Tag Archives: business history

Cold, Calculating Political Economy’: Fixed costs, the Rate of Profit and the Length of the Working Day in the Factory Act Debates, 1832-1847

By Steve Toms (Leeds University Business School)

URL: http://econpapers.repec.org/paper/pramprapa/54408.htm

The paper re-analyses the evidence presented by pro and anti-regulation interests during the debates on factory reform. To do so it considers the interrelationship between fixed costs, the rate of profit and the length of the working day. The interrelationship casts new light on the lobbying positions on either side of the debate. It does so by comparing the evidence presented in the debates before parliament and associated pamphlets with actual figures contained in the business records of implicated firms. As a result the paper identifies the compromise position of the working day length compatible with reasonable rates of profit based on actual cost structures. It is thereby able to reinterpret the validity of the claims of contemporary political economy used to support the cases for and against factory regulation.

Reviewed by Mark J Crowley

This paper was circulated by NEP-HIS on 2014-03-22 and its a follow up to that reviewed by Masayoshi Noguchi in an earlier post on the NEP-HIS blog (click here)

This second paper by Toms draws on a range of archival materials from both government and businesses to explore in detail the implications of legislative changes on British business during the industrial revolution.  It shows how the debates concerning the implementation of stricter working hours were contentious. Outlining the difficulties faced by the government and businesses to uniformly apply these new measures, particularly since businesses were exposed to different pressures according to their contribution to society, it shows how these factors further influencing the implementation and drafting of these measures.   By citing the debates of the anti-regulation bodies in Parliament, and also Parliamentary debates, it exemplifies how the interpretations of profit influenced the debates tabled by the Ten Hours movement – the pressure group created with a view to enshrine, in legislation, a maximum 10 hour working day.   This perspective in itself is new, particularly since it moves away from the traditional approaches adopted by trade union historians such as Alistair Reid and others who have examined the influence of unions in these disputes, but have examined them from the perspective of strikes (Reid, 2005).

 

Summary

Adopting a theoretical approach, especially in its examination of different interpretations of profit in the nineteenth century, this paper scrutinizes the range of factors that determined wages in nineteenth century factories, concluding that the reasons were much more complex than originally assumed.  In claiming that accounting manipulators were used as a major force in setting these wages, Toms shows how the considerations governing the decisions about wages were based on a range of accounting methods, although these methods at this time were not well-developed.  Furthermore, he claims convincingly that accountancy was poorly practiced in the nineteenth century, primarily owing to the apparent paucity of regulations governing the profession.   In adopting this approach, Toms highlights the two sides of the debate suggested by historians so far concerning the role of accountancy, that being: that it did not have an important role at all; or that it played a role that was sufficient to encourage competition.  By doing so, he has lucidly integrated the laissez faire ideology to elucidate the role of accountants in the policymaking process.

Working conditions at factories were often difficult and dangerous, the implications of which are discussed in detail in this paper

Working conditions at factories were often difficult and dangerous, the implications of which are discussed in detail in this paper

Pressures on workers and the arduous hours did result in greater pressure on government to develop measures to regulate working hours

Much of the debates concerning workplace rights have adopted either a policy history perspective (examining the efforts of the government to regulate the economy) or a social history perspective (examining the perceived improvement in rights for workers).  Yet a detailed analysis of the implications of company accounting on government policy decisions has not yet been undertaken.  While economic historians such as Nicholas Crafts have used econometrics as a method to try and explain the causes of the industrial revolution, (Crafts, 2012) little attention has been given to the implications of these changes in terms of workplace legislation on not only the workers themselves, but on the calculations affecting industrial output and their response to government intervention.  Through examining the role of prominent socialists such as Robert Owen, this paper highlights the complex nature of the debates concerning profits, loss and its correlation with productivity to show that while the pro-regulation movement sought to protect the rights of individual workers, the anti-regulation movement created an inextricable link between the reduction of profit and the justification for longer working days. Locating this argument within the debate concerning fixed costs, it demonstrates how the definitions and arbiters of profits, loss and value was a moveable feast.

Robert Owen's ideas to reform the system and ensure greater equality were especially influential

Robert Owen’s ideas to reform the system and ensure greater equality were especially influential

This approach to the data has led to a different account of the costs faced by businesses than has hitherto been suggested by historians, and while Toms is careful to claim that this does not resolve the conceptual disputes surrounding the practice of accounting in the nineteenth century, it does provide a platform for further debate and a re-examination of the figures.  For example, in the analysis of the Ashworth accounts, Toms claims that the adoption of a variable approach to costing of volume-based products shows an annual running cost of £2500 per year, £3800 less than Boyson concluded in his 1970 study.  In his analysis of profit, Toms concludes that there could be a 3 hour variable that would not have detrimentally affected the profitability of companies.  Claiming that profitability would be at last 10 percent with 58 hour or 55 hour working week, this challenges previous assumptions those longer working hours would yield greater profits.  However, he highlights that the only significant difference would be that if these figures were compared to the onerous 69 hour week, where the profit margins could be expected to rise by a further 5 percent, although the pro-regulation body, for the purposes of strengthening their argument, presented this variable as high as 15 percent.

The final part of the paper lucidly examines the impact of foreign competition.  Citing the increased costs of British production when compared with European counterparts, with Manchester reported to be 50 percent higher in terms of spinning production costs than Switzerland, Toms shows how superficially the justification for maintaining the British market was now becoming even more difficult.  However, a deeper analysis of the figures reveals a different story, and to illustrate the point, evidence from Mulhausen is juxtaposed with Lancashire to show how wages were on average 18 d per day higher in Lancashire, although their productivity was almost double that of their German counterpart, and concludes that in effect, the overseas threat to the British market was as substantial as originally assumed.

