Episode: 533 |
Richard Langlois:
Author of The Corporation and the Twentieth Century:


Richard Langlois

Author of The Corporation and the Twentieth Century

Show Notes

Richard Langlois, author of the book The Corporation and the 20th Century: The History of American Business Enterprise, and Will Bachman discuss the transition from entrepreneur-led businesses to modern multi-unit businesses. Richard talks about the drivers behind this transformation, including antitrust, which led to unintended consequences such as making coordination between firms illegal, and the shift from vertically integrated businesses to modular corporations.  His book highlights the impact of the depression, which eliminated many financial institutions, making it possible for internal capital markets to function and fund innovation. His book also explores the issue of  price controls and government interference with markets also interfered with market mechanisms, making it difficult for smaller businesses to coordinate resources.


From Entrepreneur-led Businesses to Multi-unit Businesses

Richard explains that the rise of large companies and far-flung enterprises in the mid-20th century required conscious management and professional managers who weren’t also owners, and that transactions in a market require market supporting institutions, such as financial markets and legal systems, which can be provided in a decentralized way or within the firm. He argues that the success of large, vertically integrated corporations is partly due to the lack of success of alternatives to these structures. Antitrust also plays a role in this transition, as it made it difficult for firms to engage in complex contracts and do things internally. He talks about how the transition from entrepreneur-led businesses to multi-unit businesses was driven by factors such as antitrust, the Great Depression, World War 2, and the New Deal. Richard offers a few examples of antitrust in action with the concept of block booking, where movie studios pre-sell entire blocks of movies to cinemas without allowing them to preview them first to ensure the studios could recoup costs of production. Another interesting aspect he cites is the leverage theory. Taking us back to the 1930s, he talks about IBM who used control over proprietary punch cards to sell their mechanical computing equipment to maintain quality control and price discrimination, which is charging high prices to those who want the product and low prices to those who don’t. He goes on to explain how this became the “one lump of monopoly theory,” and what this means.


The History of Leasing Machines and Government Opposition

Richard discusses the concept and history of leasing machines, which began in the early industrial revolution. In Britain, the textile industry was highly vertically disintegrated. Entrepreneurs could rent equipment to get into manufacturing products. This allowed entrepreneurs to lower upfront fixed costs and easily enter the business. However, the federal government’s antitrust policy made it difficult for companies to lease their machines and wanted them to sell them. This led to lawsuits against them from the entrepreneurs who, once they knew how to use the manufacturing equipment, decided they wanted to break the lease to rent cheaper equipment from a competitor. However, manufacturers enforced long leases and prevented customers from buying cheaper equipment elsewhere, and breaking their original lease. This practice was seen as anti-competitive, as retailers couldn’t compete on price, but manufacturers wanted retailers to compete on quality, service, repairs, and service rather than price.


Resale Price Maintenance

In the early 20th century, companies would charge high prices for complex products like vacuum cleaners and washing machines, which required hard salesmanship and servicing. This discouraged customers from visiting full-service showrooms and purchasing cheap products online. Resale price maintenance is a strategy to prevent resellers from free-riding on services, but the antitrust authorities argued it was anti-competitive because it wasn’t allowing resellers to compete on price.  This was partly intellectual and partly thinking that businesses tend to be anti-competitive, and partly in the interest of consumers. He talks about management consulting and the role of scientific management and how it is all about learning through trial and error, and coming up with new theories.


Regulating the Corporation and Controversial Opinions

One view on antitrust  is that it is driven by what profit opportunities there are in the world and what relative prices are. He believes that part of the reason the large corporation got torn apart into much more specialized corporations was in part that market supporting institutions had come back to life, capital markets were working again, and external capital markets were more effective than internal capital markets and firms. Regulations were impending innovation, and so there were profit opportunities for entrepreneurs who could pressure Congress and the executive branch to try to undo some of the regulations that made it hard for them to innovate. He states that it is important to be aware of the potential unintended consequences of antitrust. He argues that if antitrust goes against complex contracts as anti-competitive, it could lead to people hiding those contracts within the boundaries of the firm. This idea is controversial, as it suggests that the history of corporations was a story about institutional choice and some institutions being preferred over others.


Deregulation, Holding Companies, and Pyramidal Business Groups

Richard talks about the common belief that the rise of neoliberalism in the late 1900s led to deregulation, but he argues that most of the deregulation occurred before this, as the market economy transitioned from the Depression and World War Two. He goes on to talk about the concept of holding companies, which were once common in the early 20th century, and how  most industrial organizations today are organized around business groups, with a family or foundation at the top owning controlling shares and subsidiaries, but The US is an outlier in this, due to public policy concerns about allowing one company to own the stock of another.  Richard talks about  private equity in the modern corporate world, wholly owned subsidiaries, and majority and minority stockholders.


The Modular Corporation

The corporate form of corporations evolved over time and became more akin to the incorporation of modules. These modules are created like personal computers, allowing them to interact and buy shares from other modules without necessarily being integrated with their operations. This modularity was a key factor in the creation of the corporation and it differs from the vertically integrated business model where everything is connected to everything, but this doesn’t scale well. So, as corporations grew, they began to recognize the need for modularity, breaking up operations into smaller pieces that didn’t constantly transmit information to each other.  These modules were wholly-owned subsidiaries, for example, Chevrolet was a module of General Motors. During the conglomerate era, people could buy these divisions from one another. This allowed them to operate through the interface of the market and the corporate hierarchy.


