The Modern G.E.

(Return to the Contents Topics page.)  

          In recent posts we’ve been discussing the announcement four days ago by General Electric, America’s largest corporation, that it is paying no federal taxes this year, and that it has filed a $3.2 billion tax benefit. Today, G.E. announced it plans to spend $3.2 billion for a 90 percent stake inConverteam, a company based in Massy, France…. Did your eyebrows just go up? 

          Let’s review the changes over the last 30 years to the structures and functions of industrial corporations in America, with G.E. in mind.  General Electric is familiar to me, having lived for 40 years near its original home base in Schenectady, NY and also near my wife’s hometown of Pittsfield, MA which was also a G.E. company town.  For years, hardworking professional people (including some of my friends and in-laws) settled in those communities, intending to make G.E. their career employer.  It was a prestigious manufacturing company, and it was their company.

          The old G.E. culture was suddenly shattered, however, when a new CEO, Jack Welch, assumed power in 1981.  His ascent coincided with a major political development in the new Reagan Administration, the suspension of enforcement of the anti-trust laws designed to check monopoly power.  There was an immediate and wholesale change in G.E.’s business plans, as Welch moved quickly to take advantage of new possibilities.  There were major changes here,  including new business directions, unit closings, and substantial layoffs.  Indeed, virtually overnight both Schenectady and Pittsfield became shadows of their former selves.  People wondered why G.E. would abandon its faithful workforce, and its traditional industrial role in society.  

The Classical G.E.

          In his new book, [1] Barry C. Lynn presents an account of both what G.E. had been, and what it was about to become:

          “Here I want to begin to look at the main institution we have used to protect our industrial and scientific arts and to pass them from one generation to the next: the industrial corporation itself.  Specifically, I want to look at the intent, character, structure, and legal nature of the classic industrial enterprise that dominated the U.S. economy through most of the mid-twentieth century: the great oligopolies like General Electric, U.S. Steel, DuPont, IBM, RCA, Xerox, 3M, John Deere, Eli Lilly, Boeing, Caterpillar, and Westinghouse, as well as, of course, General Motors and the other automakers.

          “Like Macy’s and Wal-Mart today, these firms exercised direct control over the actual people who made the goods and provided the services.  Unlike Macy’s and Wal-Mart and the other mega-retailers, the old industrial enterprises did so in ways that generally resulted in the protection of these producers and the machines and systems they had devised. * * *

          “And Henry Ford himself provided America’s industrial managers with what was arguably the single most important model of organization.  This was something called vertical integration, and it meant that a particular enterprise tried to produce almost all the main components of its product in-house, in its own factories. * * * Not all industrialists followed suit, but most big enterprises did. * * *

          “During these years, American society came to rely on these giant industrial enterprises to provide many of the basic services we generally associate with government.  Some services were social in nature, such as the collection of income taxes, the provision of pensions, and the management of health care.  Some were political; * * * The most important services were intellectual in nature.

          “These giant firms also served as America’s main economic planners.  Managers and engineers consciously structured the twentieth-century industrial enterprise to plan for the development and improvement of the products they manufactured and the manufacturing processes they governed. * * *

          “Through the heart of the twentieth century, the U.S. industrial enterprise functioned as a highly specialized largely bureaucratic, social institution that had more in common with the government of a large city than a personal private business like a farm or and independent grocery store.” [1]

G.E. Transformed

          As Lynn explains, this entire structure began to change 30 years ago, during the Reagan Administration:  

          “So how did we go from a political economy centered around production-oriented firms like General Motors and General Electric to one centered around trading-oriented firms like Wal-Mart and Macy’s?  And let’s be clear: we are not talking about a transfer of relative power, in which one kind of company shrinks in size while another type of company grows.  What we have witnessed over the last generation, alongside the emergence of the trading company, is the complete transformation of the industrial company itself, to the point where even such heavyweights as GM and Boeing have taken on may of the attributes of the trading company.