Critique

This paper is extremely ambitious in its scope and development, and has covered significant ground in its analysis.  Its conclusions are convincing and are based on deep theoretical and conceptual understandings of the accountancy process.  My only suggestion is that the final section of the paper examining the ideological theories of profit could be fleshed out more so as to fully contextualise the political, legislative and business developments at this time.  It may also be possible to connect these issues with the contemporary debates concerning ‘thrift’, and the development of commercial banking.  For example, the idea of thrift was widely debated with the growth of friendly societies, and the decision of the government to open a Post Office Savings Bank to enable workers to deposit their savings.  Therefore, was there any connection between contemporary ideas of profit and thrift, and if so, was there a common ideological strand that linked people together in terms of their perceptions of money and its role in the wider society?

 

References

Crafts, NFR., “British Relative Economic Decline Revisited: the Role of Competition”, Explorations in Economic History (2012), 49, 17-29

Reid, Alastair J., United We Stand: A History of Britain’s Trade Unions (London: Penguin, 2005).

 

Constructing Contemporary (Mexican Banking) History

Bank Nationalisation, Privatisation, Crisis and Financial Rescue: Using Testimonials to Write Contemporary Mexican Banking History

By Enrique Cárdenas (Centro de Estudios Espinosa Yglesias)

Abstract – The Mexican banking system has experienced a large number of transformations during the last 30 years. Although important regulatory changes were introduced in the 1970s, all but a couple of the commercial banks were nationalized in 1982, consolidated into 18 institutions and these were re-privatized in 1992. Shortly after, a balance of payments crisis in 1995 (i.e. Tequila effect) led the government to mount a financial rescue of the banking system which, in turn, resulted in foreign capital controlling all but a couple of institutions. Each and every one of these events was highly disruptive for Mexico’s productive capacity and society as a whole as their consequences have had long lasting effects on politics, regulation and supervision of the financial sector as well as polarising society. Not surprisingly the contemporary narrative accompanying these events has been highly controversial and full of conflicting accounts, with competing versions of events resulting in a long list of misconceptions and “urban legends”.

URL (Podcast: 07 April 2014, 1 hr and 38 min)

Review by Bernardo Bátiz-Lazo

This entry departs from our usual as it fails to discuss a specific paper circulated by NEP-HIS. Instead I comment and reflect on a public lecture, that is, another common medium we use to communicate our research. The lecture build around two multi volume books and three DVD’s, and was delivered by Enrique Cárdenas (Executive Director of Centro de Estudios Espinosa Yglesias or CEEY) at Bangor Business School’s London campus on 2014-04-07. The actual publications are available, by the way, in hard copy from CEEY’s book store and in electronic version from Amazon.com.mx, as well as following the links to videos below and the link to the full podcast of the presentation above.

The chief aim of this project is to offer new evidence on the process of nationalisation (1982) and privatisation (1991-1992) of Mexican commercial banks. These two episodes of contemporary financial history had important rippling effect on Mexican society, politics and macroeconomic performance. They also had global consequences, first, as they mark the start of the so-called “International Debt Crisis” after Mexico informed of a payment moratorium of sovereign debt in August 1982. Secondly, the ratification of Robert Rubin as the 70th US Treasury Secretary (1995-1999) together with Ernesto Zedillo taking office as 54th President of Mexico (1994-2000), led to a political power vacuum and impasse in economic policy making between the Autumn of 1994 and early Winter of 1995. Known in the vernacular as the “Tequila Crisis”, in December 1994 Mexico devalued its currency and this led to instability in international foreign exchange markets and accelerated the exit of portfolio investments from a number of other countries (most notably Argentina and Brazil). By this point in time, Mexicans had fought hard during negotiations with the US and Canada to keep the banking system out of the North American Free Trade Agreement (NAFTA). But this exception was lost in the aftermath of the “Tequila Crisis” while the subsequent bailout of the newly privatised banks represented a precedent missed by US and British regulators of what would happen, on a much bigger scale, during the 2007-9 financial debacle.

José López-Portillo y Pacheco (Last presidential address to the Nation, 1982; The president broke into tears after announcing the nationalisation of the banks).  Courtesy of Centro de Estudios Espinosa Yglesias

José López-Portillo y Pacheco (1920-2004) (Last presidential address to the Nation, 1982; The president brakes into tears). Courtesy of Centro de Estudios Espinosa Yglesias

Cárdenas’ analytical framework is based on Stephen Haber’s ideas of co-dependence between political and financial spheres. Cardenas’ evidence-based approach is certainly welcomed. But more so as he tackles head on with the issue of periodicity and method. Specifically whether and how to write accurate and meaningful economic history using of oral sources in the recent past. Revisiting and unpacking method and methodology are topics not far from current debates in business history, as has been portrayed in previous posting in the NEP-HIS blog (click here); the forthcoming panel on oral histories and World War I at theEuropean Association for Banking and Financial History (EABH) meeting in Rüschlikon, Switzerland; recent and forthcoming publications in refereed journal articles by Stephanie Decker and colleagues (see full references below); and JoAnne Yates’s contribution to the edited book by Bucheli and Wadhwani (2014) (as well as their panel on the latter publication during the recent World Business History Conference in Frankfurt). Indeed, one of Cárdenas’ and CEEY trustees’ chief motivations to engage in this research was to listen to what major players had to say while they were still alive.