The US Monetary System and the Gold Standard

Richard describes the history of the US monetary system, which was initially tied to gold. This was a conscious decision by business interests, particularly those involved in international trade, to ensure the currency was taken seriously by other countries like Britain. However, the US imposed tariffs to protect manufacturing interests, which were essentially attacks on exporters. Exporters, who were primarily farmers, wanted a weak dollar, while importers and financiers wanted a strong dollar. Keeping the currency low was a common strategy in developing countries. Anchoring to the gold standard kept the currency stable.  The 19th century saw the demand of a mixed standard with silver. This was driven by inflation, as tying money to other items led to more money and a decrease in the value of the dollar. The West, who were exporters, supported free silver, and the East, who were financiers dealing with the British and importers, wanted a strong dollar. The monetary macro was simpler in the days of a fixed metallic standard, which stopped happening after World War One. After World War One, the US was technically on the gold standard, but it was a managed gold standard where people hoarded gold. Most economic historians believe that these manipulations led to the Great Depression, as the Federal Reserve had just been created without knowledge of its actions and allowed the country to fall into a depression.



01:22 What drove the transformation into the corporate world

05:17 Transactions in a market require institutions

07:36 Antitrust and anti-trust

05:39 Why did we see the end of the large managerial firm?

09:44 Leverage theory and hedging

15:09 The one lump of monopoly theory

20:37 How to stop free riding

27:12 How important are ideas in anti-trust policy?

32:03 Why did holding companies become illegal?

37:12 Why vertically integrated companies were precluded by deregulation

44:33 Recommended biographies




The book: https://www.amazon.com/Corporation-Twentieth-Century-American-Enterprise-ebook/dp/B0BRBWG6LX/


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  1. Richard Langlois


Will Bachman, Richard Langlois


Will Bachman  00:01

Hello, and welcome to Unleashed. I’m your host will Bachman. And I am so excited to be here today with Richard Langlois, who is the author of the corporation and the 20th century, the history of American business enterprise. And I can’t recommend this book enough. I’ve been reading it for the past month, it is a commitment is 550 pages was honored with the pages and notes. This is a masterpiece. And I’m so excited to speak with the author dick, welcome to the show.


Richard Langlois  00:32

Well, thank you very much. It’s great to be invited.


Will Bachman  00:35

So let me start with saying something that is probably partly wrong, but simplified. And I’m going to ask you to correct my understanding. So the kind of broad brush strokes, Alfred Chandler won the Pulitzer Prize for history in 1977, for the visible hand, the managerial revolution in American business. And the main argument of that book, if I understand it correctly, is that, you know, we had this transition from entrepreneur led businesses like Rockefellers Standard Oil, to the modern multi unit business, with its multi divisional, administrative run by managers and not necessarily by owners. And as I understood it, his main argument was that the multi unit business enterprise with internal administrative managerial coordination, was better able to coordinate resources than the market. And that’s why we have these big corporations, but your book, kind of broad brush, and I want you to correct me or, you know, or get more precise, my takeaway is that, well, that might be partly true, but actually, what largely drove this transformation is number one anti trust, which had all these unintended consequences, anti trust, because it said, you couldn’t have restraint, afraid it made coordination out between firms, in many cases illegal, but you could do similar sorts of coordination within the firm. So corporations responded by acquiring either competitors or vertically integrating, that was a big driver that I took away. And then additionally, other things impacted it, like the depression wiping out so many financial institutions made it the case that internal capital markets were able to function and fund innovation, whereas the external finance opportunities to fund were largely, you know, in many cases like obliterated not available to smaller businesses. And then third factor that I took from the book was that price controls and government interference with markets can just interfere with market mechanisms. So it made it difficult for smaller businesses, but larger businesses could coordinate resources. So those are three things. But but, you know, I’d like you to tell the story and and, and expand it for me.


