Business History Mock Revision

Question 1

The significance of cartels for the formation of German industry: Para 1

Answer 1

a coalition or cooperative arrangement between political parties intended to promote a mutual interest. The general view of a cartel is that they have a net cost on society, with Smith calling it simply ‘an absurd tax’. These are price-fixing cartels but we will focus on the German case whereby the aims of the respective cartels were different and the system surrounding them were designed with a particular purpose.

Question 2

The significance of cartels for the formation of German industry: Extra Para

Answer 2

The view of cartels being of net cost to society and being unstable is straightforward. It assumes that those cartels keeping the price high are extracting the extra profit and hoarding such money, also acting in an ant-competitive manor to maintain high prices, and therefore high profits. By nature, such an arrangement would be unstable due to the gains that could be made by one company undercutting the rest, ultimately leading to an untrusting environment and the cartels breaking down. To understand the significance of cartels in Germany, it is first important to consider the economic and industrial environment within Germany, and as such, why cartels became so significant.

Question 3

The significance of cartels for the formation of German industry: Para 3

Answer 3

Following the formation of the railways and communication, the modern industrial enterprise appeared in Germany, as with the US. This was assisted by a strong government in the late 19th century, pursuing coherent industrial policy. This therefore set the landscape for industrialisation, but Germany was the last Western power to enter the industrial field. Until the imposition of the ‘Tariff Bill’ in 1879, Germany was a major importer of product manufactured in other nations, without exporting much itself. Friedrich List, a German and US economist, held the view that no industrial development was possible without first allowing the domestic industry to grow, thereby meaning it doesn’t have to instantaneously have to compete with the industrial powers of Europe or the US. Cartels were seen as providing stability and growth for small industries within this time. Thus, it was the Cartel device and high tariff legislation that allowed German industry to develop so drastically (Von Bekerath 1935).

Question 4

The significance of cartels for the formation of German industry: Para 2

Answer 4

What made the formation of Cartels in Germany viable was the use of cartel agreements, which could be made legally binding if they were enforced by contracts. This prevented firms from undercutting others and resulted in positives for German industry, such as technology sharing, price-stability, or agreeing on a pattern of specialisation. Such an approach allowed for productivity gains and competition within the market through innovation. The framework around cartels encouraged more people/ families to invest in specific industries as a specific quota of goods would be purchased at a given price, meaning investment in industries and innovation by such people was higher. This method also encouraged firms to compete on quality rather than the price, which was set at a level. As such, the number of cartels being formed within Germany grew from 550/560 in 1911/12 to 2100 in 1929/30 (Fischer and Wagenführ).

Question 5

2. The role of ‘complementary assets’ in Josiah Wedgwood’s product innovation.1

Answer 5

Josiah Wedgwood was the foremost of the entrepreneurs who developed the industrial district known as ‘The Potteries’ in Staffordshire. The Potteries transformed from a small trading centre within a small local market to a centre of global trade. Complementary assets are assets, infrastructure or capabilities needed to support the successful commercialization and marketing of a technological innovation, other than those assets fundamentally associated with that innovation.

Question 6

2. The role of ‘complementary assets’ in Josiah Wedgwood’s product innovation.2

Answer 6

Imitators can often outperform innovators if they are better positioned with respect to critical complementary assets (Teece). As such it is extremely important to use complementary assets to avoid such imitation, which Wedgwood was fully aware of. The core to Wedgwoods business was the brand, built with the help of Thomas Bentley, a renowned salesman. Wedgwood built up a reputation around his brand with a particular focus on high quality and fashionable products, as “Fashion is infinitely superior to merit…” (Wedgwood). Such an approach was further complemented by maintaining a high price of his goods, making them desirable and exclusive, which further added to their appeal. It was this focus on quality and fashion that gained Wedgewood the position of ‘Potter to Her Majesty’, which Wedgwood henceforth able to inextricably link the ‘Queensware’ pottery with the beloved Queen Charlotte. As such, the ‘Queensware’ line personified the values and fashion of the beloved Queen Charlotte, further distinguishing the Wedgwood brand from those of imitators. Wedgwood continued in linking his products with patronage and other archetypical individuals, such as the pope. Such a method to is something that is still prominent today and continues to garner similar outcomes, with brands being linked to celebrities and royalty. The link to patronage resulted in the great success of the Black Basalt line and failure to link patronage to the Jasperware line was its key failure in gaining the same notoriety as the previous lines.

Question 7

2. The role of ‘complementary assets’ in Josiah Wedgwood’s product innovation.3

Answer 7

Wedgwood was a master in innovating products that appealed to different individuals and social classes. He was able to appeal to middle classes through the use of drapes instead of nudes; able to garner favour from the upper class through the use of ambassadors and able to exploit foreign markets with the help of Bentley. The Wedgwood brand became synonymous with high quality, fashion and exclusivity and as such became far superior to the products that imitated his lines. Therefore, it was complementary assets that enabled the success of the Wedgwood brand.