          “Today’s big industrial companies are still not as ‘flat’ as Wal-Mart, but they are far less vertical in their organization than they were even a decade ago. * * * This metamorphosis [of the classic American industrial enterprise into a Wal-Mart-like trading company] is one of the most dramatic events in our recent political economic history. * * *

          “The first stage of this transformation took place in the 1980s, when the professional, salaried managers who then controlled most big firms began to adapt their manufacturing operations to a legal environment that had been radically altered by the revolutionary changes in antimonopoly law in 1981.  Perhaps the best way to understand this change is to focus on Jack Welch, who was CEO of General Electric between 1981 and 2001 and who was one of the more brilliant managers of his era. * * *

          “[I]n a speech [in December 1981] to a ballroom full of Wall Street analysts, he demonstrated just how well he understood the license he had just been given by the Reagan Administration’s de facto suspension of antimonopoly law half a year earlier.  A ‘central idea’ would guide G.E. during his reign, Welch said.  Managers would make every business unit in the giant conglomerate into ‘the number one or number two leanest, lowest-cost, world-wide producer of quality goods and services.’ In cases in which G.E. … did not have a technology… to grow swiftly to one or two, Welch said the company would get there some other way, or else sell off or close the unit. * * *

          “It became a lot easier to understand exactly what Welch meant during the next few years as he illustrated his concepts with real-life actions.  The most dramatic and iconic of these followed G.E.’s 1985 takeover of the television pioneer RCA.  This deal took place when Americans’ fear of Japanese industrial competition was rising fast, and Welch assured Congress that he intended to create a national champion in television production.  His plan, he said, was to merge RCA’s TV division into G.E.’s, then upgrade the technology and manufacturing processes of the combined operation.

          “It took only a year, however, for Welch to drop the ruse and orchestrate instead a masterful swap with his counterpart at France’s Thompson Electronics.  In exchange for Thompson’s medical device business, Welch traded away the combined television manufacturing capabilities of both RCA and G.E. in a no-cash deal.

          “In two strokes, Welch remade multiple world-spanning industries. The rationale behind his moves was simple: concentrate power, avoid direct competition with firms backed by mercantilist states (as Japan’s electronics companies were), and focus on industrial activities that could be protected through interaction with regulators (Thompson’s medical device business) or the Pentagon (RCA’s defense business, which Welch kept.)

          “In so doing, Welch helped to set the pattern for the great Wall Street merger boom of the 1980s. * * * The general modus operandi was to break apart the huge mixed conglomerates that had been assembled in the late 1950s and 1960s … and then reassemble the parts in ways that better linked like to like.      

          “Welch was a highly capable engineer, and his vision of industrial organization was that of a rational manager. * * * He cut overall capacity, thinned out supply bases, culled skilled workers, and reduced the incentive to innovate.  Nevertheless, he did so with some degree of care, and thereby managed to keep G.E. atop the world market in everything from locomotives to jet engines to power-plant turbines to electricity-generating windmills.

          “In other words, Welch’s approach still involved some risk to capital. Which is why his model would soon be tossed aside.” [2]

          This account of G.E.’s history shows how monopoly power over market sectors can be gained through mergers & acquisitions [M&A].  Lynn observes that because manufacturing involves risk to capital, the next stage in the transformation of the manufacturer into a trading company like Wal-Mart attempts to socialize and reduce that risk.  Although he notes that “Welch got into the game, as he opted to outsource a huge portion of his company’s work in the late 1990s,” he leaves G.E. to move on to other examples.

            We’ll return in another post to a fuller discussion of what Lynn describes as the “strip-mining” of firms by financial operators to achieve horizontal monopolies, a practice that he says has recreated the U.S. domestic economy in ways harmful to the American consuming public. [3] 

JMH – 3/29/11

_______

 [1] “Cornered: The New Monopoly Capitalism and the Economics of Destruction,” John Wiley & Sons, 2010, pp. 62-65.

[2] Id. at 66-68.

[3] Suffice it to say, for now, that Lynn attributes the transformation of manufacturing companies like G.E. into Wal-Mart-style trading companies to: (1) elimination of legal constraints on monopoly power; (2) relaxation of U.S. control of international trade; and (3) the centralization of power over corporations in the hands of financiers.

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