Michael Medved

In other words, for many and perhaps even most Americans, small business constitutes the most positive force in our society, while big business amounts to the most destructive and malevolent of all contemporary institutions. This stark dichotomy ignores the obvious reality that every big business began as a small enterprise, and every small business yearns to get big (or at least bigger).

Moreover, the polarized black-and-white reaction to insidious large companies vs. admirable little firms ignores the obvious difficulty in definitive determination of what counts as a big business. The most recent statistics from the Small Business Administration show an impressive total 13,831 firms with payrolls ranging from 400 employees to 999. Do these companies count as lovable small businesses, or hateful big ones?

If a corporation’s payroll suddenly goes from 999 to 1009 does it suddenly, mysteriously, cease to serve its community and begin to menace the public interest?

The illogical favoritism for little companies over big ones, for shaky firms struggling for survival over the nations most prodigiously prosperous enterprises, owes a great deal to the instinctive, deep-rooted American preference for the underdog. Americans love upsets and upstarts: we reflexively root for David, not Goliath, and only a strange breed (mostly within New York’s five boroughs) chooses to vote for the wealthy, free-spending, predictably formidable Yankees.

FIGHTING THE MONEY POWER

The sentimental preference for minor, unassuming, local endeavors dates from the earliest days of the Republic and arose in part from unique historical circumstances. Colonial settlements and frontier outposts struggled for survival, as pioneers confronted loneliness and deprivation, with few of the comforts and options of established cities. In this context, the opening of a new general store (or tavern, or blacksmith, or apothecary, or cobbler) amounted to such an obvious boon to a raw, tenuous community that no one worried about the new merchant’s pursuit of profit, or fretted over the chance that he’d enrich himself at the expense of his neighbors. If, on the other hand, a subsistence farmer purchased a new plow from some distant, faceless company back east the resentment at paying off the outrageous cost of even the most necessary implement overrode any sense of feeling blessed by its availability. The unprecedented distances in the vast new nation helped to shape the powerful distinction between good small businesses (our friends and neighbors) and evil big firms (our far-away class enemies). For several centuries, the distrust of big business connected to feelings of alienation by the nation’s agrarian majority from the commercial interests in remote urban centers (or even Europe).

In one of the most famous (and stirring) expressions of that distrust, a 36-year-old Nebraska lawyer who had served briefly in Congress addressed the Democratic National Convention in 1896. You come to us and tell us that the great cities are in favor of the gold standard, said William Jennings Bryan. We reply that the great cities rest upon our broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic; but destroy our farms and the grass will grow in the streets of every city of the country. The delegates in Chicago went wild when the Boy Orator of the Platte framed the choice in the upcoming election as a struggle between the idle holders of idle capital and the struggling masses, who produce the wealth and pay the taxes of the country. The idea that idle capital played a necessary role in funding the business enterprises that allowed the struggling masses to produce that wealth never troubled the delirious Democrats, who proceeded to shock the world by nominating the unknown from Omaha for the first of his three (unsuccessful) presidential bids.

For Bryan (and the populists who preceded and inspired him), the prairie farmer toiling day and night to produce and sell his crops constituted the prime of example of the virtuous small businessman, while big city bankers or factory owners, with their mysterious manipulation of money, represented the vile corruption of big business. A hundred years earlier, Thomas Jefferson emphasized the same distinctions while similarly idealizing the humble souls who tilled the soil. At a time when the biggest towns in the country (including Philadelphia, New York and Boston) amounted to little more than overgrown villages with barely 50,000 inhabitants, Jefferson still characterized cities as ulcers on the body politic. In words of economic historian John Steele Gordon, the third president nurtured a vision of America as a land of self-sufficient yeoman farmers, a rural utopia that never really existed and would be utterly at odds with the American economy as it actually developed in the industrial age then just coming into being. Jefferson loathed the rude, money-grubbing spirit of Philadelphia, or London, for that matter; during the worldwide struggle between Britain and France that haunted his presidency he tilted in a French direction in part because he shared Napoleons contempt for the English as a nation of shopkeepers. As a child of inherited privilege (the death of his father left him more than 5,000 acres of land and 300 slaves) he could afford disdain for the getting and spending poetically reviled by his contemporary, Wordsworth; despite all the hundreds of laborers who toiled for him in the fields and shops around Monticello, it seemed never to occur to him that he himself ran a big business. He expressed his disdain for commercial values with a life-long habit of self-destructive spending and thoughtless borrowing, leaving behind a mountain of unpaid (and largely ignored, unsecured) debts when he died at age 83. I have ever been the enemy of banks, he wrote to his friend (and former rival) John Adams in old age. My zeal against these institutions was so warm and open at the establishment of the Bank of the U.S. that I was derided as a Maniac by the tribe of bank-mongers, who were seeking to filch from the public their swindling, and barren gains.