Richard Langlois  03:05

I think that’s, I think you have it exactly. Exactly. Right. I mean, the book functions at a couple of levels, at one level, it’s an economic history of the corporation in the 20th century. But as you say, I have, in addition, this, this kind of running argument at a number of levels, it’s kind of a conversation with, with Alfred Chandler, he, you know, coming out of what I described as kind of progressive tradition in the early 20th century, thinking that that scientific management has arrived. And now scientific management is really a substitute for the market. And we can create these large, vertically integrated corporations or they arose these large, vertically integrated, and that’s part of the story too, is that is what I’m talking about here about vertical integration, why one company will do lots of different things, instead of being specialized. So you can have large companies that are large, have a high market cap or something, but are very specialized in one thing, and contract for a lot of other things. Or you can have the kind of companies we saw a lot in the middle of the 20th century, which did all kinds of different things and made all their own parts and right and did lots of things like that. So candle argues that well, in the 19th century, it was all small businesses. You know, things were coordinated by the price mechanism, but with the rise of the railroad, the coming of coal as an as a as a power source, you saw the rise of the large company and in order to manage these far flung enterprises with with high economies of scale, you necessarily had to have management you had to have conscious As management of the corporation with, with professional managers who weren’t also owners, and my argument is to push back a little bit, as you’re saying on that, just to say that we have to look at at what was going on in history at this time. And I great in basically the the kind of theoretical structure of the argument is transactions in a market require institutions, they require market supporting institutions of various kinds, financial markets, legal systems, things of that sort. And you can provide those in the larger economy in a decentralized way. But if those institutions don’t work very well, for various reasons, the large firm is, is insane in a sense of substitutes and substitutes source of institutions. And that’s one way to think about this whole argument. So you can create institutions in a decentralized way in in markets, if you want to call them that. Or you can if markets don’t work very well, you can create those institutions inside of the firm. And so my argument is, why did we see that the era of the large managerial firm well in part Chandler’s write about coordination, but also a lot of it was, if you step back, you see that markets weren’t working very well, for some of the reasons you enumerated, I put put a lot of emphasis on on the Great Depression, which really was a catastrophe, and it destroyed market supporting institutions, and affect it in and what we sort of like a Darwinian effect, a lot of small enterprises went away, and what was left were the large firms, the the New Deal and the Second World War, and reemphasize this, because the New Deal, put controls on market institutions, the Second World War had to utilize the large corporations to to make stuff for the war. And so that whole middle part of the century, right, you saw markets not working very well. And so part of what we see in the great success of the large, vertically integrated Corporation is the lack of success of the alternatives to the large, vertically integrated Corporation. And, you know, anti trust comes into this as well. And that’s one of the themes that runs through this. You see this, especially I think, after World War Two, which was a period of very intense antitrust scrutiny, there was a period, you know, Teddy Roosevelt, and William Howard Taft, it was really a period of intense anti trust. And then you get another period of intense and anti trust, after the war. And then that was, I think, important for the reasons that you said it may, it made it difficult to engage in contracting in the market, because those contracts, especially if they looked complex and hard to understand these contracts would come under antitrust scrutiny, and it was just a lot easier for firms to do things internally when nobody could see them, if you will. Right. And so that is part of the argument.


Will Bachman  08:33

Let’s get into some examples of these contracts that, at the time, were hard to understand there’s several places in the book, where you talk about a type of form of contract. And then and where you say, you know, later in the century, economists would come to understand that this actually makes a ton of sense, or see the reasons for it. Right, you know, so one that you gave, which I thought was fascinating was around how movie studios would sell entire blocks of movies and and to the cinemas. And the cinemas would have would sort of agree to I’ll just show the next 10 films that you produce whatever they are, I don’t get to look at them first. And that that was declared illegal. Tell us about that one a little bit, and then maybe give some other examples of forms of contract like retail price maintenance, that were deemed illegal at one point.


Richard Langlois  09:25

Sure. I mean, block booking is one of the most fascinating episodes and economists have had or are still kind of arguing about that there are lots of different theories but the basic argument is that movies today as back then are shot in the dark right? So you make this you have to spend a lot of money upfront to make a movie. And but you don’t know how it’s going to be received right? So it could be a total it could be a hit or it could be a total failure. And we see this today right with with you know, have studios hedging their bet trying to, you know, make movies that they’re almost sure people are gonna want, but they still get it wrong, right? So what did the movie studios have to do they have to, they have to hedge their bets in some way. So how do they do that? Well, they do that the way we do in finance all the time, you don’t put all your eggs in one basket, right? So they would make a bunch of movies. And they would pre sell them to the distributors, they would also own some movie theaters, so that they could have a good sense of what was working and what was not working. They would pre sell these to the distributors. And they would say, Look, you better show all of them. So that’s going to reduce our risk, because we know you’re going to have to show all of them, some of them will be successes, and some of them will be failures. But on average, right, that they’ll do well, and we and so we can smooth kind of smoother. Our our portfolio and the way finance teaches us but of course, the theaters said they wish they could the theaters could tell right away which ones were going to be, you know, from people showing up, which ones are going to be good and which ones are going to be bad. And they didn’t want to pay for the bad ones, right? They wanted to pay. They wanted to keep only the good ones and not pay for the bad ones. And so and so they raised a lot of fuss about this. And the antitrust authorities looked at this and they said oh my god, this is a strange contract. This must be anti competitive. They’re, you know, they’re restricting you from competing because you know, you’re in. And so the courts actually broke up the actual this, the thing that turned out actually to be more most significant was not allowing Sears to own distributors and distributors to own movie theaters. And that actually, that actually destroyed the old studio system, and gave us a system that we know that we had today. But they also required if for some periods that that studios not sell us a block, they had to sell each movie individually, which of course raise the raise the risk and uncertainty to them. So I’d say that that’s fascinating to me. Another one that’s actually maybe more relevant today, we could think about is, and was really, I think, formative and in among economists and thinking about these contracts was the so called leverage theory. So intuitively, you might think, if I, if I’m making a product that requires two complementary things, so like a classic case was in the 1930s, when IBM was still making mechanical computing equipment before, before computers, they relied on punch cards, punch cards, went back through Herman Hollerith in the 19th century in which was a part of the beginning of what became IBM. So they would have these computing machines, and they would also have the cards and IBM would say, you have to buy cards from us, you can’t buy the cards from anybody else. Right? And why would they want? You know, so why does IBM care, right? They’re making these complicated machines, what are they care about little pieces of, you know, little pieces of cardboard to sell you, and economist a lot about that. And he said, Well, there’s there’s two reasons they want to do this right? One is quality control. Because if you buy crummy cards from somebody else, it’s going to wreck their machines, and you blame them. The other reason is price discrimination. Price discrimination means we charge a high price the people who really really want this and will charge a low price to people who don’t want it so much. And that that actually makes more money for us, it’s actually efficient, economically efficient to do that. Right. Because if we sell you a punch card machine, we can’t tell if you are a big demander of, of this service of computing or or light demander. But by selling you the cards, we can tell how many cards you buy, right? And we can check we can put more of the price onto the cards. And so the big demand or is paying more than the law demanders. Right? So there’s all these complicated reasons why they would do this. But the antitrust authorities said This is terrible. This is just you know, this is an anti competitive practice. But of course, it makes no sense. Because they said well, what’s happening is the big companies trying to leverage its monopoly from one it’s got a monopoly in the war market power anyway, right and computing equipment, because it’s better than anybody else in making computer equipment. So it’s got some market power and computer equipment, and it’s trying to take over the punch card industry. And it turns out this is silly from an economic point of view, right because what are you selling you are selling? Computing Services and computing services consists of both the machine and the cards. And so you can shift the price around between the two. But there’s only one optimal price to charge for that service. Right? You can’t make that any bigger and say this came to be called the so called one lump of monopoly theory, right? You can’t make your monopoly any bigger, by tying it to something else, because what you’re doing is actually raising the total price of the whole service above what the best price is for you. And that’s sort of relevant today. Because a lot of a lot of issues are arising with with, you know, people like Amazon and Google and Apple and so on about so called self prep, preferencing. Right. And this is a version of the same thing, right? Where, where you’re, you’re taught, you’re effectively tying your service, your version of some component to your main thing that you’re selling. And economists say, Look, this is really just tie this is tying in another guy’s that that you’re just kind of moving the price around between these two things. But you’re not really, you’re not really making your monopoly any bigger by by, by self by self preferencing. Yeah, it


