Business

Business. Modern capitalist economic progress began during the seventeenth and eighteenth centuries, just when the thirteen colonies that would form the United States were being settled. Such corporate enterprises as the Massachusetts Bay Company, the Virginia Company of London, and the Royal African Company even brought immigrants to the New World. This latter corporation's commerce in human beings constituted only a small fraction of the transatlantic slave trade, but it symbolized the extent to which businesspeople on both sides of the Atlantic were willing to go to make a profit. Most white immigrants to America during the eighteenth and early nineteenth centuries came as indentured servants. In this business transaction, the would‐be immigrant exchanged three to seven years of service for passage to a land of enhanced opportunity. Mostly self‐selected risk takers, indentured servants embraced an entrepreneurial culture once their terms of servitude ended.

Statistical Gauges of Business Success.

The modern capitalist era marked a profound historical discontinuity. For the 8,000 years of recorded human experience up to around 1700, most people lived on the edge of survival. Their incomes grew slowly, if at all. But beginning the First Industrial Revolution in about 1760, business growth accelerated. Between 1820 and 2000, per‐capita incomes in the United States doubled every forty‐two years—a phenomenal business achievement and “miracle” of economic growth.

Only a few major countries attained such growth, and all were organized around capitalist economies. Of the twenty‐five nations classified as “high‐income” countries by the early twenty‐first century, the United States had long occupied a special position. Its economy was the world's largest—double that of the runner up, Japan. The per‐capita purchasing power of Americans ranked first among major countries. The volume of U.S. industrial production also ranked first, as it had since the 1880s. So too, during much of this period, had its productivity (value of output per hour of work) in manufacturing, distribution, services, construction, mining, and most other business activities.

The Ongoing Role of Immigrants.

People of many nationalities and ethnic groups made fundamental contributions to American business throughout the nation's history. The early Treasury secretaries Alexander Hamilton (from the West Indies) and Albert Gallatin (from Switzerland) played vital roles in shaping a national economy hospitable to entrepreneurship. Immigrant businessmen formed companies that became internationally leading firms. In 1837, for example, William Procter, a candlemaker from England, and James Gamble, a soap boiler from Ireland, founded Procter and Gamble, which became the world's largest consumer‐products company. John Jacob Astor, a poor immigrant from Germany, amassed a vast fortune in the fur trade, transoceanic commerce, and New York City real estate. Daniel McCallum (Scotland), general superintendent of the New York and Erie Railroad, published the earliest known treatise on business administration in 1855. In the 1870s, while working for the Louisville and Nashville Railroad, Albert Fink (Germany) devised such an ingenious method of separating fixed costs from variable costs (a distinction vital in accounting and business planning) that he later became known as the “Father of Railway Economics.” Andrew Carnegie, who emigrated from Scotland, became the world's greatest steel magnate.

Twentieth‐century immigrants continued to make vital contributions to American business. David Sarnoff, born in a Russian shtetl, emigrated to the United States as a boy. Without formal education beyond the eighth grade, he became the architect and chief executive officer of the Radio Corporation of America (RCA), a leader in radio network broadcasting (NBC, 1926) and television research and development. Other Jewish immigrants from Eastern Europe, such as Samuel Goldwyn (Poland) and Louis B. Mayer (Russia), built movie studios that made Hollywood the world's entertainment capital.

During the 1970s, An Wang (China) innovated in producing mini‐computers and office workstations. In the 1980s, Roberto Gouizeta (Cuba) became chief executive officer (CEO) of the Coca‐Cola Company and led it to unprecedented growth. In the 1990s, Alex Trotman (Scotland) served as CEO of the Ford Motor Company and presided over its “globalization.”

Just as the “American” business achievement drew freely on the abilities of diverse immigrants, so did business‐related American science and technology. In the 1790s, during the First Industrial Revolution, Samuel Slater (England) brought the power loom to the budding American textile industry. The du Pont family (France) founded a small gunpowder firm in 1802 that eventually became the world's leading chemical company. In the early twentieth century, Charles Steinmetz (Germany), the resident inventive genius at General Electric, led that company's move into high‐tech products.

