No. 52, June 2012

No. 52
(June 2012):

The Political Economy of Corporations:
Behind the Veil of ‘Corporate Efficiency’

by Rahul Varman2


The corporate media as well as the academia have bombarded us with the message that the private corporate sector is efficient, and that the other sectors (the public sector, small & medium enterprises, and even small-peasant agriculture) are inefficient. Though in recent years corporate debacles such as Satyam, Kingfisher and Enron have somewhat dented this reputation and there is a renewal of anti-corporate movements worldwide. In this context, we look first at the history of rail corporations as they arose in the US and then discuss the operations of corporations in one ‘sunrise’ sector in India – civil aviation.

While monopolistic3 corporations are the principal actors in the practice of neoliberalism, they pose some problems for neoliberal theory. After all Adam Smith (1723-90), whom neoliberal theorists claim as their founding father,  idealised a free market where a large number of small producers competed, and none of the actors, nor even an alliance of a few of them, could influence the market. But within a hundred years after Smith, large corporations had come to control strategic sectors of American business, such as railroads, and by the middle of the 20th century this was the case in most of the industrial world. Such corporations historically have played a crucial role in capitalist development and are central institutions of present-day capitalism.  Today, a handful of corporations dominate the world economy and control a gamut of economic activities – mining, manufacturing, transport, trading, retailing, finance, media, and public utilities, such as electricity generation or telecommunications. We continuously encounter a barrage of pronouncements that markets can address various problems, and yet we live with the everyday reality that large parts of economic activity have come to be dominated by monopolistic corporations.

The programme of ‘organisational economics’ of Oliver Williamson and his associates attempts to fill this yawning gap between the theory and practice of neoliberalism by making the theory of ‘free markets’ consistent with the practice of corporate concentration. For this contribution Williamson was awarded a Nobel Memorial Prize in Economics in 2009. Williamson’s long lineage in organisational economics can be traced back to John R. Commons and Ronald Coase in the 1930s and Herbert Simon and his associates in the 1950s (the second and the third were also Nobel laureates).  But it is in the 1970s that this tradition got fully integrated with neoliberal thought, in the work of Williamson; since then Williamson has continued to occupy centre stage. For empirical data Williamson has drawn heavily on the evidence provided by the pioneering and enormously influential work of Alfred Chandler, the business historian. Perhaps it is not a coincidence that Chandler and Williamson produced their pioneering work in the 1960s and 70s, which were difficult times for the American corporations due to a proactive state policy4 that attempted to regulate corporations and even cut them to size through anti-trust laws.

Basically, they argue that in certain situations, large corporations work as a superior substitute to the markets. In the neoliberal discourse, the market is the most ‘efficient’ way of conducting an economic activity as it regulates itself and discovers the price at which the allocations of investment and the distribution of commodities can be made in an optimal way. W-C5argue that in particular situations it is more efficient to conduct certain economic activities within the confines of a corporate organisation instead of through markets. With this basic argument W-C explain the rise of large single product or service companies first, then the multiproduct conglomerates, and later multinational corporations (Williamson, 1981). Perhaps bolstered by  the arguments of Williamson, Chandler et al. since the mid-1970s, courts and enforcement officials in the US generally have supported the view that anti-trust6 policy should not follow ‘social and political aims’ that undermine ‘economic efficiency’.

According to Chandler (1977) large organisations were formed and took particular shape at specific moments, whether railroads in the middle of 19th century or General Motors in the early 20th century, because such organisational forms offered significant ‘economies of scale and scope7 due to emerging technologies and economic context. Chandler argued that mass production technology made it imperative that production organisations in various sectors like steel, chemicals, sugar refining, cigarettes, etc. operate at particular volumes to take the advantage of scale economies. The economies of scope came about due to the emerging technologies of transportation, like railroads and telecommunications, which could link up and even integrate distant markets and make it possible to bring operations like distribution and retail within the fold of the existing operations of the corporations. Thus Chandler argued that the new technologies replaced the Smithian ‘invisible hand’ of markets with the ‘visible hand’ of management. Large organisations supplanted markets across various sectors and business activities. Chandler argued that this could happen because of the emergence of a new profession, that of managers, who had the skills to undertake the complex operations of such large corporations and its various functions, from operations, finance, and marketing to personnel. Williamson argued that activities could be taken up within the fold of large organisations as they can be performed more economically through a system of common organisational goals, employee incentives and fiats, instead of a price-based system of markets.  This is how he explains the emergence of large corporations, to begin with, in the late 19th and early 20th century US. Thereafter, Chandler and his associates have attempted to study the rise of large corporations in other parts of the industrial world, like Europe and Japan, which has led them to similar formulations with some context-specific variations.

The notion of the superior efficiency of corporations is accepted uncritically often even amongst progressive circles by taking for granted the economies of scale and scope. That economies of scale exist for many industries, particularly those with large fixed costs, is not disputed. However, an investment that could bring about an economy of scale for an individual firm, when pursued by a number of firms engaged in cutthroat competition could result in enormous waste, social inefficiency and even losses to the firms concerned. Moreover, it was not through economies of scale alone that corporations gained ascendancy in capitalist economies. Larger capitals were able to use other means as well, some of which imposed enormous social costs. Once it is assumed that corporations are ‘efficient’, without examining the nature of that ‘efficiency’, and once it is assumed that ‘efficiency’ alone is the reason for their ascendancy,  the debate gets restricted to  one about their ownership (whether public or private), and to what ends the surplus generated is deployed; or  to some of the ‘undesirable side effects’ like pollution or poor working conditions, the assumption being that such ‘side effects’ can be addressed by appropriate regulation. All the time the notion of corporate efficiency is taken for granted. Given the centrality of corporations to present-day capitalism, in this article we critically examine this idea of ‘corporate efficiency’. W-C primarily look at costs of corporate operations from the point of view of the owners and/or those governing the corporations, and ignore several other significant costs, mostly borne by those who are lower down the  class hierarchy. Thus the efficiency of large corporations is defined in the terms they themselves set. 

A modern corporation is generally defined as a private entity (as opposed to something that is held by the state) which is owned by a set of stockholders; thus it is a private property though likely to be owned by a large number of stockholders. Two, it is a joint stock company, that is different from a proprietorship company,  and is owned through a large set of stockholders - its stocks are traded in the stock market; thus the ownership is, in a sense, social in nature8. Three, it is a limited liability company and thus the legal responsibility of the owners in case of insolvency is only to the extent of the capital invested in the firm. Four, it is a legal entity in its own right under the law, separate from the owners and managers of the corporation; thus a corporation has person-like rights and certain obligations too under the law. Lastly, the ownership and management are separated and often quite distant from each other; though owners are represented on the board of directors yet they often have only limited say in various operational and sometimes even in policy matters. Not all of these features may be found in all cases; for instance, it is possible that some strategic shareowners have disproportionate say in running a corporation. More importantly, the essential feature of corporations for the purpose of our discussion is that they are the characteristic organisational form of capitalist enterprise, in particular under monopoly capitalism.

