9 Rules For Business Prosperity In The New Economy
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An identical physical facility with the same capacity to produce can have different values in the marketplace at different times, depending on the degree to which the investing public feels confident about the ability of the firm to perceive and respond to the future environments in which the plant will be turning out goods and services.
The value of a steel mill, which has an unchanging ability to turn out sheet steel, for example, can vary widely in the marketplace depending on the level of interest rates, the overall rate of inflation, and a number of other factors that have nothing to do with the engineering aspects of the production of steel.
What matters is how investors view the markets into which the steel from the mill is expected to be sold over the years ahead. When that degree of confidence in judging the future is high, discounted future values also are high--and so are the prices of equities, which, of course, are the claims on our productive assets. The forces that shape the degree of confidence are largely endogenous to an economic process that is generally self-correcting as consumers and investors interact with a continually changing market reality.
I do not claim that all market behavior is a rational response to changes in the real world. But most of it must be. For, were it otherwise, the relatively stable economic environments that have been evident among the major industrial countries over the generations would not be possible. Certainly, the degree of confidence that future outcomes are perceivable and projectable, and hence valued, depends in large part on the underlying political stability of any country with a market-oriented economy. Unless market participants are assured that their future commitments and contracts are protected by a rule of law, such commitments will not be made; productive efforts will be focused to address only the immediate short-term imperatives of survival; and efforts to build an infrastructure to provide for future needs will be stunted.
A society that protects claims to long-lived productive assets thereby surely encourages their development. That spurs levels of production to go beyond the needs of the moment, the needs of immediate consumption, because claims on future production values will be discounted far less than in an environment of political instability and, for example, a weak law of contracts. At that point, the makings of a sophisticated economy based on longer-term commitments are in place.
It will be an economy that saves and invests--that is, commits to the future--and, hence, one that will grow. But every competitive market economy, even one solidly based on a rule of law, is always in a state of flux, and its perceived productiveness is always subject to degrees of uncertainty that are inevitably associated with endeavors to anticipate future outcomes.
Thus, while the general state of confidence and consumers' and investors' willingness to commit to long-term investment is buttressed by the perceptions of the stability of the society and economy, history demonstrates that that degree of confidence is subject to wide variations. Most of those variations are the result of the sheer difficulty in making judgments and, therefore, commitments about, and to, the future. On occasion, this very difficulty leads to less-disciplined evaluations, which foster price volatility and, in some cases, what we term market bubbles--that is, asset values inflated more on the expectation that others will pay higher prices than on a knowledgeable judgment of true value.
The behavior of market economies across the globe in recent years, especially in Asia and the United States, has underscored how large a role expectations have come to play in real economic development. Economists use the term "time preference" to identify the broader tradeoff that individuals are willing to make, even without concern for risk, between current consumption and claims to future consumption. Measurable discount factors are intended to capture in addition the various types of uncertainties that inevitably cloud the future. Dramatic changes in the latter underscore how human evaluation, interacting with the more palpable changes in real output, can have profound effects on an economy, as the experiences in Asia have so amply demonstrated during the past year.
Vicious cycles have arisen across Southeast Asia with virtually no notice. At one point, an economy would appear to be struggling, but no more than had been the case many times in the past. The next moment, market prices and the economy appeared in free fall. Our experiences with these vicious cycles in Asia emphasize the key role in a market economy of a critical human attribute: confidence or trust in the functioning of a market system. Implicitly, we engage in a division of labor because we trust that others will produce and be willing to trade the goods and services we do not produce ourselves.
We take for granted that contracts will be fulfilled in the normal course of business, relying on the rule of law, especially the law of contracts. But if trust evaporated and every contract had to be adjudicated, the division of labor would collapse. A key characteristic, perhaps the fundamental cause of a vicious cycle, is the loss of trust.
We did not foresee such a breakdown in Asia. I suspect that the very nature of the process may make it virtually impossible to anticipate. It is like water pressing against a dam. Everything appears normal until a crack brings a deluge. The immediate cause of the breakdown was an evident pulling back from future commitments, arguably, the result of the emergence among international lenders of widening doubt that the dramatic growth evident among the Asian "tigers" could be sustained.
The emergence of excess worldwide capacity in semiconductors, a valued export for the tigers, may have been among the precipitating events. In any case, the initial rise in market uncertainty led to a sharp rise in discounts on future claims to income and, accordingly, falling prices of real estate and equities. The process became self-feeding as disengagement from future commitments led to still greater disruption and uncertainty, rising risk premiums and discount factors, and a sharp fall in production. While the reverse phenomenon, a virtuous cycle, is not fully symmetrical, some part is.