Will Bachman  16:19

was basically almost the Amazon Web Services of the day, they were really selling kind of usage of the machines. Correct. So another related one, which about IBM, which I thought was fascinating was that IBM was leasing their machines and, and instead of just selling the machines, which had several implications, one is that their salespeople were actually perfectly happy to kind of sell into computers to replace the mechanical machines, because it wasn’t going to cannibalize their sales, it was going to, you know, just replace one lease with another. But but then the federal government made those leases illegal, I think so it did tell us a little bit about that. Like, why was the federal government like opposing leases?


Richard Langlois  17:10

I mean, it’s super good question. I mean, the leasing goes, goes way back, right. So this really started in the first industrial revolution, where the companies that made loom so in Britain, less so in the US, but in Britain, Tex, the textile industry was highly vertically disintegrated, it was sort of it looked like a 21st century industrial district, right, everybody own little firms, and you could buy everything on the market. So if you want to start a cloth making firm, you could rent the equipment from Platt brothers of Oldham, who made the equipment and you just pay by the month or whatever, or by the by the amount of cloth you made or something. And so that lowers the, the upfront fixed costs for entrepreneurs. So this was something that happened throughout the 19th century into the 20th. United shoe machinery was another case, it’s very similar. United shoe machinery was just a big company in Beverly, Massachusetts that need all the shoemaking equipment. And if you wanted to get into the shoe business, you had an idea for a new kind of shoe, you could just rent your capital equipment from United shoe machinery. And they would set everything up for you, they tell you which machines you needed, they would charge you by how many shoes you made, or something like that, not charge you for the right, not charge you for you wouldn’t own the equipment, you would just lease it from them, and they would continue to own it in this kind of spirit, you know, again, entrepreneurial, small entrepreneurial sector who could who could easily get into the business. And the same was true with IBM. So they would lease their giant in the days of giant mainframe computers. They would they would lease that. And by federal government, in this case, it was it was really an antitrust policy. So there were lawsuits that were there was a lawsuit against United shoe machinery, there was a lawsuit against against IBM, and they told them that they they couldn’t. They couldn’t lease these machines they had to, to sell them and why it’s it’s not entirely it’s not entirely clear, right? And a lot of it has in all these cases, it has to do with with competitors, right? If you’re somebody who’s also trying to make get into the computer business, or somebody, there were a lot of smaller and less successful mainframe computer companies, there were a few smaller and less successful shoe machinery companies. And they saw the success of the larger companies by by leasing making it hard for them to get into the business right. If you had to sell the say the shoemaking machinery for example. You had to sell it well then I maybe I don’t have to buy all of it. From United shoe machinery, I could buy it from some of these other people. In fact, what this is part of the issue is what United would do it would make it hard for you to buy from these other people. Because what the, what the shoe makers would do is they would, they would start out buying leasing the stuff from United shoe machinery, who would show him how to do everything, but set up the whole enterprise for them, teach them how it worked. And once they knew all that, then they would want to get rid of their leases. And they would go want to go buy the cheaper equipment from the other guys who were in the right in the in the industry. And that would kind of make the whole system collapse. So United would say, Look, if you’re going to buy from us and get all this knowledge and information bundled with our machines, then you can’t, we’re going to make sure that you have long leases, and you can’t just stop leasing from us and go buy the cheap stuff, free and free ride on, you know, free ride on the knowledge we gave you. And in fact, a lot of these, a lot of these complex contracting are all about free riding, they’re all about kind of stopping free riding, you mentioned resale, price maintenance, that’s another you know, that’s another example, if I, if I’m going on too long here, stop me.


