The Cartel Puzzle

Here's a homework assignment to occupy your minds while I'm away.*  In the winter/spring of 1901, J. P. Morgan and his minions assembled what became if not the first, then certainly one of the greatest, of industrial cartels.  The venture  made millionaires out of countless plodding managers who had surely never dreamt of wealth on anything like so grand a scale.  During its first year of operation (per Wiki) it comprised something like 67 percent of the nation's steel production.

It would be fascinating to look inside the mind of Morgan as he orchestrated this great edifice.  Money of course; Morgan clearly loved money.  Yet even more than money, he seems to have loved power, and together with power, good order.  Morgan clearly found competition anarchic and, worse, wasteful A part of him very likely believed that by creating US Steel, he had built an enterprise that would make a better life for it workers and its customers as well as its owners.

Perhaps he did.  Yet it is clear that he also created a virtual showcase for the economic vices of the cartel: a company almost Ottoman in its sluggish complacency--a company which, in after the miracle of its creation, seems never to have done anything innovative or ground-breaking in industrial history ever again.  You could see all this, if not before, then in the post-World-War-II period when the great behemoth painfully lurched towards irrelevance.  As upstarts around the world began to devise new ways to do an old business, USS (and, yes, its unions) slowly choked on a virtual edema of excuses and evasions.

Now compare US Steel with ATT, "the telephone company," another and even more explicit monopoly/cartel, created just six years later.  It's easy to forget in the mist of time that ATT did not begin life as the "natural monopoly" as so many people may age were long habituated to regard it.  No: it took unction  and guile and a lot of hard work to clothe  the original telephone idea with the garment of universality that gaze the system its sanctity.

But here's the fascinating parallel.  As I say, USS (would anybody argue with this?) never innovated anything.  Meanwhile ATT in 1925, still just at the beginning of its ascent to dominance, spun off what may well be the most enduringly creative research institution in the history of the United States, maybe the world.

For valuable prizes, why did one company become USS and the other become ATT?

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*Oh, didn't I mention?   We're off to Europe for some summertime opera.  No, not Wagner, we don't do Wagner.

The Worker and the Cartels

My friend Steve is from Rochester.  This comes a surprise; I had thought he was from Buffalo. No,  no, says Steve, Rochester.  Kodak.  If you got on board at Kodak at 18, you were pretty much set for life.

Which prompted me to reflect back on a theme I've explored before: the 47-73 years as a time of sleekly well-protected semi-cartels, where management could make their deals with unions because they could charge prices above marginal cost.   Thing is, there is a flip side: as Steve suggests, the worker who wangled his way to the protective bosom of the appropriate cartel, his life might have been boring and in some ways constrained but it was pretty safe.  Oddly, we tend to think of this sort of corporate welfare as an artifact of the glory days of Japan.  But consider: AT&T (there's a reason why they called it "Ma Bell"); IBM, General Motors, and yes, Kodak, and more.

I can relate in a small way.  I worked for the none of the above but I spent a decade in Louisville, in the warm lap of one of those newspaper monopolies against which we used to fulminate until they all began to crumble or wither away.    I'll grant that Louisville might have been a little special: unlike the seed, feed and dry goods merchants who refashioned themselves as press lords in so many communities, our Corporate Masters in Louisville actually fancied themselves friends of journalism and expended some effort to make it happen.

This doesn't mean they paid well; nobody ever earned a decent paycheck in journalism outside the celebrity class.  But they were willing to give you some scope; if you sold them on the notion that you had a viable project, they'd give you the time and the backup and you didn't need to worry about being canned for time-wasting (nor for any other reason; they were notoriously reluctant to fire anybody).   

Needless to say, these comfy little boltholes are mostly gone now, attendant upon the decay of the protective structure that supported them. This protective structure certainly had its downside, but we may lament the demise of its virtues.  

A corollary: as I guess I've said before, I suspect we observe here one important reason why so many are so mad at public employees: those who remember how they or their parents flourished in the realm of the semi-cartels are bound to get a little shirty when they see public employees continue to enjoy some of the protections these private-employer folks no longer enjoy.  Disclaimer, this is not an endorsement of the Kasich/Walker platform,.

Pay footnote:  I suggested that the newspaper pay was lousy.  Actually, the pay in Louisville might have been a smidgen better than among its competitors.  The reason would be that our Corporate Masters, notoriously liberal on their editorial page, fought tooth and toenail to keep the unions out of the city room.  One way to do it was to make the pay just enough better than the union competitors that we would regard ourselves as blessed to go without.  And come to think of it--I said they were slow to fire and they were.  But one guy who did find himself unceremoniously squeezed out of his job was the feckless chap who actually tried to organize a union,.