Deconstructing Corporate Efficiency: Case of the US Railroads

Our first stop is the US railroads in the 19th century - the US’s ‘first big business’, and at the very core of the W-C arguments. “Railroads were not just the harbingers of the modern corporation, until the very end of the century, they were corporate capitalism” (Roy, 1997: 96). By 1850s the railroad industry in the US was the largest market for iron and a major market for coal, wood, machinery, felt, glass, rubber and brass. While in the 1850s it employed 4,000 persons, that number had multiplied to 50,000 by the 1880s. Chandler (1977) argues that such a vast railroad network with such complex operations required a fundamental break in organisation. Unlike a factory, which could be supervised at one or a few sites, railroad operations were distributed over a vast geographical area. As the speed of the locomotives multiplied, managerial and organisational aspects became critical to avoid accidents and implement proper scheduling. And thus sophisticated organising with appropriate command and control systems were devised, incorporating precise scheduling, centralised fare setting and collections, elaborate procedural manuals, etc. Day-to-day operations were delegated to the station masters through decentralised divisional forms of organisation, while operations across stations and over a large geographical area were integrated through detailed and standardised procedures that were developed by staff headquarters. Certain critical aspects such as commerce and maintenance were supervised by the head office, and communication lines were maintained through the newly invented telegraph system.

Contradictory Experience in Other Countries

Though Chandler argues that large railroad corporations in the US came up for the sake of efficiency, and provides an interesting account of complex sets of organisational mechanisms invented and institutionalised by the industry9 , Perrrow (2002) and many others question the claim that the US pattern minimised transaction costs. 10 Perrow compares the contemporaneous development of railroads in Europe and the US, and emphasises that the US was the only industrialised nation to completely privatise a public good of such major consequence. Dobbin’s (1994) comparative account of railroads in France, England and the US11 notes that France had a state organisation, Bureau of Roads and Bridges, at the time of the beginning of railways – it ran the railroads, provided loan guarantees, and allowed only a passive role for private capital. Thus private firms had little say over location of lines, construction priorities, standards for track and engines, safety devices, and fares. In Britain, because of the restrictions the crown placed upon finance capital, requiring partnerships rather than limited liability corporations, large railroad companies did not emerge. So parliament allowed cartels to get the necessary national integration of lines, but it regulated them. Britain was already industrialised when the railroad came along; the investment in the railroad just linked the established enterprises and agricultural and natural resources areas, developing a decentralised railroad system. Thus if contemporary railroads in other nation states with similar technology took different institutional forms involving much greater state intervention and regulation than the lightly regulated private corporations of the US, there is little case for the American authors’ argument that the corporation arose from the search for lower transaction costs and greater efficiency. Indeed, “compared to Europe (US railroads) were poorly built, overbuilt, inefficient, dangerous and slow to adopt innovations” (Perrow, 2002: 115). After the Civil War, railroad executive Charles Francis Adams complained that the French had nationalised the railways and developed a modern, well-functioning, widely used system, in stark contrast to America’s “lemon socialism” (Roy, 1997: 74). In fact the French anticipated the problems with the US system, as summarised by Dobbin:

(I)f capitalists were left to their own devices, France would find itself with a mess of disjointed, poorly constructed stretches of track that would ill serve the nation… and squander the nation’s resources on local projects without a view to constructing a national network (1994: 109).

Even in case of railroads in the US, historians have brought out that other forms of organisations were also financially viable; it was only the domination of corporate capital which led to their marginalisation during the course of the 19th century. For example, the 138-km Western and Atlantic Railroad in Georgia operated successfully from 1836 to 1870 under government ownership. Chandler himself documents an effective and decentralised contract system adopted by several railroads in the 1950s whereby the owners leased locos to be run and maintained by engineers. There was a long-drawn struggle between regional and local interests which wanted a spatially decentralised railroad system versus big business which wanted a pan-US centralised railroad system because this would bring economies for their operations.12

Alternative Explanation for the Pattern of Development of US Railroads

Interestingly, the initial railroads were joint public-private investments and local governments attempted regulation – as late as 1856, of the $12.4 million in railroad stock, almost $6.8 million was owned by the government bodies (Roy, 1997). But soon the railroads became more powerful than any government. Thus it was the national, social context of the US rather than economic rationality that resulted in a different organisational form from that of Europe.

a)Corruption as a medium for ensuring state backing
Indeed state backing to the corporations was key to the process and one medium for ensuring this support was corruption. Corruption enabled large centres of capital to shape the system in their interests and made the possibility of regulation in the public interest quite remote. Even Davis and North, otherwise votaries of economic rationality of the railroad corporations, had to confess, “… the location of those (rail)roads, twisting and turning across the plains like a terrified snake, can only be explained in terms of the bribes certain towns and counties were willing to pay…” (1971: 155). Perrow complains that even corruption is formulated as a ‘sin’ of the public officials by the conventional literature13: The fact that the railroad companies offered the bribes is conveniently ignored and is treated as irrelevant  by this account. Corporations are taken to be the inert recipients of the government’s largesse while the blame is put on the latter that it “actively and deliberately promoted industrial development… without questioning its efficacy or the propriety…” (Dobbin, 1994: 42); others have justified it as “ingenious tactics” (Chandler, 1977: 149) or even a tool of “assimilation of new groups into the political system” or caused by “too many laws” (Huntington, 1968). Trains never ran on certain lines, ties were untreated and rotted, wooden rather than iron tracks were laid and became useless within a year, bridges collapsed, competing lines chose different track sizes, routes zigzagged, and lines were abandoned. In 1850s Michigan Central carried out no construction but increased its construction account by $4 million, and then paid high dividends (Chandler, 1956). Major subsidy laws for railroads were written by the railroad executives themselves. 

Even when the misdeeds of the corporations are discussed in the literature they are attributed to individuals – it is interesting to note that while corporations were ‘efficient’ and ‘innovative’, it was the individual corporate officials who paid bribes or committed illegal or immoral acts! To illustrate, five circulars published in 1871 document how railroads were “exceptionally creative in defrauding the public” (Perrow, 2002: 145). They bring out that Commodore Vanderbilt (who had controlling interests in some of the most important railroads of the time and was one of the richest men in American history) realised profits of $135 million in excess of the actual costs and yet refused to pay the government 5 per cent taxes on his earnings. In another instance, he voted himself a bonus of $20 million. Archival records bring out systemic, large scale, regular and persistent records of bribing the legislators. Thus there are several incidents of public assistance for lines which had no chance of making money; for instance, Erie Railroad had won its charter in 1832 with a stock of $1 million and was subscribed for an estimated construction cost of $3 million. After several rounds of changes in estimation, insolvency and state subsidy, the road finally opened in 1851 at an actual cost of $50 million. The directors realised that manipulating the stock was far more profitable than the mundane task of running the railroads. Within four years they recapitalised the company from $17 million to $78 million. In one case the directors purchased a worthless road, Buffalo, Bradford and Pittsburgh, for $250,000 then issued $2 million worth of bonds in the name of the company and finally leased the road to Erie for 499 years. Erie then assumed the bonds leaving the directors with handsome profits (Roy, 1997).

