THE RECONSTRUCTION OF AMERICAN ENTERPRISE
By ALFRED P. SLOAN, JR., Chairman, General Motors Corporation
Delivered at the 24th Annual Meeting of the "National Industrial Conference Board, Waldorf Astoria Hotel, New York, May 22, 1940
Vital Speeches of the Day, Vol. VI, pp. 715-719
A RECONSTRUCTION Program For American Enterprise" is the title the National Industrial Conference Board has chosen for discussion this evening. From this title I would assume that all are agreed that something destructive has happened to American enterprise and something or somebody is in need of reconstruction. Unfortunately, that is only too true. On the eve of a national political campaign and in a life and death struggle between two opposing ways of life, it seems appropriate to review briefly a few of the more serious forces that have proved so definitely restrictive to American enterprise.
The present may be regarded as a bridge of time betweentwo decades. The decade of the thirties was a period of apprehension and industrial stagnation and retardation. However induced, it was both prolonged and intensified by economic panaceas and political intolerance. Now comes the decade of the forties that might well be a period of renewed opportunity with the resumption of industrial progress unless over-shadowed by continued political interference with our essential economic processes. From 1790 until 1930, the industrial progress and living standards of America advanced continuously. The economy was free. The volume of industrial production in each new business cycle exceeded that of the preceding cycle. America was moving ahead.
In recent years private enterprise has been confronted with a number of destructive forces and other deterrents never heretofore experienced. Production of goods and services has fallen considerably since 1929. Although population is greater, yet the production is less, and millions are unemployed. Something has happened. The American industrial system of enterprise and its leadership have been charged with the responsibility for the ills and misfortunes of the economy and their impact upon the people. We shall examine into that question for a moment, but before doing so let us consider another question. One that so concerns us as we meet together this evening.
The paramount issue of the day, and the subject first in the minds of all of us, is resistance to force and aggression, the preservation of our American way of life. To insure this, it is clear that it is of vital concern to us that the standard bearers of democracy emerge victorious in the present struggle. Any other result would be a catastrophe to civilization. Today both national and international morality in respect to human rights is largely passing out of the consciousness of those responsible for their preservation. Hence there is demanded a policy of intelligent and aggressive preparedness in defense of American security and our way of living. Both are essential. The instruments of warfare of today are the most highly technical products of industry. We should start with the recognition of that fact and demand that the essential program be directed by those possessing the technical knowledge and experience to assume such a great responsibility unencumbered by the demoralizing influence of the political consideration. There is a job to be done. Let us do it intelligently. Certainly after the past seven years of financial dissipation, we should know that we are no longer in a position to afford any degree of such luxury. This system of national defense must be adequate to our needs. It should be the keynote of our national policy. National security has become essential to national confidence. Thus our problem becomes two-fold: construction of national defense and reconstruction of economic policies.
Lack of adequate defense is due to lack of foresight. The essential element of statesmanship and national leadership is foresight. Without foresight, real statesmanship can not exist. Perhaps in the days to come we will wonder how we justified the attitude of yesterday in relation to the world situation. The argument might well be advanced that a more realistic attitude on the part of the world's democracies toward the problem of preparedness in the face of the threatening storm might have avoided the catastrophe. Aggression flows from economic limitations. The last opportunity to deal with that problem on a world basis was the London Economic Conference of 1933. What might have been accomplished there with real statesmanship and foresight the world will never know. There are some who think that under wise statesmanship it might have altered the course of history by substituting the economic adjustments of peace for the arbitrament of war.
American enterprise comprises thrift and skill; in other words, capital and management. Our democratic traditionsgave equality of opportunity and equality of responsibility, placed no handicaps upon success, encouraged every individual to seek as high a place in business, the professions, or in politics as his ability would justify and honored him for his accomplishments. That has contributed markedly to the outstanding success of American enterprise. In consequence, our industrial population earns more in purchasing power and enjoys a higher standard of living than any similar group anywhere. America with seven percent of the world population enjoys more than fifty percent of the world's wealth. That is the result of our system of enterprise. The primary objective of private enterprise must be to produce more and a greater variety of useful things always more effectively, so that they may be sold at always lower prices. Reduced prices mean more may use and enjoy industry's products and more may be employed in the production of an expanding volume. Business is the outstanding activity of any civilization. Society and government exist only through the success of business. Because of this dependence of society upon business, an intelligent and beneficial leadership for the one should imply simultaneously an intelligent and beneficial leadership for the other. Business and government must cooperate on the basis of an intelligent interest in the common-welfare. Sad are the facts today.