Will Bachman  21:20

This is great, this is great.


Richard Langlois  21:23

Resale Price maintenance is where the manufacturers tells the retailer what price they have to sell. And so that’s that looks anti competitive, right, because the retailers can’t compete on price. But what the manufacturer wants to do is they don’t want the retailers to compete on price. They want them to compete on quality and service and, you know, repairs and service and stuff like that. So I mean, if you think about some product, especially a product is fairly new. I was just reading a paper about about vacuum cleaners and washing machines in the early 20th century that would that would sort of work like this. People didn’t really in refrigerators, people really didn’t know about these things, right? These were unknown products. And they were very complicated products that needed a lot of service in the early days. And so what the what the companies would do is they would say, you have to charge this price for these machines. And you have to provide service and sales and, you know, really hard salesmanship and you have to do the servicing for people and all that kind of stuff. Because they didn’t want people to go to and you can, you know, this is maybe something we experience in our own lives, you could go to the full service showroom, right? And ask them all these questions about the product. Right? It’s been a lot of weight spent a lot of the, the salesman’s time finding out about this product and which one is the best for you and how it works and so on. And then you go online and buy the cheap one.


Will Bachman  23:06

Yeah, right. There’s even a term for that. showrooming. Right.


Richard Langlois  23:11

Right. Right. Right. Exactly. And so resale price maintenance was to stop showrooming basically, right to make sure that the that people couldn’t freeride on the on the people who were doing what they were supposed to be doing and offering all of this services. And again, the antitrust people say, Well, this is anti competitive, because you’re not allowing the you’re not allowing the, the the resellers to compete on, on on price. I part of it. So why did they do this? I think it’s a very interesting question. I think it’s partly intellectual. Right, it’s more partly sort of, you know, partly kind of an anti, you know, thinking that businesses are being generally have a tendency to be anti competitive. And part of it is having this kind of naive model about how we how, you know, how markets work. And part of it is the interests of consumers, right? So there were a lot of cut cut rate sellers who didn’t like this, he wanted to get into the business by by free riding, right. And so they were we put pressure on the antitrust authorities to stop this so that they could get into this market and and use a price strategy instead of instead of a quality strategy.


Will Bachman  24:27

What effect if any, did you have you detected in all of research on the impact of ideas and management technology, if you will, not technology in terms of computers, but just management techniques, you know, KPIs, roles, authorities or charts, the beast, the BCG matrix of cash, cows and stars and dogs and stuff like yeah, to what degree to just ideas about how to manage a company did how did to what extent did that affect the evolution of business? Was his management consultants in the ideas industry more of just a after effect of observing what’s already happening? Or? Or did in some cases actually drive change?


Richard Langlois  25:16

Well, I mean, I, I don’t talk that much about management consulting in the book. Because as you point out, it’s already too long. So there’s a lot of other things like I could have talked about. I mean, when I talk about science, I talked about scientific management and kind of not so much a negative way is I think it has been misunderstood. And I think management consultants who are listening to this will probably understand this, right? That it’s not a magic bullet, right. So it’s not that we become experts, and we know how to manage all of these things. It’s that we were sort of learning from heart from how things are actually done, we’re kind of learning better ways to do things. Right. And that was true of the going back to the the scientific management of Frederick Winslow Taylor, and all of these guys, in the early 20th century, it’s not that they had some, you know, they kind of portrayed it as if they had some special knowledge. But what what was really going on is, you know, they were working, Taylor was working at Midvale steel, and learning, you know, trying in slowly, kind of by trial and error, discovering better ways to do things. Right. And, and I think that’s the right way to think about it. But that scientific management management consulting is about learning. Through trial and error, learning better ways to do things will come up with new theories, right? The BCG matrix was very important in the, you know, I talked about the period of the conglomerates and the breaking up of the conglomerates, and that was, you know, contemporaneous with the with, with that set of theories, right. So which company which divisions do we buy? Which ones do we invest in? Which ones do we keep? Right, the Jack Welch, GE, kind of kind of stuff. You know, that was important. That was important in its in its day. But as I, as I talked about in the book, that was kind of an episode. That happened in in, in the in the breakup and deregulation of these large in these large firms. I don’t think the I don’t think that was the that the ideas were driving this? I mean, that’s, that’s a big question. Right? So how important are ideas? And I think to some extent, my this book is kind of leaning against the wind, about ideas. I mean, there’s a lot of books out there that talk about, you know, so called neoliberalism, and the neoliberalism is the late 20th century. And it was those ideas that broke up companies and so on. And my argument is that that was not necessarily unimportant. And I think ideas are very important. For example, in anti trust policy, they’ve been important in anti trust throughout the history of anti trust. But I think a lot of it is being driven just by, you know, you know, and I don’t maybe I overemphasize this because I’m kind of leaning against the wind here. But a lot of it is driven by what profit opportunities there are out there in the world and what relative prices are. And you my argument, you know, towards the end of the book is that a lot of the reason the large corporation got torn apart into into much more specialized corporations was in part that market supporting institutions had come back to life. Right. So now capital markets were working again, external capital markets were now more effective than the internal capital markets and firms and so they were taking firms part. Regulations were impeding innovation in areas like, right like like air, freight and containerized, shipping and telecommunications and so on. And so if there were profit opportunities for entrepreneurs, who could undo some of that stuff, right, who could put pressure on on Congress and any executive branch to try to undo some of the some of the regulation of the mid century that was making it hard for them to to innovate?