Journalism Footnote:  One index of how much our Corporate Masters wanted to be thought of as real journalists: in 1965 I won a modest but satisfying prize from the American Bar Association for some reporting law issues. To receive the prize, the publisher sent--not me, but himself, the publisher, who for aught I could tell didn't even known the stories were in the paper until after news of the bauble arrived.  I honestly didn't mind: I never much fancied this kind of ceremony and as I recall, it would have meant  trip to Miami in the summer. But I took it as an index of how desperate he was to be thought a real player and not some glorified bookkeeper.

Kodak footnote:  Actually,Steve's parents were not part of the Kodak family.  They subsisted in the treacherous no-man's land of the retail carpet business.  But Steve is happy to report that it saw them out: they were able to sell it for a satisfying price as they moved into retirement. 

[For added verisimilitude, I tried to scare up a cut of the old "carpets from the looms of Mohawk" commercial, but apparently not everything is on the web.   Búm búm bàbabàba búm búm.]

Bell Labs and Monopoly Innovation

[Repost: I put this up last night and then somehow it mysteriously disappeared.--ed.]

An insight about monopoly innovation came home to me while reading The Idea Factory, Jon Gertner's highly readable and instructive history of Bell Labs, the research arm of  Ma Bell,  the old Telephone Company.  It's a point probably old stuff to the cognoscenti but perhaps still an eye-opener to the vulgar horde (that would be me).

Here's the thing: we are all taught that the (a)  problem with monopoly is that it discourages innovation: the monopolizer grows fat and somnolent and we all pay more for less.  But Gertner demonstrates that for a generation or more, Ma Bell was one of the great innovators, and that the Labs were the engine.   But Ma Bell was a monopoly--worse, a regulated, sanctioned, monopoly, with all the power of the state behind it. How can this be?

Answer--who'd have guessed?--Ma Bell seemed to have lived through the entire time in a state of paranoid anxiety over the fear that they might lose their beloved  monopoly.  And so they hustled every way we might expect a competitor to hustle.  And more: because they were a monopoly, Ma Bell always had a surplus (a rent?) available to plow back into R&D..  Which is to say, Bell Labs.

The fear was not groundless.  We know that, of course, because in the end the government did break up Ma Bell (Bell Labs lost its moorings more or less as an incidental casualty, an afterthought).  But long before the final breakup, Ma Bell knew that parts of the government wanted to break it up and would have if they could  Ma Bell held them at bay partly through relentless innovation.  But there was a second prong to their strategy: they threw themselves into the arms of the Defense Department.  For a long time, it seems, there was a sort of functional membrane between Bell Labs and Defense that nourished organisms on both sides.

This relationship with the Defense Department suggests that there was something in Ma Bell's competitive DNA beyond mere paranoia.   That would be the competitive zeal that comes with warfare, or the threat of warfare.   Which is to say that Ma Bell was driven not just by zeal for lucre, but also by ideology and a salting of nationalist bravado.  Note to self, is there a good history of DARPA, the Defense Advanced Research Projects Agency?  And what, exactly, is/was the relationship between Bell Labs and DARPA?

In any event, in an it seems that everyone is some flavor of libertarian, it is almost impossible to imagine ourselves back into a time when the state nurtured and was nurtured by such a semi-private free-market octopus.  Even more astounding, from our blindered hindight, is the extent to which it actually worked.

Another Nice Thing about a Recession

Mark J. Perry, whose day job is making lemonade out of lemons, argues that another nice thing about recession is that it is a wide open opportunity for entrepreneurship. He's actually onto something here if you don't overdo it, but he picks a couple of funny examples to make his point.

One is Bill Gates who got his start (as Perry says, picking his words carefully) "after the 1975 recession," (my emphasis) although it is hard to identify any one thing that Gates might have done differently had he come of age in a healthier economy. One might just as plausibly say that he got started just in time to run into the firewall of Paul Volcker interest rates. Perry also mentions Gates' highly equivocal role as in "inventor"--more bluntly, the fact that he never "invented" anything, unless you count the means and technique of capturing and exploiting economic rents (this is too strong: in the very early days, he did write some code. But his fortune relies almost entirely on stuff done by others--or by suppressing competition)

The other is the game of Monopoly which Perry says (with carefully crafted nuance) "was patented during the Great Depression."

Hm. In the narrowest sense of the term, that appears to be true; Monopoly was patented in the middle of the Depression. One could go further and say that the "inventor," Charles Darrow, had time to pursue his project because he was otherwise un- (or under-) employed. You could say that Darrow (unlike Gates) actually did some of the "creation" that went into the final product.

The trouble is, as even the most superficial observers now knows, Darrow was only the lucky latest in a long line of "creators," extending at least back to the turn of the century. Parker Brothers spent most of a generation warding (or paying) off competing claims.

So both Microsoft and Monopoly are stories about the capturing and enjoying economic rents. They have little or nothing to do with creativity in general. If that is what a recession facilitates, we can well do without.