(b) Socialisation of costs
State patronage and thus socialisation of costs by the industry was an important part of the US railroad tale. Nearly one-tenth of the nation’s land was given over to the railroads; much of it became extremely valuable as the industry grew. Such corporate privileges could always be justified in the name of ‘prosperity’ and growth. For example, a ruling by a Kentucky judge in 1839 affirmed - so necessary were the “agents of transportation in a populous and prospering country that private injury and personal damage… must be expected” (Sellers, 1991: 52).

The interesting fact is that such state sponsorship came with little corporate accountability. In spite of massive public funds, government directors were repeatedly forbidden from voting on the railroad boards. In 1857 Pennsylvania Railroad was exempted from all the tonnage tax by the state legislature; the canal commission sued and won the case in the state court but lost in the federal court. When the next legislature tried to overturn it, the court ruled that the contract had to be honoured (Roy, 1997). In 1834 locos were provided by the government on a Columbia road on which while the government earned a return of 3 per cent on a $4 million investment, companies earned returns of 200 per cent on a $30,000 investment for supplying the rakes and operating the trains (Hartz, 1948).

State investments were withdrawn from the industry only after the economic slump of 1837. The debate was put in terms of the state getting out versus losing more. Roy (1997) points out that the same debate was posed in very different terms in France at the same time. In response to the same problem, that of inadequate control, France brought in more state regulation as a response14. Ringwalt’s contemporary account sums it up well:

It was charged (by a committee of the New York state legislature) that the railroads were capitalised on a basis of two dollars for every one actually paid in providing facilities, and that they could be constructed for one third of their nominal value… (1888: 263)

The costs were also regularly passed off to the workers by means of skimping on safety measures. The US railroads had one of the worst safety records, due to weak regulations. For instance, the Safety Application Act 1893 made it mandatory to use couples and automatic brakes; but this was 25 years after their invention (ironically, in the US itself), much after they were adopted in Europe. The rate of injuries was alarming: for instance, by one account, one in seven switchers was disabled in the period of 1874-84. The US Supreme Court justified it on the grounds that “higher wages compensate risk”. In 1889, for every 117 men employed, one was killed; for every 12, one was injured. In England the corresponding statistics were 1 trainman in 329 killed and 1 in 30 injured. Lack of attention to safety may have been related to size and power, Perrow (2002) emphasises.

(c)Wall Street takeover of railroads

Finally, Wall Street, that is, finance capital, completed the story of corporatisation of railroads. After the Civil War, over one-third of the railroad stock was watered (i.e., its value was overstated), half of the track was in receivership, and the Credit Mobilier scandal15 was the biggest of the century. Before the railroads Wall Street was primarily in government stocks; between 1870 to 1890 Wall Street money primarily made during the Civil War poured into railroads. Centralised capital markets wanted centralised railroads. Between 1875 and 1897, 700 railroad companies representing more than half of the country’s track went bankrupt, and by the turn of the century, railroad companies had coalesced into six major clusters. When J. P. Morgan reorganised a sizable proportion of the industry, its investment house decided which lines would close and which would get a competition free lease of life on the grounds of returns to his organisation. For instance, short hauls subsidised the rates for the long hauls, as there was a lot of competition for the latter and little for the former, and this was vetted by the Supreme Court. 

Morgan eventually controlled 63,000 miles of road equalling 1/6th of the nation, the combined revenues being equivalent to half of the total receipts of the federal government. The giant railroads used a small number of suppliers to reduce ‘transaction costs’, resulting in suppliers of steel like the Carnegie Company, and several other kinds of suppliers, becoming some of the largest manufacturing companies in the world (Roy, 1997). A disproportionate number of industries that concentrated in the 1870s and 1880s had high transportation costs, and their dominant firms enjoyed rebates or other special relationships with the railroads. Lower transportation costs and wider markets have been emphasised as the manifestations of railroad efficiency. Because of the corporate financial devices used by the railroads, Roy (1997) estimates that until the 1890s the enormous profits of the railroad companies came at least as much from constructing and merging railroads as from operating them. Thus, from a Chandlerian point of view, even “very inefficient firms could be considered profitable because they could convince those with the capital to buy stocks or bonds that the corporation would survive, and could convince the government to give them grants, loans, and free lands” (Perrow, 2002: 200). Says Roy (1997):

A weak railroad could continue operation issuing bonds or other securities. When these became due, new bonds could be issued to cover the older ones as long as the dominant financiers gave their blessing. In the inevitable absence of perfect information, interpersonal influence substituted for rational investment decisions in the flow of socialised capital among corporations (101).

Such a consolidated and profitable business need not bother about the workers either. Perrow comments wryly:

A business that brings annual returns of 30 per cent and can count on the state militia to keep the lines running during strikes might not be concerned with fine tuning either its management style or its labour relations (2002: 174).

(d) Corporatisation of the manufacturing sector
The Wall Street crash of 1893 was partly triggered by overinvestment in railroads. Later this concentrated capital found new avenues, leading to corporatisation of other sectors. Incredibly, there was almost no Wall Street capital in the production sector at this point, as investors considered manufacturing “too risky and industrialists resisted surrendering control to outsiders” (Roy, 1997). Thus, until 1904 the book value of capital in the railroad industry exceeded the aggregate capital invested in the entire industrial sector. But during 1898-1903 money poured into manufacturing and mining, and in the process, the aggregate value of listed stocks and bonds went up from $1 billion to $7 billion. The free flow of finance also led to a massive wave of consolidation and concentration: 75 per cent of the merged companies joined a consolidation of five or more enterprises. W-C argue that, if the explanation for mergers is simply the power of large firms to concentrate capital further, vertical integration16 should have taken place across all industries; whereas it took place only in certain industries, indicating that mergers were brought about where they increased efficiency. Applying a statistical test to the efficiency theory, Roy (1997) finds that efficiency factors did not explain corporatisation in specific industries. Corporations did not arise only in industries with high capital intensity, high productivity, and rapid growth. Instead, the size of the firm was the real explanatory variable: size gives power to control markets and dominate others, and hence large corporations became progressively larger.

Later other industries copied the model of the US railroads, first in the US and within half a century in European countries. For instance, Carnegie copied the organisation structure of the Pennsylvania Railroad, breaking his organisation up into divisions, with separate heads, rather like smaller organisations, owned and run by a super-ordinate organisation. Again one can see that the whole process had little to do with the technical logic of efficiency – one author refers to US Steel as “the new monster… the largest corporation in the world was overcapitalised, lacked proper coordination, and functioned poorly (Cochran, 1977).” Since US Steel lacked competition, domestic steel prices rose by 1904 to a level about 50 per cent higher than prices on the export market, where competition was stronger. In the post-second world war period steel industry management in the US was notorious for its unwillingness to invest in modernisation. For example, basic oxygen furnaces and continuous casting offered substantial cost savings but the industry refused to invest in these technologies long after they had become standard in steel plants throughout the world (Perelman, 2006). Fligstein (1990) records that in the early 20th century corporations such as Standard Oil, DuPont and General Electric pursued anti-trust practices such as cross-subsidisation between competitive and non-competitive markets, killing competition by selling at less than the costs, and bundling products together. All these corporations have been celebrated by Chandler as models of ‘efficiency’. Thus size gave the power to control markets, influence policy and pass on the costs to society and the workers.