Indeed, much of the current American economic expansion is best understood in the context of favorable expectations, interacting with production and finance to expand rather than implode economic processes. The American economic stability of the past five years has helped engender increasing confidence of future stability. While the vast majority of these gains augmented retirement and other savings programs, enough spilled over into consumer spending to significantly lower the proportion of household income that consumers, especially upper income consumers, believed it necessary to save.
In addition, the longer the elevated level of stock prices was sustained, the more consumers likely viewed their capital gains as permanent increments to their net worth, and, hence, as spendable. The recent windfall financed not only higher personal consumption expenditures but home purchases as well. It is difficult to explain the recent record level of home sales without reference to earlier stock market gains. The rise in stock prices also meant a fall in the equity cost of capital that doubtless raised the pace of new capital investment. Investment in new facilities had already been given a major boost by the acceleration in technological developments, which evidently increased the potential for profit in recent years.
The sharp surge in capital outlays during the past five years apparently reflected the availability of higher rates of return on a broad spectrum of potential investments owing to an acceleration in technological advances, especially in computer and telecommunications applications. This is the apparent root of the recent evident quickened pace of productivity advance. While the recent technological advances have patently added new and increasingly flexible capacity, the ability of these technologies to improve the efficiency of productive processes an issue I will elaborate on shortly has significantly reduced labor requirements per unit of output.
This, no doubt, was one factor contributing to a dramatic increase in corporate downsizing and reported widespread layoffs in the early s. The unemployment rate also began to fall as the pace of new hires to man the new facilities exceeded the pace of layoffs from the old. Parenthetically, the perception of increased churning of our workforce in the s has understandably increased the sense of accelerated job-skill obsolescence among a significant segment of our workforce, especially among those most closely wedded to older technologies.
The pressures are reflected in a major increase in on-the-job training and a dramatic expansion of college enrollment, especially at community colleges. As a result, the average age of full-time college students has risen dramatically in recent years as large numbers of experienced workers return to school for skill upgrading. But the sense of increasing skill obsolescence has also led to an apparent willingness on the part of employees to forgo wage and benefit increases for increased job security.
Thus, despite the incredible tightness of labor markets, increases in compensation per hour have continued to be relatively modest. Coupled with the quickened pace of productivity growth, wage and benefit moderation has kept growth in unit labor costs subdued in the current expansion.
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This has both damped inflation and allowed profit margins to reach high levels. That, in turn, apparently was the driving force beginning in early in security analysts' significant upward revision of their company-by-company long-term earnings projections. These upward revisions, coupled with falling interest rates, point to two key underlying forces that impelled investors to produce one of history's most notable bull stock markets.
But they are not the only forces. In addition, the sequence of greater capital investment, productivity growth, and falling inflation fostered an ever more benevolent sense of long-term stable growth. A committee of AFL craft unions undertook a successful membership drive in the steel industry in that year. When U. Steel refused to bargain, the committee called a strike, the failure of which was a sharp blow to the unionization drive. Brody, In the same year, the United Mine Workers undertook a large strike and also lost. These two lost strikes and the depression took the impetus out of the union movement and led to severe membership losses that continued through the twenties.
Figure 6. The AFL officially opposed any government actions that would have diminished worker attachment to unions by providing competing benefits, such as government sponsored unemployment insurance, minimum wage proposals, maximum hours proposals and social security programs. But Irving Bernstein concludes that, on the whole, union-management cooperation in the twenties was a failure.
Some firms formed company unions to thwart independent unionization and the number of company-controlled unions grew from to between and Until the late thirties the AFL was a voluntary association of independent national craft unions. Craft unions relied upon the particular skills the workers had acquired their craft to distinguish the workers and provide barriers to the entry of other workers. Most craft unions required a period of apprenticeship before a worker was fully accepted as a journeyman worker.
The skills, and often lengthy apprenticeship, constituted the entry barrier that gave the union its bargaining power. The AFL had been created on two principles: the autonomy of the national unions and the exclusive jurisdiction of the national union. Representation in the AFL gave dominance to the national unions, and, as a result, the AFL had little effective power over them. The craft lines, however, had never been distinct and increasingly became blurred. The AFL was constantly mediating jurisdictional disputes between member national unions.
Because the AFL and its individual unions were not set up to appeal to and work for the relatively less skilled industrial workers, union organizing and growth lagged in the twenties. As agricultural production in Europe declined, the demand for American agricultural exports rose, leading to rising farm product prices and incomes. In response to this, American farmers expanded production by moving onto marginal farmland, such as Wisconsin cutover property on the edge of the woods and hilly terrain in the Ozark and Appalachian regions. They also increased output by purchasing more machinery, such as tractors, plows, mowers, and threshers.