Question 8

3. The Schumpeterian concept of the entrepreneur. 1

Answer 8

• According to Schumpeter “carrying out innovations is the only function which is fundamental in history” and entrepreneurs are disequilibrating ‘agents of change’ through innovation and ‘creative destruction’. - Their function is: “to reform or revolutionise the pattern of production by exploiting an invention or, more generally, an untried technologicalpossibility for producing an old one in a new way, by openingup a new source of supply or materials or a new outlet for newproducts, by reorganising an industry and so on”.

Question 9

3. The Schumpeterian concept of the entrepreneur. 2

Answer 9

Schumpeter viewed the entrepreneur as providing 5 innovative functions:
1. The introduction of a new good –‘product innovation’
2. The introduction of a new method of production (or handling a product in a new way commercially) –‘process innovation’
3. The opening of a new market by an existing branch of manufacture
4. The conquest of a new source of supply
5. The carrying out of the new organization of any industry –this may involve
breaking up a monopoly or creating one.

Question 10

3. The Schumpeterian concept of the entrepreneur. 3

Answer 10

The entrepreneur according to Schumpeter was an important actor in the First Industrial Revolution, able to innovate radical change in the organisational work
They were able to exploit environmental changes of the time that increased the pay-off for innovation. Britain encouraged entrepreneurs through eroding the ability to acquire monopoly trading privileges (State of Monopolies – 1624) and through encouraging business activity among younger sons of nobility (Primogenirture), which was less socially acceptable in France.

Question 11

4. Which is more important to society? Macro or micro inventions. 1

Answer 11

Macro-inventions are the radical breakthroughs, seemingly coming from nowhere. They create whole new industries, or at least new technological avenues to pursue.
They were examples of biased technical change which radically altered optimum factor proportions, in the case of The Second IR, this increased the ratios of both capital and energy to labour.
Micro-inventions on the other hand have no such effect on factor productions, but were responses to economic challenges as the technology was developed. They are therefore a subset of macroeconomic inventions, offering refinement an industrial applications in industries that would not even have been foreseen by the inventor.

Question 12

4. Which is more important to society? Macro or micro inventions. 2

Answer 12

Those who were unable to innovate micro-inventions were unable to exploit off macro-inventions, and therefore there would be no change in society. Such is evident in the comparison between Britain and France. Mokyr also stresses the significance of micro-inventions, arguing that most macro-inventions during the IR era originated in France and were adapted and improved in England (aside from those concerning the steam engine or cotton manufacturing). The use of such inventions is purely dependent in the economic landscape of the time. For instance, Britain was able to exploit macro-inventions due to its high cost of labour during the First Industrial Revolution, reducing the opportunity cost of investing in machinery.

Question 13

4. Which is more important to society? Macro or micro inventions. 3

Answer 13

Macro-inventions such as the Newcomensteam-engine and the introduction of machinery(e.g. the spinning jenny) provide trajectories for subsequent micro-inventions, but without the micro-inventions, seemingly novel macro inventions would fail to develop into changes for society. It is therefore my view that mico-inventions are more important to society, as these are the applications and refinements of the micro-inventions that ultimately cause the change in society. This is not however to say that macro inventions are not important, as without such inventions microinventions would not be able to come to fruition. According to Mokyr though, macroinventions depend upon succeeding microinventions for their eventual importance.

Question 14

5. The concept of ‘efficiency wages’. 1

Answer 14

The concept of efficiency wages relates to the payment of wages by a company above that of the competitive or market clearing conditions. Such an increase may be efficient and profits maximising, with this higher pay linking to higher profits.

Question 15

5. The concept of ‘efficiency wages’. 2

Answer 15

There are a few reasons to implement efficiency wages:
• Better retention and lower turnover, so lower turnover costs by keeping more money within the business
• Inducing more effort. This focuses on the inability of management to fully monitor their workers efficiency and therefore relies on the assumption that these higher wages will correct for this and result in a more than proportionate increase in the profitability of the business.
• Attracting better quality workers
• Improving morale

Question 16

5. The concept of ‘efficiency wages’. 3

Answer 16

The concept of efficiency wages arises under our study of Henry Ford and his implementation of $5 work day. He said ‘A low wage business is always insecure… The payment of $5 for an eight hour work day was one of the finest cost cutting moves we ever made”. – maybe get rid of this’. Mathewson’s classic work shows us that in automobile production there was substantial scope – even for workers with routinized jobs – to collude and restrict economic output. As such, by Ford increasing wages (although only for male workers, over the age of 21 who had worked for the company for atleast 6 months), there was an increase in efficiency inline with the concept of efficiency wages.