Mergers as a Means of Overcoming Competition<

In a particular phase, corporations made large investments in order to drive down costs and undercut their rivals. All corporations pursued this strategy simultaneously, resulting in an anarchy of booms and depressions, overinvestment in relation to demand, and destruction of value with the resultant shut-downs – hardly compatible with the ‘economies of scale’ and greater efficiency ascribed to corporations by their apologists. This anarchy indicated the sharpening contradiction between an increasingly socialised production process and a private accumulation process. But instead of giving rise to the socialisation of the means of production and the subordination of investment to a social plan, what emerged from this crisis was the phase of monopoly capital, marked by giant firms which actively restricted competition. This was the actual historical process of corporatisation, and not W-C’s hypothetical search for greater efficiency.

Railroads were perhaps the first industry to bring out dramatically the problem of fixed costs that needed to be amortised over a long period. As mentioned earlier, until 1904 the book value of capital in the railroad industry exceeded the aggregate capital invested in the entire industrial sector in the US. Because of the promoters’ mercantilist mindset, there was no accounting of the depreciation of capital assets in the early years of the railroads, and since maintenance costs were low (especially in the beginning), most of the revenues were booked as profits, leading to high dividends and fuelling stock market frenzy (Perelman, 2006). But such frenzy led to building of overcapacities and cut-throat competition. As a contemporary commentator asserted, “if the railroad is threatened with the loss of part of its traffic, it is better to reduce rates almost to the level of operating expenses, even if this leaves nothing for interest and repairs” (Hadley, 1886: 35).  As all firms followed this strategy, by 1893 the entire industry was in a severe crisis: one third of the railroads fell into receivership, leading to drastic restructuring of the industry. A captain of another important industry of the time, Andrew Carnegie of Carnegie Steel, brought out the relation between ruinous competition and eventual concentration:

As manufacturing is carried out today in enormous establishments with 5 or 10 million dollars of invested capital and with thousands of workers, it costs the manufacturer much less to run at a loss per ton or per yard than to check his production. While continuing to produce may be costly, the manufacturer knows too well that stoppage would be ruin…  it is in soil thus prepared that anything promising relief is gladly welcomed. Combinations, syndicates, trust – they will try anything (Fligstein, 1990: 38).

Carnegie’s proposed solution was to stay ahead of competitors by making even more capital investment! But this penchant of Carnegie for continuous replacement of fixed assets to stay ahead destroyed the capital value of his competitors. J.P. Morgan, the pre-eminent representative of finance capital, had to intervene. He bought out Carnegie Steel and merged it with a number of other steel companies, forming US Steel, comprising 213 manufacturing plants, 41 mines, and almost thousand miles of railroads (Perelman, 2006). Thus finance brought about a vastly greater concentration of the steel industry. According to DeLong,

Samuel Untermyer (chief investigator of the Pujo Committee formed in 1912 to investigate the ‘money trust’) had argued that Morgan, his partners, and their peers at a handful of smaller banks were directors, voting trustees, or principal shareholders of corporations capitalised at $30 billion – the equivalent, in proportion to the size of the economy of $7.5 trillion today (1992: 17).

Thus another way of looking at the drive towards consolidation of railroads after the Civil War and the manufacturing industry at the turn of the twentieth century is that they were driven not so much by the belief that large organisations are a more efficient alternative to the markets but as a way to save themselves from ruinous competition in industries with large fixed costs. This sentiment is corroborated by Albert Fink, head of one of the railroad pools, in a Senate hearing in 1886:

I express it as my opinion, the result of the most careful consideration, that the only legislation required to accomplish the object which the most zealous advocate of the public interests can desire to accomplish, is to legalise, and even to enforce the cooperative system of the railroad companies (Fligstein, 1990: 42).

 By “cooperative system” he meant a system to check competition. The first step towards this system was the drive towards pool formation after the Civil War (1861-65), where producers agreed to collectively set output levels and prices (Roy, 1997).  Pools formed across a diverse set of industries with differing arrangements: salt, whiskey, steel, and nail producers did not let new entrants have access to machines, gunpowder producers compensated individual units for local disturbances and some even divided the world markets with Europeans. Pooling patents under common control could be used to help govern industries by providing a tool to discipline those who deviated from the agreed upon norms. For instance in 1869 manufacturers formed a patent pool in paper bags which fixed prices and allocated territory enforced by controlling all the patents, which were then leased back to the constituent companies for a royalty that in turn was used to buy and contest patents (Roy, 1997). Thus 46 industries having high capital investment out of 272 industries listed in 1900 census made attempts at cartelisation (Fligstein, 1990). In the 1870s and 80s pools were as diverse as the Associated Pipe Works (cast iron pipe), Steel Rail Pool, Gunpowder Manufacturers’ Association, Kentucky Distilleries’ Association, Upholsterers’ Felt Association, Sand paper Association, Wall  Paper Association, and Standard Envelope Company (Chandler, 1977). However, the courts declared such pools illegal. In 1880 an Ohio court ruled that agreement among manufacturers for common marketing arrangements were a general constraint on trade.

Once attempts at cartelisation through pooling and forming trusts failed, corporatisation through mergers and acquisition within an industry followed, especially after the 1888 New Jersey law which legalised holding companies. In fact the first industry to corporatise, after their trust was declared illegal, was a nondescript American Cotton Oil Company in the low profile cottonseed oil industry (and not any industry with so called economies of scale and scope), perhaps because fewer actors were involved (Roy, 1997). It was then followed by hundreds others.

The process of over-capitalisation, failure, reorganisation and merger was an important part in the course of concentration of capital; it eventually fuelled the creation of large industrial corporations. The primary purpose of the merger movement of the 1890s was control in order to maintain prices and profits. The strongest predictor of whether or not an industry participated in the merger movement was whether or not its member firms had participated earlier in cartels. Moreover, the central factor in formation of cartels was high level of capital investment and low level of profits in the particular industry according to Fligstein’s (1990) quantitative analysis. Chandler (1977) says that large modern corporation arose as a vertically integrated firm so that it could control its operations efficiently from materials to sales. But Lamoreaux (1985) has shown that 78.3 per cent of mergers were horizontal and only 12 per cent vertical. Courts did their own bit in the rise of large corporations. In the US Steel anti-trust case of 1911 the Supreme Court ruled that the company could legitimately act as a price setter, which it was able to do due to its large size, and this was not an ‘illegal restraint of trade’.