In the 1930s and 1940s, a cadre of brilliant physicists, chemists, and mathematicians fleeing Nazi Europe, including as Albert Einstein (Germany), Enrico Fermi (Italy), Niels Bohr (Denmark), Hans Bethe (Germany), and John von Neumann (Hungary), advanced the frontiers of American science. Augmenting this distinguished group were immigrant German rocket scientists who had worked for the Nazi regime, the best‐known of whom was Werner von Braun. Much of late‐twentieth‐century American leadership electronics, nuclear, and aerospace derived from the scientific and entrepreneurial talents of immigrants. Andrew Grove (Hungary), a key figure in the rise of Intel Corporation, played such a key role in the development of microprocessors that Time magazines named him its “Person of the Year” for 1997. Intel and hundreds of other information‐technology firms, including Hewlett‐Packard, Apple Computer, Sun Microsystems, Oracle, and Cisco Systems, set up their headquarters in California's Silicon Valley, southeast of San Francisco. Collectively, these companies spearheaded American economic growth at the turn of the twenty‐first century—and became a powerful magnet for still another flood of immigrant talent, notably from East Asia and South Asia.

Attitudes and Ideologies.

From the start, many American businesspeople were unabashedly ambitious about increasing their fortunes. Benjamin Franklin wrote in his Autobiography that as a young Philadelphia printer he had taken care “not only to be in reality industrious and frugal but to avoid all appearances to the contrary.” In The Protestant Ethic and the Spirit of Capitalism (1904–1905), the German sociologist Max Weber declared that Franklin's sentiments expressed “above all the idea of a duty of the individual toward the increase of his capital, which is assumed as an end in itself.” In earlier times, Weber added, that this new way of thinking, which “called forth the applause of a whole [American] people, would have been proscribed as the lowest sort of avarice and as an attitude entirely lacking in self‐respect.”

Yet even in the Colonial and Early National Eras, a large proportion of Americans fervently embraced the opportunities afforded by the North American continent's rich resources. They also benefited from a pro‐business legal system inherited from the British, particularly rules protecting property rights. Taking the sanctity of contracts almost for granted, they started thousands of proprietorships and partnerships in cities along the eastern seaboard: Boston, Newport, New York, Philadelphia, Baltimore, and Charleston. Moving westward, they not only established farms, but also opened innumerable small businesses.

Early nineteenth‐century Americans enacted laws to promote this business growth, such as general incorporation laws, very low tax rates, and liberal bankruptcy proceedings. Relying on this latter advantage, which shifted part of the risk of doing business from entrepreneurs to creditors, Americans showed themselves singularly willing to traffic in personal and business credit. This trait, fully evident by the mid‐nineteenth century, has remained a hallmark of the nation's business and consumer culture. By 2000, business and consumer debt stood at several trillion dollars each, and Americans possessed well over a billion credit cards.

Throughout the nation's history, most of the American electorate endorsed the business system. They took political action to restrain it less frequently than did voters in other democratic capitalist countries, not to mention socialist ones. They tolerated the gyrations of the business cycle more willingly, including dozens of recessions and several deep economic depressions. The worst of all business downturns, the worldwide Great Depression of the 1930s, hit the United States harder than almost any other nation, but resulted in less political turmoil than occurred in Germany, Japan, Britain, France, Italy, and many other countries.

The individualistic laissez‐faire ideology embraced by most Americans promoted a high degree of entrepreneurial effort and released an immense amount of business energy. But the social and environmental cost of business success sometimes proved woefully high. Up until the New Deal Era of the 1930s, and in many ways beyond that, business exploited children, women, minorities, and laborers of all types. The United States consistently had a lower percentage of unionized workers than did comparable countries. Even in the early twenty‐first century, American business and its political allies—in contrast to Great Britain, France, Germany, and Japan—did a relatively ineffectual job of protecting those who found it hard to compete within the system. By 2000, the gap between rich and poor had become greater in the United States than in any other developed country, reversing both a national commitment to equality and a sixty‐year statistical trend. Some CEOs of large American firms were receiving 400 times the earnings of the lowest‐paid members of their own companies. This multiple far exceeded the averages in Europe or Japan, and was ten times the rate in the United States itself as recently as 1975.

