| Daniel A. Wren David Ross Boyd Division of Management University of Oklahoma 307 West Brooks, room 206A Norman, OK 73019-4006 |
Through his alter ego, Andrew Carnegie expresses his view of David Korten's When Corporations Rule the World. From observation and other evidence that large corporations are unable to hold their dominant positions over the long term, Carnegie concludes that corporations rarely govern themselves well and there is no danger of their world domination. The size of a corporation is no guarantee of its long term success as long as competitive forces are in play. It is concluded that Korten has overreacted and not examined historical examples of growth with progress and how other gloomy predictions have not been realized.
I was born in Dunfermline, Scotland, November 25, 1835. Dunfermline, about 15 miles northwest of Edinburgh across the Firth of Forth, was considered the "most radical town in the [United Kingdom]." Robert the Bruce is buried there and William Wallace and Robert Burns were heroes to the citizens of Dunfermline. As a youth, "I developed into a violent young Republican whose motto was `death to privilege.´ At that time I did not know what privilege meant, but my Father did." (Carnegie, 1920, p. 12) We wanted independence for Scotland, opposed the established Church of England, and were against the privileged aristocracy. As a youth I was told in school that England was larger than Scotland so its rule was justified. I was most disappointed. But my uncle reassured me that "if Scotland were rolled out flat as England, Scotland would be larger, but [he asked] would you have the Highlands rolled down?" After that I felt much better about my native country.
My Father, William Carnegie, was a master weaver, employing four apprentices at hand looms. Dunfermline wove the finest linen in those days but times were changing -- cotton cloth was becoming cheaper and more abundant, the Jacquard loom could weave more intricate designs and faster than hand loom weavers, and steam powered looms came to replace the hand weavers. It was intended that I follow my Father's craft but the advances in cloth weaving destroyed that. My Father's craft was gone and "after this I began to learn what poverty meant."
My Mother, Margaret Morrison Carnegie, was the daughter of a shoe cobbler and her knowledge of that trade helped the family income. But we had to leave Scotland because the opportunities were so poor there. My Mother had two sisters who had emigrated to the United States and we followed in 1848, when I was 13 years old.
We settled near Pittsburgh where we had family and friends. My Father wove table cloths, sold them door to door, but would never be able to provide for the family again. My Mother took in shoes for binding and made four dollars a week. I worshipped my Mother because she provided for our growing up and kept the family together. Later, I would recall how "the children of honest poverty have the most precious of all advantages over those of wealth" in a loving family.
I found a job as a bobbin boy in a textile mill, making $1.20 a week, and proud that my wages added to the family table. The shop owner, Mr. Hay, learned that I could write and cipher and asked me to keep his accounts. I did not know bookkeeping, but walked to Pittsburgh after each 12 hour work day to learn. Then I took a job as a telegraph messenger and learned the trade of telegraphy in my spare time.
My greatest pleasure as a youth came when Colonel James Anderson of Pittsburgh announced that his 400 volume library would be open to any young man who could take them out for one week. "In this way the windows were opened in the walls of my dungeon through which the light of knowledge streamed in." I read Maccaulay's essays, Bancroft's history of the United States, Lamb's essays, and Shakespeare. Later, "when fortune smiled upon me," I erected a monument to Colonel Anderson that now stands in front of the Allegheny (Pennsylvania) public library. It was as a youth:
that I decided there was no use to which money could be applied so productive of good to boys and girls who have good within them and ability and ambition to develop it, as the founding of a public library in a community which is willing to support it as a municipal institution. I am sure that the future of those libraries I have been privileged to found will prove the correctness of this opinion. For if one boy in each library district, by having access to one of these libraries, is half as much benefitted as I was by having access to Colonel Anderson's four hundred well-worn volumes, I shall consider they have not been established in vain. (Carnegie, 1920, p. 47)
Another influential individual on my life was Tom Scott. When I first met Mr. Scott, he was Superintendent of the Western Division of the Pennsylvania Railroad. I delivered telegraph messages to Mr. Scott and he decided to hire me as his personal telegrapher and clerk. My pay was now $35 a month and I was employed where I could see the importance of the railroad and the telegraph to economic life. I was 17 years old but knew that my future was in the opportunities that Mr. Scott had presented.