The price of farmland, particularly marginal farmland, rose in response to the increased demand, and the debt of American farmers increased substantially. This expansion of American agriculture continued past the end of the First World War as farm exports to Europe and farm prices initially remained high. However, agricultural production in Europe recovered much faster than most observers had anticipated. Even before the onset of the short depression in , farm exports and farm product prices had begun to fall.
During the depression, farm prices virtually collapsed. From to , the consumer price index fell Real average net income per farm fell over Figure 7 Farm mortgage foreclosures rose and stayed at historically high levels for the entire decade of the s. Figure 8 The value of farmland and buildings fell throughout the twenties and, for the first time in American history, the number of cultivated acres actually declined as farmers pulled back from the marginal farmland brought into production during the war.
Rather than indicators of a general depression in agriculture in the twenties, these were the results of the financial commitments made by overoptimistic American farmers during and directly after the war. The foreclosures were generally on second mortgages rather than on first mortgages as they were in the early s. Johnson, ; Alston, A major difficulty in analyzing the interwar agricultural sector lies in separating the effects of the and depressions from those that arose because agriculture was declining relative to the other sectors. A relatively very slow growing demand for basic agricultural products and significant increases in the productivity of labor, land, and machinery in agricultural production combined with a much more rapid extensive economic growth in the nonagricultural sectors of the economy required a shift of resources, particularly labor, out of agriculture.
Figure 9 The market induces labor to voluntarily move from one sector to another through income differentials, suggesting that even in the absence of the effects of the depressions, farm incomes would have been lower than nonfarm incomes so as to bring about this migration. The continuous substitution of tractor power for horse and mule power released hay and oats acreage to grow crops for human consumption.
Though cotton and tobacco continued as the primary crops in the south, the relative production of cotton continued to shift to the west as production in Arkansas, Missouri, Oklahoma, Texas, New Mexico, Arizona, and California increased. As quotas reduced immigration and incomes rose, the demand for cereal grains grew slowly—more slowly than the supply—and the demand for fruits, vegetables, and dairy products grew. Refrigeration and faster freight shipments expanded the milk sheds further from metropolitan areas.
Wisconsin and other North Central states began to ship cream and cheeses to the Atlantic Coast. Due to transportation improvements, specialized truck farms and the citrus industry became more important in California and Florida. Parker, ; Soule, The relative decline of the agricultural sector in this period was closely related to the highly inelastic income elasticity of demand for many farm products, particularly cereal grains, pork, and cotton. As incomes grew, the demand for these staples grew much more slowly. At the same time, rising land and labor productivity were increasing the supplies of staples, causing real prices to fall.
Table 3 presents selected agricultural productivity statistics for these years. Those data indicate that there were greater gains in labor productivity than in land productivity or per acre yields. Per acre yields in wheat and hay actually decreased between and These productivity increases, which released resources from the agricultural sector, were the result of technological improvements in agriculture.
In many ways the adoption of the tractor in the interwar period symbolizes the technological changes that occurred in the agricultural sector. The adoption of the tractor was land saving by releasing acreage previously used to produce crops for workstock and labor saving. At the same time it increased the risks of farming because farmers were now much more exposed to the marketplace. They could not produce their own fuel for tractors as they had for the workstock. Rather, this had to be purchased from other suppliers. Repair and replacement parts also had to be purchased, and sometimes the repairs had to be undertaken by specialized mechanics.
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The purchase of a tractor also commonly required the purchase of new complementary machines; therefore, the decision to purchase a tractor was not an isolated one. These changes resulted in more and more farmers purchasing and using tractors, but the rate of adoption varied sharply across the United States. Technological innovations in plants and animals also raised productivity. Hybrid seed corn increased yields from an average of 40 bushels per acre to to bushels per acre. New varieties of wheat were developed from the hardy Russian and Turkish wheat varieties which had been imported.
The U. For example, in the Columbia River Basin new varieties raised yields from an average of Shepherd, New hog breeds produced more meat and new methods of swine sanitation sharply increased the survival rate of piglets. An effective serum for hog cholera was developed, and the federal government led the way in the testing and eradication of bovine tuberculosis and brucellosis. Prior to the Second World War, a number of pesticides to control animal disease were developed, including cattle dips and disinfectants.
The cattle tick, which carried Texas Fever, was largely controlled through inspections. Schlebecker, ; Bogue, ; Wood, The problems that arose in the agricultural sector during the twenties once again led to insistent demands by farmers for government to alleviate their distress. Though there were increasing calls for direct federal government intervention to limit production and raise farm prices, this was not used until Roosevelt took office.