Cárdenas was not limited to oral sources. He endeavoured to gather surviving but uncatalogued documents as well as the construction and reconstruction of statistical data series to complement historical analysis. Actors were of the highest standing in society including former Presidents, Mexican and foreign Treasury ministers, senior staff at multinational financial bodies, past and present senior bank executives, regulators, economic academic advisors, etc. To deal with historians mistrust of recollection and potential bias, Cárdenas sent in advance a questionnaire split in two sections: one aimed at enabling a 360 degree perspective on key moments; and the second, made out of questions tailored to the participant’s office and status during the event. All participants were informed of who else would take part of the discussions but none were shown others’ responses until all were collected and ready for publication. The risk of being “outed” thus resulted in only a handful of contradictions as participants preferred to declined answering “painful” topics than stretching the “truth”. Meetings were recorded, transcribed, and compared against statistical data. The latter would either strengthen the participant’s argument or was returned to him with further queries. Several iterations resulted in each participant embracing full ownership of individual texts and thus effectively becoming an author of his entry. It’s this process of iterations and guided discussion to which Cárdenas refers to as “testimonials”.

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As mentioned, the result of the CEEY’s sponsored research by Cárdenas was two multi book volumes and three documentary videos all of which, as illustrated by the links below to trailers and video documentaries below, have been edited but have no narrators. All views are expressed by the main actors “so that viewers can draw their own conclusions” said Cárdenas during his lecture. By publishing a large number inconclusive outputs based on “testimonials” the CEEY, and Cádernas as his Executive Director, aim to offer a new empirical source for others to include in their own analytical work and come to their own conclusions. Indeed, CEEY’s publications also include a number single author monographs and the commissioning of edited collections by academic authors who have used the testimonials as part of their evidentiary repertoire.

But does Cárdenas have any conclusions of his own? For one, he believes the effort to generate and document events through testimonials and new statistical material results in a much more balanced approach to assess the limited options President López-Portillo had at the end of his term in office. For starters in 1981 he was to nominate on his successor ahead of elections (“el dedazo”). The events that followed were to become the beginning of the end for the one party rule that characterised Mexico during most of the 20th century. At this point in time, Mexico had experienced four record years of strong economic growth. Never seen before and never to be seen since. Its oil production was doubling each year but its international debt was skyrocketing (particularly that of short-term maturity in 1981-2).

But as international oil prices begin to drop, Mexico followed an erratic behaviour (reducing and then raising its oil price) while oil revenues generated 35% of fiscal income and 75% of exports. Moreover, prices for other Mexican exports also fell while a practically fixed-rate parity with the US dollar meant a strongly overvalued peso. A devaluation was followed by a massive increase in salaries. And in the midst of political jockeying and an accelerating worsening of public finance, the President (a lawyer by training) was, according to Cárdenas, to receive conflicting and contradicting information (Cárdenas calls it “deceiving”) on the actual size of the public deficit (which was to double from 7% of GDP in 1981 to 14% of GDP in 1982) as well as the merits of defending the Mexican peso vs US dollar exchange rate (which he publicly claim to “defend like a dog [would defend his master]“.

2014-04-07 13.42.25

This conclusion sheds a significant amount of light on the decisions of late former President López-Portillo. As much as also help to better understand the end of some otherwise promising political careers. The narrative of actors bring fresh light to understand the break up between Mexican political and business elites, which eventually results in the end of the one party rule in the presidential election of 2000. It also helps to explain the break up of the rule of law during the next 15 to 20 years in Mexico as well as the loss of the moral authority of its government.

Cárdenas and CEEY have certainly produced a piece that will resist the test of time. They offer a unique effort in creating contemporary financial history while building from oral sources, privileged access to main actors and in this process, developing an interesting method to deal with concerns around potential bias. Given the passion that the topics of nationalisation and privatisation still generate amongst Mexicans and scholars of modern day Mexico, it is understandable that the analysis has emphasised idiosyncratic elements of these events. But somehow links with wider issues have been lost. For one, nationalisation or sequestration of assets (whether of local or foreign ownership) characterised the “short” 20th century. Nationalisation is one side of the coin. The other is public deficit reduction through the sale of government assets. Indeed, the privatisation of Mexican banks between 1991 and 1992 enabled to finance about half of the reduction of Mexican sovereign debt (though the massive rescue that followed practically annulled that reduction). Mexicans were not inmune to Thatcherism to the same extent that a reduction of the state in economic activity (whether real or not) was and is part and parcel of the “second” globalisation.

In summary and in Enrique Cárdenas own words: “Writing current (economic) history is not only possible, but highly desirable!”. We welcome his contributions to enhance empirical evidence around such important events as well as offering a way to systematically deal with oral sources.

Videos

The President’s Decision (1982) – Trailer (with English subtitles)

The President’s Decision (1982) – Full length (in Spanish)

From Nationalisation to Privatisation of Mexican Banks (1982-1991) – Trailer (with English subtitles)

Privatization of Mexican Banks (The President’s Decision Ex Post: Bank Privatization [Tequila effect - 1991-1995] – Trailer (with English subtitles)

References

Yates, J. (2014) “Understanding Historical Methods in Organizational Studies” in M. Bucheli and R. D. Wadhwani (eds.) Organizations in Time : History, Theory, Methods Oxford: Oxford University Press, pp. 265-283.

Decker, S. (forthcoming) “Solid Intentions: An Archival Ethnography of Corporate Architecture and Organizational Remembering”, Organization.