The attempt to create monopolies did not always end the problem of viability. By 1919 about 60 percent of the large mergers had failed as they achieved few economies of scale; in fact production costs often increased because firms were difficult or impossible to manage (Fligstein, 1990). Even Chandler accepts that “building of the giant systems during the 1880s and 1890s resulted in non-productive rather than productive expansion of railroad enterprises”, as the costs of such expansion were far greater than any savings that could have been achieved from more efficient operations (1977: 487).  To summarise it in Roy’s words:

The corporate system of railroads, despite the rise of managerial systems that rationalised operation, was efficient only in its ability to create large systems, not in its ability to effectively use resources and return reliable profits. Throughout the 1890s, including the banner years at the end of the century when they were paying over $4 billion in dividends, over half the country’s railroad companies paid no dividends at all. The corporate system effectively raised capital and built systems, but the result was investment far beyond what the system ‘needed’ or could support (1997: 107, emphasis added).


‘Corporate Efficiency’ in India: The Case of the Civil Aviation Industry

What happened in the nineteenth century railroads and at the turn of the twentieth century during the corporatisation of manufacturing industry in the US has been repeated time and time again, especially in the last few decades, as corporations have been the main vehicle for internationalisation and accumulation of capital. A good example is the civil aviation industry in India. Putting together some of the never ending headlines, one can see three clear trends in the civil aviation business in the recent past:

  1. Systematic attempts at dismantling the public carrier, with collusion between private capital and state actors;
  2. Externalisation and socialisation of costs by private carriers, like Kingfisher, especially with the aid of financial institutions, and
  3. Capital’s attempt to overcome the crisis by manipulation and building of monopolies

Systematic Attempts at Dismantling the Public Carrier

(a) Merger or sabotage?
If we take one step beyond the public-private debate on the airlines industry (‘public inefficient, private efficient’) we can see a pattern of systematic attempts at dismantling the merged Air India-Indian Airlines public carrier itself by those very persons entrusted with the responsibility of protecting and furthering its interests. From a monopoly position in the 1990s, Air India is today fourth in terms of market share (17 per cent), has a debt burden of whopping Rs.46,000 crore and financial losses amounting to Rs.5,551 crore in a single year (2009-10). Before Indian Airlines and Air India were merged in 2007, the domestic carrier had losses of Rs.280 crore, while Air India had losses of about Rs.455 crore. Within three years of the merger the combined AI-IA accumulated losses have touched nearly Rs.20,000 crore. Although this was done in the name of ‘rationalisation’ and economies of scale, official bodies such as the Comptroller and Auditor General (CAG) have passed severe strictures on the merger, suggesting that it lacked both strategic foresight and immediate plans about how the two airlines would work together post merger. In a letter dated 13 July 2009, the All-India Airlines Retired Personnel Association accused Praful Patel, the then Civil Aviation minister, of having “single-handedly and systematically stripped the two national carriers - AI and IA - and brought them to the brink of bankruptcy by a series of well planned out manoeuvres... All along, all these actions have been cloaked under the garb of unleashing India’s civil aviation potential, even as they struck at the very root of AI’s and IA’s existence” (Donthi, 2011). The Parliamentary Committee on Public Undertakings in a report of March 2010 described the merger as “an ill-conceived and erroneous decision neither arrived at by the two Airlines on their own accord nor mutually considered by them to be in their best interests.”

(b) Heavy capital investments beyond economic sense
Simultaneously the two airlines embarked on capital investment of such massive proportions that it defies commonsense. With an annual turnover of just Rs.7,000 crore, Air India placed an order in 2005 for Rs.41,000 crore worth of aircraft. Initially, Air India had planned to buy only 24 aircraft and Indian Airlines had planned to purchase 43 aircraft, but under the active ‘guidance’ of Patel, Air India changed its plan within 24 weeks and firmed up a proposal to buy 68 aircraft (Saha, 2011). In 2007, the Parliamentary Committee looking into Air India’s acquisition plans of 2005 observed, “Reasons for going ahead with huge purchases by the civil aviation ministry despite Air India and Indian Airlines not having the capacity to support it remain unknown to the Committee. It, therefore, recommends that this aspect needs to be further probed to fix the responsibility for taking such an ambitious decision that has become a big financial liability.” A CAG report notes, “From the approval for the constitution of EGoM (Empowered Group of Ministers) by the CCEA (Cabinet Committee on Economic Affairs) for final round of negotiation with lowest bidder, to the signing of purchase agreement, it just took 16 days.” In the space of one day - 30 December 2005, when the deal was signed — all of the following steps were completed: the Prime Minister saw the note on the final acquisition proposal from the EGoM, headed by Finance Minister P Chidambaram, and granted his approval; the PMO forwarded the note, with his approval, to the aviation ministry; the ministry conveyed the government’s approval to Air India; and Air India signed the purchase agreements with Boeing17. The government obviously can act really fast when it chooses to!  Arguably the public carrier needed to modernise given that the AI-IA fleet was 15-20 years old while for airlines like Kingfisher it was less than 2 years old, but the haste and scale of it is mindboggling.

(c) Surrender of profitable routes in the name of rationalisation
Even as the two airlines were being merged and such a large fleet of brand new top of the line aircrafts was being ordered, the government began so-called ‘route rationalisation’ – the surrendering of profitable routes. The airlines industry is a sort of natural monopoly given that air routes are commons 18 that are controlled by states (similar to the spectrum whose buying and selling is in the eye of storm currently). Thus the flying rights are governed by agreements between states, often bilateral, which traditionally provided rights to two or three Indian carriers to operate on certain international routes. But given the monopoly of AI-IA before the 1990s, many of these rights, such as the very profitable routes to the Middle East, were vested in the two airlines. The immediate consequence of merger of the two was that such routes became available to be given to private airlines. Some have alleged that this was a driving force for the merger. As All India Employees Guild General Secretary George Abraham said, “After the merger, the two airlines had to share (route) entitlements while the balance was given away to private carriers, it was a clever move to gift the market away (Business Today, 2011).” For instance, the airline had, without citing any reason, sent letters on 8 October 2009 to its stations in Kozhikode, Doha and Bahrain stating that it was withdrawing operations on the route. “This is a route that is referred to as a legacy route,” a senior pilot asserted. “We were raking in revenue to the tune of Rs.100 crore per annum of which Rs.40 crore came from Doha and the rest was the earnings from our Bahrain station. Despite all station managers writing to their regional managers to restart operations on this route, the stations managers never received any reply from the management (Saha, 2011).” To substantiate his point, the pilot said, “Next what we learnt was that Jet Airways had started operations on this route, Etihad increased its frequency from three to seven flights a week, Emirates doubled its frequency from seven to fourteen a week. This was one of the most profit-making routes and suddenly we were not on it but other foreign and private carriers were.” By an estimate, in 2009 alone Air India/Indian Airlines pulled out of as many as 32 routes which had load factors above 90 per cent, mainly in the Gulf and Singapore sectors, and their flights were substituted by Kingfisher and Jet (Skaria, 2011)! As a result against 90 hours of flying per month, Air India pilots are flying an average of 49-53 hours per month. Similarly, the average utilisation of aircraft has also been affected — as against 16 hours of flying per day, aircraft with Air India are airborne for barely 9-10 hours a day. The 2011 CAG report notes that “foreign airlines derived disproportionate economic advantage out of the traffic rights” negotiated in these agreements. In her leaked phone conversation with Jaideep Bose of the Times of India, from July 2009, Nira Radia accused Patel of having profited personally from the expansion in capacity and the conversation goes to the extent of suggesting the price per seat which changed hands in this process and even names specific middle men involved in facilitating the entry of the international airlines. The Caravan quotes a senior official at the Directorate General of Civil Aviation (DGCA), who monitors bilateral agreements, as saying “they say Emirates is India’s national carrier these days.” Captain G.R. Gopinath, who launched India’s first low-cost airline, Air Deccan, paid a kind of backhanded tribute to the success of Jet Airways under Praful Patel in an October 2011 Indian Express article, writing that Jet had “built a robust international network and secured good international routes that are controlled by the government in bilateral agreements” (Donthi, 2011). In July 2004, Jet acquired landing rights at Heathrow Airport in London, though Indian domestic carriers till then were not permitted to operate outside of ASEAN countries.