Industrial leadership exists in an atmosphere of reality. Therefore, industrial experience should contribute importantly toward a fundamental understanding of the necessities of the community as a whole. Industrial leaders devote their lives to the solution of the problems of the economic world. The impact of those problems reacts on the progress and stability of society. Political leadership involves too often the emotional appeal rather than the logic or facts of realism. Emotionalism has secured an undue control even in our democracies—dangerous because of its lack of intelligent control. And this power is too often obtained through speeches, gestures and appeals of a propaganda character purposely addressed to this emotionalism and sentimentalism. It is effective only because of a lack of fundamental understanding on the part of the multitude. Industrial leadership, therefore, involves an entirely different approach to the solution of any problem than political leadership. It is important that the community be made to understand these distinctions in order that they may more intelligently decide where their best interests lie.
Industrial leadership has been concerned with the promotion of trade and the improvement of living standards in all nations. Its objectives are not limited by national boundaries. Political leadership, to a considerable degree, has been concerned with promoting nationalism and too frequently imposes uneconomic restrictions on the economy that serve to limit, even depress, the living standards of its people in promoting that policy.
I think it is a fair statement that the major current forces now adversely affecting our system of enterprise are not economic or social problems but are rather political in character. Our enterprise system may be regarded as engaged in a life and death struggle. It is under attack both from within as well as from without.
While there may be only a few among us who openly advocate the substitution of some form of state socialism for the American system of enterprise, there are far too many who advocate economic policies that inevitably lead to that result. The alternative to the American form of enterprise is regimentation under bureaucratic or dictatorial control.
It may not be fitting for industrial leadership to take any political position as such. Business in politics is usually recognized as bad policy but it is of vital consequence that industrial leadership assume a greater and broader responsibility in support of the American system than has been the practice in the past. This is clear. If we desire to continue to enjoy the manifest fruits of free enterprise we must be willing to work and fight. Industrial leadership can and must take an economic position as affecting its ability to contribute to the general welfare. In that area lies the interest of the American system of enterprise and all those who earn their living. Let us examine into that question of responsibility for a moment.
In the past industrial responsibility has been concerned with the production and distribution of an ever increasing volume and variety of useful goods and services at decreasing prices. Because of this, America made industrial progress that became the envy of the world. But for many years past I have been convinced that industry's responsibilities can not be adequately discharged, with the mere physical production of goods and services. As our national economy becomes more and more involved, the margin of error within which we can operate and maintain economic and social equilibrium, to say nothing of the vital urge for progress, is being constantly narrowed. Hence a much broader responsibility must be assumed. Industrial leadership must seek to develop ways and means to better correlate our industrial mechanism and its component parts with the national economy as a whole, in order to more effectively promote human progress and security and to advance civilization. Inaction means the challenging of free enterprise. Failure means the urge for more and more political interference—Government in business. If industry fails to recognize and discharge this broadened responsibility, has it any adequate right to complain of the penalties that it must pay?
This philosophy is not new. It was laid down over five years ago. I asserted at that time that industrial leadership must evolve into industrial statesmanship. If we are to remain a democracy, if we are to perpetuate free enterprise, it is essential that through the process of mass education, we develop a better and broader understanding of not only all the factors involved in our complicated national economy, but also the economic consequences of the things that we do or do not do, as influencing the lives and happiness of our people. Again, that is not an academic observation. Much progress has already been made in many directions. In the management of the affairs of General Motors Corporation, particularly in its public relations activity, and in other ways we have tried to the best of our ability to adequately recognize that responsibility, and others are doing likewise. But we must move forward on a far wider front, and far more aggressively. That is a most important plank in our platform of reconstruction of our enterprise system.