Decker (2013) “The Silence of the Archives: Postcolonialism and Business History”, Management and Organisational History 8(2): 155-173.

Rowlinson, M. Hassard, J. and Decker, S. (forthcoming) “Research Strategies for Organizational History: A Dialogue between Organization Theory and Historical Theory”, Academy of Management Review.

Note: with special thanks for helpful comments to Sergio Negrete (ITESO) and Gustavo del Angel (CIDE).

Accounting for Deception in the Industrial Revolution

Creative accounting in the British Industrial Revolution: Cotton manufacturers and the ‘Ten Hours’ Movement

By Steve Toms and Alice Shepherd (both at the University of Leeds Business School)

Abstract

The paper examines an early case of creative accounting, and how, during British industrialization, accounting was enlisted by the manufacturers’ interest to resist demands, led by the ‘Ten hours’ movement, for limiting the working day. In contrast to much of the prior literature, which argues that entrepreneurs made poor use of accounting techniques in the British industrial revolution, the paper shows that there was considerable sophistication in their application to specific purposes, including political lobbying and accounting for the accumulation of capital. To illustrate lobbying behaviour, the paper examines entrepreneurs’ use of accounting to resist the threat of regulation of working time in textile mills. It explains why accounting information became so important in the debate over factory legislation. In doing so, it shows that a significant element was the accounting evidence of one manufacturer in particular, Robert Hyde Greg, which had a strong impact on the outcome of the parliamentary process. The paper uses archival evidence to illustrate how accounting was used in Greg’s enterprise and the reality of its economic performance. The archival evidence of actual performance is then contrasted with the figures presented by Greg to the Factories Inquiry Commission, convened by the House of Commons in 1833-1834 to hear witnesses from the manufacturing interest. These sets of figures are compared and contrasted and discrepancies noted. Conclusions show that the discrepancies were substantial, motivated by Greg’s incentives to present a particular view of low profits, high fixed costs, and the threat of cheaper overseas competition. The figures appeared to lend some credibility to the apparent plight of manufacturers and to Nassau Senior’s flawed argument about all profit being earned in the ‘last hour’ of the working day. The consequence was a setback for the Ten Hours movement, leading to a further intensification of political struggles over working conditions in the 1840s.

URL: http://econpapers.repec.org/paper/pramprapa/51478.htm

Review by Masayoshi Noguchi

The paper by Toms and Shepherd was distributed by NEP-HIS on 2013-11-22. It makes a welcomed contribution to researching the role of accounting information within the British Industrial Revolution, as great debate still continues over the extent to which accounting technology was used for management decision making during that period.

The aim of Toms and Shepherd is to examine “the use of accounting by entrepreneurs to resist the threat of regulation of working time in textile mills in the early 1830s” (p. 2). This by analyzing the extent of “anti-regulation lobbying on working hours and child labour was influenced by accounting manipulation” (p. 2).

Archival evidence was sourced in the business records of the partnerships of Samuel H. Greg and Sons. As is well known, one distinctive feature of accounting system of partnerships until present day is profit-sharing amongst principals. Toms and Shepherd also examines in detail the level of “sophistication in recording capital appropriations and accumulations” (p. 4) among partners. This as the partnerships’ accounting system recognised implied interest charges of capital and used them to arrive at the balance carried forward. However, this criteria sharply contrasted with the absence of any other criteria for accounting for fixed assets (including depreciation). Fixed assets were treated as part of “[Greg’s] private estate and not assigned to the partnership” (p. 14). The practice at Greg and Sons thus provides a further case to support Pollard’s critical assessment of the limited use of accounting information for decision purposes (p.14).

Business records recording the actual performance of the business are then contrasted with evidence submitted by Robert Hyde Greg to the Factories Inquiry Commission of 1833. Toms and Shepherd then argue that the latter accounting evidence was distorted by the manufacturer’s interest to oppose the introduction of regulation stipulating the working day in textile factories. In particular, Greg manipulated accounting evidence submitted to the Factories Inquiry Commission by exaggerating “the importance of wages as an expense” (p. 22). This by assuming that most of the production costs in general, and wages in particular, were fixed costs and thus “reducing the working day would increase the burden of fixed charges” (p. 21) on profit.

Robert Hyde Greg (1795-1875)

Using the information recorded in Greg’s accounts of the partnership, Toms and Shepherd offer some factual and contra-factual exercises, including the calculation of “implied” rate of return on capital (pp.32-33). They then compare these results with the evidence provided by Greg to the Commission thus providing clear evidence of the manufacturer’s accounting manipulation. However, as the authors themselves admit, the concept of “return on capital is not referred to specifically in Greg’s evidence (only ratios of profit to output)” (p. 31), even though “the committee (sic) could easily draw conclusions from his tabulated appendices” (p. 31). Personally I would like to know more about the effect of writing-off the asset values exercised in 1832 (pp. 27, 30) on Greg’s submission of the accounting evidence to the commission in 1933.

With the skilled manipulation, the evidence submitted by Greg was successful to achieve a political effect with the final report of the Commission incorporated the entrepreneurs’ argument against the regulation on working hours. The authors conclude that accounting information could be used “not so much as an aid to [rational] management decisions, but as a [opportunistic] means of influencing others” (p. 36).

Does educational stratification put toffs at the top?