On another front, the Air India and former Indian Airlines unions came together in late 2008 to protest the ministry’s proposal to transfer ground-handling services to a new joint venture between Air India and SATS, a subsidiary of Singapore Airlines. Ground handling is a lucrative business for AI and a series of agitations and threatened strikes over the ground-handling joint venture forced the government to step back. According to a former ministry official, Raghu Menon, the then CMD, resisted giving his approval to the project, but was sacked by Patel less than a year into his three-year contract. The SATS ground-handling joint venture was subsequently approved by the next incumbent.

After the merger, buying spree and ‘route rationalisation’, minister Patel summed up his policy in the following remark: “I have been saying since 2004 that the airline (AI-IA) should be sold, but I have been asked to keep it going” (Business Standard, 2009).

Externalisation and Socialisation of Costs by Private Carriers:
Financial Manipulations by Kingfisher Airlines

Of late, Kingfisher Airlines has been regularly in the headlines but only for the wrong reasons. The second largest airline in the country (till last year) has been continuously making losses, its debts are mounting, and the list of those whom the airline is unable to pay seems to be growing by the day: employees, fuel suppliers, aircraft lessors, airports, income tax authorities, and so on. But the problems of Kingfisher have not been recent. It has been a loss-making entity ever since it was launched in 2003, and has accumulated losses of close to Rs.6,000 crore at present. Amidst all the recent trouble, the high profile chairman of the airline gallantly announced that it did not need any largesse from the government and could take care of itself. 

In 2010, when it was in a similar mess, Kingfisher got its debt ‘restructured’. At that time Kingfisher’s total debt was Rs.7,650 crore19. Public sector banks decided to convert part of the debt into equity to give the company some breathing space, as equity would not require any interest or instalment payments. That is, the public sector banks bailed out this private company which was on its way to bankruptcy, by taking shares in Kingfisher in exchange for writing off part of the debt. The bankers converted approximately Rs.750 crore into equity and acquired a 23 per cent stake in the company. The whole transaction was done with each Kingfisher Airline (KFA) share being valued at Rs.64.48. But the share price of Kingfisher that day was only Rs.39.90; the failing airline got an incredible premium of 61 per cent per share, depriving the public sector banks of almost Rs.300 crore. In addition Rs.553 crore of debt was converted to Compulsorily Redeemable Preference Shares (CRPS), again at Rs.64.48 price per share, which meant that banks allowed KFA to return this money on a later date, but the amount would not be reflected in KFA’s debt column. The stated logic of the banks for paying a premium for the Kingfisher shares was the future ‘potential’ of the airlines and the aviation business. But since then the highest price that the share has ever fetched has been Rs.49.25, around a year back; and amid the current crisis it has dropped to less than Rs.14 in May 2012, adding another Rs.300 crore to the freebie offered by the public sector banks to Kingfisher20. The banks also reduced the interest rate on the rest of the debt by 2.5 per cent meaning a further loss of Rs.150 crore per annum in interest income, over the term of the loan. After all this the airline was also given additional term loans of Rs.1,000 crore as part of the same ‘debt restructuring’ exercise. All this was offered by the financial institutions to a company for which the auditors in its own annual report in 2010-11 were forced to state:  “the financial statements of the Company having been prepared on a going concern basis, notwithstanding the fact that its net worth is completely eroded.”21

In September 2011, a Canadian research firm, Veritas, published a report on Kingfisher Airlines (KAIR)22 which stated the true picture:

We believe that KAIR’s book equity has been wiped out although audited financials pretend otherwise. The airline is burning cash at a rapid rate, we estimate Rs.301.10 crore ($65 million) in the first quarter of 2011-12, is in a business that requires capital perpetually, has no pricing power given six carriers fighting over the major hubs in India, is dependent on the vagaries of the price of oil and the largesse of state-run financial institutions in India, and its parent UB has run out of financial room to accommodate the needs of this capital-starved child.

Moreover, in spite of the so-called debt recast, we believe that once the non-cancellable operating and financing lease commitments of KAIR are included, KAIR’s enterprise value is less than its contractually required cash obligations, implying negative residual equity value for KAIR...

KAIR owes substantial sums to employees in wages, employees state insurance, and provident fund. According to its auditors, KAIR owes the exchequer Rs.423 crore in tax deducted at source (TDS), Rs.10.5 crore in service tax, and Rs.4.5 crore in fringe benefit tax. It owes the public sector oil corporations some Rs.800 crore. “Clearly”, says Veritas, “Kingfisher is funding itself at the expense of its employees and the Indian exchequer.... We do not believe that KAIR’s antics would have found any takers in a responsible credit market... the airline would have been liquidated by now.” Interestingly, Veritas even comments that the government’s behaviour with the public sector Air India has been “duplicitous”: “Our view stems from the fact that it could be on the diktat of the regulatory authorities involving various ministries of the Government that an unviable airline, KAIR, which is competing against the incumbent state carrier and siphoning away its passengers on both the domestic and international routes, is being supported via taxpayer-funded financial institutions.” Veritas points out that Kingfisher’s parent company, UB Holdings Ltd, has provided loan guarantees of Rs.16,853 crore on behalf of Kingfisher – compared to UB’s marketable assets of Rs.4,713 crore. It recommends that financial institutions auction the collateral to the highest bidder and recoup whatever is left. However, even after the appearance of this report, Kingfisher’s public sector creditors did nothing to protect the public interest. The eventual loss, of course, will be borne by the public. Veritas notes that “unless the banking institutions have provisioned judiciously for the debt provided to KAIR – approximately Rs.4,567 crore ($986 million) in loans to Kingfisher in addition to standby letters of credit, etc – it renders the disclosed capital position of the banks unreliable.” Partly because the capital of public sector banks has been eroded by non-performing assets, including corporate firms like Kingfisher, the government has spent vast sums to recapitalise the banks: On top of Rs.18,617 crore in 2010-11 and Rs.12,000 crore in 2011-12, it plans to spend Rs.14,588 crore in 2012-13 on this head.23

