THE OLIGOPOLISTIC PROFIT CYCLE GRINDS ON
By the 1920s the American industrial economy had been operating for over a hundred years: time to check in with the evolution of our profit cycle. While industrial output was increasing during the twenties, the rate of new job creation was falling. Productivity, cost reduction and mass volumes hint that the specter of Markusen’s third stage was hiding in the decade’s shadows. New industries and sectors such as automobiles/trucks, petrochemical and aerospace had emerged; science, R&D, and new and better machines, materials and processes developed; business management improved production; consumers acquired new tastes and lost others; discretionary spending was increasing—the list goes on.
But facilities aged; production required new types of space; and logistics and transportation constantly shifted advantages and disadvantages across metro regions, the nation and the globe for that matter. Some managers were great; others made mistakes. Unions formed, ebbed and flowed (the 1920s were not particularly good years for the union movement); some brands lost touch with the consumer; mergers occurred constantly, and bankruptcies happened. And the structure—the concentration or number of firms in each sector and industry—tended to contract with each decade. Oligarchies, our code word for all of this, became more prevalent. In short, time wounds all heels, and many industry sectors had moved along our profit life cycle, deep into Stage 3 and 4.
Can We Learn How to Manage the Jurisdictional Economic Base?
We have just begun our journey through American ED history. The time period under discussion is the 1920s—nearly a hundred years ago. Our goal in this section is to set a base from which the reader can read future chapters and discern what he or she might take away for their use. This may be best done by selected case studies which raise issues, frame questions and ground expectations as to what can be done to manage the jurisdictional economic base more effectively. History, in case the reader was wondering, does not provide magic bullet answers or simple causal explanations derived from an ideology or conceptual framework. Both derive magic bullet answers because they simplify why things happen—and place the blame or find the single solution for us. Good history does none of these things. So why bother?
Rather than create a theoretical, conceptual or ideological fantasyland, history reveals that problems and crises are chronic—seldom “solved”, and history provides some idea as to when and how those who came before dealt with them. In many cases we can learn why they went wrong: a good deal of the time our future history shows economic developers and the Policy World made assumptions that did not prove valid but which seemed reasonable at the time. Most of the time these assumptions and solutions were simple and easy to follow. In some cases they fought the past wars over again, and lost. In other cases their political culture demanded or precluded solutions which did not work—maybe could not work.
Within each of the three “Parts” of this history, economic developers worked within paradigms or a framework of assumptions, key variables and solutions. These paradigms were affected by the political culture of the jurisdiction and the world they perceived surrounded them. Paradigms simplify and they create herds; herds seem to overwhelm any possibility of a paradigm’s success. Part of the problem is that, looking from the bottom up, this history sees a paradigm as one-explanation/solution-fits-all does not reflect diversity of regions, cities of different size and composition of the jurisdictional economic base. It does not encompass the variety of goals that any community may ask its economic developers to pursue. Paradigms can superimpose goals on a jurisdiction and its residents. Asking questions can check the knee-jerk application of a paradigm to a community simply because it is influential. We will return to these “questions” at the conclusion of the chapter.
A valuable initial lesson from our history, I suggest, is, whether or not the nation’s and the globe’s economic system is capitalist or state owned, the jurisdictional economic base is not under the control of local economic developers. It was created by, responds to and will travel in tandem with outside forces as they evolve through time. Local economic developers are not powerless; but they are not masters of their fate either. Like parenting, local ED is a process; you do your best and hope it works out. That is why the profit life-cycle is so helpful to economic developers: it impresses upon them the reality that the component firms and industry sectors in the economic base are not fixed, and that over time they will change. Agglomerations become oligopolies under the impact of some form of commoditization. Productivity may increase productions and profits, usually at the expense of jobs. Disruptive innovation can exert similar effects. Our friends can be our enemies.