I will be brief -- my railroad career was successful. By 24 I was promoted to Mr. Scott's job as Superintendent of the Western Division and by age 30 I was offered the position of General Superintendent of the Pennsylvania Railroad. I declined because my horizon extended beyond the railroad and the opportunities I had seen in the iron industry. That, too, was because of Mr. Scott.
Tom Scott also introduced me to the fine art of investing. He advised me to buy shares in the Adams Express Company but lacking funds, I asked my Mother for a loan. She mortgaged the home and I invested $500; but soon Adams Express was prospering and the dividends amounted to $1,400 per year. I then invested in the Woodruff Palace Car Company (later to be merged with George Pullman's sleeping car company); bought shares in Andrew Kloman's iron foundry; shares in telegraph and oil companies; and in the Keystone Bridge Company. By age 28, my total income was $48,000 a year, including my $2,800 salary from the Pennsylvania Railroad.
When I left the Pennsylvania Railroad in 1865 iron was selling at $135 a ton and the industry was characterized by labor intensive small-batch production. Some firms owned the furnaces that smelted the ore into pig iron; others had the rolling mills and forges that converted the pig iron into bars or slabs; and still others took the bars or slabs and rolled them into rails, sheets, nails, wire, or whatever. Between each of these independent operations, an intermediary took the output of one and sold it to the next producer, also taking a profit for providing this service.
Britain was the world's leader in the iron industry when I began: in 1870, for example, Britain produced 5,693,000 tons, the U.S. 1,865,000. The British also made better steel and U.S. railroads preferred to buy their rails abroad. When the British did make a poor quality batch, they would call it "American iron" and sell it cheaply. I traveled frequently to the United Kingdom and often took U.S. railway securities to sell in the British and European markets. These trips led to a friendship with the successful London investment banker, Junius Morgan, whose son was gaining prominence in U.S. financial circles and who would play an important role in my later years in the business.
On one of my trips I saw a demonstration of Sir Henry Bessemer's process for making steel that involved blasting air through the molten iron, resulting in a spectacular shower of sparks and removing more impurities to make the steel harder than earlier iron-making processes. After that, I had a vision of how this improved technology could be used. In 1872, I stopped my stock speculations, sold my Pullman interests, and concentrated on steel because: "Every dollar of capital or credit, every business thought, should be concentrated upon the one business upon which a man has embarked. He should never scatter his shot. . .Put all your eggs in one basket, and then watch that basket, is the true doctrine -- the most valuable rule of all." (Carnegie, 1902, p. 100)
You are probably aware of how my career in the steel business was also successful. Others have told how from those beginnings Carnegie Steel became the world's dominant steel producer. You ask, however, for my views of the corporation and of its governance. Perhaps it was my independent Scot's attitude that led me to the "cardinal doctrine that I could manage my own capital better than any other person, much better than any board of directors." (Carnegie, 1920, p. 177)
I share this with a fellow Scotsman, Adam Smith, who had little confidence in a company managed by people who had no personal stake in it. As he pointed out:
The trade of a joint stock company is always managed by a court of directors. . .But the greater part of those proprietors seldom pretend to understand anything of the business of the company; and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half yearly or yearly dividend, as the directors think proper to make to them. This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery. (Smith, 1937, p. 741)
With a lesser chance of loss, what incentive is there for these shareholders to look after their property? If it does not go well, they sell, and see only short term consequences as the motive for their actions. As Smith has said, joint stock companies suffer a disadvantage compared to individual enterprise:
The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account that joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. (Smith, 1937, p. 741)
My view of corporate governance has followed Smith's advice -- but later I will ask you to consider some complicating factors in this matter.