In Congress passed the Capper-Volstead Act to promote agricultural cooperatives and the Fordney-McCumber Tariff to impose high duties on most agricultural imports. Hoffman and Liebcap, The revenues were to come from taxes imposed on farmers. This act committed the federal government to a policy of stabilizing farm prices through several nongovernment institutions but these failed during the depression. Federal intervention in the agricultural sector really came of age during the New Deal era of the s. Agriculture was not the only sector experiencing difficulties in the twenties. Other industries, such as textiles, boots and shoes, and coal mining, also experienced trying times.
However, at the same time that these industries were declining, other industries, such as electrical appliances, automobiles, and construction, were growing rapidly. The simultaneous existence of growing and declining industries has been common to all eras because economic growth and technological progress never affect all sectors in the same way.
In general, in manufacturing there was a rapid rate of growth of productivity during the twenties. The rise of real wages due to immigration restrictions and the slower growth of the resident population spurred this. Transportation improvements and communications advances were also responsible.
These developments brought about differential growth in the various manufacturing sectors in the United States in the s. Because of the historic pattern of economic development in the United States, the northeast was the first area to really develop a manufacturing base. By the mid-nineteenth century the East North Central region was creating a manufacturing base and the other regions began to create manufacturing bases in the last half of the nineteenth century resulting in a relative westward and southern shift of manufacturing activity.
There was considerable variation in the growth of the industries and shifts in their ranking during the decade. The largest broadly defined industries were, not surprisingly, food and kindred products; textile mill products; those producing and fabricating primary metals; machinery production; and chemicals. When industries are more narrowly defined, the automobile industry, which ranked third in manufacturing value added in , ranked first by the mids.
Gavin Wright has argued that one of the underappreciated characteristics of American industrial history has been its reliance on mineral resources. Wright argues that the growing American strength in industrial exports and industrialization in general relied on an increasing intensity in nonreproducible natural resources. The large American market was knit together as one large market without internal barriers through the development of widespread low-cost transportation.
As a result the United States became the dominant industrial force in the world s and s. In addition to this growing intensity in the use of nonreproducible natural resources as a source of productivity gains in American manufacturing, other technological changes during the twenties and thirties tended to raise the productivity of the existing capital through the replacement of critical types of capital equipment with superior equipment and through changes in management methods.
Soule, ; Lorant, ; Devine, ; Oshima, Some changes, such as the standardization of parts and processes and the reduction of the number of styles and designs, raised the productivity of both capital and labor. Modern management techniques, first introduced by Frederick W. Taylor, were introduced on a wider scale. One of the important forces contributing to mass production and increased productivity was the transfer to electric power. Devine, By about 70 percent of manufacturing activity relied on electricity, compared to roughly 30 percent in Steam provided 80 percent of the mechanical drive capacity in manufacturing in , but electricity provided over 50 percent by and 78 percent by An increasing number of factories were buying their power from electric utilities.
In , 64 percent of the electric motor capacity in manufacturing establishments used electricity generated on the factory site; by , 57 percent of the electricity used in manufacturing was purchased from independent electric utilities. The shift from coal to oil and natural gas and from raw unprocessed energy in the forms of coal and waterpower to processed energy in the form of internal combustion fuel and electricity increased thermal efficiency.
After the First World War energy consumption relative to GNP fell, there was a sharp increase in the growth rate of output per labor-hour, and the output per unit of capital input once again began rising. These trends can be seen in the data in Table 3. Labor productivity grew much more rapidly during the s than in the previous or following decade. Capital productivity had declined in the decade previous to the s while it also increased sharply during the twenties and continued to rise in the following decade.
Alexander Field has argued that the s were the most technologically progressive decade of the twentieth century basing his argument on the growth of multi-factor productivity as well as the impressive array of technological developments during the thirties. However, the twenties also saw impressive increases in labor and capital productivity as, particularly, developments in energy and transportation accelerated.
Warren Devine, Jr. Electricity brought about an increased flow of production by allowing new flexibility in the design of buildings and the arrangement of machines. In this way it maximized throughput. Electricity made possible the use of portable power tools that could be taken anywhere in the factory.
Electricity brought about improved illumination, ventilation, and cleanliness in the plants, dramatically improving working conditions. It improved the control of machines since there was no longer belt slippage with overhead line shafts and belt transmission, and there were less limitations on the operating speeds of machines. Finally, it made plant expansion much easier than when overhead shafts and belts had been relied upon for operating power.