African Americans and Women.

The extraordinary mixture of cultures and nationalities resulting from mass immigration became the defining trait of the American business system. The 1900 census revealed that a majority of the nation's seventy‐six million people were either nonwhite, immigrants, or second‐generation Americans. Despite the record of economic exploitation, one of the signal triumphs of American society and its business system was to absorb the best contributions of a myriad of cultures without disintegrating under the stress of racial and ethnic strife. The great exception, of course, was the Civil War. But while that conflict ended slavery and gave millions of African Americans a chance to participate in the business opportunities available to their fellow citizens, progress proved slow for a century after emancipation. Open racism prevailed in business up until the post–World War II civil rights movement and the landmark voting rights and public‐accommodation laws enacted during the 1960s. Equality in employment opportunity was the last barrier to fall, and in mainstream American business it did not begin to come down until about the 1970s. Despite significant progress, latent racism continued to plague American business into the twenty‐first century.

Discrimination also hampered most American women who attempted business careers. In 1900, females comprised only 4.5 percent of all U.S. managers, proprietors, and other business officials, and by 1940 only 11 percent. But women's business opportunities grew markedly after 1970, epitomized by the careers of Estée Lauder, Mary Kay Ash, Oprah Winfrey, Margaret Whitman, and other entrepreneurs. By 2000, about 40 percent of all new firms were being started by women, and women had made extraordinary gains in business‐related professions such as law and accounting. In big business, however, the “glass ceiling” remained formidable. In 2000, only three of America's 500 largest firms had female chief executive officers, and only two were headed by African Americans.

Even so, entrepreneurial activity by African American, Asian, and Hispanic businesspeople—both men and women—has historically been far greater than is commonly recognized. Devoting their energies to enterprises often overlooked by historians who have tended to focus on large firms, members of these groups operated service businesses such as insurance companies, small stores, dressmaking and millinery boutiques, barber and beauty salons, and shoe repair shops, catering primarily to members of their own ethnic or gendered clienteles.

The First Industrial Revolution.

Scholars disagree over whether the term “industrial revolution” is applicable to business. Critics point out that economic growth seldom occurs in tumultuous spurts analogous to violent political upheavals. Instead, business typically evolves through the steady accretion and dissemination of small and medium‐sized gains in technology and organizational design.

Yet, breakthroughs such as the telegraph, railroad, electric motor, internal combustion engine, computer, polymerization of chemicals, and the mapping of the human genome do tend to accelerate business growth. And even in normal times, business never stands still. Entrepreneurial energies and competitive pressures promote what the economist Joseph Schumpeter aptly termed a “perennial gale of creative destruction.” A constant succession of new products, new firms, and new forms of business organizations are forever sweeping away old ones. So the idea of industrial revolutions, though flawed, does offer a useful framework for understanding the evolution of American business.

During the First Industrial Revolution, from about 1760 to 1840, the new roads and canals markedly improved American business productivity. In a few industries, factories first appeared, steam power began to replace water and animal power, and work was regulated by the clock rather than by the sun and seasons. Machine‐based mass production was adopted for some products, most notably cotton textiles, and prices of these products dropped precipitously.

Most businesses remained small in these years, employing at most a few hundred workers and never more than a thousand. An artisanal and mercantile economy predominated, as opposed to a full‐fledged industrial one. Thousands of modest proprietorships and partnerships—grocers, blacksmiths, fabric merchants, printers, tailors, dressmakers, milliners—sold specialized goods. Most remained local, and almost no products were branded. Kinship and religious affiliations, by enforcing commercial commitments through non‐economic sanctions, figured significantly in financing and maintaining business relationships, because they helped to enforce commerical commitments through non‐economic sanctions. The same had been true in colonial times for New England's Puritan merchants and for southern planters marketing their products.

The largest companies of the First Industrial Revolution, measured by their market value, were banking, insurance, and canals. Some of these firms survived into the twenty‐first century as big businesses, such as Citigroup, Fleet Financial Group, and Cigna Corporation (insurance). Through special acts passed by state legislatures, a few hundred such firms operated as corporations. (To put this early nineteenth‐century figure in perspective, tens of thousands of corporations were doing business by 1900, and 4.5 million by 2000.) Still, most American enterprises have always been small proprietorships or partnerships, of which there were more than 15 million in 2000.