Many so-called reform measures now undermining the enterprise system have been prompted by the laudable desire to correct an apparent evil or abuse but too often without adequate understanding of all the facts and circumstances and too often without the requisite knowledge of the fundamentals as to how the desired result should be accomplished intelligently. We must be concerned with the correction of evil but we need not destroy something of greater value in the corrective process. Apparent evils are sometimes merely transitory phases and are essentially self-corrective with the passage of reasonable time, given the high standard of intelligence prevailing in our country.
It is important to realize that a planned economy is wholly incompatible with the provisions of the Bill of Rights. The social and economic philosophy of capitalism is inseparably linked with freedom and democracy. This war is a revolution against democracy and the whole way of living which has been developed with it. It is important to remember that we have had eight years of so-called emergency. Hardly a single emergency power has been relinquished, even though inmost instances the emergencies have passed. In the present world situation it is quite possible that new centralized controls may become essential. There lies a great potential danger to free enterprise. Therefore it is of the utmost importance that all emergency powers and controls be relinquished automatically upon the conclusion of the emergency that brings them into being. The record of the past few years gives little confidence that such a result would ensue. Such is the trend and as long as it continues confidence, an essential component of the enterprise system, is endangered.
Looking ahead, and from the standpoint of its broad implications, the present danger to America of becoming involved directly in the present world emergency, is not so much the loss of wealth; it is not only the loss of life, terrible to even contemplate, but it is the very serious possibility, or even probability that with it would go the American system of enterprise. That is a danger. It is a real danger. We must stand continually on guard.
In America social security and the abolition of poverty are possible. The fact that such objectives are within the realm of argument is evidence that the private enterprise system is capable of providing a substantial surplus above subsistence needs. Social consciousness was always present in degree but could flourish only if there was a surplus. And no one group has a monopoly on good intentions. The unfortunate can be supported only by the producers of the nation. The American educational system is a great asset, but too often our educators who have never lived in the reality of industrial life preach the doctrines of defeat now so prevalent. They fail to understand the economic and social benefits flowing from the American enterprise system.
The private enterprise system is based on the profit motive. It must create a profit. It must earn the payroll. In an expanding economy there must be a saving of surplus out of production. And that saving must be risked in the hope of making an adequate profit. Savings thus provide the venture money or equity capital for the expansion of enterprise. Although we speak of a profit economy, it is really a profit and loss economy. It is the hope of profit that provides the urge to assume the risk. Thus the possibility of loss must be reckoned with the opportunity for profit. While a limited number of well managed enterprises earn a profit, over the longer term most enterprises result in loss. And in the aggregate the return is hardly equal to a reasonable rate of interest. When our system of taxation takes such a large proportion of the possible profits as at present, and the investor must assume the entire loss, then very little happens. That is a factor in the picture of today. The venture spirit that has made American enterprise is largely frozen in an uneconomic attempt to penalize outstanding accomplishment. That should be considered in our platform of reconstruction.
The removal or modification of all politically imposed deterrents to enterprise constitutes an important element in a reconstruction program.
I mentioned economic panaceas and political intolerance as influences restrictive to enterprise. As to the latter, little need be said. I remind you of the story how in other countries they knight conspicuous success, while in this country the practice has been to indict that success, and without just discrimination, and when not possible in the Court of Law, then before the Court of Public Opinion. I speak feelingly because I have had it both ways. This is another factor in our reconstruction program.
As to specific economic panaceas, these are well known to all of us. They have been discussed freely and frequently. Time does not permit their consideration here. This might be said however, only by an expanding economy can we have a greater supply of useful goods, a higher standard of livingand reduced unemployment. The return of confidence in the long-pull position of the enterprise system is an essential step before an expanding economy is possible. Increased wealth means increased production. Restriction on production, the theory of scarcity, the political creed of today, should have no place in the American system of things. Our motto must be the "theory of plenty." Sooner or later we will learn that we cannot penalize some for the benefit of others. We are all a part of the same economy. Sooner or later we will learn that wages are determined solely by the productive opportunity given the worker. We may by law require that the wage rate be raised to a definite level or hours reduced, or both, but we take from some and give to others. There can be no gain.