Will Bachman  29:42

I don’t know enough about economic history to necessarily identify them. So I would like to ask you, what claims or arguments that you make in the book would be considered controversial by some of your peers in the profession.


Richard Langlois  29:59

Oh, Um, well, I think I think my view of my view of anti trust would be controversial. I think there are a lot of people who would agree with me, but there will also be a lot of people who don’t agree with me I, you know, as you as you put it, I mean, I, this is not really kind of just anti Trump, against anti trust for the sake of being against anti trust, I’m making a very specific argument in kind of a neglected argument about what we should be careful about in the unintended consequences of anti trust, right, that if anti trust goes up, it goes against complex contracts as anti competitive, it’s going to have the unintended consequences of, of just making people want to hide those contracts inside the boundaries of the firm. And I think that’s, I think that’s potentially potentially a controversial idea. And I think sort of the the idea that, you know, that, that the history of the corporation was really a story about about, you know, institutional choice and some institutions being being preferred over other institutions. I think that’s, that’s kind of a controversial way of thinking about it. I mean, you know, a lot of books that you read, especially by, you know, historians of capitalism, who aren’t really economists will be, you know, books about, about neoliberal neoliberalism, right? There’s about a dozen books out there now about, you know, but the the rise of neoliberalism in the late 19 1900s, and why that was. You know, that was the cause of deregulation, and so on. And, you know, I’m, again, kind of leaning against that wind, too, and saying that, you know, most of the deregulation occurred before. Before, there was a lot of ideological change in Washington, it was really going on, even from the end of World War Two, right? Because it’s pretty clear at the end of World War Two, we’re getting back to a market economy. And a lot of the a lot of the institutional structures that are put up and then put up in the Depression and World War Two were not appropriate to the market economy that we’re getting into after World War Two. And so and so there was a lot of realignment that was necessarily going to happen, quite independent of ideas, if you will,


Will Bachman  32:38

one area that I just don’t have enough, like direct exposure, or intuition about, I’d love it, if you could help me understand it better is, well, two things actually, like holding companies and the informed Corporation, maybe we talk about holding companies first. So back in the early 20th century, holding companies were a big deal, you’d have a company owning other companies that own other companies, like turtles all the way down to be like multiple levels. And then some stuff happened. And that became, I think, like, illegal. And so like, we don’t really have holding companies anymore, per se, although we do now have, you know, private equity firms that owned a bunch of companies. But maybe that’s different. But tell me a little bit about like, because I just, I don’t really understand it, since we don’t have them today. What were holding companies like, why did the government like outlaw them? And what was the what was the what are economics? economists think about holding companies? They just help educate me a little bit there? Yeah. Okay.


Richard Langlois  33:37

That’s a very good question. Because that’s kind of another big theme in the, in the book, right? So holding company is, in some sense, just what we think of as a regular as a corporation. And that really didn’t fit with the modern corporation as we think of it right. So when a company were, where you can go to Delaware, fill out some papers, pay a little money, and you can become incorporated and you become a legal person, you have limited liability, you have all these other legal features, right? That really didn’t exist in the United States until 1899. Roughly, before that, governments had to specifically license companies and they’ve limited what they could do and right and so on. So by then, by 1899, you get the this this unrestricted corporate form that we now think of, and one of the things that corporations the unrestricted corporation could do is it as a as a legal person could buy the stock of some other company, right. And this is actually how most of the world today is organized. The US is really an outlier in this. So if you look at industrial organization, especially in developing countries, but even in some highly developed countries like Canada, or Sweden or Israel, what you find are business groups, right? So there’s gonna there’s a family at the top, it’s often a family or a foundation that was created by family long ago that that is the kind of apex of the pyramid and then that company owns some other companies. And but they don’t completely on them. So they’re not so they’re not unlike in the US. So in the US, you’ve got a company that has divisions, but those divisions are typically wholly owned subsidiaries, right? There are no minority stockholders, whereas around the world, you have these business groups where the the, the, the apex company will own controlling shares and a bunch of companies, but not all the shares. And then those companies in turn will own controlling shares and some other companies, but not all the shares, right? So so it’s a giant pyramid, all the way down. And that didn’t develop in us because of because of public policy, right, because people almost immediately and still, and it’s still widely believed in a lot of populous circles on both sides of the political spectrum, actually, that that there’s something inherently wrong with allowing one company to own the stock of another company. And this was widely felt in the early 20, in the early 20th century, and it was believed by people like Franklin Roosevelt, and and so they’ve been and Louis Brandeis, and people like that. And, and it was basically through a variety of channels, it was, it was outlawed in the US, or make made very difficult, right, that we have inter corporate divot, taxation of inter corporate dividends in the US, which most companies most places don’t, right, if you’re going to tax into corporate dividends, if this is not a wholly owned subsidiary, you’re going to, you’re going to make it hard for people to to create these, these, these pyramidal. These pyramidal business groups, right. And so that was another reason for why we see vertically integrated operating companies is because they couldn’t organize it in other ways or so other organizational forms were kind of precluded with deregulation, you raise a very interesting question. You were very interesting point about private equity, because since with deregulation, there’s in some ways, we’re kind of going back to some of the structures that we had earlier on, right. So you can think about groups in the early 20th century, like the house of Morgan, JP Morgan, JP Morgan. They were basically what they were were private, it was private equity, right. So they would own a controlling shares and a bunch of companies and they would, they would, you know, have elect elect directors, and so on. And so, you know, that’s not very different from, you know, KPg or something today, or, or, you know, I guess, Berkshire Hathaway, but Berkshire Hathaway is a little bit of a REIT is a little bit of a unique example, right? We’re where the Berkshire Hathaway owns, doesn’t own all of companies and owns controlling interests, and sometimes not even controlling interests, right, in a lot of companies. So that’s, that’s a form that exists around the world and used to exist in the US, but really didn’t exist in the middle of the 20th century for kind of public policy reasons.


