have subjected all of big business to direct, socialistic state control. Today's Republican advocates who speak of "Republican principles" and "traditions" would do well to study the history of their own party. The most socialist president in American history was a Republican, although much of Theodore Roosevelt's socialism came when he ran as the Bull Moose candidate. Wilson was less statist than Roosevelt because he and his followers "distinguished more finely between positive government and statism."

Between the 1880s 1904 (p. 46) "there were roughly 300 industrial combinations with an aggregate capitalization" and about three fourths with a capitalization of about $6 billion occurred in 1898-1904.

Sklar points out that the corporate view of the period "conceived" that (p. 55) "overproduction" was "chronic tendency inherent in modern industrial capitalist development. Concentration...was the inevitable concomitant of modern industrial methods..."

Economic necessity required either alliances, contracts to restrict price, corporate mergers and consolidations. Thus, firms felt impelled to merge, but the Sherman Anti-Trust Act posed a problem.

In the Progressive era, the leading advocates of the overproduction thesis that justified mergers included Arthur Twining Hadley, Jeremiah Whipple Jenks and Charles Arthur Conant. These Progressive writers had a theory of business strategy that emphasized the importance of economies of scale and fixed investment, a situation that the Progressive era assumed would carry forward indefinitely (p. 58):

"Large fixed investment put a premium on economies of scale, and, as Andrew Carnegie explained in what came to be known as 'Carnegie's law of surplus,' every manufacturer preferred to lose one dollar by running full and holding markets through selling at lower prices than to lose two dollars by running less than full or close down and incur the risk of losing markets, defaulting on interest payments and falling into bankruptcy. Four years before Carnegie made this piont in print, Hadley had already noted...that the idea of competition in which prices tended to be proportional to the cost of production approximated reality in Ricardo's time but not in an era of growing fixed investment. 'It very often involves worse loss to stop producing than to produce below cost.'"

Like David Ames Wells, Hadley believed that large fixed investment changed the relationship between marginal costs and marginal revenues for profit maximizing firms. He believed the long term equation of marginal costs and revenues to have been eliminated by fixed investment. From the standpoint of today's microeconomics, this is a peculiar argument, and it suggests a reason for Progressivism's fixation on statism. The equilibration of marginal costs and benefits is a condition for rational behavior. The Progressives thus believed that firms behaved irrationally. The existence of fixed costs does not alter the rationality of the equation of long term costs and benefits. For firms to behave otherwise would suggest an inability to develop coherent business strategy. Firms will continue producing until the present value of expected margainal costs of production equal expected the present value of expected marginal revenues. If fixed cost investment causes irrational, sub-optimizing behavior in some firms, more rational firms would leave the market, leaving it to the sub-optimizing firms. In turn, supply would be reduced. Although such adjustment would take time and be painful to owners, it would certainly occur. Moreover, the Progressive model diametrically opposes basic thinking about business strategy. Progressives like Hadley argued that firms were incapable of strategic thinking and were unable to change direction. The idea that a firm would continue producing ad infinitum because it is cheaper to produce than to close shop, an argument found in David Ames Wells's work as well as Hadley's, ignores valuation based on future earnngs. Firms are valued not only on the basis of cash flow and current earnings but on the present value of future earnings. Publicly traded firms that are willing to take losses ad infinitum will have share prices that reflect infinite losses and will therefore be valued at close to zero. Short term gains due to closing may be less than short closing costs, but short term closing costs cannot be greater than ad inifinitum production losses. Although cash flow might be hurt by closing, the argument that existence of fixed costs repeals the principle that firms will produce to the point where their expected costs of production just equal the expected revenues because is false.

In his section on the anti-trust law Sklar emphasizes that the British American common law (p. 93)prohibited restraints of trade. Under the case of Horner v. Graves price fixing and contracts to restrain trade were totally legal unless (p. 95) "they directly and unduly or unreasonably restrained competition and were therefore detrimental to the public interest." Contracts "restraining trade completely" were against public policy. Thus, (p. 100) "Invalid restraints of trade at common law were those contracts, agreements or combinations that were unreasonable and therefore void..." Unreasonable restraints of trade attempted to control an entire industry, restrict entry by new businesses. Reasonable restraints of trade were consistent with freedom of contract and property. "The common law, then, was not intended to protect weaker or inefficient competitors from stronger or more efficient competitors nor even to compel competition" (p. 104)

When the Sherman Act was passed, the courts first interpreted it merely as a restatement of the common law that added treble damages and made unreasonable restraints of trade federal crimes (p. 105). Sklar goes into the Sherman Act's legislative history and shows that Sherman's original draft did not satisfy a common law interpretation, although that was Sherman's intent, and more expert Senators such as James Z. George and John T. Morgan redrafted the bill to ensure its common law implication (p. 115). Between 1890 and 1897 the federal courts interpreted the Sherman Act consistent with the reasonable/unreasonable distinction.

