The Modern Corporation

The dominant institution in the peripheral economy in the contemporary period is the foreign affiliate or branch plant of the great modem corporation. In a recent book, Professor John Galbraith has given a name to that part of the American economy which is characterised by “a few hundred technically dynamic, massively capitalized and highly organized corporations.” He calls it the “Industrial System”. What is important here is not the particular name Galbraith has chosen to distinguish the phenomenon; it is the fact that he perceives so clearly how a system characterized by very large corporations is qualitatively different in its processes from a system which is comprised of an infinite number of small enterprises. These differences are crucial in understanding the impact of the expansion of the metropolitan corporation on the hinterlands: the peripheral fringes and margins of their domain. The hinterlands are the countries in which subsidiaries are located to supply the corporations with their inputs of raw materials and to organize the disposition of their outputs of consumer, intermediate and capital goods. The result is the re-creation of certain patterns of the old mercantilism and the fragmentation and destruction of national economics and associated natural political systems in states such as Canada and some of the Latin American counties. Present conditions are particularly unfavourable to national economic and political integration in the man new states established in the post-war period. Thus we are witnessing a simultaneous process of decolonization and re-colonization.

In summary, Galbraith’s argument runs as follows: the imperatives of modem technology increase both the amount of capital committed and the time for which it is committed. Further, the commitment of time and money, tends to be ever more specific to a given task. This sets up requirements for specialized manpower, and the inevitable counterpart of specialization, which is organization.

In the interest of securing high and growing profits and of reducing risk and uncertainty, the firm is motivated to engage in planning. It may be added here, in anticipation, that risk is not so much eliminated as shifted to small scale entrepreneurs and to the peripheral, or hinterland economics.

The Industrial System entails a shift of power from the ‘classical’ entrepreneurs and suppliers of capital to the corporate techo-structure:

“Technology, with its companion commitment of time and capital means that the needs of the consumer must be anticipated – by months or years. . . In addition to deciding what the consumer will want and will pay, the firm must take every feasible step to see that what it decides to produce is wanted by the consumer at a remunerative price. It must see that the labour, materials and equipment that it needs will be available at a cost consistent with the price it will receive. It must exercise control what is supplied. It must replace the market with planning.”

Contrary to the postulates of economic doctrine, it follows that the initiative in deciding what is produced comes not from the sovereign consumer who issues instructions to the market which bend the productive mechanism to his will; but rather it comes:

“from the great producing organization which reaches forward to control the markets that it presumes to serve and beyond, to bend the consumer to its needs, and in so doing it deeply influences his values and beliefs.”

The economic calculus whereby the corporation nets to shape consumer tastes and “needs” is central to our argument. For, the creation of particular tastes for particular products largely determines the technology to be used, the parts, supplies and capital goods req11ired, the complementary goods demanded the particular professional skills used, and the channels of distribution through which inputs and outputs flow. The significance of this for our analysis, of the international economy lies in the advantage which accrues to centralization of control and power in the head offices of the “international” corporation.

In pursuit of security, the corporation is driven to maximise control over all markets by planning:

“The common strategy requires that the market be replaced by an authoritative determination of price and the amounts to be sold and bought at these prices.”

There are. says Galbraith, three ways of doing this: the market can be superseded; it can be controlled by buyers and sellers; or it can be suspended for definite or indefinite periods by contracts between the parties.

“The market is superseded by what is commonly called vertical integration. The planning unit takes over the source of supply or the outlet. Where a firm is specially dependent on an important material or product as an oil company on crude petroleum, a steel company on ore, an aluminium company on bauxite, there is always danger that the requisite supplies will be available only at inconvenient prices…”

As viewed by the firm, elimination of a market converts an external negotiation, a partially or wholly uncontrollable decision to a matter for purely internal decision. “Nothing, we shall see, better explains modern industrial policy … than the desire to make these highly strategic cost factors subject to purely internal decision.”

The author concludes that the most obvious requirement for effective planning by the firm to protect and secure long-term profit is size. There is therefore virtually no limit on the size of the corporation. Size is not, as economists generally believe determined by the requirements of economics of modern large-scale production; nor is it determined simply by the desire to exercise monopoly power in markets. The typical corporation is large enough to afford a score of productions units of optimum technical size, and frequently extends into the production of a diversity of goods. As for market power an associated with monopoly, the threat of competition requires a constant stream of product-innovations designed to capture markets by want-creation and product differentiation.