The mechanization of American manufacturing accelerated in the s, and this led to a much more rapid growth of productivity in manufacturing compared to earlier decades and to other sectors at that time. There were several forces that promoted mechanization. One was the rapidly expanding aggregate demand during the prosperous twenties. Another was the technological developments in new machines and processes, of which electrification played an important part. Finally, Harry Jerome and, later, Harry Oshima both suggest that the price of unskilled labor began to rise as immigration sharply declined with new immigration laws and falling population growth.
Technological changes during this period can be documented for a number of individual industries. In bituminous coal mining, labor productivity rose when mechanical loading devices reduced the labor required from 24 to 50 percent. The burst of paved road construction in the twenties led to the development of a finishing machine to smooth the surface of cement highways, and this reduced the labor requirement from 40 to 60 percent.
Mechanical pavers that spread centrally mixed materials further increased productivity in road construction. These replaced the roadside dump and wheelbarrow methods of spreading the cement. Jerome reports that the glass in electric light bulbs was made by new machines that cut the number of labor-hours required for their manufacture by nearly half.
New machines to produce cigarettes and cigars, for warp-tying in textile production, and for pressing clothes in clothing shops also cut labor-hours. The Banbury mixer reduced the labor input in the production of automobile tires by half, and output per worker of inner tubes increased about four times with a new production method. John Lorant has documented other technological advances that occurred in American manufacturing during the twenties. For example, the organic chemical industry developed rapidly due to the introduction of the Weizman fermentation process.
As Avi Cohen has shown, the continuing advances in these machines were the result of evolutionary changes to the basic machine. Mechanization in many types of mass-production industries raised the productivity of labor and capital. In the glass industry, automatic feeding and other types of fully automatic production raised the efficiency of the production of glass containers, window glass, and pressed glass. Though not directly bringing about productivity increases in manufacturing processes, developments in the management of manufacturing firms, particularly the largest ones, also significantly affected their structure and operation.
Alfred D. Chandler, Jr. Until the First World War most industrial firms were centralized, single-division firms even when becoming vertically integrated. When this began to change the management of the large industrial firms had to change accordingly. Because of these changes in the size and structure of the firm during the First World War, E. The firm found that the centralized, divisional structure that had served it so well was not suited to this strategy, and its poor business performance led its executives to develop between and a decentralized, multidivisional structure that boosted it to the first rank among American industrial firms.
General Motors had a somewhat different problem. By it was already decentralized into separate divisions. In fact, there was so much decentralization that those divisions essentially remained separate companies and there was little coordination between the operating divisions. A financial crisis at the end of ousted W. Durant and brought in the du Ponts and Alfred Sloan. Sloan, who had seen the problems at GM but had been unable to convince Durant to make changes, began reorganizing the management of the company.
Over the next several years Sloan and other GM executives developed the general office for a decentralized, multidivisional firm. Though facing related problems at nearly the same time, GM and du Pont developed their decentralized, multidivisional organizations separately. As other manufacturing firms began to diversify, GM and du Pont became the models for reorganizing the management of the firms. In many industrial firms these reorganizations were not completed until well after the Second World War.
The rise of big businesses, which accelerated in the postbellum period and particularly during the first great turn-of-the-century merger wave, continued in the interwar period. Between and the share of manufacturing assets held by the largest corporations rose from Niemi, As a public policy, the concern with monopolies diminished in the s even though firms were growing larger.
But the growing size of businesses was one of the convenient scapegoats upon which to blame the Great Depression. However, the rise of large manufacturing firms in the interwar period is not so easily interpreted as an attempt to monopolize their industries. Some of the growth came about through vertical integration by the more successful manufacturing firms. Livesay and Porter suggested a number of reasons why firms chose to integrate forward. In some cases they had to provide the mass distribution facilities to handle their much larger outputs; especially when the product was a new one.
The complexity of some new products required technical expertise that the existing distribution system could not provide. The producers of automobiles, petroleum, typewriters, sewing machines, and harvesters were typical of those manufacturers that integrated all the way into retailing. In some cases, increases in industry concentration arose as a natural process of industrial maturation.
Of the several thousand companies that had produced cars prior to , were still doing so then, but Ford and General Motors were the clear leaders, together producing nearly 70 percent of the cars. During the twenties, several other companies, such as Durant, Willys, and Studebaker, missed their opportunity to become more important producers, and Chrysler, formed in early , became the third most important producer by Many went out of business and by only 44 companies were still producing cars.
The Great Depression decimated the industry. Dozens of minor firms went out of business. Ford struggled through by relying on its huge stockpile of cash accumulated prior to the mids, while Chrysler actually grew. By , only eight companies still produced cars—GM, Ford, and Chrysler had about 85 percent of the market, while Willys, Studebaker, Nash, Hudson, and Packard shared the remainder.