Social mobility at the top: Why are elites self-reproducing?

by Elise S. Brezis (Azrieli Center for Economic Policy, Israel) & Joël Hellier (EQUIPPE, Univ. de Lille, Bar-Ilan University, Israel and LEMNA, Univ. de Nantes, France)

URL: http://EconPapers.repec.org/RePEc:inq:inqwps:ecineq2013-312

This paper proposes an explanation for the decrease in social mobility that has occurred in the last two decades in number of advanced economies, as well as for the divergence in mobility dynamics across countries. Within an intergenerational framework, we show that a two-tier higher education system with standard and elite universities generates social stratification, high social immobility and self-reproduction of the elite. Moreover, we show that the higher the relative funding for elite universities, the higher the elite self-reproduction, and the lower social mobility. We also analyse the impacts of changes in the weight of the elite and of the middle class upon social mobility. Our findings provide theoretical bases for the inverted-U profile of social mobility experienced in several countries since World War II and to the ‘Great Gatsby Curve’ relating social mobility to inequality.

Reviewed by Mark J Crowley

This paper was circulated by NEP-HIS on 2014-01-10, and was of particular interest to me, primarily since I spent my formative years attending primary and secondary school in an area of the South Wales valleys prioritised by the European Union for what was then termed as ‘Objective One funding’ in recognition of its lack of social inclusion and opportunity – a position precipitated by the closure of the coalmines in the 1980s, which deprived thousands of their livelihoods. It stored up numerous social problems for the future, primarily owing to the absence of a cogent plan to replace and maintain the community’s employment following the completion of the area’s pit closures in the late 1980s, but was exacerbated, following the removal of these employment opportunities, by the deeply-embedded mindset of the coalfield communities vis-à-vis academic and/or cultural education, symptomatic of that seen in the movie ‘Billy Elliot’ (2000). Although disliked, inequality was largely accepted almost as a fait-accompli. For the Conservative Party of the 1980s, as Peter Dorey has argued, it was regarded as inherently necessary and positive in contemporary Thatcherite political thought (Dorey, 2010).Economic inequality became deeply clear from the 1908s in Britain

Summary

Citing the fact that society has been ‘constructed’ since medieval times, enforcing people’s ‘place’, whether it be as a member of the Feudal society or as a designated member of a particular ‘social class’, scholars have traditionally argued that inequalities have primarily been enforced according the socially-assigned opportunities during childhood. In the UK, the frequent use of the vernacular such as ‘toff’ and ‘poshboy’ by those of the opposition Labour Party (despite many of them, too, having received an elite education) in response to the perception of the British government’s inability to connect with the grassroots, picks up on the main concerns of this paper, that being that the current social and educational construct in many advanced European economies helps to perpetuate the development of an elite social class who, despite forming the smallest percentage of the nation’s overall population, receive the greatest power and highest chances of success.

This paper claims that the stratification of universities according to ‘elite’ and ‘secondary’ categories propagates an inequality that helps nurture the protection and development of an ‘elite’ through better resources afforded to those universities according to their finances and staffing. The transition of graduates to a higher social class, facilitated by their better education, and affording them with the skills maybe not available to their parents to secure a middle-class, white collar job enforces, at least superficially, the so-called ‘New right’ rhetoric of an ‘upwardly mobile’ society, but one which is fundamentally and inherently contradictory.

The methods used by the authors to convey their point are very persuasive.  The use of the intergenerational earnings elasticity model, with the use of gender and parental income as the variable helps to demonstrate the extent of the ‘elite construction’ which is the main theme of this paper, and is used as a method to measure intergenerational social mobility. Their findings suggest a constant increase in intergenerational social mobility in the countries where the so-called ‘dual’ (i.e. elite and secondary) education exists, namely France, the UK and the USA, but are contrasted with Nordic countries that do not have this system to show that such a trend does not exist here.  However, they are also keen to emphasise that a range of factors could have contributed to these changes, with sociological factors after the Second World War being cited as a major example of changes to the demographic of society in the post-1945 period, such as the number of blue collar workers entering the elite class in the USA during the 1960s being double that of countries such as Britain, France and Germany, although after the 1980s, the extent of their social mobility was severely decreasing. (Brezis & Hellier, 2013:6)

Yet the authors believe that the growth of tertiary education is possibly one of the largest reasons to explain this shift, with this form of education accounting for 60% of students in the present period, compared with 10% in the post-war period, representing an increase of 525% in enrolment to the ‘non-elitist colleges’ in the USA between 1959-2008, and an increase of 250% in elite colleges for the same period.  (Brezis & Hellier, 2013: 7)  Coupled with this of course is the fact that elite universities (Ivy League), particularly in the USA, have become more selective in their recruitment, recruiting only those with the highest grades and thus creating a small student body, and in turn spending treble the money per head  compared to secondary universities.  On the other hand,  recruitment to secondary universities has increased, largely, according to what the authors believe to be a more lenient admissions policy, but one that has led to a larger student body, and less money per head being spent on students.( Brezis & Hellier, 2013, 8)

However, the authors are also keen to correlate educational attainment with family background.  Citing the fact that at its highest, children of upper class families were 40 times more likely to enter an elite educational institution compared to those from lower social classes clearly demonstrates this class divide, and that, to a large extent, this divide is possibly ever-increasing.  (Brezis & Hellier, 2013, 8)

Using the idea that a two-tier education system prevailing in many advanced economies could be considered as a major source pertaining to rising inequality and reduced social mobility, this paper asserts that stratification of universities has also affected the level of spending per head on students, and thus influenced their educational opportunities and attainment. Declaring that the so-called ‘elite universities’ tend to recruit students from the higher social classes, it implicitly suggests that those from the lower social orders are disadvantaged at the recruitment stage, despite possessing requisite, identical and in some cases better evidence of academic attainment. Although the latter issue remains controversial, the authors have certainly identified a phenomenon that the universities concerned attempt to rebuff, and policymakers try to ‘level out’, but one that remains virtually impossible to eradicate, especially in view of the fact that many of the elite universities are in receipt of significant funds from rich benefactors, many of whom are alumni.