The Second Industrial Revolution.

The corporate form accelerated the progress of business during this crucial era, roughly 1850–1950. Practically all states stopped requiring special acts of incorporation and instead passed general laws permitting groups to incorporate for any legitimate business purpose. Some states vied with each other in offering generous terms. This “charter mongering” led to the incorporation of many prominent firms' headquarters in New Jersey and Delaware, each of which offered low fees for incorporation and permitted holding companies to own subsidiary corporations.

The advantages of corporations over proprietorships and partnerships included limited liability, easier financing, and institutional permanence. Most important, corporations afforded far more efficient means of governance, through stockholder oversight and hierarchical management structures based on merit rather than family connection or social standing.

The 1880s proved an especially portentous decade for the development of American business. As the commercialization of electricity, the telephone, and the internal combustion engine began in earnest, entrepreneurs founded scores of important new companies. Among the firms started in this decade (some with different names originally) one finds Scott Paper, the Times Mirror Company, Kroger, Dresser Industries, Consolidated Edison, Eastman Kodak, Chiquita Brands, Honeywell, Johnson and Johnson, Tyco International, Avon Products, Coca‐Cola, Sears Roebuck, Sun Oil, Union Carbide, Unisys, Upjohn, US West, Hershey Foods, Westinghouse, Merck, Alcoa, Abbott Laboratories, Amoco, Pennzoil, and Berkshire Hathaway.

During the Second Industrial Revolution, the telegraph and then the telephone made instantaneous communication possible on a broad scale. Between 1840 and 1890, railroad firms laid down more than 200,000 miles of new tracks. Around 1900, the automobile, truck, and airplane all materialized in a remarkably brief time. Both the Ford Motor Company and General Motors were founded during the first decade of the new century; Boeing in 1916; and Chrysler, Lockheed, Douglas Aircraft, Yellow Freight, Delta Airlines, and United Airlines during the 1920s.

Meanwhile, alongside mass production, most of the modern institutions of mass marketing—department stores, franchised outlets, catalogue stores, and chain retailers—appeared during this era as well. Numerous companies, including many of those listed above, “integrated vertically”—that is, they both produced and marketed goods. In some cases they also procured raw materials and conducted research and development in‐house.

This multifunctional approach gave rise to the “multi‐divisional structure” in the governance of firms, as several large corporations began to organize their divisions along product lines rather than functional ones, giving bottom‐line responsibility to division heads who oversaw both the production and marketing of particular products. The older functional system, under which sets of executives handled production, sales, and purchasing of all items across the company, made it difficult to pinpoint responsibility when problems arose. The new multidivisional system, by contrast, carved giant companies into smaller segments categorized by individual products, and gave aspiring managers a clear path up the corporate ladder. Created in the early 1920s almost simultaneously by Alfred P. Sloan Jr. at General Motors and by several DuPont executives, the multidivisional structure proved to be the most influential organizational innovation of the twentieth century. Companies in the United States and worldwide emulated it, particularly after World War II, when many firms began offering different lines of products.

Although the vast majority of Second Industrial Revolution businesses remained small or medium‐sized, a few became giants. The Pennsylvania Railroad employed more than 100,000 people by the 1890s, General Motors several hundred thousand by the 1940s, and the American Telephone and Telegraph Company about one million before its breakup under antitrust pressures during the 1980s. Some companies (Singer Sewing Machines, H.J. Heinz, Ford Motor Company) grew large through internal expansion. Others (United States Steel, International Harvester, General Electric) resulted from major mergers. Prominent financiers such as the investment banker J.P. Morgan organized several large combinations. But in the United States during the Second Industrial Revolution, finance proved less important as a source of business innovation than in other major economies, notably those of Germany and Japan.

Most companies that became “big businesses” shared certain common characteristics, all of which differed from conventional business practices during the First Industrial Revolution. They tended to be capital‐intensive, and vertically integrated, and to serve national (and sometimes international) mass markets with standardized, machine‐manufactured products. They typically generated enormous cash flows and financed their operations through retained earnings more than by issuing stocks and bonds. These Second Industrial Revolution firms employed large staffs of professional managers organized in formal hierarchies.