One critical underlying paradigm of Part I is growth. The growth paradigm continues to the present day: slow growth, sustainable growth, equitable growth—growth is still with us! No one talks about decline. A problem ahead in future chapters is that Big City economic developers encounter decline and embrace a paradigm to deal with it. The paradigm’s explanation for decline is suburbia, and the solution is to assert central city hegemony over its hinterland. While fighting that war, few look at the jurisdictional economic base, other than it might be leaving for the suburbs. So the profit life-cycle grinds on through Stage 3 and into Stages 4 and 5. At the same time, the Big City regional hegemony is being silently undermined—new regions come into economic and political power with a different economic base than found in the Big City. And so we will pick up the resulting mess in Part III and a subsequent volume. In Part II economic developers take their eye off the jurisdictional economic base.
In this section three brief descriptions of important profit life cycle changes will be presented: formation and diffusion of the Detroit/Michigan/Great Lakes agglomeration; the maturation of Lehigh Valley coal-mining; and the second phase in the New England/Carolinas’ textile war. Each tale offers lessons to an economic developer—the constant is that the profit life cycle grinds on. ED cannot take for granted the sustained and eternal health and growth of firms in its jurisdictional economic base. No matter the community, no matter which political culture dominates, no matter the sector, time is not our friend. Sooner or later someone else makes decisions which affect the jurisdiction. Nothing is forever young.
Diffusion of the Auto Agglomeration
In the early decades of the twentieth century came the gazelle of all gazelles— reconstructed economic bases of Detroit, Michigan, Ohio and the Great Lakes states. That gazelle uprooted America’s existing transportation system and revolutionized logistics, eventually creating the “Asphalt Nation” (Kay, 1998). This section does not attempt anything like an auto industry history, or a penetrating assessment of its internal dynamics; it simply describes the auto industry’s geographic diffusion in the twenties through the Depression. I limit the auto industry to two sectors: assembly and auto parts-making.
Growing out of the late nineteenth-century horse and carriage industry, firms in nearly every major Northeast and Midwest state with home-bred innovators “motorized” the buggy. By 1893, autos using various power sources were in production across the Great Lake states. About 1899 the sector entered Stage 2: a period of “tremendous innovation … as the number of parts and assembly plants reached more than 2,800, the number of manufacturers of complete cars reached 181, and employment grew to 400,000” (Markusen, 1985, pp. 163–75). The Stage 2 auto industry exhibited a great deal of regional specialization in technologies: steam in Massachusetts, electricity in Connecticut and gasoline in Detroit (Markusen, 1985, p. 168). By 1903, however, the gasoline engine proved superior, and Detroit became home to the gasoline-powered auto.
Detroit’s gasoline engine evolved from gasoline-powered, combustion-marine engines for lake-going freighters. The area also housed carriage and bicycle firms that converted into auto parts suppliers. Detroit’s wonderful multi-modal location was also a low-wage, non-union town with ample workforce. So by 1903, 73 percent of all autos were made in Michigan. Ford’s revolutionary innovation was not the gasoline engine but the assembly line, which he introduced in 1903. An updated, state-of-the-art “moving” assembly line was inaugurated at Highland Park Michigan in 1914.
Using interchangeable parts, highly differentiated work tasks, and standardized design with no retooling for eleven years, Ford was able to cut the price of his car from $950 in 1909 to $295 in 1922. By 1922 Ford as a company was producing 2 million cars and controlled 55 percent of the market. (Markusen, 1985, p. 164) Concentration (oligopoly) developed within 20 years.
Henry Ford’s business model depended upon flexible, adaptive parts and machine tool manufacturers. They produced the standardized components that were assembled into a complete car; they also fabricated the machine tools needed for assembly. Close proximity to these firms was required. Within a decade labor productivity increased tenfold, and crushing price competition meant the sector had clearly moved through Stage 2 and passed into Stage 3. Stage 3 meant firms outside Detroit either had to embrace the innovation or close up shop: “Smaller firms failed in droves. Two-thirds of the firms competing at the 1919 peak disappeared by 1933 … Job growth became less dramatic as mechanization continually increased productivity” (Markusen, 1985, p. 164).
