The Homebrew Industrial Revolution, Chapter One (second excerpt)

[Michel Bauwens has kindly invited me to serialize excerpts from my forthcoming book The Homebrew Industrial Revolution:  A Low-Overhead Manifesto.  Over the next several weeks, I will post two excerpts from each chapter (one excerpt a week).]

Chapter One.  A Wrong Turn (first excerpt)

The natural course of things, according to [Ralph] Borsodi, was that the “process of shifting production from the home and neighborhood to the distantly located factory” would have peaked with “the perfection of the reciprocating steam-engine,” and then leveled off until the invention of the electric motor reversed the process and enabled families and local producers to utilize the powered machinery previously restricted to the factory. [Borsodi, Prosperity and Security]  But it didn’t happen that way.  Instead, electricity was incorporated into manufacturing in an utterly perverse way.

Michael Piore and Charles Sabel described a fork in the road, based on which of two possible alternative ways were chosen for incorporating electrical power into manufacturing.  The first, more in keeping with the unique potential of the new technology, was to integrate electrically powered machinery into small-scale craft production:  “a combination of craft skill and flexible equipment,” or “mechanized craft production.”

Its foundation was the idea that machines and processes could augment the craftsman’s skill, allowing the worker to embody his or her knowledge in ever more varied products:  the more flexible the machine, the more widely applicable the process, the more it expanded the craftsman’s capacity for productive expression.

The other was to adapt electrical machinery to the preexisting framework of paleotechnic industrial organization—in other words, what was to become twentieth century mass-production industry.  This latter alternative entailed breaking the production process down into its separate steps, and then substituting extremely expensive and specialized machinery for human skill.  “The more specialized the machine—the faster it worked and the less specialized its operator needed to be—the greater its contribution to cutting production costs. [Sabel and Piore, The Second Industrial Divide]

The first path, unfortunately, was for the most part the one not taken….

The second, mass-production model became the dominant form of industrial organization.  Neotechnic advances like electrically powered machinery, which offered the potential for decentralized production and were ideally suited to a fundamentally different kind of society, have so far been integrated into the framework of mass production industry.

Mumford argued (in Technics and Civilization) that the neotechnic advances, rather than being used to their full potential as the basis for a new kind of economy, were instead incorporated into a paleotechnic framework.  Neotechnic had not “displaced the older regime” with  “speed and decisiveness,” and had not yet “developed its own form and organization.”

Emerging from the paleotechnic order, the neotechnic institutions have nevertheless in many cases compromised with it, given way before it, lost their identity by reason of the weight of vested interests that continued to support the obsolete instruments and the anti-social aims of the middle industrial era.  Paleotechnic ideals still largely dominate the industry and the politics of the Western World….

* * *

The new machines followed, not their own pattern, but the pattern laid down by previous economic and technical structures….

* * *

The fact is that in the great industrial areas of Western Europe and America…, the paleotechnic phase is still intact and all its essential characteristics are uppermost, even though many of the machines it uses are neotechnic ones or have been made over—as in the electrification of railroad systems—by neotechnic methods.  In this persistence of paleotechnics… we continue to worship the twin deities, Mammon and Moloch….

* * *

We have merely used our new machines and energies to further processes which were begun under the auspices of capitalist and military enterprise:  we have not yet utilized them to conquer these forms of enterprise and subdue them to more vital and humane purposes….

* * *

Not alone have the older forms of technics served to constrain the development of the neotechnic economy:  but the new  inventions and devices have been frequently used to maintain, renew, stabilize the structure of the old social order….

* * *

The present pseudomorph is, socially and technically, third-rate.  It has only a fraction of the efficiency that the neotechnic civilization as a whole may possess, provided it finally produces its own institutional forms and controls and directions and patterns.  At present, instead of finding these forms, we have applied our skill and invention in such a manner as to give a fresh lease of life to many of the obsolete capitalist and militarist institutions of the older period.  Paleotechnic purposes with neotechnic means:  that is the most obvious characteristic of the present order.

Mumford used  Spengler’s idea of the “cultural pseudomorph” to illustrate the process:  “…in geology… a rock may retain its structure after certain elements have been leached out of it and been replaced by an entirely different kind of material.  Since the apparent structure of the old rock remains, the new product is called a pseudomorph.”

A similar metamorphosis is possible in culture:  new forces, activities, institutions, instead of crystallizing independently into their own appropriate forms, may creep into the structure of an existing civilization….  As a civilization, we have not yet entered the neotechnic phase….

How were existing institutional interests able to thwart the revolutionary potential of electrical power, and divert neotechnic technologies into paleotechnic channels?  The answer is that the state tipped the balance.

The state played a central role in the triumph of mass-production industry in the United States.