From the beginning I adopted the policy of growth by plowing back my profits rather than increasing capitalization by selling stock in the open market. We did issue bonds, but not equity, as I wished "no outsiders" in the business. Ownership was limited to those who were actively engaged in the management who would see their interests as those of the enterprise. The corporate form of ownership would not do this since it is seldom that shareholders have the interests of the firm as their own. The ownership principle we followed was the limited partnership where:
the undoubted advantages of individual over corporate manage-ment could be secured without danger of ruin to the members, whose liability is limited to the amount of the capital stock of the partnership. In the great corpora-tion the shares are generally bought and sold upon the stock exchange, and the real owners are unknown. All depends upon salaried officials, who may or may not have a dollar in the enterprise. In the limited partnership, on the contrary, only shareholders can be members; the shares are not sold to outsiders, and thus is insured the eye of the master over all. (Carnegie, 1901, p. 87)
We originally had 5 partners and, over a period of years, there were 40 partners in Carnegie Steel. As I have said, "Mr. [J.P.] Morgan buys his partners. I grow my own." I do this by creating
. . .owners from among exceptional but [financially] poor employ-ees, from whom no capital is required, the partnership agreeing to permit the profits to pay for the interest given. By this plan it is possible to provide for the rise of the poor but able employee, thus neutralizing, to some extent, the acknowledged difficulty of men rising to ownership in our day, because of the enormous amount of capital required for successful operations under present, and probably enduring, conditions. The day of small concerns within the means of many able men seems to be over, never to return. The rise to partnership in vast concerns must come chiefly through such means as these permitted by the laws of limited partnership. (Carnegie, 1901, p. 88)
As I wrote Mr. Frick (1896) "I am perfectly willing to give from my interest for the purpose [of giving a percentage of ownership]. . .It is a good plan to have all your heads of departments interested, and I should like to vote for the admission of Mr. Corey. . .Mr. Kerr. . .Mr. Brown. . .[and] Mr. Miller. . .We cannot have too many of the right sort interested in profits." (Wall, 1970, p. 665) As part owners these individuals will share our concern for the success of the company. The partnership plan worked -- Carnegie Steel became the world's largest, most efficient, and most profitable steel company. Alone, we could produce over 50 percent more steel than the annual steel production of Great Britain.
Although we were successful with this system of governance, it had some problems that arose in the 1890s. I share these experiences with you in the hope that you can learn from them. Partnerships depend on trust and that coin can be counterfeited. The incident to illustrate this was a low mark in my career and in the history of labor - management relations. You may be familiar with the circumstances surrounding an 1892 strike at our Homestead Mill. I was in Scotland when the contract expired and thought my partners understood my position -- the steel market was in oversupply and we had a stockpile but I favored negotiations, but if an agreement could not be reached, we would engage in a lock-out.
Henry Clay Frick, chief among our partners, had a long standing grudge against me as being soft on labor. I had forced Frick to settle a strike at the Connellsville coke works and he never forgave me. When I heard of the strike, I wired my partners, offering to return, but by return wire I was told that my presence was not needed. One of our partners, Henry Phipps, told the New York Herald that I was told to stay in Scotland because they "knew of [my] extreme disposition to always grant the demands of labor, however unreasonable. . .all of the partners rejoiced that they were permitted to manage the affair their own way." (Carnegie, 1920, p. 228)
In the course of events, the workers seized the mill, took over the city of Homestead, and appointed a workers' committee to stop anyone from entering the town or the mill. Frick's reaction was to hire 300 men from the Pinkerton detective agency to assail the mill fences and to reclaim the mill. The Pinkertons floated down the Monogahela River in barges by night, hoping to catch the workers napping -- but the workers were waiting and what followed would have been comical if the outcome had not been tragic:
The battle lasted all day as the strikers kept the Pinkertons pinned down on the barges and tried to kill every last one of them. That they [the strikers] failed testified only to their lack of skill, not to any lack of desire. They charged the town's courthouse cannon with dynamite; it blew up. They poured oil on the river and set fire to it; the wind blew it the wrong way. They threw a lighted stick of dynamite onto a barge; it rolled into a bucket of water. They loaded a flatcar with blazing combustibles and pushed it down the track toward the barges; it derailed. (Livesey, 1975, p. 141)
One Pinkerton was killed, eleven were injured, and they surrendered late in the afternoon. They were promised safe conduct out of town by the union leaders but the emotions of the workers and citizens could not be controlled and mob psychology took over. The Pinkertons ran a gauntlet of sticks and stones; three more died and the remainder were injured in some way.
