In response to:

The Company He Keeps from the March 19, 1964 issue

To the Editors:

In his review of My Years with General Motors, by Alfred P. Sloan, Daniel Bell quotes an “unpublished study” by Fisher, Griliches and Kaysen of “The Costs of Automobile Model Changes since 1949.” This study has in fact been published in the Journal of Political Economy, Vol. LXX, no. 5, October, 1962.

Harry G. Johnson


The Journal of Political Economy

University of Chicago

Daniel Bell replies:
  1. Mr. Kittrell is not only egregiously pompous (“as economists have shown”), but also obtuse. The question is not whether General Motors would have made more money using its retained earnings inside the firm or outside the firm (G.M. is probably the most efficient company in the U.S. and obviously it would get a better return at home), but who receives the benefit of that efficiency, how it makes its money, and what use is made of that money. And this is not a matter of specialisms, but of public policy.

My argument is this: By a system of administered prices, G.M. has made a fantastic return on invested capital (between 25 and 30 per cent a year). It has not used its vaunted efficiency to reduce prices (it could do so by 25 per cent and still make a return equal to the best of other firms) but to pile up huge profits, which go back into plant, to increase efficiency, to make even higher profits, to go back into plant, etc. By this quasi-monopoly, General Motors has levied a “hidden tax” on the consumer. The consumer (not the stockholder) has made an involuntary investment in General Motors, with no equity in return, or even a promise of future price reductions.

But who gives the corporation manager his legitimacy, and his extraordinary social power? Under the pure “pure’ theory of capitalism, the corporation itself would be regarded as illegitimate. Adam Smith repudiated the stock corporation as a business mechanism, saying, “The directors of such companies…being the managers rather of other people’s money than their own, it cannot well be expected they should watch over it with the same anxious vigilance with which partners in a private copartnery frequently watch over their own.” (Mr. Kittrell should go back to some sophomore economics.)

The first Smith assumed that private property was a unity involving possession, that ownership and control were combined. We know this is no longer the case. The law of corporations, however, goes by the traditional logic of property. As Berle and Means put it in their imperfect “pure” theory (The Modern Corporation and Private Property), so far as the law is concerned, “the profits of the enterprise belong to the security holders in toto…Not only that: they are entitled to those profits which the management in reasonable exercise of its powers ought to make…. The control group is not in a position openly to combat this logic. Constant appeals are made both to this ideology and to its legal basis when corporations go into the market seeking capital. The expectation of the entire profit is the precise lure used to induce investment in corporate enterprises.”

But it is quite clear that in economic reality, the traditional legal logic of property has disappeared. Most investment funds today (in manufacturing) are generated internally, so there is no test of the capital market from that score. More and more people buy stock not for dividends, but for capital gains (so, as in the black market, the sardine cans circulate rapidly, and no one opens them). Capital resources in the society are allocated by a small group of men on the basis of corporate logic, not social utility.

There is, finally, the shibboleth of the “free-choice” economy. First, the “hidden tax” already imposed on the consumer by the administered price policy, and since for most persons the automobile is an economic or social need, he has no choice there. (Of course, he can walk, take a bus, or a rattling train.)

Second, I don’t think General Motors is concerned with real choices of cars. In a fascinating chapter, which I didn’t have the space to discuss, Mr. Sloan in his book tells how Charles F. Kettering in the early Twenties wanted G.M. to build an air-cooled car, which would have then revolutionized the automobile industry. But this car would have interfered with the marketing strategy of the company, and Sloan finally killed it. The point is that General Motors is not in business to make cars, but to make money. If there is a choice between a better car (such as in Mr. Sloan’s example) with a prospect of a low profit margin, and a poorer car with a high profit margin, isn’t it obvious what the choice will be? As Mr. Sloan’s book makes abundantly clear, the first point of reference in company policy is the rate of return on investment, and all elements are geared to that.

Third, I don’t believe there is a genuine free choice or any idea of freedom until consumers are wholly aware of alternatives. Take the question of the annual model change which, according to the study of Fisher, Griliches, and Kavsen cost the consumer (the figure is not disputed!) about five billion dollars a year. This I submit is an additional manipulation of the consumer on top of the quasi-monopoly policies. Were such costs worth while? “There is a presumption that consumer purchases are worth the money paid,” say the authors, “yet one might argue that the fact that our figures for the late 1950s (about $700 in the purchase price per car, or more than 25 per cent, and $40 per year in [extra] gasoline expenses) will probably seem surprisingly high to consumers is an indication that the costs in question were not fully understood by the consuming public.”

In the end, the authors leave it as an ‘open question.” But the question really has to be expanded. Should the society spend $5 billion a year on extra horsepower for cars, or should such money go for railroad commuter subsidies, or to improve urban transport. The real point is that we have no social mechanism which allows us to put such choices before the consumer and have him decide what he wants. Corporations howl about public taxes (which may go for railroads or urban transport), but then, by administered price policies and manipulation of the public, they levy a hidden tax (with no public debate!) of their own on the consumer. Where is the choice?

  1. The letter of Mr. Lewis, who runs a marketing concern, reminds me of that lovely marginal caption of Adam Smith in The Wealth of Nations. “The sneaking arts of underling tradesmen have been erected into political maxims.”

I think the answer to him is a simple one. Since the consumer receives few of the benefits of the vaunted efficiency of General Motors, any number of procedures would be better than the present one: break up General Motors, force it by law to pay all its profits to the stockholders, let the United Auto Workers claim 50 per cent profit-sharing, or, at the very least, since it is a competitor for the “tax dollar’ (public or hidden), let the government advertise widely to the public what the price and profit policies, and the annual model costs of cars, in the automobile industry really are.

  1. To Professor Johnson, my apologies. In this instance I am the victim of the “invisible college.” I received a multilithed copy of the Fisher, Griliches, Kaysen essay long before its appearance—as one does these days of so many academic articles—and I did not keep track of its publication.

This Issue

April 30, 1964