The bank mongers, led by Jefferson’s rival Alexander Hamilton, decisively triumphed in that fateful battle within the Washington administration, setting up the First Bank of the United States and lending much-needed financial stability to the early years of the Republic. In 1811, a sharply-divided Congress failed to re-charter the central bank (when the Vice President broke a tie vote in the Senate) but five years later the skeptics reconsidered. The funding and financial struggles associated with the War of 1812 persuaded President Madison, despite his impeccable Jeffersonian credentials, that the nation needed an official, dominant bank the ultimate big business.

The Second Bank of the United States made major contributions to the Republics spectacular growth in the years that followed and President Andrew Jackson’s implacable hatred of the institution stemmed more from its political influence than its economic operations. Jackson introduced some of the most persistent and persuasive objections to big business in his bitter war against the Bank, which he scowlingly described as the Money Power. The president warned that the concentration of such great wealth and influence in an institution operated for private gain threatened to distort the operations of government. In vetoing a new charter for the Bank of the United States in 1832, his most celebrated objection declared: It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and potent more powerful, the humble members of society the farmers, mechanics, and laborers who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government.

Unlike Jefferson, Jackson didn’t see himself as an enemy of banks in general, but only of a single, huge financial institution which wielded its power through government favor and sponsorship. After killing the effort to re-charter the Bank of the United States, Old Hickory removed federal funds and placed them instead in an array of lesser state banks. These pet banks of the Jackson administration seemed more worthy and less menacing precisely because they were smaller. With the blessing of the government, minor financial institutions sprang up everywhere; the number of banks in the country more than doubled from 329 in 1829 to 788 in 1837. In the absence of the steadying influence of a central bank, speculation exploded and then crashed (after Jacksons Specie Circular insisted that the federal land office accept only gold and silver).

In a matter of months, some 343 banks failed entirely; 62 failed partially. By early fall of 1837 (under the new president, Martin Van Buren), 90 percent of the nations factories had closed and unemployment, not yet officially calculated by government, rose to previously unimagined levels. Best estimates suggest that more than one-in-four laborers failed to find work, and federal revenues instantly fell by half. The depression lasted a full 72 months and so thoroughly shattered confidence in the American business system that John Steele Gordon points to a telling passage in Charles Dickens international bestseller, A Christmas Carol (1843): when Ebenezer Scrooge realizes that a note payable to him may yet be redeemed, he’s relieved to see that its not as worthless as a mere United States security.

The hatred of big business assumed new forms following the nation’s slow recovery from the Panic of 1837. Jacksonians feared that a handful of huge enterprises would bend the acts of government to their selfish ends; they worried, ultimately, about the abuse of political, not economic, power. According to Alan Greenspan in 1961 (yes, that Alan Greenspan, future chairman of the Federal Reserve): Americans have always feared the concentration of arbitrary power in the hands of politicians. Prior to the Civil War, few attributed such power to businessmen. It was recognized that government officials had the legal power to compel obedience by the use of physical force and that businessmen had no such power. A businessman needed customers. He had to appeal to their self interest.

THE CURSE OF BIGNESS

After the War Between the States, the rapid rise of national railroads and other major corporations radically altered public perceptions. Residents in the well-settled Eastern states could choose from any number of competing and established rail lines that crisscrossed their territory, but vast stretches of the thinly populated West and upper Midwest relied on a single set of tracks and a single company. These corporations dramatically expanded right after the war with federal approval and, to some extent governmental sponsorship, and terrified the hard-pressed tillers of the soil with their uncontested authority. As Greenspan noted in his fascinating essay Antitrust: Outwardly, the railroads did not have the backing of legal force. But to the farmers of the West, the railroads seemed to hold arbitrary power previously ascribed solely to government.