Those with the most power in society have appeared to be in the minority - a position influenced by growing affluence in the higher classes

Critique

The authors have engaged in a very deep analysis of the social class and its impact on entry into elite universities, and have also clearly shown the divergence between social class and educational attainment at university level. Drawing on a large range of quantitative methods and materials, this research clearly attests to the ‘Gatsby Curve’ pertaining to social mobility and inequality, demonstrating that this is relevant across several nations in developed economies.

To further amplify the impact of this research, perhaps the authors could consider exploring the difficulties faced by universities today in terms of marketing themselves to students? In the UK, and also in the US, this has become especially pertinent over recent years, and has, superficially at least, made the distinction of ‘elite universities’ more blurred, particularly in view of the spike in tuition fees implemented in the UK by the Conservative-Liberal coalition. Tied with these was the option for universities to level fees within a prescribed range, leaving many universities, even those considered among the ‘secondary’ level, to charge higher fees to avoid enforcing, or indeed accepting a position both statistically and in the public mind, as a lower-level institution. In fact, this position does raise deeper questions concerning the definition of ‘elite’ institutions. Is it based on its historical tradition, research output (as is often used as the arbiter of much government funding), student satisfaction, quality of teaching, or student attainment after graduation?

Additionally, in an age where having staff whose capabilities extend beyond the traditional realms of research and teaching has become ever-more necessary in view of the growing commercialisation of universities in the twenty-first century, with its leaders becoming more financially-savvy, and turning more towards international outreach to attract large external funding, perhaps the authors could explore whether they think the growing commercialisation of universities has deepened the class divide, thus forcing many away from pursuing a university education on the grounds of cost, or whether the growing competition among educational institutions, much of which now has a strong business-orientated approach, especially with the creation, in some universities, of the position of ‘Chief Executive’, will work to level out the ubiquitous class divide.

References

Dorey, Peter (2010) British Conservatism : The Philosophy and Politics of Inequality , London : I.B. Tauris.

David Cameron and Boris Johnson in the livery of the Oxford University Bullingdon Club (crica 1986)

David Cameron and Boris Johnson in the livery of the Oxford University Bullingdon Club (crica 1986)

La Deutsche Vida

Foreign family business and capital flight. The case for a fraud to fail

By Giovanni Favero, Università Ca’ Foscari Venezia (gfavero@unive.it)

Abstract:
The research here proposed is a micro-analysis of a business ending in bankruptcy in the aftermaths of the first oil shock, concerning the Italian subsidiary of a German wareenamelling group established in the town of Bassano in 1925. Following the budget reports and the interviews with the former entrepreurs, the company flourished until the 1960s, when managerial and entrepreneurial successions emphasized the growing difficulties deriving from growing labour costs. A tentative reorganization of the company was hindered in 1968 by union resistance and political pressures for the preservation of employment levels. In 1975 the board of directors decided to declare bankruptcy as a consequence of the huge budget losses. However, a subsequent inquiry of the Italian tax authority discovered an accounting fraud concerning hidden profits in 1974 and 1975. The fraud disclosure shows how historical conditions could create the convenience for performance understatement not only for fiscal purposes, but also in order to make divestment possible. However, it is also used here as an element to argue that business sources and the story they tell should not be taken at their face value, and that a different reconstruction of the company’s path to failure is possible. The literature concerning the missed recognition of opportunities is then mobilised in order to interpret the inconsistencies that emerge from the triangulation of business archives, press columns and interviews with union representatives and politicians. This allows to put back into perspective what results as an obsession of company management with labour costs, concealing the importance of other competitive elements, such as the increasing specialisation of the producers of home appliances. This ‘refractive error’ may be typical of businesses operating in (presumed) mature industries at international level, where wage differentials offer the opportunity to pursue quite literally exploitation much further.

URL: http://econpapers.repec.org/paper/vnmwpdman/63.htm.

Reviewed by Bernardo Bátiz-Lazo

This paper was distributed by NEP-HIS on 2013-12-15 and offers an interesting combination of business and accounting history around the long-term performance of the Italian assets of an Austrian family business (named Westens). The investment relates to a enamelling plant in the town of Bassano in 1925 (called Smalteria Metallurgica Veneta or SMV, today part of BDR Thermea). The Bassano plant was one of the largest factories of glazed products (for use in electric water heaters, bathtubs and heating products like radiators). Favero’s story takes us from its origins until the Westens leave the company in 1975. Activities, however, continued and by “the end of the 1970s the company focused its production in the heating sector… In the mid-eighties the company expanded into foreign markets. “[see further here].

Air photo of original factory (Source: http://www.baxi.it/storia/)

Air photo of original factory (Source: http://www.baxi.it/storia/)

The narrative gyrates around the Bassano plant, some three generations of Westens and an equal number of internal grown talent at the helm of SMV. Favero argues that the reason behind the origins of SMV and other similar investments in Central and Easter Europe by the Westens was to overcome growing protectionism and the end of Empire. However, the number of secondary references suggests the SMV case is relevant for Italian business history and perhaps, more could have been said about this. Nevertheless, we can follow the changes in corporate governance, the attitude of the family to foreign investments, the changing relationship between national branches and SMV’s “strategy” (a term used rather loosely by the author) as the 20th century progresses. Also how the plant was established on the basis of a then unique process of enamelling, a source of competitive advantage that also erodes as time goes by. Some discussion about the role of Chandler’s “first mover advantage” within family business would have been desirable here.