The rising concentration in this industry was not due to attempts to monopolize. As the industry matured, growing economies of scale in factory production and vertical integration, as well as the advantages of a widespread dealer network, led to a dramatic decrease in the number of viable firms. Chandler, and ; Rae, ; Bernstein, It was a similar story in the tire industry.
The increasing concentration and growth of firms was driven by scale economies in production and retailing and by the devastating effects of the depression in the thirties. Although there were firms in , 5 firms dominated the industry—Goodyear, B. Goodrich, Firestone, U. During the twenties, firms left the industry while 66 entered. The share of the 5 largest firms rose from 50 percent in to 75 percent in During the depressed thirties, there was fierce price competition, and many firms exited the industry.
By there were 30 firms, but the average employment per factory was 4.
French, and ; Nelson, ; Fricke, The steel industry was already highly concentrated by as U. Steel had around 50 percent of the market. But U. However, the initiation of the National Recovery Administration NRA codes in required the firms to cooperate rather than compete, and Baker argues that this constituted a training period leading firms to cooperate in price and output policies after McCraw and Reinhardt, ; Weiss, ; Adams, A number of the larger firms grew by merger during this period, and the second great merger wave in American industry occurred during the last half of the s.
Figure 10 shows two series on mergers during the interwar period. The FTC series included many of the smaller mergers. The series constructed by Carl Eis only includes the larger mergers and ends in Stigler, This merger wave created many larger firms that ranked below the industry leaders. Much of the activity in occurred in the banking and public utilities industries. Markham, In manufacturing and mining, the effects on industrial structure were less striking.
Eis found that while mergers took place in almost all industries, they were concentrated in a smaller number of them, particularly petroleum, primary metals, and food products. In the s there was relatively little activity by the Justice Department, but after the Great Depression the New Dealers tried to take advantage of big business to make business exempt from the antitrust laws and cartelize industries under government supervision. Though minor amendments were later enacted, the primary changes after that came in the enforcement of the laws and in swings in judicial decisions.
Their two primary areas of application were in the areas of overt behavior, such as horizontal and vertical price-fixing, and in market structure, such as mergers and dominant firms. Horizontal price-fixing involves firms that would normally be competitors getting together to agree on stable and higher prices for their products.
As long as most of the important competitors agree on the new, higher prices, substitution between products is eliminated and the demand becomes much less elastic. Thus, increasing the price increases the revenues and the profits of the firms who are fixing prices. Vertical price-fixing involves firms setting the prices of intermediate products purchased at different stages of production.
It also tends to eliminate substitutes and makes the demand less elastic. Price-fixing continued to be considered illegal throughout the period, but there was no major judicial activity regarding it in the s other than the Trenton Potteries decision in In that decision 20 individuals and 23 corporations were found guilty of conspiring to fix the prices of bathroom bowls. The evidence in the case suggested that the firms were not very successful at doing so, but the court found that they were guilty nevertheless; their success, or lack thereof, was not held to be a factor in the decision.
Scherer and Ross, Though criticized by some, the decision was precedent setting in that it prohibited explicit pricing conspiracies per se. The Justice Department had achieved success in dismantling Standard Oil and American Tobacco in through decisions that the firms had unreasonably restrained trade. These were essentially the same points used in court decisions against the Powder Trust in , the thread trust in , Eastman Kodak in , the glucose and cornstarch trust in , and the anthracite railroads in The criterion of an unreasonable restraint of trade was used in the and decisions that found the American Can Company and the United Shoe Machinery Company innocent of violating the Sherman Act; it was also clearly enunciated in the U.
Steel decision. This became known as the rule of reason standard in antitrust policy. A series of court decisions in the twenties and thirties further reduced the possibilities of Justice Department actions against mergers. The search for energy and new ways to translate it into heat, light, and motion has been one of the unending themes in history. From whale oil to coal oil to kerosene to electricity, the search for better and less costly ways to light our lives, heat our homes, and move our machines has consumed much time and effort.
The energy industries responded to those demands and the consumption of energy materials coal, oil, gas, and fuel wood as a percent of GNP rose from about 2 percent in the latter part of the nineteenth century to about 3 percent in the twentieth. Changes in the energy markets that had begun in the nineteenth century continued. The evolution of energy sources for lighting continued; at the end of the nineteenth century, natural gas and electricity, rather than liquid fuels began to provide more lighting for streets, businesses, and homes.
In the twentieth century the continuing shift to electricity and internal combustion fuels increased the efficiency with which the American economy used energy. These processed forms of energy resulted in a more rapid increase in the productivity of labor and capital in American manufacturing. From to , output per labor-hour increased at an average annual rate of 1. The productivity of capital had fallen at an average annual rate of 1. As discussed above, the adoption of electricity in American manufacturing initiated a rapid evolution in the organization of plants and rapid increases in productivity in all types of manufacturing.