The situation led to desperate demands for federal and state action to cut the largest companies down to size with the forlorn hope that such anti-business intervention could foster competition and benefit the public. In place of the strict governmental neutrality envisioned by Jefferson and Jackson, the bashers of big business now wanted aggressive federal and state intrusion to curb unhealthy corporate growth.

This agitation led directly to the Interstate Commerce Act of 1887 and, three years later, to passage of the Sherman Anti-Trust Act to outlaw combinations in restraint of trade and to threaten jail terms for any and all who sought monopolistic control. Drafted by Ohio’s GOP Senator John Sherman (a perennial presidential candidate and older brother of Civil War hero William Tecumseh Sherman), the legislation won near unanimous approval despite the domination of both houses of Congress by purportedly pro-business Republicans.

The Sherman act enshrined as government policy the peculiar idea that any business combination efficient and successful enough to dominate its market niche deserved suspicious scrutiny, if not outright punishment, by federal authorities. Some 58 years after the laws passage, Supreme Court Justice William O. Douglas explicitly interpreted the purpose of the legislation as a curb on the size and scope of corporations, rather than a ban of specific business practices. We have here the problem of bigness, he wrote in a dissenting opinion in the anti-trust action United States vs. Columbia Steel Co. The Curse of Bigness shows how size can become a menace both industrial and social. It can be an industrial menace because it creates gross inequalities against existing or putative competitors. In other words, Justice Douglas wanted governmental intervention on the side of small, weak, struggling competitors that might not otherwise survive against a thriving capitalist concern. Industrial power should be decentralized, he declared. It should be scattered into many hands so that the fortunes of the people will not be dependent on the whim or caprice, the political prejudices, the emotional stability of a few self-appointed men. That is the philosophy and the command of the Sherman Act. It is founded on a theory of hostility to the concentration in private hands of power so great that only a government of the people should have it. In other words, judges, bureaucrats and politicians should determine the extent of corporate growth and development, and not the dynamics of the marketplace.

ANTITRUST INSANITY

At the turn of the twentieth century, President Theodore Roosevelt won enthusiastic public support for his well-publicized trust-busting under the Sherman Act, launching 45 lawsuits against private companies. His conservative successor, William Howard Taft, pursued anti-trust cases even more vigorously, with 75 pieces of major litigation in his single term (1909-1913). A hundred years later the efforts to dispel The Curse of Bigness have metastasized into a vast, swollen bureaucracy: according to 2009 figures, the Antitrust Division of the Department of Justice employs a full-time staff of 773, at an annual cost to taxpayers of $150,591,000 (an increase of more than 34 percent since 2000).

This investment has purchased such legal travesties as the hugely complex and costly litigation against Microsoft by the Department of Justice and 20 states beginning in 1998. The feds pounced on the software giant not for gouging the public with high prices, but for bundling its Internet Explorer web browser at no additional charge together with its ubiquitous Windows operating system. The company and its supporters counterattacked in the court of public opinion, with a newspaper ad signed by 240 economists that declared: “Consumers did not ask for these antitrust actions - rival business firms did. Consumers of high technology have enjoyed falling prices, expanding outputs, and a breathtaking array of new products and innovations....Increasingly, however, some firms have sought to handicap their rivals by turning to government for protection. Many of these cases are based on speculation about some vaguely specified consumer harm in some unspecified future, and many of the proposed interventions will weaken successful U.S. firms and impede their competitiveness abroad.”

Despite this logic, the trial judge ordered Microsoft split in two as punishment for its consumer-friendly misdeeds and during the appeal process the company agreed to a settlement that terminated some of the practices specifically challenged by the government even though Bill Gates insisted that efficiency would suffer in the process. Meanwhile, the Netscape browser, which the federal lawsuit specifically aimed to protect, still failed to hold its own in a hugely competitive arena, falling to less than 1 percent of the market before its virtual disappearance and purchase by AOL. Eight years after the bitter litigation came to an end, Microsoft’s Internet Explorer still draws 65.5 percent of all browser uses, but faces robust competition from Mozilla Firefox and Safari (rivals that played little or no role in the lawsuits), as well as a daunting new challenge from Google Chrome.