Will Bachman  38:51

So it’s interesting. So they said, Okay, you can own 100% of your subsidiary, but you’re not allowed to own 65%.


Richard Langlois  38:58

Correct, right, because what they were worried about people like Burley and means and Brandeis, they were worried about oppressing the the minority stockholders, right? So so if you’re majority stockholder and you own so think about these business groups where you have controlling interest in all these companies. Well, what if you move money around between these companies in ways that enriches you but harms the minority stockholders of the other of the of those companies? Right. So the so minority stockholders was the was the problem. It turns out that they had to pay a price for this, that that in fact that there was a that stockholders got a discount on their stock and because of this threat, which which may, typically didn’t actually didn’t actually happen, but that’s what they were worried about. Right. So they were worried about, they were worried about the minority. Okay. They were worried about the minorities, stockholders. was more than more than any anything else? Right? So tell


Will Bachman  40:05

me about the inform? Corporation. Right? How did that and how did that differ from? Like, previous types?


Richard Langlois  40:13

So in the end, you know, so what is cool about the corporate form? Right? What is cool about it is that it is, it is kind of like a modular, it creates a kind of a module, right, where everything goes on inside the module is kind of hidden from the outside. And then the, the module itself, right, it’s like, you know, the pieces of a, of a personal computer, right, and it talks to the it can talk to other invite media and buy the shares of other modules, but doesn’t necessarily, it’s not integrated with the operations of these other modules. Right. And that was, that’s sort of what that’s kind of the genius of the corporation. So if you think about the history of the of this idea of the corporation, and people have written about the history of the corporation, going back to two really ancient times in why it was created, the Catholic Church had a lot to do with it in the West, right? It was a way to protect church assets from the state and so on


Will Bachman  41:22

what books there’s on that there’s William Magnussen book for profit? What I don’t know, there’s we the corporation’s what are their books on the history of the corporation? Yeah,


Richard Langlois  41:32

right. Greg is really guy called Ron Harris has written a book on the, in the same series, as my book actually is written a book on the history of the old history of corporations. But the issue is, is modules, right? So these corporations were modules? And it’s very complicated to integrate, right? So the vertically integrated company in the beginning, everything is connected to everything, right. So and this was, this was true, for example, with Standard Oil, for example, in the early days, that everything was connected to everything, you were on one, you know, one executive would be on seven different committees, and right, so all the information is flowing all over the place. And that’s it. That’s that that doesn’t scale well. Right. So whereas a modular system scales, well, a non modular system doesn’t scale very well. So as these corporations got bigger, they started to say, well, we can’t become holding companies anymore, but we need modularity. That is we need to break up our operations into smaller pieces that don’t aren’t constant. They’re not constantly transmitting information, rich information to each other. And this was the inform, right? So this is the brainchild of people like Alfred Sloan and Pierre Dupont, they were going to break the company up into into pieces, but the pieces would be wholly owned subsidiaries, rather than holding company. So you can think of the M form is kind of in was, in a way, the kind of wholly owned version of the holding company. Right. So So for example, Chevrolet was was a module in General Motors, and Buick was a module and Cadillac was a module, right? And these were divisions that were wholly owned by General Motors, you couldn’t buy shares. In Chevrolet, you had to buy shares in General Motors, right. But within General Motors, Chevrolet was a module like sort of like its own company, right. And so later on in, you know, during the conglomerate era, people would could just buy these divisions from one another, because they were modules, right. They were like holding companies, they were wholly owned, holding companies, but we could just buy them from one another. Right? So I TT bought, but a hotel chain, and they bought a bakery in company and right, and they bought insurance companies, right? Things that are completely unrelated to their business, because you’re just modules, we’re going to buy them, and we’re going to put them underneath that underneath the head office. So they’re very similar. So there’s a holding company and an informed division really very similar. The main difference was, in one case, they operated through the interface of the market and the other case they operated through the corporate hierarchy.