It is evident that Favero has had access to a large number of source material (including oral histories and fiscal authority memoranda and investigative papers). Yet the case is rather short and this result in the narrative progressing some time in jumps rather than a smooth flow. For instance, it is only until the end that we learn why the fraud was discovered five years after the original owners declared bankruptcy. Namely the intervention of the Italian government to maintain employment kept the plant (or the company, its not clear) afloat. There is also reference to some “bad blood” between the Westens and the Italians but we are not totally sure why and when. There are indications of growing tensions with unions and Favero tries to make a case about “management’s “obsession with labour costs”. We could also benefit from learning about the inconsistencies Favero between different sources. Perhaps an idea would be to add a timeline where one side maps changes in strategy, corporate governance or in the ruling family and the other side maps changes in the environment.

However, in its present form this makes a potentially useful teaching case in a world economic history, international business or globalisation course. Favero also claims the SMV case is part of a larger project looking at Westens’ investments in different countries. I certainly look forward to future instalments.

Giovanni Favero

Giovanni Favero

So, who was lightning the bulb in Latin America?

Foreign Electricity Companies in Argentina and Brazil: The Case of American and Foreign Power (1926 – 1965)
[Original title: Companhias estrangeiras de eletricidade na Argentina e no Brasil: o caso da American & Foreign Power (1926-1965]

By Alexandre Macchione Saes (alexandre.saes@usp.br), Universidade de São Paulo – FEA/USP and Norma S. Lanciotti (nlanciot@unr.edu.ar), Universidad Nacional de Rosario – CONICET

URL: http://econpapers.repec.org/paper/spawpaper/2013wpecon14.htm

Abstract

The article analyses the evolution, strategies and position of American & Foreign Power subsidiaries in electric power sector in Argentina and Brazil from their entry in the mid-1920s to their nationalisation. We compare the economic performance and entry strategies followed by the American holding in different host economies. We also examine the relations between the American electricity firms and the Governments of both countries, focusing on the debates and policies that explain American & Foreign Power’s withdrawal from Argentina and Brazil in 1959-1965. Finally, the article reviews the role of foreign direct investment in the development of electric power sector in both countries. The study is based upon the Annual Reports and Proceedings of American & Foreign Power (1923-1963) and other corporate reports, Government statistics and official Reports from Argentina, Brazil and the United States.

Review by Beatriz Rodríguez-Satizábal

This paper was circulated by NEP-HIS on 2013-11-02. Its topic deals with the popular subject of energy provision. Indeed, there has been no shortage of turning points in the history of the energy markets around the world. Since the development of the electricity in the late nineteenth century, energy markets have been a constant cause for debate. The discussion ranges from technical and engineering issues (such as heated debates around Nikola Telsa and Thomas Alva Edison), to the adoption of common standards, to questions as to who will provide the service, to a wider debate on government policies such as pricing and, more recently, on how to become “greener” (see for example the debate on UK gas and electricity providers).

Kilowatt

In the developing countries, the debate on energy has been tied to the relation between the foreign direct investment, the efficient provision of electricity, and nationalization policies (topics that, by the way, were picked up from a business history perspective in William J. Hausman, Peter Hertner & Mira Wilkins “Global Electrification” (2008, CUP). The question on the relation between foreign companies investing in such countries and the debate on the effects of imperialism is also latent in recent research (see for example the work of Marcelo Bucheli, Stephanie Decker, or Niall Ferguson). In this line of work, the paper by Macchione Saes and Lanciotti further explores the intricate relationship between a foreign company and its host countries but, at the same time, offers a contribution to the literature on Latin American foreign investment during the second half of the twentieth century.

According to Alexandre Macchione and Norma Lanciotti, the arrival of the American and Foreign Power Co in Brazil and Argentina marked the start of an expansion of US direct investment in those countries, while seeking new consumer markets during the 1920s (p. 2). However, it is important to notice that the company arrived to the region more than 20 years after the first electricity companies had established. Therefore, the case of American and Foreign Power Co offers an example of the aggressive expansion of an electricity company that only few years after its arrival suffered the effects of the crisis of 1929 and later on, had to deal with centralization and nationalization policies.

AlexandreNorma

The aim of the paper is to analyse the evolution, strategies, and position of the American and Foreign Power Company in both countries between 1926 and 1965. Divided in four sections, including an introduction and the concluding remarks, it presents first the greater attention that US companies gave to Latin America after the First World War, looking mainly to the evolution of the company in the US market and the subsidiaries in Brazil and Argentina. Then, the paper discusses the shift of the regulation and describes the complex relation between the state and the company. As a result, the main sections widely discuss the investment strategies which focus was in improving the service while achieving higher returns.

Three important issues emerge from this paper, namely:

1) The US investment was dominated by a few large holding companies that controlled the utilities supply in various countries. The localization in South America answers to both the search of economies of scale through new consumer markets and the need to diversify investment (p. 3). In order to keep growing in the local markets, the electricity companies acquired small and medium concessions keeping their organizational structure. Clearly, this served to the purpose of increasing returns, but there is no mention of the effects of this choice in the need for improving the service. In other words, how efficient the company became as a result of greater scale.