“The size of General Motors is in the service not of monopoly. or the economies of scale but of planning. And for this planning control of supply, control of demand, provision of capital, minimisation of risk – there is no clear upper limit to the desirable size. It dates to this need. Quite clearly it allows the firm to be very, very large”

The concentration of power in the hands of a relatively small number of corporation has proceeded at a very rapid rate. What is more, concentration in search and development expenditures which are crucial in maintaining technological superiority is proceeding even more rapidly than concentration in assets and sales. Because of the well-established pay-off to research, the tendency to concentration is self-reinforcing.

In 1960, in the United States, four corporations accounted for 22 per cent of all industrial and development expenditures. Three hundred and eighty-four corporations employing 5,000 or more workers accounted for 85 per cent of research and development expenditures, while 260,000 rums employing fewer than 1,000 workers ,1ccounted for only 7 per cent of research and development expenditures

The strategy of eliminating market uncertainty by eliminating the market is not confined to the procuring of supplies and the disposition of outputs. The capital market has also been severely restricted.

The control of the supply of savings is strategic for industrial planning No form of market uncertainty is so serious as that involving the terms and conditions on which capital is obtained. Insofar as the corporation can rely on self-financing. the decision on what will be saved and what will be invested has been converted into an internal decision.

It is well known that personal savings are a relatively unimportant source of finance, compared with the internal savings of business. In 1965. in the United States, savings by individuals much of it institutional, amounted to $25 billion while business saving was $84 billion.

By and large, the big corporation no longer faces the risk if the capital market:

“It concedes no authority to outsiders. It has full control over its rate of expansion, over the nature of that expansion and over decisions between products, plans and processes. No banker can impose conditions as to how retained earnings are to be used. Nor can any other outsider. It is hard to over-estimate the importance of the shift in power that ls associated with the availability of such a source of capital. Few other developments can have more Fundamentally altered the nature of capitalism.”

The success of the strategies described by Galbraith is reflected in a fact which, he points out, has been little noticed: the big corporations do not lose money. For instance, in 1957 which was a year of recession, not one of the hundred largest corporations failed to tum in a profit. Only one of the largest two hundred finished the year in the red.

In textbooks, profit is variously described as the reward for risk-taking or the reward for saving, the reward for abstinence. According to our argument, the big corporation has largely eliminated risk. The decision to save is not made by the individual earner of income – the corporation does not give him the choice. It is governed by the drive to concentrate control and rower. As Galbraith sees it:

“The individual serves the industrial system, not by supplying it with savings and the resulting capital. He serves it by consuming its products. In no other matter is he so elaborately and skilfully and expensively instructed.”

The shaping of consumer tastes is central to the strategy of profit maximization of the large corporation. Seen in this light it is the corporation which is sovereign. The consumer is captive. The savings of the corporation arise from the sale of goods produced by persons who as consumers have- been conditioned to need paquotille. Galbraith reminds us that, in the olden days, commodities such as tobacco, alcohol, and opium which involved a physical and progressive addiction were considered useful trade goods. Nowadays:

“In all underdeveloped countries, the introduction of new consumer goods- cosmetics, motor scooters, transistor radios, canned food, bicycle, phonograph records, movies, American cigarettes, is recognised to be of the highest importance in the strategy of economic development.”

It is becoming clear that this strategy of economic development is really a strategy of long term profit maximization of the international corporations.

Because economies of scale in research, design and technology are realised by spreading costs over total output, which include output sold in metropolitan markets, the profitability of the parent corporation is assisted by every influence which eliminates cultural resistance to the consumption patterns of the metro polis. The corporation thus has a vested interest in the destruction of cultural differences and homogenization of the way of life, the world over.

In a deep insight into the “internationalism” of the modem corporation. George Grant has observed that “corporation capitalism and liberalism go together in the nature of things” and that “liberalism is the ideological means whereby individual cultures are homogenised. Further, he observed that ‘’at the heart of modern liberalism lies the desire to homogenize the world Today’s natural and social sciences are consciously produced as instruments to this end.” In this context it appears that the economists are the high priests of modem capitalism – they have elevated the rate of increase of consumption of goods and services to the ultimate criterion of social good.

For the corporation, there is no shortage of capital – only a shortage of homogenized consumers. The corporation has institutionalised capital accumulation within the framework of its organization. The process is self-sustaining and self-financing so long as new products can be devised and new markets created. In the words of an executive of the Proctor and Gamble Company:

“Our problem is not access to capital and I believe this is true of most American companies. Our problem is the development of ideas that will justify the investment of capital.”

Galbraith’s model of the New Industrial State is largely drawn from the experience of the USA and focuses attention on the role of the American corporation within the domestic economy. But his insights are particularly helpful in understanding the operations of the corporations in the international economy. They illuminate the processes which have created an “overseas economy” of the United States corporations whose annual sales had reached $90 billion by 1964 almost four times the total value of U.S. commodity exports.