Ford distrusted what he could not personally oversee, so the Ford Corporation became vertically integrated, buying up parts companies, even raw material firms, and relocating them in the Detroit area (Klier and Rubenstein, 2010). Increasing in size/scale, relying on mass marketing and coordinated planning necessary if parts and materials arrived as needed, meant that logistics, headquarters and administrative/ advertising functions were also located in Detroit and the Great Lakes area. “Auto stimulated the output of steel, glass, pain, upholstery fabrics, and rubber … and oil (gasoline refineries) encouraged secondary agglomerations—and industry concentration.” By 1930 three corporations controlled 90 percent of the finished auto production; by 1941 only 12 companies produced cars at all (Markusen, 1985, pp. 163–6).
Hundreds of firms, scattered from Boston to Chicago, had been acquired, and many relocated or closed down. There were holes in jurisdictional economic bases throughout the North. Detroit had shot its home-brewed gazelle. Innovation and disruption were two-way streets. Oligopoly, however, operated on a one-way street. The renaissance of Detroit recalibrated the Big City and North/Midwest urban hierarchy. Chambers in affected communities were left to deal with these “adjustments”. At the same time, these are the jobs that fueled the Southern Diaspora/Great Migration. These are the jobs that absorbed the excess southern subsistence-level labor force and broke the Redeemer southern agricultural/political system. The effects of oligopoly make visible the vulnerability of the jurisdictional economic base, a phenomenon later called “uneven economic development.” The effects of oligopoly on regional economic development were profound—the South would literally not be the same again. But the auto oligopoly is not finished with jurisdictional and regional impacts.
Things changed in the 1930s. Henry Ford hated unions. He battled, often violently, with Walter Reuther and his United Automobile Workers union (UAW). In 1941 Ford finally signed a collective agreement with the UAW, the last car company to do so. Detroit and the auto industry unionized during the 1930s, and that brutal struggle prompted the auto industry management to leave town. Assembly plants were the first to go; it was cheaper to ship parts and components than an assembled vehicle. If a market area supported sales of 100,000 cars, it justified construction of a regional assembly plant: “They also sought cheaper, more tractable labor in far-flung locations”. Parts manufacturers followed assembly plants. By 1947 assembly plants had been built in Los Angeles by GM, Ford and Chrysler; Atlanta (GM, Ford); Louisville, San Jose and New Jersey (Ford); and Wilmington and Framingham (MA). Accordingly, Michigan’s share of auto employment dropped to 57 percent in 1947: “The impetus to disperse came from three factors: the push of government policy (dispersion of production facilities for military safety during World War II), the push of an organized labor force, and the pull of new markets (Markusen, 1985, pp. 169–70). What oligopoly taketh, it also giveth away.
Pennsylvania Anthracite Coal
Northeastern Pennsylvania’s eight-county anthracite coal region provides us with an interesting counter to our unfortunate fascination with Big Cities, and a companion to the New England/Carolina textile industry. The Lehigh Valley had plenty of coal, a chief source of energy, and that attracted a sizeable number of immigrants. Lehigh coal fueled the blast furnaces of Bethlehem Steel and other firms throughout the Northeast and the Great Lakes. The Lehigh story began in the 1880 when the valley’s three principal cities—Scranton (45,850), Hazleton (6935)8 and Wilkes-Barre in Pennsylvania (23,339)—were established, along with numerous “patch” towns that formed around individual mines. Population peak for all three cities was reached in 1930: (Scranton, 143,433), Hazleton (36,765) and Wilkes-Barre (86,626)—declining ever since. The highest growth period was 1880–90, but each city experienced a second growth spurt (for example in 1870–80 for Scranton and 1900–1910 for Hazleton). The high point in anthracite coal employment was 1917 (175,000); in 2000 coal mining employed fewer than 1000. These were the golden years of the anthracite coal mining region.