In 1897, led by Justice Harlan, the Supreme Court reversed itself (p. 127) in the case United States v. Trans-Missouri Freight Association. In Trans Missouri the Supreme Court held that all combinations, reasonable and unreasonable, hence potentially all corporations, were illegal restraints of trade. The Supreme Court reached a similar decision in United States v. Joint Traffic Association and Addyston Pipe, in which Judge William Howard Taft ruled that reasonable and unreasonable restraints of trade must be declared illegal even though that interpretation disagreed with his analysis of the common law. The aggressive interpretation of the Sherman Anti-trust Act lasted from 1897 to 1911.

In 1911 the Supreme Court returned to the common law interpretation because of judicial and public criticism (p. 146). The Standard Oil and American Tobacco cases involved the break ups of those two firms, but the Supreme Courts did so in such a way to say that the corporate economy was safe, in other words that it was returning to the common law interpretation of the Sherman Act as illegalizing unreasonable but not reasonable restraints of trade. The United States had been unique in the world in prohibiting all restraints of trade (p. 154) so the return to the unreasonable standard was a return to the global norm.

I think this material sheds a lot of light on William Howard Taft's labor law decisions when he became Chief Justice after losing to Wilson. The labor history has tended to overlook the importance of anti-trust law to Taft's career, and his anti-union interpretation of the Sherman Act during his nine years on the Supreme Court, which led to the Norris La Guardia Act in 1932, needs to be viewed in light of his broader anti-trust ideas.

The two interpretations of the Sherman Anti-trust Act respectively reflected the interests of rural, single proprietor firms versus large corporations. It was not realistic to attempt to impede the growth of large corporations in this way.

In his section on the politics of antitrust law Sklar traces the history of the Bureau of Corporations, which Congress created in February 1903. The commission originally advocated publicity about corporate affairs and federal licensing of corporations (p. 185). The supporters of the Bureau of Corporations included George W. Perkins of JP Morgan. Sklar traces considerable detail about legislative proposals of Jeremiah Jenks and Herbert Knox Smith. Herbert Knox Smith didn't agree with Roosevelt's extreme statism. Roosevelt favored federal incorporation or licensing of corporations and Knox worked on this to please Roosevelt, but he disagreed (p. 201). He also traces in considerable detail the reform efforts of the National Civic Federation led by Mugwump and Progressive Seth Low.

The case of Loewe v. Lawlor also known as the Danbury Hatters' case, had important implications. As Theodore Roosevelt was cajoling (p. 230) Seth Low on behalf of the Civic Federation to propose a generalization of the Hepburn Act that would have radically increased federal authority over corporations. (The Hepburn Act applied centralized economic planning principles, rate setting and the like to railroads.) Under a proposed bill that was kicked around, all corporations engaged in interstate commerce could register with the federal government. All combinations and contracts of the corporation would be filed with the federal government. If a corporation chose to file it would not be proscecuted for past Sherman Act violations. The bill provided for favorable treatment of labor unions. This was Roosevelt's bill, but Roosevelt refrained from aggressively supporting it because it was so radical. Sklar notes (p. 245) that had it passed it would have done a few things: (1) it legalized large corporations; (2) it subjected them to federal regulation; and (3) it established administrtive executive supervision rather than judicial review. The Bureau of Corporations would have become a central planning agency and American big business would have been state directed. The bill would have mandated a degree of direct government control (p. 248) over big business that the business executives did not expect. The bill did not catch on and died.

Herbert Knox Smith, who was an official of the Bureau of Corporations, although a Roosevelt follower, did not agree with the bill. He was (p. 300) troubled by the "centralizing tendency and implications of a government-directed economy. He was no less concerned, at the same time, with the economically and socially deleterious effects of concentrated market power represented by big corporations." Smith favored a publicity function of the Bureau of Corporations and that this could be accomplished by requiring registration of corporations with the federal government without too much additional regulation (p. 305): "Most important, in Smith's mind, the registration system he favored would avoid the state direction of market transactions implied in (other) proposals." Senator Newlands introduced an interstate trade commission bill in July 1911 (p. 310) which was a "tough license-registration measure." However, the bill stalled because of labor issues and Smith convinced Newlands to moderate the bill. Smith argued that a system of regulation would be smoother than a system of court enforcement.

Sklar traces through the evolution of the Federal Trade Commission and Clayton Acts of 1914, the rather minimal regulatory outcomes of the debates about whether to regulate corporations. Although Progressivism was mostly Republican, it reached its climax with Woodrow Wilson, who pushed for the Federal Reserve, which had been a Mugwump idea. It is important to understand that the Federal Reserve adopted in 1913 was very different from today because there was a gold standard and so the central bank's power to create money was limited. However, it was the first of three steps that led to unlimited money creation power.

In the final sections of the book, Sklar gives a really fine review of the ideas of Roosevelt, Taft and Wilson.

Overall, I found Martin J. Sklar's book to be energizing and informing. It took me a long time to read, but it was worth it.