The change in transportation was even more remarkable. Internal combustion engines running on gasoline or diesel fuel revolutionized transportation. Trucking began eating into the freight carried by the railroads. These developments brought about changes in the energy industries. Coal mining became a declining industry. As Figure 11 shows, in the share of petroleum in the value of coal, gas, and petroleum output exceeded bituminous coal, and it continued to rise.
These changes, especially the declining coal industry, were the source of considerable worry in the twenties. Income in the industry declined, and bankruptcies were frequent. Strikes frequently interrupted production. Anthracite or hard coal output was much smaller during the twenties. Real coal prices rose from to , and bituminous coal prices fell sharply from then to Figure 12 Coal mining employment plummeted during the twenties.
Annual earnings, especially in bituminous coal mining, also fell because of dwindling hourly earnings and, from on, a shrinking workweek. Figure The sources of these changes are to be found in the increasing supply due to productivity advances in coal production and in the decreasing demand for coal. The demand fell as industries began turning from coal to electricity and because of productivity advances in the use of coal to create energy in steel, railroads, and electric utilities. Keller, In the generation of electricity, larger steam plants employing higher temperatures and steam pressures continued to reduce coal consumption per kilowatt hour.
Similar reductions were found in the production of coke from coal for iron and steel production and in the use of coal by the steam railroad engines. Rezneck, All of these factors reduced the demand for coal. Productivity advances in coal mining tended to be labor saving. Mechanical cutting accounted for By the middle of the twenties, the mechanical loading of coal began to be introduced.
Between and , output per labor-hour rose nearly one third in bituminous coal mining and nearly four fifths in anthracite as more mines adopted machine mining and mechanical loading and strip mining expanded. The increasing supply and falling demand for coal led to the closure of mines that were too costly to operate. A mine could simply cease operations, let the equipment stand idle, and lay off employees.
When bankruptcies occurred, the mines generally just turned up under new ownership with lower capital charges. When demand increased or strikes reduced the supply of coal, idle mines simply resumed production. As a result, the easily expanded supply largely eliminated economic profits.
The average daily employment in coal mining dropped by over , from its peak in , but the sharply falling real wages suggests that the supply of labor did not fall as rapidly as the demand for labor. Soule notes that when employment fell in coal mining, it meant fewer days of work for the same number of men.
Social and cultural characteristics tended to tie many to their home region. The local alternatives were few, and ignorance of alternatives outside the Appalachian rural areas, where most bituminous coal was mined, made it very costly to transfer out. In contrast to the coal industry, the petroleum industry was growing throughout the interwar period.
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By the thirties, crude petroleum dominated the real value of the production of energy materials. As Figure 14 shows, the production of crude petroleum increased sharply between and , while real petroleum prices, though highly variable, tended to decline. The growing demand for petroleum was driven by the growth in demand for gasoline as America became a motorized society. The production of gasoline surpassed kerosene production in The development of oil burners in the twenties began a switch from coal toward fuel oil for home heating, and this further increased the growing demand for petroleum.
The growth in the demand for fuel oil and diesel fuel for ship engines also increased petroleum demand. But it was the growth in the demand for gasoline that drove the petroleum market. The decline in real prices in the latter part of the twenties shows that supply was growing even faster than demand. The discovery of new fields in the early twenties increased the supply of petroleum and led to falling prices as production capacity grew.
The Santa Fe Springs, California strike in initiated a supply shock as did the discovery of the Long Beach, California field in New discoveries in Powell, Texas and Smackover Arkansas further increased the supply of petroleum in New supply increases occurred in to with petroleum strikes in Seminole, Oklahoma and Hendricks, Texas. The supply of oil increased sharply in to with new discoveries in Oklahoma City and East Texas. Each new discovery pushed down real oil prices, and the prices of petroleum derivatives, and the growing production capacity led to a general declining trend in petroleum prices.
McMillin and Parker argue that supply shocks generated by these new discoveries were a factor in the business cycles during the s. The supply of gasoline increased more than the supply of crude petroleum. In a chemist at Standard Oil of Indiana introduced the cracking process to refine crude petroleum; until that time it had been refined by distillation or unpressurized heating. In the heating process, various refined products such as kerosene, gasoline, naphtha, and lubricating oils were produced at different temperatures.
It was difficult to vary the amount of the different refined products produced from a barrel of crude. The cracking process used pressurized heating to break heavier components down into lighter crude derivatives; with cracking, it was possible to increase the amount of gasoline obtained from a barrel of crude from 15 to 45 percent.