Previous antitrust prosecutions in the computer industry proved similarly misguided and ineffectual in particular the bloody 13 year battle against a respected corporate innovator that once dominated the field. As John Steele Gordon recalled in Forbes Magazine: Go back to 1969. The Microsoft of the day was the International Business Machine Corp. seemingly invincible, with a 65 percent share of the computer market. The little guys were being squashed. Burroughs, Sperry, General Electric, Honeywell, Control Data. More, perhaps, to protect them than to protect consumers, the U.S. government sued IBM, demanding that the company be dismantled. By the time the Justice Department dropped the case in 1982, mainframes had begun a long, slow fade from glory. Before the decade was over, IBM was heading into serious trouble and was soon to lay off thousands of employees.

Gordon also associates antitrust policies with the long, slow, tragic decline of one of the nation’s greatest companies. General Motors never suffered a government antitrust attack, but lived for years in holy terror of one, he writes. Gordon goes on to cite Alfred D. Chandler, the Pulitzer-prize winning business historian at Harvard, who recalled conservations with Alfred P. Sloan, GMs chairman during its glory years from 1937 to 1956. Sloan knew that if GM topped 45 percent in market share it would have an antitrust problem, but telling his managers to stop at 45 percent was telling them not to work hard. And Sloan was right. American automobile technology and manufacturing largely went to sleep in the postwar years. Detroit’s unanticipated blow from the Japanese in the 1980s was nearly fatal.

History demonstrates that even without the fear of aggressive antitrust assaults by government, dominance of any major industry by a single company proves ephemeral. As Alan Greenspan describes the normal sequence of events: An industry begins with a few small firms; in time, many of them merge; this increases efficiency and augments profits. As the market expands, new firms enter the field, thus cutting down the share of the market held by the dominant firm. This has been the pattern in steel, oil, aluminum, containers and numerous other major industries. The observable tendency of an industry’s dominant companies eventually to lose part of their share of the market is not caused by antitrust legislation, but by the fact that it is difficult to prevent new firms from entering the field when the demand for a certain product increases. Texaco and Gulf, for example, would have grown into large firms even if the original Standard Oil Trust had not been dissolved.

Once hailed as an economic genius and the all-knowing Maestro who orchestrated a record-setting boom, now reviled as a bumbling manipulator whose ill-advised decisions contributed to financial collapse, Alan Greenspan the Fed Chairman has become a deeply controversial figure. But his observations and analysis in Antitrust (originally published as part of the 1961 Ayn Rand anthology, Capitalism: The Unknown Ideal) remain unassailable.

“The world of antitrust is reminiscent of Alice’s Wonderland,” he writes. “It is a world in which competition is lauded as the basic axiom and guiding principle, yet too much competition is condemned as cutthroat. It is a world in which actions designed to limit competition are branded as criminal when taken by businesses, yet praised as enlightened when initiated by government. It is a world in which the law is so vague that businessmen have no way of knowing whether specific actions will be declared illegal until they hear the judge’s verdict- after the fact.”

He concludes that accused monopolists have actually earned recognition for nurturing their expanding enterprises and steering them to a commanding position: It takes extraordinary skill to hold more than 50 percent of a large industry’s market in a free economy. It requires unusual productive ability, unfailing business judgment, unrelenting effort at the continuous improvement of ones product and technique. The rare company which is able to retain its share of the market year after year and decade after decade does so by means of productive efficiency and deserves praise, not condemnation.


Michael Medved

Michael Medved's daily syndicated radio talk show reaches one of the largest national audiences every weekday between 3 and 6 PM, Eastern Time. Michael Medved is the author of eleven books, including the bestsellers What Really Happened to the Class of '65?, Hollywood vs. America, Right Turns, The Ten Big Lies About America and 5 Big Lies About American Business
 
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