Will Bachman  44:33

I would like to read more biographies, particularly biographies of some business executives, innovators, business professionals. You know, I’ve read the Robert Carroll biographies of Lyndon Johnson and Robert Moses. F, of course, and those are amazing. Are there with all your reading and research for this? Are their biographies that you would recommend And of any characters, like, as I was going through the book, I may start making a list of people I’d like to learn more about, like Herbert Hoover Vanover. Bush, Alfred Sloan, Grace Hopper, Bernard Baruch. Are there any particular biographies that you think really illustrate not just the person but also the time that you think would be that you’d add to a list?


Richard Langlois  45:20

Yeah. I mean, there’s the there’s all the, you know, there’s of course, all the Ron Chernow biographies, right, so he did the rock he did, Rockefeller and, and Morgan, so those would be good places to, to start. In there are biographies of all these of all these people. There’s a lot of biographies of Hoover, there’s actually some, you know, revisionist ones that you know that I think that are much more I would have to I would have to look for the, for the names. You know, one author that I would very, very much recommend is Mark Levinson, he did what he did a wonderful book about a&p, the great Atlantic and Pacific Tea Company, and a great book about the container. I mean, he didn’t like that the definitive book about containerized. Shipping. Yeah, I mean, those are, those are, those are great. Those are great books that I would recommend to anybody.


Will Bachman  46:26

I was one of those students that did very well, in micro economics, in college and business school, it almost seemed intuitive. But I really struggled with macro economics. I was one of those students, that was like, very bimodal, you know, the heat, you know, super sailed through and micro like, but really struggled with getting my head around macro stuff. So yeah, I always had a hard time with these arguments around like the gold standard and the silver standard. And then your argument that the depression, like, we largely came out of it not through fiscal policy, but through monetary policy. Right, in just two minutes, because it’s just a simple topic. Could you explain like the gold standard versus silver standard argument that was going on with the election and McKinley and who were what was? Why? Why were they fighting about that? Right? Sure.


Richard Langlois  47:17

Sure. That mean, that’s, that’s really interesting stuff. So we no longer have, you know, a monetary metal standard, we have what’s called fiat money, meaning the government can determine what the what the money is. So the Federal Reserve just creates money out of out of thin air. But But back in the day, in principle, and for a while, in fact, the monetary standard was tied to gold, right. In in the US. And that was a conscious decision by some interests, right, the business interests especially wanted, especially the ones involved in international trade wanted us to be on the gold standard, so that our currency would be taken seriously by other countries like Britain. Because it’s, it’s the same as their currency, basically, right? Everything’s gold and dollars are exchangeable for gold. And that’s right. And, and that’s fine. But what the US did in the 19th century, well into the 20th century is they imposed tariffs to protect the manufacturing interests, which was really effectively attacks on our exporters. And so who are exporters, exporters pretended to be farmers, exporting wheat and cotton and raw materials and things and things like that. And so the people who were importers and finance ears, they wanted a strong dollar. So that’s why they wanted it connected to gold. The people who were exporting wanted a weak dollar, because they wanted their goods to look cheap to people in other countries, so people wouldn’t other countries would buy them. Right? So it’s pretty, it’s pretty straightforward, right? That exporters generally want a weak currency. And importers want a lot of strong currency that was you know, and that’s true and has been true and a lot of developing Tiger countries and whatever they’ve they’ve tried to keep their their currency cheap so that foreigners would buy, you know, foreigners would buy their stuff. And so this so because we’re on the gold standard, this really anchored that mean, this was this was a big thing. And then in the 19th century, right, there’s a famous claim that the movie The Wizard of Oz is all about this, right that Oz was the that the yellow brick road was the gold standard. And you know, the Scarecrow represented the farmers, right, and the Tin Man represented the industrial worker and all this kind of stuff. And what did these people want? They didn’t they wanted to get rid of the goals. Standard and they want it to go to a mix standard with silver. Why is that? Well, because that’s inflation, right? So if you if you can tie the money to other stuff, you’ve got more money. And so the dollar the value of the dollar falls or more dollars there are, right, the less valuable every dollar is. So the currency is cheaper and people are going to buy our stuff abroad. So the the people in the West who were exporters were, you know, you know, supporters of free silver, and the people in the East who were financiers dealing with the British and importers wanted to have a strong dollar. And that was a lot of the political economy of the 19th century. And in fact, they argue that the Sherman Antitrust Act actually actually was part of that whole you know, that whole you know, Episode You know, but yeah, that monetary macro was a lot simpler in the days when there was a fixed metallic standard that stopped happening, really with World War One. And after World War One us was technically on the gold standard, but it was a managed gold standard where they would they, you know, they would hope hoard gold and things like that. And, and most economic historians would say that those manipulations are really what led to the great depression because the Fed had just been created. It didn’t know what it was doing. It did all the wrong things and it allowed the country to fall into to fall into a depression.


Will Bachman  51:42

Take this has been a wonderful discussion, if listeners want to find you online and look at that. Learn more about your research. Where would you point them?


Richard Langlois  51:53

Well, it’s just easy to find me. It’s just Richard long. Wha la NGLS, Google me and my my web page at UConn will come up.


Will Bachman  52:02

Fantastic. We will include that link and a link to the book in the shownotes. Thank you so much for joining. This was a lot of fun after reading your book to speak with you about it.


Richard Langlois  52:12

Great. Well, I very much enjoyed it. Thank you

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