Although I cannot be certain, I feel my presence would have made a difference -- I know I would not have called for the Pinkertons. The name over the gate was "Carnegie Steel" and it was my responsibility, even though the actions were my partners. The corporate form of governance would not necessarily have been better, but perhaps it would have been cumbersome enough in its decision making so as not to provoke a hasty reaction. For my feelings, "no pangs remain of any wound received in my business career save that of Homestead. It was so unnecessary." (Carnegie, 1920, p. 232)
The second factor I would mention is that partnerships have limited growth potential when size becomes essential to success. Carnegie Steel was large but by 1899 we had reached a point where the partnership could not longer provide the capital needed to stay competitive. My partners wanted the profits to be their income; I wanted to retain the surplus for growth.
I had financed the archeological digging that led to the discovery of a giant herbivorous dinosaur, the largest ever discovered at that time. The dinosaur remains were named Diplodocus Carnegei in recognition of my sponsorship of that research. My partners took great delight in this, believing that I was the dinosaur who was clinging to the past ways of financing growth.
In the latter part of the nineteenth century we saw greater and greater aggregations of capital. I see the logic of this larger scale of operations as leading to a lower cost of products:
Now, the cheapening of all these good things, whether it be in the metals, in textiles, or in food, or especially in books and prints, is rendered possible only through the operation of the law, which may be stated thus: cheapness is in proportion to the scale of produc-tion. To make ten tons of steel a day would cost many times as much per ton as to make one hundred tons; to make one hundred tons would cost double as much per ton as a thousand; and to make one thousand tons per day would cost greatly more than to make ten thousand tons. Thus, the larger the scale of operation the cheaper the product. (Carnegie, 1901, p. 90)
This is true in large department stores rather than small shops and in large cargo ships rather than smaller ones. When I began work for the Pennsylvania Railroad, we carried 7 or 8 tons per car; now it is 50 tons, all carried more cheaply than before. I feel that this tendency toward size should be encouraged:
we should hail every increase as something gained, not for the few rich, but for the millions of poor, seeing that the law is salutary, working for good and not for evil. Every enlargement is an improvement, step by step, upon what has preceded. It makes for higher civilization, for the enrichment of human life, not for one, but for all classes of men. It tends to bring to the laborer's cottage the luxuries hitherto enjoyed only by the rich, to remove from the most squalid homes much of their squalor, and to foster the growth of human happiness relatively more in the workman's home than in the millionaire's palace. It does not tend to make the rich poorer, but it does tend to make the poor richer in the possession of better things, and greatly lessens the wide and deplorable gulf between the rich and the poor. (Carnegie, 1901, pp. 91-92)
These large accumulations of capital have had their critics. Two early critics were Charles Francis Adams Jr. and Henry Adams who assaulted the power of the Erie Railroad that held "swaying power such as has never in the world's history been trusted in the hands of mere private citizens." (Adams and Adams, 1871, p. 134) But, I ask you, where is the Erie Railroad today?
When Carnegie Steel became part of United States Steel, Ray Stannard Baker lamented in 1901 the power of that corporation: "It receives and expends more money every year than any but the very greatest of the world's national governments; its debt is larger than that of many of the lesser nations of Europe; it absolutely controls the destinies of a population nearly as large as that of Maryland or Nebraska, and indirectly influences twice that number." (Baker, 1901, p. 6) Again, where is that vast corporation now?