The state’s subsidies to long-distance transportation were first and most important. There never would have been large manufacturing firms producing for a national market, had not the federal government first created a national market with the national railroad network.  A high-volume national transportation system was an indispensable prerequisite for big business.

We quoted Mumford’s observation above, that the neotechnic revolution offered to substitute industrialization by local economic development for reliance on long-distance transport.  State policies, however, tipped the balance in the other direction:  they artificially shifted the competitive advantage toward industrial concentration and long-distance distribution.

Alfred Chandler, the chief apostle of the large mass-production corporation, himself admitted as much:  all the advantages he claimed for mass production presupposed a high-volume, high-speed, high-turnover distribution system on a national scale, without regard to whether the costs of the latter exceeded the alleged benefits of the former….

The railroad and telegraph, “so essential to high-volume production and distribution,” were in Chandler’s view what made possible this steady flow of goods through the distribution pipeline.

The primacy of such state-subsidized infrastructure is indicated by the very structure of Chandler’s book.  He begins with the railroads and telegraph system, themselves the first modern, multi-unit enterprises.  And in subsequent chapters, he recounts the successive evolution of a national wholesale network piggybacking on the centralized transportation system, followed by a national retail system, and only then by large-scale manufacturing for the national market.  A national long-distance transportation system led to mass distribution, which in turn led to mass production….

In other words, the so-called “internal economies of scale” in manufacturing could come about only when the offsetting external diseconomies of long-distance distribution were artificially nullified by corporate welfare.  Such “economies” can only occur given an artificial set of circumstances which permit the reduced unit costs of expensive, product-specific machinery to be considered in isolation, because the indirect costs entailed are all externalized on society.   And if the real costs of long-distance shipping, high-pressure marketing, etc., do in fact exceed  the savings from faster and more specialized machinery, then the “efficiency” is a false one….

The national railroad system simply never would have come into existence on such a scale, with a centralized network of trunk lines of such capacity, had not the state rammed the project through.

Piore and Sabel describe the enormous capital outlays, and the enormous transaction costs to be overcome, in creating a national railroad system.   Not only the startup costs of actual physical capital, but those of securing rights of way, were “huge”:

It is unlikely that railroads would have been built as quickly and extensively as they were but for the availability of massive government subsidies.

Other transaction costs overcome by government, in creating the railroad system, included the revision of tort and contract law (e.g., to exempt common carriers from liability for many kinds of physical damage caused by their operation).

According to Matthew Josephson (The Robber Barons), for ten years or more before 1861, “the railroads, especially in the West, were ‘land companies’ which acquired their principal raw material through pure grants in return for their promise to build, and whose directors… did a rushing land business in farm lands and town sites at rising prices.”…

The federal railroad land grants… included fifteen mile tracts of land on either side of the actual right of way.  As the railroads were completed, this land skyrocketed in value.  And as new towns were built along the railroad routes, every house and business was built on land sold by the railroads.  The tracts included valuable timber land, as well….

Absent the land grants and government purchases of railroad bonds, the railroads would likely have developed instead along the initial lines described by Mumford:  many local rail networks linking communities into local industrial economies.  The regional and national interlinkages of local networks,  when they did occur, would have been far fewer and far smaller in capacity.  The comparative costs of local and national distribution, accordingly, would have been quite different.  In a nation of hundreds of local industrial economies, with long-distance rail transport much more costly than at present, the natural pattern of industrialization would have been to integrate small-scale power machinery into flexible manufacturing for local markets.

Instead, the state artificially aggregated the demand for manufactured goods into a single national market, and artificially lowered the costs of distribution for those serving that market.  In effect, it created an artificial ecosystem to which large-scale, mass-production industry was best “adapted”….

Besides almost single-handedly creating the artificially unified and cheap national market without which national manufacturers could not have existed, the railroad companies also actively promoted the concentration of industry through their rate policies.  Piore and Sabel argue that “the railroads’ policy of favoring their largest customers, through rebates,” was a central factor in the rise of the large corporation.”…

“Indeed, seen in this light, the rise of the American corporation can be interpreted more as the result of complex alliances among Gilded Age robber barons than as a first solution to the problem of market stabilization faced by a mass-production economy.”

Second, the American legal framework was transformed in the mid-nineteenth century in ways that made a more hospitable environment for large corporations operating on a national scale.  Among the changes were the rise of a general federal commercial law, general incorporation laws, and the status of the corporation as a person under the Fourteenth Amendment.  The functional significance of these changes on a national scale was analogous to the later effect, on a global scale, of the Bretton Woods agencies and the GATT process:  a centralized legal order was created, prerequisite for their stable functioning, coextensive with the market areas of large corporations….

