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This is the second of three installments of Bob Kuttner’s essay on the corporation in America. Reprinted with permission from Dissent, Winter 1993 Is Big Beautiful? Thus, to review Berle and Means after sixty years is also to review three long-standing debates in political economy. First, what is the relationship of size, scale, and market-power to dynamic efficiency, technical innovation and growth? Second, how can society best make sure that these benefits are broadly diffused? And third, how does a global economy, in which the market outruns the stabilizing instruments of the nation state, change the conversation? Before turning to the practical policy choices, one must address the theory. On the first part of this debate, left and right have often switched camps. The business right, for most of this century, defended bigness, both in practice and in theory. The Brandeis left attacked it. In the New Deal era, however, as long as government was in friendly hands and unionism ascendant, corporatism looked to many progressives like a good way of converting giantism to social ends. In the 1980s, it was the supply-side/hostile-takeover right that attacked the large, bumbling corporation as inefficient. From yet another quarter, one major strand of the right the law and economics school has attacked antitrust even as it vigorously defends competition, on the bizarre ground that markets are so self-cleansing that any monopoly or price leadership will soon disappear. \(Do these Some on the anti-trust left, meanwhile, continued to attack corporate giantism as both inefficient and undemocratic. A good example is the 1985 book, The Bigness Complex, by economists Walter Adams and James W. Brock, a kind of latter-day Berle and Means Schumpter and Galbraith, but as progressives, Adams and Brock offer hard-to-refute examples of the plain laziness and stupidity of large corporate managers. They note the inefficiency of the onceheralded conglomerate movement. The sort of “planning” pursued by General Motors, they insist, has neither been reliable for workers nor constructive for society. Many on the moderate left, including Seymour Melman, Edward S. Herman, Mark Green and most of the Marxian left find the modern corporation an affront to productive efficiency as well as to social justice. However, others on the left have looked longingly at the stable, dynamic, large corporations of Germany and Japan as well as the social contracts they permit. A very provocative example of the latter view is a recent monograph by Maryellen R. Kelley and Todd A. Watkins, The Defense Industrial Network: A Legacy of the Cold War \(Pittsburgh, Carnegie Mellon University; unpublished, forthWatkins argue that because of the atomization of American industry generally and the American antipathy to planning, the network of Pentagon contractors stands out as of the few oases of planning, in which the security of long-term contractual relationships exist and best-practice manufacturing techniques are diffused from Pentagon sponsor to prime contractor to subcontractors. This contrasts with the general slowness of American small firms to adopt advanced manufacturing techniques. Kelley and Watkins analogize the American system of Pentagon contractors to the Japanese Keiretsu the intricate web of industrial networks. The Pentagon, they note, because of its demand for ever more sophisticated weapons, has long been committed to the promotion and diffusion of manufacturing technology. This is a pure case of allocative versus dynamic efficiency; in a static sense Pentagon contracting is as inefficient as the economy gets the home of hundred-dollar hammers and six-hundred-dollar toilet seats. But despite the longstanding and largely justifiable disgust with Melman’s “Pentagon Capitalism,” military contracting is one of our economy’s few refuges of long-term planning and is clearly a source of Schumpeterian innovation. Still others on the left, such as Charles Sabel and Michael scale via a different sort of networking that empowers skilled workers and relies on a kind of updated artisan model. Within the economic priesthood, there has been for the most part a studied ignorance of the relationship of size, economic concentration, technical innovation and growth. The great economic historians, such as Alfred Chandler, have pretty well demonstrated what Schumpeter inferred major innovations have been made by large firms that enjoyed market power, economies of scale and scope, and thus-an ability to reconcile the creation of the industrial lab with respite from the destruction of pure price competition. However, most economic theory has treated technology as a “black box.” In economic parlance, innovation is “exogenous” the main economic problem is allocative. The wellsprings of innovation are unknowable, at least by economists. Yet another body of work, pioneered by economist Oliver Williamson, elegantly pursues the theoretical implications of the obvious insight that the marketization of every transaction is not exactly costless to the firm otherwise everything would always be contracted out. But contracting out buying rather than making leaves the firm vulnerable to uncertainties, incurs transaction costs, and risks sharing knowledge with suppliers who may not be loyal. Quite apart from the traditional notions of economies of scale and scope, or market power and rents, Williamson’s theory of transaction costs supplies yet another rationale for why bigness may be functional and not just Adam Smith’s case of merchants conspiring against the public. A landmark 1988 essay in the Journal of Economic Literature, by Giovanni Dosi, \(“Sources, Procedures, and Microeconomic every major work exploring the relation between scale and innovation, and concluded that to simply ask whether large size and market power facilitates technical advance poses too simple a question. Context is everything. Apparently, in some systems and some industries large scale and oligopoly pricing power are conducive to technical progress; in other circumstances, innovation thrives on atomistic competition. In agricultural research, for example, small scale and atomized production did not provide fertile ground for research into productivity-enhancing hybrid seeds, fertilizer, machinery, and so on; it took the U.S. Department of Agriculture to overcome this market failure. Dosi proposes that “appropriability” the likelihood that the innovator will capture most of the fruits of innovation helps explain whether size is conducive to innovation. Citing the work of Richard Nelson, Dosi notes that the process of innovation involves differing combinations of “proprietary and public forms of knowledge” that vary according to the conditions of different industries. Software innovation may thrive in an Adam Smithstyle economy of thousands of independent producers; aircraft innovation may require oligopoly, market power, and government presence if not government regulation. The “Schumpeterian hypothesis” that innovation correlates with bigness is evidently valid for some industries, not for others. Public policy cannot afford to ignore these conclusions, for the wrong kind of antitrust policy, the wrong kind of technology policy, the wrong kind of deregulation, the wrong policy toward intellectual property, the failure to recognize the unacknowledged impact of the cold war on technological innovation, will all have negative effects on American prosperity. Studied indifference to issues of innovation in the name of “free markets” is also a policy. NEXT: HOW TO INTERVENE THE TEXAS OBSERVER 7