In my life I have seen the rise and fall of trusts and of those who attempted to monopolize. As I wrote earlier, these efforts are doomed to fail and the course of that path is thus:
For a short time competition is hindered, but rarely, if ever, completely stifled. The profits of the trusts are high. [but] This only whets the appetite of others who see the success of the first innovator, and other works soon spring up. No sooner has the trust purchased one threatened rival than two appear, and the end is disaster. The people may rest assured that neither in one article nor in another is it possible for any trust to exact exorbitant profits without thereby speedily undermining its own foundations. It is not long since trusts first made their appearance, and already many have disappeared. Only a few survive to-day, and none have secured the coveted monopoly. . .Already the ghosts of numerous departed trusts which aimed at monopolies have marched across the stage of human affairs, each pointing to its fatal wound, inflicted by that great corrective, competition. (Carnegie, 1901, pp. 101-103)
I see the benefits of these aggregations of capital but I chose not to be a part of the corporate world. I did not wish to take Carnegie Steel public and have its shares thrown about by speculators on the stock exchange. "Men are only gamblers there. Stock gambling and honorable business are incompatible." When a syndicate formed by J.P. Morgan bought my interests, I was pleased to sell rather than to incorporate.
Now, looking backward almost two decades to that sale, I see the world of the corporation and wonder which of these firms will survive. The top ten firms in assets in 1917: (1)
U.S. Steel
Standard Oil of New Jersey
Bethlehem Steel
Armour & Company
Swift & Company
Midvale Steel
International Harvester
Du Pont
U.S. Rubber
Phelps Dodge. (Navin, 1970, p. 369)
U.S. Steel is the result of the syndicate built around Carnegie Steel. Will it survive as the giant it is? Then there is Mr. Rockefeller's company, huge even after the anti-trust break-up: what is its future? Size is not guarantee of success and the past indicates a future of one giant being replaced by another.
While I speculate on the future, how shall I be remembered -- what will be my legacy? Will it be the incident at Homestead that left a lasting stain on business-labor history? Will it be the steel business where we were able to provide inexpensive steel for rails, bridges, structures, etc.. Through mass production we lowered the cost of iron rails from $135 to sturdier steel rails for $12 a ton, or will it be for my "Gospel of Wealth" that built some 3,000 public libraries; provided over 7,000 church organs; endowed the Carnegie Institute of Technology; established the Peace Palace in the Hague; endowed the Carnegie Corporation for the advancement and diffusion of knowledge; founded the Carnegie Center for the performing arts; and established the Carnegie Endowment for the Advancement of Learning that led to the Teacher's Insurance and Annuity Association?
Regardless of what history may say of Andrew Carnegie, I take definite issue with what David Korten (1996) says about the corporation. Corporations have their critics in every generation, for example Charles and Henry Adams and Ray Stannard Baker, but David Korten demonizes the corporation by attributing to it all human malaise of the present and future. Like many others, Korten makes a number of charges that I feel are not based on fact nor on the historical record.
Corporate power: Korten's thesis is that corporate power is great and has run amok, threatening us all. However, corporations have far less power than Korten thinks and, like Hamlet's ghosts, come and go across the economic stage. Evidence about the top corporations of 1917 (presented earlier) illustrates the ebb and flow of corporations which may appear large and powerful but who later fall prey to changing markets, new products, or, in some cases, poor management. Some corporations can barely govern themselves well, so it is highly unlikely that they will exercise dominion in a larger sphere of influence.
Korten overlooks the great levelers of the playing field, competition and innovation. The power of the corporation to act without regard for its market is limited, and innovative products and ideas are a threat to those who think they wield a perpetual scepter of power.
Size: Korten (1996, p.74 passim) would like for us to scale down from global to local economies with capital raised locally, small competitive businesses, and management by its owners. If this occurred, we would be thrust backward two hundred years, perhaps farther. An aggregation of capital is essential in many industries to achieve economies of scale. Being big, however, is no guarantee of success as history shows.