Third, not only did the government indirectly promote the concentration and cartelization of industry through the railroads it had created, but it did so directly through patent law.   …[M]ass-production requires large business organizations capable of exercising sufficient power over their external environment to guarantee the consumption of their output.  Patents promoted the stable control of markets by oligopoly firms through the control, exchange and pooling of patents.

According to David Noble (America by Design), two essentially new science-based industries (those that “grew out of the soil of scientific rather than traditional craft knowledge”) emerged in the late 19th century:  the electrical and chemical industries.

In the electrical industry, General Electric had its origins first in a merger between Edison Electric (which controlled all of Edison’s electrical patents) and the Sprague Electric Railway and Motor Company, and then in an 1892 merger between Edison General Electric and Thomas-Houston—both of them motivated primarily by patent considerations….   From the 1890s on, the electrical industry was dominated by two large firms:  GE and Westinghouse, both of which owed their market shares largely to patent control.  In addition to the patents which they originally owned, they acquired control over patents (and hence over much of the electrical manufacturing market) through “acquisition of the patent rights of individual inventors, acquisition of competing firms, mergers with competitors, and the systematic and strategic development of their own patentable inventions.  As GE and Westinghouse together secured a deadlock on the electrical industry through patent acquisition, competition between them became increasingly intense and disruptive.  By 1896 the litigation cost from some three hundred pending patent suits was enormous, and the two companies agreed to form a joint Board of Patent Control….

The structure of the telephone industry had similar origins, with the Bell Patent Association forming “the nucleus of the first Bell industrial organization” (and eventually of AT&T)  The National Bell Telephone Company, from the 1880s on, fought vigorously to “occupy the field” (in the words of general manager Theodore N. Vail) through patent control.  As Vail described the process, the company surrounded itself

with everything that would protect the business, that is the knowledge of the business, all the auxiliary apparatus; a thousand and one little patents and inventions with which to do the business which was necessary, that is what we wanted to control and get possession of….

This approach strengthened the company’s position of control over the market not only during the seventeen year period of the main patents, but (as Frederick Fish put it in an address to the American Institute of Electrical Engineers) during the subsequent seventeen years of

each and every one of the patents taken out on subsidiary methods and devices invented during the progress of commercial development.  [Therefore] one of the first steps taken was to organize a corps of inventive engineers to perfect and improve the telephone system in all directions …that by securing accessory inventions, possession of the field might be retained as far as possible and for as long a time as possible….

Even with the intensified competition resulting from the expiration of the original Bell patents in 1894, and before government favoritism in the grants of rights-of-way and regulated monopoly status, the legacy  effect of AT&T’s control of the secondary patents was sufficient to secure it half the telephone market thirteen years later, in 1907….

By the time the FCC was formed in 1935, the Bell System had acquired patents to “some of the most important inventions in telephony and radio,” and “through various radio-patent pool agreements in the 1920s… had effectively consolidated its position relative to the other giants in the industry.”  In so doing, according to an FCC investigation, AT&T had gained control of “the exploitation of potentially competitive and emerging forms of communication” and “pre-empt[ed] for itself new frontiers of technology for exploitation in the future….”

The radio-patent pools included AT&T, GE and Westinghouse, RCA (itself formed as a subsidiary of GE after the latter acquired American Marconi), and American Marconi.  Alfred Chandler’s history of the origins of the consumer electronics industry (Inventing the Electronic Century) is little more than an extended account of which patents were held, and subsequently acquired, by which companies….

The American chemical industry, in its modern form, was made possible by the Justice Department’s seizure of German chemical patents in WWI…

More generally,  patents are an effective tool for cartelizing markets in industry at large.  They were used in the automobile and steel industries among others, according to Noble.  In a 1906 article, mechanical engineer and patent lawyer Edwin Prindle described patents as “the best and most effective means of controlling competition.”…

And unlike purely private cartels, which tend toward defection and instability, patent control cartels—being based on a state-granted privilege—carry a credible and effective punishment for defection.

Through their “Napoleonic concept of industrial warfare, with inventions and patents as the soldiers of fortune,” and through “the research arm of the ‘patent offensive,’” manufacturing corporations were able to secure stable control of markets in their respective industries.

These were the conditions present at the outset of the mass production revolution, in which the development of the corporate industrial economy began.  In the absence of these necessary preconditions, there simply would not have been a single national market or large industrial corporations serving it.  Rather than being adopted into the framework of the paleotechnic factory system, the introduction of electrical machinery would likely have followed its natural course and lived up to its unique potential:  powered machinery would have been incorporated into small-scale production for local markets, and the national economy would have developed as “a hundred Emilia-Romagnas.”

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