The Third Industrial Revolution: 1950s and Beyond.

In this fertile business era, the percentage of jobs in the service sector came to exceed the total in manufacturing, mining, construction, and agriculture combined. Beginning in the 1980s, many corporations downsized their staffs, flattened their hierarchies, and outsourced their non‐core functions. These steps derived from intensified competition both domestically and from overseas challengers such as Japanese automobile and consumer electronics companies. A third trend in business growth, and in the long run the most important, was the driving force of science and technology. This was not an altogether new phenomenon, of course. The steam engine had symbolized the First Industrial Revolution and the electric motor and internal combustion engine the Second. But the Third Industrial Revolution brought unparalleled levels of scientific knowledge readily applicable to business: jet engines, rocket power, nuclear power, satellite communications, lasers, computer hardware and software, robotics, and a dazzling array of new chemicals based on polymer science and of pharmaceuticals based on genetic research and development.

A simple listing of representative new companies and their founding dates illustrates the nature of the Third Industrial Revolution. Note the preponderance of service firms, high‐tech companies, and marketers of international scope. In the 1940s, Wal‐Mart, Mattel, Toys “ɹ” Us, McDonald's, and Circuit City; in the 1950s, Eckerd Drugs, Caldor, and Service Merchandise; in the 1960s, MCI Communications, Turner Broadcasting, Nike, Intel, The Gap, The Limited, and Columbia HCA Healthcare; in the 1970s, Federal Express, Microsoft, Apple Computer, and Home Depot; in the 1980s, Compaq, Sun Microsystems, Dell Computer, and Gateway; in the 1990s, an explosion of Internet‐based firms such as eBay and amazon.com.

The “Information Age” component of the Third Industrial Revolution seemed to peak at the turn of the twenty‐first century, with its multitudinous startups of “dot.com” and biotechnology businesses. The term “IPO” (initial public offering of a company's common stock) entered the vernacular. As a means of measuring the value and prospects of firms and the health of the national economy, the NASDAQ Composite Index, consisting mostly of high‐tech stocks, began to rival the venerable Dow Jones Industrial Average, which originated in 1884 for railroads and 1897 for industrial corporations. In several high‐tech industries, venture capitalism displaced traditional investment banking as the quickest route to personal fortunes for both founding entrepreneurs and their financial backers.

As firms that grew out of the Second and Third Industrial Revolutions internationalized their operations and moved much of their manufacturing to offshore sources of inexpensive labor, the number of well‐paid jobs in American manufacturing declined. Simultaneously, franchised service operations such as McDonald's, Kinko's copy centers, and 7‐Eleven convenience stores proliferated. These companies typically paid low initial wages, but they offered masses of immigrants first‐time jobs and numerous students entry into the workforce as part‐time employees. They also provided entrepreneurial opportunities for owner‐operator franchisees, of which there were nearly one million by the early twenty‐first century.

How all of these changes would ultimately turn out remained unknowable. But throughout its history, the American business system had exhibited a remarkable resilience and adaptability. So it seemed likely that Schumpeter's “perennial gale of creative destruction” would remain a fitting metaphor for its future course.
See also Advertising; Airplanes and Air Transport; Antitrust Legislation; Automotive Industry; Business Roundtable; Canals and Waterways; Chemical Industry; Child Labor; Cotton Industry; du Pont, Pierre; Economic Regulation; Electrical Industry; Factory System; Foreign Trade, U.S.; Human Genome Project; Indentured Servitude; Industrialization; Industrial Diseases and Hazards; Industrial Relations; Iron and Steel Industry; Labor Markets; Labor Movements; Multinational Enterprises; Pharmaceutical Industry; Social Darwinism; Petroleum Industry; Roads and Turnpikes, Early; Rockefeller, John D.; Stock Market; Stock Market Crash of 1929; Strikes and Industrial Conflict; Tobacco Industry; Unemployment; Women in the Labor Force.

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Thomas K. McCraw