Most interesting is the company’s response to the crisis: while bravely stating that it does not need any state support, it has regularly been ascribing all its woes to Government policy (taxation and regulation). This is the case when Kingfisher and Jet Airlines have been the principal beneficiaries of Praful Patel’s systematic sabotage of the public sector airlines. (One of Mallya’s complaints has been the tax on Aviation Turbine Fuel – a tax that existed when he and other private firms entered the airline industry, and which his business model was supposed to take into account.) Under corporate capitalism, corporations can indulge in the worst form of profligacy, get repeatedly bailed out by public money, and yet continue to put all the blame on ‘unfair’/‘inappropriate’ public regulation! Note that all the trouble of Kingfisher has made little difference to the profile of its Chairman Vijay Mallya, who is in his second term as a member of the upper house of parliament. All these handouts have been doled out while Kingfisher’s promoters had surpluses to invest in the Indian Premier League, Formula One, football clubs, swimsuit calendars and even derby teams24. Mallya’s lifestyle is among the most ostentatious of the ostentatious Indian elite: he is reported to own several private jets, luxury yachts, homes in several cities and world capitals, even private island near Monte Carlo.25

Capital’s Attempt to Overcome the Crisis by Manipulation and Building Monopolies

In spite of all the hype about the rapid growth of civil aviation in India with the entry of high-profile corporate players, there seems to be no end to the crisis of the industry as a whole. The current debt burden of the airline industry is close to Rs.100,000 crore ($20 billion). On a revenue base of approximately Rs.50,000 crore the industry is expected to book losses of Rs.12,000 crore this year (2011-12). While the traffic has been growing at the rate of 15-20 per cent per annum, and the Indian aviation industry has become one of the top ten in the world, it has not made any profits in the last five years. Along with the financial condition of the airlines, their safety standards too have deteriorated alarmingly: a recent report by the Director General of Civil Aviation finds that almost all the leading airlines in the country – Jet Airways, Kingfisher, IndiGo, SpiceJet, GoAir, Alliance Air, JetLite and Air India Express – are guilty of lapses such as non-reporting of incidents, lack of pilots, lack of proper and regular training, absence of qualified safety officials, non-compliance of safety audits, and other irregularities. The DGCA notes that the financial sickness of the sector is “seriously impacting the safety of flight operations.”26

In the early years of the economic reforms we were told that increase in competition and deregulation would address all the ills of the industry. The gradual deregulation of the industry began in the late 1980s with granting of permission to private sector players such as Air Sahara, Jet Airways, Damania Airways, East West Airlines, Modiluft and NEPC Airways to operate as air taxi services. In 1994 the government repealed the Air Corporation Act and in 1995 granted scheduled carrier status to six private air taxi operators. However, not many operators were able to continue their business and by 1998, at least six private airlines, East-West, Modi-Luft, NEPC, Damania, Gujarat Airways and Span Air were closed down (Shah, 2007).

Now it is being said in the industry circles that ‘unregulated competition’ is precisely the problem, and the clamour for state regulation (of course of the kind which can protect and promote private profits) is increasing by the day! Each airline kept making big investments and reduced fares in an attempt to gain market share and drive out competitors. The eventual aim was to be one of the two or three survivors, who would then jack up fares and recoup losses - something very similar to what happened in the railroads and steel industry in the US earlier. (In particular, private firms anticipated that the surviving firms would be able to take over or carve up the public sector firm Air India, promising a huge bonanza in market share and assets.) As a result the industry is not only saddled with overcapacity (over 30 per cent), but unsustainable losses as well. According to a recent estimate, against a daily traffic of 150,000 airline passengers in India, the airlines have a combined capacity of more than 200,000 passengers; they also have close to 40 per cent cargo capacity that remains unutilised (Bhan, 2011). The Indian airline industry is able to keep its planes in the air for less than nine hours a day, compared to top international carriers, which routinely achieve close to 17 hours of flying per day!

Unlike the US railroads, which were an essential infrastructure, the airlines in India are largely a luxury industry. As Bidwai (2008) asserts, “the airlines (in India) nurtured and spread the illusion that air travel would become affordable for 'the common man' through sheer expansion and economies of scale.” Thus many airlines set their fares deliberately low to draw passengers away from rail travel, in the process missing the point that ‘economies of scale’ are relatively small in the aviation industry, where fuel accounts for more than 40 per cent of operating costs. Moreover, in spite of the high rate of growth in the number of passengers flying, the industry has not been able to reach more than 3 per cent of Indians. In line with the pattern of the Indian economy, air traffic is structurally concentrated: the Delhi-Mumbai route carries over half of India’s 33 million passengers traffic per annum (Shah, 2007). Air travel remains luxury consumption for many even amongst this small stratum, making them extremely sensitive to prices.

The dominant players in the Indian aviation industry have attempted to move towards consolidation and control through mergers and alliances. Besides the AI-IA merger, 2007 saw two other mergers amongst the key players: the Jet-Sahara and the Kingfisher-Deccan, which meant that over 80 per cent of the market was controlled by just three players (till the recent freefall of Kingfisher).  There have been regular reports of code-sharing by the top players whereby an airline sells seats, under its own name, on another carrier's flight. Also, there have been repeated attempts at price fixing by the two top players, Jet and Kingfisher (between them the two have had close to two-thirds of the market). The intensification of the crisis in the civil aviation industry in India, most acutely expressed in the condition of Kingfisher, is bound to result in the reduction in the number of firms operating (either through mergers or bankruptcies); in the wake of this ‘consolidation’, the surviving firms will have greater ‘pricing power’, i.e., they will be able to jack up fares in a coordinated fashion.

When discussing the socialisation of the costs of the airlines, we have restricted ourselves to their financial operations.  We have ignored the externalities involved in carbon emissions due to air travel, or for that matter, huge pollution involved in bauxite mining and aluminium smelting (aluminium is one of the main constituents of aircrafts) which is being resisted worldwide and for which some of the poorest people in the world, who will never travel by air, and the future generations, will pay. We have also not included the huge public costs involved in creating airports27 and other infrastructure facilities which in ultimate analysis become public subsidies for private profits in the name of ‘public good’ (this ‘public good’ at best involves the tiny elite of the country). The same resources invested in bus or rail travel could have resulted in a genuine benefit to the public.


Contrary to the assertions by the dominant discourse, we have contended here that the rise of corporations did not result from their greater efficiency; if they appear to be more efficient than the alternatives, this is only because the arguments in their favour are structured in a certain manner and facts are mustered selectively to buttress these arguments. The history of the rise of corporations is actually one of great inefficiency and anarchy of investment (at the macro level and in social terms); use of the state as an instrument of private accumulation, oiled by corruption; emergence of monopoly with the help of high finance; and suppression of viable alternatives. While voices against corporations are regaining momentum from Occupy Wall Street to Tahrir Square to Niyamgiri hills, it is time to investigate the real history of corporations, in order to bring out their social inefficiency and obsolescence.



Bhan, Sushil 2011. “Planes Don’t Fly When the Boss is Asleep”., accessed on March 08, 2012.

Bidwai, Praful 2008.  “Mindless Deregulation Disastrous for India”., accessed on March 07, 2012.