In the early twenties, chemists at Standard Oil of New Jersey improved the cracking process, and by it was possible to obtain twice as much gasoline from a barrel of crude petroleum as in The petroleum companies also developed new ways to distribute gasoline to motorists that made it more convenient to purchase gasoline.
Prior to the First World War, gasoline was commonly purchased in one- or five-gallon cans and the purchaser used a funnel to pour the gasoline from the can into the car. These spread rapidly, and by gasoline companies were beginning to introduce their own filling stations or contract with independent stations to exclusively distribute their gasoline. Increasing competition and falling profits led filling station operators to expand into other activities such as oil changes and other mechanical repairs. Though the petroleum firms tended to be large, they were highly competitive, trying to pump as much petroleum as possible to increase their share of the fields.
This, combined with the development of new fields, led to an industry with highly volatile prices and output.
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The rest is invested in fixed income avenues. The lower direct equity exposure makes the funds less volatile even as they benefit from equity taxation. Then there are the regular hybrid funds categorised as conservative, balanced and aggressive. These funds always maintain some minimum exposure to both equity and debt—higher debt bias in conservative, higher equity tilt in aggressive and evenly distributed in balanced. Taxation can thus vary depending on the nature of exposure at the time of redemption.
But even among similar hybrid funds, there is lot of variety since fund managers take varying degree of risk within each asset class. Experts recommend equity savings funds and balanced advantage funds over others in this space. Opt for less volatile funds Some hybrid funds have effectively cushioned the market downside. Avoid investing in property Builders and housing finance companies are luring buyers with big discounts and low loan rates.
The housing market in top Indian cities has not done too well in the past one year. Except in Hyderabad, residential prices in all big cities either fell or rose marginally see table. Given the looming threat of an economic slowdown, the situation is unlikely to improve in the next few quarters. Builders are sitting on huge inventories which will take a long time to clear. In Mumbai and Bengaluru, it will take more than two years.
Home prices have stagnated Slack demand, huge inventories and stringent regulations kept home prices low across India. If you are looking to buy for immediate use, go ahead and buy. But if you plan to invest in a second property, stay away for now. There are better options available which can provide higher returns. This is especially true if you intend to take a loan to buy the property. Only the builder and the lender will gain, which explains why they are so keen to make you loosen your purse strings.
Also read: Can you survive the economic slowdown? Take this quiz to find out 4. Diversify with gold, US funds It is always a good idea to diversify the portfolio to reduce the risk. During times of uncertainty, investors tend to flock to the safety of gold—this is evident in the sharp rise in price of gold in recent months.
Investors who had taken some gold exposure would have been partly cushioned from the recent slump in the equity market. However, avoid buying physical gold ornaments or bullion because the making charges eat into the returns and issues such as safety, liquidity and purity. When investing in gold, go for financial assets such as gold ETF or gold sovereign bonds.
These allow investors to purchase gold in denominations as low as 1 gram while affording high degree of convenience and safety. Another way to diversify the portfolio is by investing in international equities, particularly US stocks. US-focused equity funds provide two main benefits: One, they lend geographical diversification by investing in another country whose market has little correlation to the domestic market. Further, they provide currency diversification. Investments in US-focused equity funds are dollar denominated, even though you invest and redeem in rupees.
As the local currency has the propensity to depreciate against the dollar over the long term, this gets added to the actual NAV return of the fund. Diversify your portfolio US-focused funds have provided healthy diversification to Indian equities. Source: Value Research Data as on 19 Aug 5.
Create an emergency corpus With jobs vanishing, an emergency fund is critical. Building a kitty to take care of medical or financial emergencies is the first step in any financial plan. But during turbulent phases, such a fund is simply indispensable. It is best to take into account your earnings, expenses and family structure to arrive at the right size. Besides routine expenses like school fees, groceries, medicines and utility bills, set aside an additional amount as cushion for any unforeseen expenses. This amount should be parked in liquid instruments, so that you can realise the proceeds the moment they are needed.
Reduce discretionary spends They say a penny saved is a penny earned. In a slowdown, you should examine your expenses to identify the ways to earn more. Tweak your lifestyle and budget to reduce discretionary spends and defer big-ticket purchases.
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You will be surprised how much you can save by curbing even small expenses like eating out or ordering food online. If a couple is eating out thrice a month and spending Rs 6,, cutting it down to once can help save Rs 4, a month. This is also the time to defer big-ticket expenses. Put plans to purchase a car, house or even a big holiday on hold till the time your finances are more secure. If it is not possible to defer these, look at second hand, pre-owned or refurbished options.
These come for a much lower price but are as good as new.