in productivity. He also paid no attention to im- proving the safety of his mills where workers toiled in dangerous conditions. Thousands of workers were injured each year because of spills of molten steel. Any attempts by workers to improve their work conditions were uniformly rejected, and Carnegie routinely crushed any of the workers’ attempts to unionize. When Carnegie decided to get out of the steel business he sold his company “lock, stock, and barrel” to a consortium of New York investors for
$485 million. The company was renamed U.S. Steel, and it is still one of the largest U.S. steel- makers today.The investors paid a high price for Carnegie’s company because they knew they could use its low-cost, competitive advantage to create a monopoly in the steel industry—which is exactly what they did. U.S. Steel kept the price of steel high and made huge profits for decades. Of course, Carnegie sold his company knowing this would likely happen. This further tarnished his reputation.1 •
Jones: Introduction To Business: How Companies Create Value for People
I. The Environment of Business
2. The Evolution of Business
© The McGraw−Hill Companies, 2007
38 Chapter Two
The earliest writings about business date back to Mesopotamia in 3000 BC and were discovered by archaeologists in what is now the Middle East. Business goes back to the Stone Age, however. Economists regard the clan, or tribe, as the earliest form of organized “business” activity. The division of labor between a clan’s members into skilled hunters, food gatherers, craftspeople, priests, shaman, and sages is a good example of how these people organized their activities. (See Figure 2.1.) In fact, their very sur- vival depended on it. Only by working together could people gather sufficient amounts food and perform the other activities necessary to protect themselves and survive in harsh conditions—such as through wars, severe winters, and so on. Only a cooperative group of hunters could bring down the biggest game or make the canoes and nets possible to fish on a large scale, for example. The Emergence of the Hierarchy To facilitate goal-directed activity, some form of power and control is needed to decide who will perform which task and how much each person should receive for his or her work. The need to reduce the transaction costs involved in exchanges led to the development of a hierarchy of authority in a tribe, clan, or any other “orga- nized” setting. The hierarchy of authority is a ranking of people according to their relative rights and responsibilities to control and utilize resources. People at one level in the hierarchy have the right to make certain kinds of resource decisions, and they have the right to expect obedience from those below them in the hierarchy. At the same time, the people who make these decisions also bear the responsibility for whether or not their decisions work out. A person’s ranking in a hierarchy will Feudalism: Land, Labor, and Property Rights
CHIEF
Hunters Food Gatherers
Priests, Shamans and Sages
Craftspeople
Family Units (Clans)
Figure 2.1 Division of Labor in a Tribe hierarchy of authority The ranking of people according to their relative rights and responsibilities to control and utilize resources.
Jones: Introduction To Business: How Companies Create Value for People
I. The Environment of Business
2. The Evolution of Business
© The McGraw−Hill Companies, 2007 change if they can show their ability (or inability) to use resources profitably to the advantage of the organization and its members. If the person succeeds, he or she will be promoted; if the person fails, he or she will be fired or deposed. At the top of the hierarchy emerged the ruler of the tribe who, as tribes became allied with one another, took on the title of chief, prince, king, or emperor. Com- monly, the ruler used power and status to create a dynasty, or ruling family, that then claimed the perpetual right to govern. The present Emperor of Japan, for example, can trace his family’s royal bloodline back over five thousand years, while the present Queen of England traces her right to the monarchy back for almost 2000 years. Hierarchy and Property Rights At the heart of any claim of a right to rule or govern and to direct the activities of oth- ers is the possession of property rights. Property rights are the claims by people to own, use, and sell the rights to valuable resources. In earliest times, the claim to prop- erty rights was a matter of brute force. Today laws provide people with a legitimate claim to own and use a resource. Since earliest times land has always been considered the most secure resource, hence the term “property” right, implying control over land (property) and the things on it. Today, property rights pertain not only to land but also to any valuable resource such as the use of one’s own labor; the tangible results of enterprise such as patents and copyrights; and ownership of financial capital in the form of bank accounts and stock. This is illustrated in Figure 2.2. In the past, the ruler of a tribe or people claimed the legitimate power to assign the property rights to control land to whomever they chose. Commonly, monarchs, who were always the largest landowner in a country, granted their most powerful support- ers the rights to control (not own) large landed estates. In this way they attempted to retain the loyalty of their most powerful followers and prevent them from trying to seize the crown for themselves! Thus came into being the aristocracy, the landed nobility that had the right to control all the resources, including the people on their estates. Consequently, they were given the power to direct all business and social activity within their particular domains. Once aristocrats were in control of their estates, they had the incentive to be enter- prising—to find ways to use the estates’ land and labor more profitably and increase their personal wealth and power. Indeed, improving the land to make it more productive
The Evolution of Business 39
Capital Ownership of the rights to financial assets such as stock, bonds, money.
Labor Ownership of the rights to ones own labor and the right to work freely.
Land Ownership of the rights to land and the buildings and structures upon it.
Property Rights
Enterprise Ownership of the rights to the products of enterprise such as patents and copyrights to products.
Figure 2.2 Property Rights and Resources property rights The right of people to own, use, or sell valuable resources. aristocracy People given the right by a ruler to control a country’s resources, including its land and labor.
Jones: Introduction To Business: How Companies Create Value for People
I. The Environment of Business
2. The Evolution of Business
© The McGraw−Hill Companies, 2007 was the principal way of building capital and wealth at this time. In most societies, a hierarchy of aristocrats came into being. An aristocrat’s position in the hierarchy was largely determined by the income their estates generated. Such a hierarchy, the one that developed in England, is depicted in Figure 2.3. Aristocrats were required to be loyal to the monarch in return for being granted the rights to control estates. They were also obligated to perform various important services for the monarch. For example, in times of war, which was often the most usual situation, aristocrats had to furnish soldiers and arms to the monarch in propor- tion to the size and wealth of their estates. In most societies, ordinary “land-less” people had no property rights; they were simply a resource owned by the estate as laborers and slaves in bondage. In Russia, for example, the slaves who worked the aristocrats’ estates were called serfs. Large Russian estates might have hundreds of thousands of serfs whose rights were deter- mined at the whim of their owners. It was not until 1861, that Tsar Alexander II freed the serfs and allowed them to buy land from their former owners. Feudalism The business or economic system in which one class of people (aristocrats) control the property rights to all valuable resources, including people, is known as feudalism. (See Figure 2.4.) Throughout the Middle Ages (A.D. 500–1500) this business system endured. Grad- ually, however, laborers began to receive more rights and rewards. In large part this was because people with few or no rights had little motivation to perform at a high level because they did not share in the profits. So, to increase the motivation of work- ers, and increase the productivity of land, the system of tenant farming evolved. To make their estates more profitable landowners assigned the most able workers to take control of specific farms on their estates. Landowners then charged these workers, or tenant farmers, rent to work the farm per year, payable either in the form
40 Chapter Two
King and Queen
Prince and Princess
Duke and Duchess
Marquess and Marchioness