You know and I know that the only way to provide more things for more people, in more places, the theory of plenty, is by increased efficiency through capitalization of technological improvement, more productivity per worker and more hours of work per week. With the national policy of establishing a definite ceiling on the hours of work, we now propose to plug the one remaining opportunity for progress and place a tax upon technological progress as a contribution toward a solution of our economic difficulties. Taxes once placed usually increase, hence the ultimate result is bound to more and more limit the increase in efficiency of production otherwise possible. Aside from the depressing economic effect of such a policy on the economy as a whole, we are erecting a specific barrier against the capital goods industries which, in terms of employment, directly, and in services related thereto, employ one-half our workers. This is an astounding proposal. And undoubtedly the most effective economic barrier against industrial progress yet advanced. That certainly has no part in our program. On the contrary a soundly conceived plan to encourage, by incentive taxation, technological progress could well be considered. Higher wages could be sustained, lower prices would be possible, and employment stimulated—true factors in an expanding economy. Such a program has demonstrated effectively its usefulness elsewhere.
Some time ago a highly placed public official stated in effect, in speaking of the unemployment problem, that it could be solved easily, if properly attacked. His plan was to reduce working hours as far as necessary to create additional jobs, maintaining the same wages as at present for the reduced working week. That same idea is being constantly advanced. It is very dangerous. Why is it we cannot understand that money wages must be considered in terms of what the money will buy? Where is the gain to the economy when prices must rise in the same proportion as wages? We cannot raise ourselves by our own boot straps.
In any broad approach to the problems of our economy, we must not fail to realize that, after all, American enterprise is largely one of small units. About two hundred thousand new businesses are started each year with an average of 13.5 employees. Too often we examine into some question using as an example one or more of our great industrial units. If the idea is to prove some desired point nothing more need be said. If it is to get the real facts, such conclusions are far from indicative of the condition of the system as a whole. General Motors products are distributed by about 16,000 independent merchants. Their aggregate investment is in excess of $200,000,000. To maintain the virility of such a scheme of distribution requires the constant addition of new capital. The great majority of these merchants are always undercapitalized. The encouragement of small business is of vital importance in the problem of an expanding economy. High taxes on business and personal incomes add to the difficulty of making savings. In looking back over the years to the beginning of many of the enterprises now a part ofGeneral Motors, it is clear that in those early days their lives were in frequent jeopardy due to lack of adequate capital. And yet, while those enterprises were then employing relatively few workers, now they are employing tens of thousands directly, and indirectly hundreds of thousands more. Today with conditions as they are, the mortality of such struggling enterprises must necessarily be higher and yet they are vitally needed, not only because of themselves but because they are frequently the beginnings of far greater things. Banks cannot meet this situation. Partnership or equity is needed— and the risk is frequently very great.
Encouragement of small business units is an essential part of our plan of reconstruction. The most intelligent approach is the broad one of doing those things that will expand the economy as a whole. Small business should not be dealt with on an individual basis.
Thus, through philosophical discussion we have evolved the concept or principle of high generality and low generality. And the need of one as compared with the other—an important distinction in determining industry's part in our program of reconstruction. The specific technical business problems, such as engineering, production, distribution, etc.—the very essence of business—are ideas of low generality, whereas ideas regarding the business as a whole in its relationship with the community as a whole, are ideas of high generality. Obviously, high concentration of thought and effort on ideas of low generality are essential to business success. There can be no short-cut—no neglect of these ideas. But that is not enough. Attention must also be given to the development of ideas of high generality, as a social philosophy. Thus we pass from industrial leadership to industrial statesmanship.
It is essential for business management to become deeply absorbed in the details of problems of immediate urgency-administrative management, in other words. While these can not be neglected, there must be some definite division of organized effort so that there will be no neglect in the development of a social philosophy which will carry forward aggressively the novelty of social and economic invention— policy formation, in other words. The former determines the fundamental concepts of the business and evaluates the problems before it in terms of its future progress and stability, its relation to the economy as a whole and its obligations to the social order. The latter deals with engrossing problems of administration found in any business. The General Motors scheme of management provides for a separation of ideas of high generality from those of low generality and requires executive attention to both phases of management. This is essential to industry's broader responsibility in this period of rapid change through which the economy is now passing.
