Monday, January 12, 2009

The Rise of American Big-Buisnesses

While this might be a paper for history, I think that it is highly relevant to today's society. Carnegie, when he created the vertical structure of businesses (along with Rockefeller), created the system that is essential in modern day companies and governments. Without the integration that he proposed, no large-businesses would have been possible. In fact, with no multi-million dollar enterprise existing before Standard oil, the setup proposed by Carnegie and perfected by Rockefeller is factually known as the primary cause of American business growth.

Furthermore, think of this as a response to those who believe that these men, the Carnegie's, the Rockefeller's, the J.P. Morgan's, and the Chase's (as a side note, I think that it is funny that Chase talked his boss (Carnegie) into selling out to Rockefeller on a golf course) are robber barrens. Sure, they were rich. And, sure, they bought out their competition. But they created the country, and they did their best to make sure that it grew. These men made the country, and they employed thousands. Think of this paper as a defense to their impact on America.

RTAP Paper #1: On Carnegie Steel

Robert M. Barga

Steel is an expensive, difficult, and time-consuming product to make. To manufacture just one ton of steel, Carnegie Steel needed one and a half tons of iron, one and a half tons of coke, and one ton of limestone1. The process of getting just one ton of steel required four tons of other materials, the transportation and refining of the same, and the man hours. Yet, somehow, this was able to be sold for two cents per three pounds. Owning all of the necessary materials (vertical structure), as argued by Carnegie, would become essential for big businesses around America.

Carnegie's main argument is that the only cost effective, for both the consumer and the producer, means of manufacturing steel is to own all the processes that are used. If one needs to pay attention to the middle man, then one is paying cost plus profit for each item; by doing ones own processing of all parts, one is only paying the cost. Carnegie is basically contending that the cheapest product is that which is produced by the company who will use it themselves.

Taking it a step further, Carnegie contended that the only possible large-scale business is one that fits his vertical integration model. To be a business you need to be able to output at the needed rate. To output at the needed rate, you needed a constant supply. Unless the company owned the supply, the company could not keep it constant. Basically, Carnegie was also contending, along with his cost arguments, that a company needed to own all of its components if it expected to become large and wealthy.

While these contentions had their objectors (usually companies that were either put out of business or had to drastically cut costs), the overall argument appealed to the American populace, be it in theory, or be it in their pockets. By showing the country, and the World, that a product produced by a company owning all of its components (be it an oil company owning the railroads, wells, and the lumber, for barrels or a steel company owning the boats, the trains, and the mining locations) is cheaper, and more reliable, Carnegie Steel was able to show the usefulness of vertical integration. The appeal to the pocketbooks, and to the schedules, made Carnegie's contentions prevalent and well received by the American populace.

Carnegie's argument was not only persuasive to the American populace, but it was also persuasive to other businesses, both past and present. Most large-scale producing companies now own their own materials, they own everything that is needed to make their product. From Ford owning rubber plantations and iron mills, to Dole owning fruit plantations and tin mines, to US Steel (formally Carnegie Steel) still owning all of its needed components, the vertical integration model proposed by Carnegie is essential in today's modern companies. By arguing that a company should keep all of its costs down, its resources at hand, and all under central control, Carnegie was able to show exactly why a company should own, or at least have stock in, everything that it needs. This argument, as well as its accompanying model, is essential as the wellbeing and foundation of all big-businesses, both now and then.

1Retrieving The American Past; Excerpt from Carnegie's Autobiography, page 29.

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