Business Standard, 2009. “'Air India Should be Sold, but I've been Asked to Keep it Going'”., accessed on March 15, 2012.

Business Today, 2011. “Sleeping on the Job”., accessed on March 08, 2012.

Chandler, Alfred D. 1977. The Visible Hand: The managerial revolution in American business. Cambridge MA: Harvard Univ. Press.

Chandler, Alfred D. 1956. Henry Vernom Poor, Business Editor, Analyst, and Reformer. Cambridge: Harvard Univ. Press.

Cochran, Thomas C. 1977. 200 Years of American Business. NY: Basic Books (cited in Perelman, 2006: 121).

Davis, Lance E. & North, Douglass 1971. Institutional Change and American Economic Growth. NY: Cambridge University Press.  

DeLong, J. Bradford 1992. “American Finance – From Morgan to Milken”, The Wilson Quarterly, 16, 4, 16-30.

Dobbin, Frank 1994. Forging Industrial Policy. NY: Cambridge Univ. Press.

Donthi, Praveen 2011. “Tailspin: Praful Patel and the fall of Air India”. The Carvan,, accessed on February 28, 2012.

Dunlavy, Colleen A. 1994. Politics and Industrialisation:  Early railroads in the United States and Prussia. Princeton University Press.

Fligstein, Neil 1990. The Transformation of Corporate Capital. Cambridge, Mass.: Harvard Univ. Press.

Hadley, A. T. 1886. “Private Monopolies and Public Rights”. Quarterly Journal of Economics, 28-44 (cited in Perelman, 2006).

Hartz, Louis 1948. Economic History and Democratic Thought. Cambridge: Harvard Univ. Press.

Huntington, Samuel P. 1968. Political Order in Changing Societies. New Haven: Yale Univ. Press.

John, Richard R. 1997. “Elaborations, Revisions, Dissents: Alfred D. Chandler, Jr.'s, ‘The Visible Hand’ after Twenty Years”. The Business History Review, 71, 2, 151-200.

Lamoreaux, N. R. 1985. The Great Merger Movement in American Business 1895-1904. New York: Cambridge Univ. Press.

Perelman, Michael 2006. Railroading Economics: The creation of the free market mythology. NY: Monthly Review Press.

Perrow, Charles 2002. Organising America. Pinceton: Prnceton Univ. Press.

Ringwalt, J. L. 1888. Development of the Transportation Systems in the United States (NY: Privately published, cited in Perrow, 2002.

Roy, William G. 1997. Socializing Capital: The rise of the large industrial corporation in America. Princeton, NJ: Princeton Univ. Press.

Saha, Samiran 2011. “The Grounding of Air India”. Tehelka Magazine, 8, 11, 19 March., accessed on February 25, 2012.

Sellers, Charles 1991 The Market Revolution. NY: Oxford Univ. Press.

Shah, Nancy 2007. “Competition Issues in the Civil Aviation Sector”., accessed on March 3, 2012.

Skaria, Roy 2011. “Murdering the Maharaja…”, accessed on February 15, 2012.

Williamson, Oliver E. 1981. “The Modern Corporation: Origins, evolution, attributes”, Journal of Economic Literature, 19: 1537-1568.


1. Detailed suggestions and comments of the editors of Aspects are gratefully acknowledged; also, Manali’s suggestions on an earlier draft improved this piece in so many ways. (back)

2. The author can be reached at [email protected] (back)

3. By ‘monopoly’ we mean, not the restricted sense of a market with a single seller, but  a stage of capitalism in which free competition is replaced by the great concentration of economic power in a handful of giant firms and banks. These giant firms are in a position to influence price, output and investment. (back)

4. The 1960s were the time of working class and student movements across the globe with anti-corporate sentiment as one of its essential features, which in turn had a bearing on state policy in large parts of the world. (back)

5. W-C stands for ‘Williamson-Chandler’; the two are picked as most important representatives of a very large and influential body of mainstream literature. (back)

6. Policies to promote competition and regulate anti-competitive conduct, known in the United States as ‘antitrust’. (back)

7.‘Economies of scale’ are the reductions in a producer’s cost of production per unit as output expands. ‘Economies of scope’ are the reductions in cost per unit for a firm in producing (or distributing) two or more products. For example, if a firm producing televisions decides to produce mobile phones or laptops as well, its average cost for the two products may be lower than if it were to produce just one or the other; a firm with a sales network for watches may enjoy economies of scope in selling jewellery as well; and so on. (back)

8. What Marx referred to as “the abolition of capital as private property within the boundaries of capitalist production itself”. – Capital, Vol. III, Part V, Chapter XXVII. (back)

9. Historians like John (1997) point out that many of the organisation innovations that Chandler attributes to railroads were already done in the government organisations like the post office. (back)

10. A transaction is a broader concept than market exchange. While exchange happens in the market, a transaction can occur either in market or inside an organisation. Both exchange and transaction involve costs — costs involved in undertaking, implementing and monitoring a transaction, such as information collection, working out the deal and then monitoring that it is properly implemented. (back)

11. There are other accounts which expand the canvas of comparison. For instance, Dunlavy’s (1994) comparative account of Prussian and US railroad brings out that Prussian railroad was developed under heavy state regulation and ownership after 1848 unlike the American railroad. (back)

12. A good overview of the alternatives to the corporate railroads can be found in Perrow (2002). (back)

13. Note the contemporary parallel with the Chief Economic Adviser to the Ministry of Finance, Government of India, wanting a certain class of bribes legalised for the bribe-giver, while penalising the recipient (the Government official):, accessed on Sep 16, 2011. (back)

14. Notice the parallel with the contemporary debate on privatisation of public sectors: what options are exercised primarily depends upon the way arguments are structured and they are often structured in a manner of ‘there is no alternative’. (back)

15., accessed on July 26, 2011 (back)

16. Vertical integration is downstream or upstream attempt to incorporate new functions within a corporation like distribution or marketing, while horizontal integration is acquiring competitive companies with similar activities and adding them in the existing functions of the corporations. (back)

17. The Caravan article goes into great length on the acts of omission and commission by Praful Patel as civil aviation minister. (back)

18. A resource that is held in common and belongs to a community (and not owned by an individual or private interests). (back)

19. Bare details of this can be found in a company update for the investor:, see especially p 21. (back)

20. This analysis is primarily based on the report: (back)

21., see note 9 on p 32, emphasis added. (back)

22. Quoted in (back)

23. Union Budget, 2012-13. (back)

24. A recent news item suggests that Mallya has invested more than Rs. 150 crores in his Formula One team, a significant amount of this being generated from KFA:$32-million-into-force-india, accessed on March 15, 2012. (back)

25. (back)

26. (back)

27. For instance, large urban (and even rural) lands are acquired for airports; in the case of the Mumbai airport alone over four lakh slum-dwellers are to be evicted from land surrounding the airport, in order to make way for the real estate ventures of the private operator of the airport. The giant T3 terminal at Delhi airport, built last year, is another real estate development on public land for the benefit of the private operator of the airport (and the airlines). (back)


Back to Contents


All material © copyright 2015 by Research Unit for Political Economy