To deny a global economy is to deny the advances in transportation and communication that have reshaped our thinking from national to international. Global alliances require the pooling of assets and human talents and, while Korten feels that this enables global companies to rule the world, he overlooks the fact that the same innovative and competitive forces that limit power will also limit size. If we examine the global economy carefully we will see that it is subject to the same forces that govern national economies. In that environment, some firms will grow because they have better ideas or products, while the laggards will stagnate and may fail to survive.
Growth: Korten (1996, p.41 passim) assumes that growth is bad and must be limited. It is true that there are limits to growth: in my experience I saw Carnegie Steel becoming unmanageable under the partnership arrangement, requiring us to move to corporate governance. That did not stop growth, merely transforming the firm so U.S. Steel could resume the pattern of growth. Even then, however, growth had inherent limitations -- U.S. Steel was the major steel producer and was apparently powerful. Changes in steel technology, international competition, inattentive management, and changing markets prevented U.S. Steel from maintaining an unlimited growth pattern.
"All is well since all grows better" became my motto. We can no more stop growth than we can stop living -- while some firms grow, others fail to adapt and perhaps decline. We can try to direct the course of growth, but not its inevitability.
Facts: Where do you get your facts, David? You tell us that 7.5 billion hectares of arable land are lost each year to desert encroachment, irrigation salinity, and so on. Do you realize that 1 hectare equals 2.471 acres of land and you are saying that 18.5325 billion acres of arable land are lost each year? If this is true, we ran out of arable land before you wrote your book.
You idealize life before the Industrial Revolution and state there is "little evidence of deprivation. . .[and] people had adequate food, shelter, and clothing, and the countryside had a prosperous appearance" (Korten, 1996). Others (Ashton, 1954; Hopkins, 1982) dispute this view, noting that the purchasing power of employee earnings was increasing and infant mortality was declining, increasing life expectancy. In the absence of major medical advances during this period, the historical record suggests that people had an increasing quality of life after the Industrial Revolution.
There are other errors of fact, such as the attribution of the Northern Securities Company to a Morgan-Rockefeller combine (Korten, 1996). In fact, Northern Securities was formed by James J. Hill, J.P. Morgan, and Edward H. Harriman to consolidate their railroad interests, not "to amalgamate 112 corporate directories." With so many errors of fact, how can anyone believe the conclusions you draw?
Limited resources: On this point you remind me of the Reverend Malthus who thought our enthusiasm for sharing DNA segments would outstrip the food supply and we would all starve. The resolution, one that never occurred to Malthus, was that better ways to produce food would occur, hence advancements in agricultural methods and technology. At the first census of the United States (1790) approximately ninety percent of its citizens were busily trying to produce enough to feed themselves. Some two centuries or so later, ninety seven percent of our population is being fed by the other three percent, and there are commodities for export.
The answer to limited resources is not the doom and gloom that Malthus predicted, but to find ways to do better and more with the resources we have. The creation of wealth, not its collective distribution, is the answer.
Power: You assume that corporations have power (which I doubt) and that the mere possession of power will lead to its abuse. I am reminded of two great jurists and their opinions in the Northern Securities Case. Northern Securities was a holding company formed to resolve the competitive differences between the railroad interests of James J. Hill and those of Edward H. Harriman. Considered a conspiracy in restraint of trade under the Sherman Anti-Trust Act, the case gradually reached the U.S. Supreme Court. In stating the majority opinion to dissolve the Northern Securities Company, Justice John Marshall Harlow opined that "It need not be shown the combination, in fact, results or will result. . .in a total monopoly, but is only essential to show that. . .[it] tends to create a monopoly." That great dissenter, Justice Oliver Wendell Holmes, stated the minority opinion that "Great cases like hard cases make bad law. . .because of some accident of immediate overwhelming interest which appeals to the feeling and distort the judgment. . .makes what previously was clear seem doubtful, and before which even well settled principles of law will bend." In that case, and in others since, we have seen the fear of power triumph over evidence that power had been exercised.
I have stated my feelings about how David Korten has misunderstood the nature and future of the corporation. His ideas appeal to fear, and not to reason, and not to the history of events. We should be en garde but not draw our swords nor pens too readily.