Question 17

7. The significance of the Sherman Antitrust Act of 1890 for the development of US industry.1

Answer 17

The Sherman Antitrust Act was the first legislation passed by congress to limit the concentrations of power that result in a lack of competition. The act was in response to the shortcomings of the Constitution in dealing with monopolies and the rise in mergers across the US from the 1800s which resulted large monopolies/ cartels/ trusts. It aimed to make collusion and the anti-competitive practices implemented by cartels illegal. This was the first time that the US government began to interfere in the market for the public good, and the Act passed with 242-0 in the House

Question 18

7. The significance of the Sherman Antitrust Act of 1890 for the development of US industry.2

Answer 18

For more than a decade after its passage, the Act was invoked only rarely against industrial monopolies and was hardly successful when used. The main use of the Act was against labour unions. After 1897 began the largest and certainly most significant merger movement in American history. It came partly because of continuing antitrust legislation and activities of the states, partly because of the increasing difficulty of enforcing contractual agreements (Chandler 1990).
Chandler held the view that the Act may have helped promote merger and industrial concentration which was being implemented by large firms to exploit economies of scale.

Question 19

7. The significance of the Sherman Antitrust Act of 1890 for the development of US industry.3

Answer 19

In 1914 The Clayton Antitrust Act passed which expanded on the additional measures that fall outside of the Sharman Act, and further still, in 1936 The Robinsons-Patman Act amended the Clayton Act. Therefore, despite The Sherman Act being unsuccessful in its approach to stifling anti-competitive practices, it was a landmark act allowed other acts to ensure its purpose was achieved. I would therefore argue that The Sharman Act was significant in being the first time the US government intervened in the activities of big business and therefore enabled the government to further push other Acts in the future to fulfil the original aims of The Sherman Act. Its failure in the short-run, prior to the other Acts being passed, was the reduction in trade union power, ironically resulting in the populous being exploited more rather than less by big business.

Question 20

9. Chandler’s organisational structure in the role of American Railway development
   1

Answer 20

Chandler believed that the railroads were the catalyst for the managerial revolution (Brown. His ‘managerial’ and ‘diffused’ ownership of American railways through a ‘decentralised line of staff’ type organisation allowed the industry to innovate and achieve economies of scale and scope

Question 21

9. Chandler’s organisational structure in the role of American Railway development
   2

Answer 21

Issues with the original structure:

• Growth of the Railway companies with their own issues regarding recruitment, training and managing.
• Chandlers organisational structure helped to increase the efficiency of the organisation, making it more suitable for innovation.
• Railroads were constantly expanding, therefore being compelled to devise new management structures (centralised management organisational structures were no longer viable. It was important to transition into a more decentralised multidivisional structure to keep up with the expanding industry (Brown)
• Expansion required significant investment – there was a need for the ‘fragmentation of corporate policy and a systematic division of roles’ (Chandler).

Question 22

9. Chandler’s organisational structure in the role of American Railway development
   3

Answer 22

New structure :

• With rapid expansion, there was a need for a headquarters to coordinate different local operations (chief superintendent) where local decision making was required.
• Moreover, Divisional superintendents were required for the day-to-day business.
• Were the first to have multiple, geographically dispersed units. Demonstrated lines of communication and authority (Brown)

Question 23

9. Chandler’s organisational structure in the role of American Railway development
   4

Answer 23

Conclusion:
Visible Hand – some of the US railroads entirely innovated management through a use of ‘decentralised line and staff type’ organisations, as opposed to merely evolving management.
Efficiency between communication ensured speed, regularity and reliability (Wilson). Chandlers organisational structure allowed the industry to become more suitable for further innovation and expansion through increased control.

Question 24

10. The extent to which Joint Stock companies are important for industrial development. 1

Answer 24

A joint stock company is one whose owners own shares of the respective company and have the ability to buy and sell such shares. This method of company ownership has two main benefits over sole proprietors or partnerships, namely the access to external funds and the separation of ownership from management.

Question 25

10. The extent to which Joint Stock companies are important for industrial development.2

Answer 25

Due to more access to external capital, there is much more scope for expansion and inward investment, be it in machinery, technology, buildings etc. This enabled companies to expand far more than during the first IR in which most businesses were family run and remained very small. Joint stock companies help to address the separation theorem proposed by Fisher, in which production is optimally left to a firm whish maximises the present value of investment opportunities when there are perfect capital markets. Individuals can sell equity in their firm on liquid capital markets to achieve a consumption pattern which is more preferable to them than that which is viable without capital markets. Such a development was key for industrial development as it led to investment into industries with long run returns but short term losses.

Question 26

10. The extent to which Joint Stock companies are important for industrial development.3

Answer 26

One view with regards to joint-stock companies is that they are less efficient than sole-proprietors or partnerships, as levied by Adam Smith in ‘The Wealth of Nations’. Smith also believed that limited liability was an unfair advantage associated with such companies. He postited that they can only survive with limited liability and monopoly privileges. His view was shared by the likes of Pollard and Marshall in his earlier years. However, it addressed the problem of an owner managed businesses life cycles through appointing managers at the top of the businesses with expertise, but whom would be replaceable if they were not performing their job sufficiently well.