2) The effects of the Great Depression were greater than expected for the directors of the company. As explained by Macchione and Lanciotti, their main concern was that currency devaluation would damage the sustainability and profitability of their investments (p. 13), but they did not expect the shifted in the regulation that followed in the 1930s and 1940s. The link between government policy and business strategy is then questioned by the authors and the company strategies are evaluated. Small differences between the two countries are noticed, opening space for a future discussion on how foreign companies deal with diverse economic and political contexts, including an analysis of their role as regulators.

American and Foreign

3) One of the main factors for the company’s decision to withdraw from the region was the expropriation lead by the Latin American governments since the late 1950s (p.22). But to what extent expropriations responded to the inefficiency of the company? Macchione and Lanciotti explained that the low quality of the service added to the fluctuation of the long-term revenues and, in some cases, led to the confiscation of assets by the local national government. These arguments, of course, are not to minimise political and nationalistic ideas driving the confiscation of assets in Latin America during the twentieth century.

In summary, the paper Macchione and Lanciotti offers a case study that brings together elements from Latin American economic history that deserve more attention. These include the role of state, the interaction between businesses and regulators, foreign direct investment, and the relative efficiency of domestic acquisitions by foreign companies in the long-term. This paper is an important contribution to understand from the company perspective the links between strategy and government policies.

Managing the Greater East Asia Co-Prosperity Sphere

Strategies and Organizations for Managing “Greater East Asia Co-Prosperity Sphere”

Tetsuji Okazaki (The University of Tokyo)

Abstract: During the World War II, Japan occupied a large part of East and South East Asia, called “Greater East Asia Co-Prosperity Sphere” (Daitoa Kyoei Ken). This paper overviews what the Japanese military authorities and the government did to develop the occupied areas in the 1930s and the early 1940s. It is remarkable that different development policies and organizations were applied across occupied areas. In Manchuria, which Japan occupied earlier, after trial and error, a system of planning and control was introduced. By this system, more or less systematic development of industries was undertaken. Meanwhile, in China Proper, the Japanese military authorities and the government prepared the statutory holding companies as channels for investment from Japan, but industrial development was basically entrusted to those holding companies and individual companies affiliated to them. Finally in South East Asia, development was almost totally entrusted to existing Japanese firms.

URL: http://econpapers.repec.org/paper/tkyfseres/2013cf900.htm

Review by Masayoshi Noguchi

This paper by the leading authority on the history of Japanese wartime economy was distributed by NEP-HIS on September 13th, 2013. It provides a very interesting general overview and understanding of the process behind the formation of the Greater East Asia Co-prosperity Sphere. Thanks to a very thorough and detailed literature review, the paper provides a comprehensive overview of “what the Japanese military authorities and the government did to develop the occupied areas [called Greater East Asia Co-Prosperity Sphere] in the 1930s and the early 1940s” (p. 1); while also summarising and contrasting different approaches taken by the Japanese authorities to the development of Japanese interests in Manchuria, mainland China and South East Asia. Comments are also offered as to the consequences of these different approaches.

Between 1915 and 1945, the Manchurian region was one of the major locations of China’s steel industry. The development of steel industry in that region was closely related to the Japanese invasion of China. Following the establishment of the (puppet) State of Manchuria in 1932, the Japanese government encouraged the formation of iron-steel factories with national capital to help transform Manchuria’s steel industry into a typical export-oriented industry. The main features of the development policy for Manchuria were the establishment of “special corporations” and so called “one industry, one corporation policy”. The five-year industrial plan for the State of Manchuria recognised the need for a business entity to administrate the overall development. It thus encourage the Nissan zaibatsu to form the Manchuria Heavy Industry and Development (MHID) Corporation, which was established in December of 1936. Nissan also took over the management of the Showa Steel Factory and invested in the Benxihu Coal and Iron Company, thereby gaining control over the steel industry in Northeast China. However, the initial plan for the MHID was soon subjected to a major revision as the outbreak of the Second Sino-Japanese War in July of 1938 significantly increased the demand to supply the Japanese military. At the same time, control of the MHID transformed and it became subject of direct control by the state. Later, when the export of steel products to Japan turned out to be less than originally expected, the steel industry ceased to be operated as an export-oriented industry.

The promotion of the economic development of mainland China was based on “the Outline of Measures to deal with the Incident” (p. 4). In order to support this development and attract capital investments from Japan to China, in November 1938 the Japanese government established two entities, namely the North China Development Corporation and the Middle China Promotion Corporation. These two corporations made significant investments to their affiliated companies in the fields of transportation, telecommunication, electricity, and coal mining.

Immediately after the outbreak of the Pacific War in December 1941, “the Outline of Economic Policies in the South East Asia” was promulgated, but in South East Asia, unlike the other two cases, “a policy to develop the local economies in a systematic way was not taken” (p. 7) and the “development was almost totally entrusted to existing Japanese firms” (p. 8).

In summary, Okazaki’s study shows how the formation of Greater East Asia Co-prosperity Sphere was not unique or consistently applied across geographies as it was conditioned with several restrictions. These included geographical terms and conditions of each area to which the Japanese army advanced, the success or failure of the military strategies, the interaction of the military, the state and economic interests as well as the economic terms and conditions of Japan itself. Although it is not easy to agree with a part of description presented by Okazaki (for instance that the advance of the Army into Manchuria was primarily motivated by its own economic concerns (p. 7)), the paper is required reading in order to understand this very important phase of the Japanese wartime economy.