Undoubtedly we are now hammering out a social economic philosophy to carry on for the future. The development of a business philosophy obviously is the job of business statesmanship. Those devoid of actual experience in business can not develop a philosophy consistent with business needs or construct satisfactory operating policies for its conduct. We have seen already that those with little experience wholly unqualified as to the technical necessities of business, such as politicians and reformers, are making inroads on the management and operation of the enterprise system through regulatory and actual control procedures. The result establishes the fact.
It has always been the responsibility of industrial management to keep ahead of the consumer demand for its goods and services. It now becomes the responsibility of industrial statesmanship to recognize the social trend in relation to its own problems. Thus enlightened self-interest and the needs of the society as a whole, properly coordinated, assume a partnership relation in a common effort. The enterprisesystem becomes an integral part of the whole community and not in any sense an abstraction or something apart from the general economy. Just as free society or democracy is dependent upon successful enterprise its perpetuation becomes more assured as industrial statesmanship assumes this obligation. It may be regarded as one of the essential elements, perhaps the keystone of a program of reconstruction of our free enterprise economic system. Upon its acceptance depends the perpetuation of that system.
Conditions and influences change. The present period is one of great and rapid transition and. one of great potential danger. The enterprise system must be progressive. It must keep in touch with the changing environment. The manifold and demonstrated benefits of the free enterprise system demand that those involved with its responsibilities fight to the utmost proposals based upon the philosophy of scarcity. Such a philosophy together with too much emphasis on the importance of security, leads to stagnation of the economy. We have seen that a progressive economy must contemplate the element of risk. Set-backs must be expected. However, the underlying forces and influences will overcome false doctrines if given an opportunity to assert themselves. The enterprise system must go forward. The standard of living of the future depends upon the intelligence with which each generation manages its affairs.
Much of the industrial equipment of America is far from modem. A tremendous opportunity exists to rebuild America on the basis of today's technology. Complete modernization, superimposed upon the demands of the consumer industries, would employ all available labor for years. The work week might well have to be increased, especially giving consideration to the increased production of goods and services now required for national defense. An economic solution of the housing problem would employ a new technique, new materials and require large-scale production methods. There lies one of the most important tasks of industry, looking toward the future. It offers the greatest industrial opportunity of modern times. If an intelligent attack on the living standards of the so-called "submerged third" were made it would create an additional and large market for consumer goods.
Thus we see real opportunities for the investment of our present and future savings. There is a big job to be done. I emphasize this point because today there are so many who fear, and have apparently satisfied themselves, that todayand tomorrow our opportunities may not be adequate to employ our savings. That means a static economy. If that proves true it will be solely because government has continued to maintain excessive obstacles against enterprise and the prospects of business profits.
It is to be hoped that the domestic political and economic abuses and limitations which have beset industry for so many years may come to an end or be corrected to an important degree in this year 1940. Should that occur, it would almost certainly be construed by the business community as justifying a return of confidence in the long-pull position of constructive enterprise. Unemployment no longer will be a national problem. On the other hand, the policy of encouraging instead of discouraging constructive enterprise and the return to national economic sanity must not be interpreted by industry as a license to re-establish any previous order inconsistent with the broader trend of economic and social change—absolutely not. On the contrary, it should be regarded by industrial statesmanship as a period within which it must justify its ability to assume these broader responsibilities. Therefore the five-year period just ahead is certain to be a most critical period. It will be a period of transition and formation in which the economic system of free enterprise must reassert itself. It will be a period in which those possessing the ability and responsibility of industrial statesmanship must exert all the intelligence they possess; with all the courage at their command to formulate constructive policies designed to steer the economy on a safe and reasonable course. This responsibility to future generations is almost beyond our conception. Certainly never before has it been confronted with a problem of such magnitude. Never before has the occasion demanded that industrial management assume such a responsibility—the reconstructing of the economy on a firm foundation of economic law. Tremendous as these problems unquestionably are, there will be superimposed upon them additional responsibilities of even greater magnitude—to an extent we can not now determine—the problems incidental to the post-war period.
Thus it is evident that the future—today, tomorrow and beyond—demands the coordinated effort of the most experienced and intelligent among us. In addition, it demands the courage that comes from the firm conviction that economic truth crushed to earth will rise again. It must be patriotic. It can not succeed as a partisan effort. And further, it must not fail.