Local boards of trade were founded in the 1880s. Their strategy, given the cyclical nature of coal mining, was to diversify the economic base. Economic downturns depressed mining production and were lean times indeed for these communities. Specifically, boards of trade sought to bring in firms which could employ women and children of mining families. While it probably fails to warm the reader’s heart, that was the goal. Attraction targets were silk and garment firms, and the primary inducement was tax abatement. In Scranton, for instance, “Commercial lenders in that decade (1880’s) formed a board of trade, which lobbied city officials to offer ten-year tax abatements to new companies that opened operations in the city” (Dublin and Licht, 2005, p. 114).
Later, in 1913–14, the Scranton Board of Trade organized fundraising drives to seed a $1 million loan for its newly established subsidiary, the Scranton Industrial Development Company. This is the earlier discussed “Scranton Plan”, a sophisticated private-funded guarantee that was widely copied. In October 1929 the chamber set up a second fund, the Credit Guarantee Fund, to support its economic development program; and in 1939 the chamber started programs to attract and retain youth (Dublin and Licht, 2005, pp. 114–15). Hazleton, less than 50 miles south of Scranton, pretty much mirrored Scranton’s economic development saga. Recruitment by its chamber equivalent started in the 1880s, intending to diversify into the silk and shirt sectors. Firms captured by their efforts were located in an industrial, park-like “factory hill”. By the mid-1920s, 5000 (mostly female) workers were employed in the silk and shirt sectors—about 20 percent of coal-mining employment. Incentive packages included: guaranteeing a $50,000 mortgage; purchasing part of a downsizing Duplan Silk plant (1935); and offering low-rent space for other industrial tenants (Dublin and Licht, 2005, p. 116). Hazleton’s most aggressive years in economic development still lay in the future, during and immediately after World War II.
Wilkes-Barre’s Board of Trade (1880s) established programs to attract silk and lace manufacturing, but its crowning success was the 1905 relocation of the Matheson Motor Company from Holyoke Massachusetts. Matheson employed nearly 500 workers. In 1929 the chamber expanded its traditional attraction program by setting up two ED committees: an Established Industries Committee (retention), and a New Industries Committee. The Established Industries’ core program was a “buy local” initiative, and the New Industries Committee attracted firms identified from a plan prepared by its New York City-based consultant, the engineering firm Lockwood, Greene & Company (which conducted a comprehensive economic survey of the area). During the Depression decade, the chamber fundraised and established an Industrial Development Fund “that channeled the chamber’s efforts through the outbreak of World War II (Dublin and Licht, 2005, p. 117).
The most obvious observation is that these second/third-tier cities developed serious and relatively sophisticated ED programs long before the turn of the century. These boards/chambers sustained successful programs for a half-century. Planning and a consultant industry were in place previous to the Depression, and current tools and strategies (targeting, loan funds, guarantee programs, industrial parks and tax abatement) were common. As far as strategy goes, the shared focus on the need to diversify and not rely on an agglomeration was evident to these local folk in the 1880s. Their almost instinctual use of attraction supports our belief that attraction draws from “primeval” urges triggered by an unstable urban hierarchy.
But there is dark side as well. Recruitment of targeted firms did occur; at least for Hazleton it provided a measure of economic diversity. Having learned from our previous automobile discussion, the auto sector was in consolidation mode around 1905, and the Matheson Corporation moved from Grand Rapids to Holyoke Massachusetts in 1903 (acquiring assets of the defunct Holyoke Automobile Company). Its move to Wilkes-Barre in 1905 and Matheson’s subsequent failure in 1912 suggest problems. In 1919 the Owen Magnetic Automobile Company occupied the facility, and in 1920 it sold 750 cars (including one to Enrico Caruso, the famous opera tenor); but in 1921 it too went belly up. This turbulence suggests that Stage 4/5 “free-floating firms” were frequent beneficiaries of attraction programs. By the way: the Matheson facility still exists at the time of writing; best knowledge is that it remains vacant.
Ron W. Coan 