The End of Power (9 page)

What Weber saw in America confirmed and strengthened his ideas about organization, power, and authority—and he would go on to produce a massive body of work that would earn him the reputation of “father of modern social science.” Weber's theory of power, laid out in
Economy and Society
, began with authority—the basis on which “domination” was justified and exercised. Drawing on his encyclopedic command of global history, Weber argued that, in the past, much authority had been “traditional”—that is, inherited by its holders and accepted by the holders' subjects. A second source for authority had been “charismatic,” in which an individual leader was seen by followers to possess a special gift. But the third form of authority—and the one suited to modern times—is “bureaucratic” and “rational” authority, grounded in laws and wielded by an administrative structure capable of enforcing clear and consistent rules. It rests, Weber wrote, on the “belief in the validity of legal statute and functional competence based on rationally created rules.”

And so, Weber believed, the key to wielding power in modern society is bureaucratic organization. Bureaucracy to Weber was far from the dirty word it has become today. It described the most advanced form of organization humans had achieved and the one best suited for progress in a capitalist society. Weber enumerated bureaucratic organizations' fundamental characteristics: specific jobs with detailed rights, obligations, responsibilities, and scope of authority as well as a clear system of supervision, subordination, and unity of command. Such organizations also relied heavily on written communications and documents, and on the training of personnel according to each job's requirements and the skills it needed. Importantly, the inner workings of bureaucratic organizations were based on the application of consistent and comprehensive rules for everyone regardless of socioeconomic status or family, religious, or political links. Therefore, recruitments, responsibilities, and promotions were based on competence
and experience—not, as in the past, on the basis of family connections or personal relationships.
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Germany had been at the forefront of European efforts to create a modern civil service, beginning with Prussia in the seventeenth and eighteenth centuries. In Weber's day, that process intensified, with parallel developments in other countries that reduced the scope for patronage. The UK's Civil Service Commission, established in 1855, is one such example; another is the US Civil Service Commission created in 1883 to control entry into the Federal service. And 1874 saw the first step toward an international civil service, with the formation of the Universal Postal Union.

On his American journey, Weber also witnessed a parallel revolution in methods and bureaucratic organization among the new pioneers in business. In Chicago's stockyards, whose packing plants were at the forefront of assembly-line mechanization and specialization of tasks that allowed management to substitute unskilled labor for craft workers, Weber was agog over “the tremendous intensity of work.”
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Yet even amid the “wholesale slaughter and oceans of blood,” his observer's mind was engaged:

For managers, large-scale industrial production in an increasingly international market required the advantages of bureaucratic specialization and hierarchy, or, as Weber listed them: “precision, speed, unambiguity, knowledge of the files, continuity, discretion, strict subordination, reduction of friction and of material and personal costs.”
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What was good for cutting-edge government was also good for cutting-edge commerce. “Normally,” Weber wrote, “the very large, modern capitalist enterprises are themselves unequalled models of strict bureaucratic organization.”
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Deploying a range of examples, Weber would ultimately show that rational, professionalized, hierarchical, and centralized structures were ascendant in every domain, from successful political parties to trade unions, “ecclesiastical structures,” and great universities. “It does not matter for the character of bureaucracy whether its authority is called ‘private' or ‘public,'”
Weber wrote. “Where the bureaucratization of administration has been completely carried through,” he concluded, “a form of power relation is established that is practically unshatterable.”
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One of the catalysts for the spread of bureaucratization was the outbreak of World War I, a conflict that Weber initially supported but came to bitterly regret. The mass mobilization of millions of men and millions of tons of materiel required managerial innovations on the battlefield and the home front. Given the stationary nature of trench warfare, for example, the supply of ammunition became arguably the most critical constraint on operations. As just one facet of the organizational challenge this represented, consider the French production of 75-millimeter artillery shells. Prewar planners set a production goal of twelve thousand shells per day. Shortly after the outbreak of hostilities, they increased it to a hundred thousand per day—still only half the level that production eventually reached to meet demand. By 1918, more than 1.7 million men, women, and youths (including prisoners of war, mutilated veterans, and conscripted foreigners) were working in French munitions plants alone. As the historian William McNeill observed, “Innumerable bureaucratic structures that had previously acted more or less independently of one another in a context of market relationships coalesced into what amounted to a single national firm for waging war”—a process that played out in every combatant nation.
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Weber died of a lung infection two years after the war ended. But everything that happened for decades after his death only confirmed his insight about the fundamental superiority of large-scale, bureaucratic systems. Weber had been keen to show the effectiveness of such systems in organizations beyond the military and business, and this indeed proved to be the case. The managerial model soon took hold in philanthropy, for example, as the same great industrialists who pioneered modern business created foundations that would dominate charitable work for a century. By 1916, there were more than forty thousand millionaires in the United States, up from just one hundred in the 1870s. Tycoons like John D. Rockefeller and Andrew Carnegie teamed up with social reformers to endow universities and create free-standing institutes such as the Rockefeller Institute for Medical Research, which became a model for similar institutions. By 1915, the United States had twenty-seven general-purpose foundations, a uniquely
American innovation, with in-house experts conducting independent research on a variety of social problems and putting programs in place to ameliorate them. By 1930, that number had swelled to more than two hundred. The rise of independent endowed foundations was accompanied by the advent of mass philanthropy, especially in areas such as public health, where reformers harnessed community giving for broad social goals. In 1905, for example, no more than five thousand Americans were donating time and money to the fight against tuberculosis, a scourge that accounted for up to 11 percent of all US deaths. By 1915, led by organizations such as the National Association for the Study and Prevention of Tuberculosis (created in 1904), there were as many as five hundred thousand donors, many of them involved in the popular “Christmas seals” campaign, a Danish innovation popularized in the United States by the reformer Jacob Riis.
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What does all this have to do with power? Everything. It is not enough to control large, power-endowing resources like money, weapons, or followers. Such resources are a necessary precondition of power; but without an effective way of managing them, the power they create is less effective, more transient, or both. Weber's central message was that without a reliable, well-functioning organization, or, to use his term, without a bureaucracy, power could not be effectively wielded.

If Weber helped us understand the rationale and workings of bureaucracy in the exercise of power, the British economist Ronald Coase helped us understand the economic advantages that they conferred on companies. In 1937, Coase produced a conceptual breakthrough that explained why large organizations were not just rational according to a certain theory of profit-maximizing behavior but, indeed, often proved more efficient than the alternatives. It was no coincidence that, while still an undergraduate, in 1931–1932, Coase carried out the research for his seminal paper, “The Nature of the Firm,” in the United States. Earlier he had flirted with socialism, and he became intrigued by the similarities in organization between American and Soviet firms and, in particular, by the question of why large industry, where power was highly centralized, had emerged on both sides of the ideological divide.
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Coase's explanation—which would help earn him the Nobel Prize in economics decades later—was both simple and revolutionary. He observed that modern firms faced numerous costs that were lower when the firm brought the functions in-house than they would have been when dealing at arms' length with another enterprise. Included among such costs are those for drafting and enforcing sales contracts—expenses that Coase initially
called “marketing costs” and later redubbed “transaction costs.” Specifically, transaction costs helped explain why some firms grew by vertically integrating—that is, by buying their suppliers or distributors—while others didn't. Large oil producers, for example, prefer to own the refineries where their oil is processed, as this tends to be less risky and more efficient than relying on a commercial relationship with independent refiners whose actions the oil companies can't control. In contrast, a large garment retailer like Zara and computer companies like Apple or Dell are less compelled to own the manufacturing facilities that make their products. They subcontract (“outsource”) the manufacturing to another firm and concentrate on the technology, design, and marketing and retailing of their products. The propensity to operate through a vertically integrated firm is driven by the structure of the market of buyers and sellers active in the different stages of the industry and by the kinds of investments needed to enter the business. In short, transaction costs determine the contours, growth patterns, and, ultimately, the very nature of firms.
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Although Coase's insight became an important underpinning of economics in general, its main initial impact was in the field of industrial organization, which focuses on factors that stimulate or hinder competition among firms.

The idea that transaction costs determine the size and even the nature of an organization can be applied to many other fields beyond industry to explain why not just modern corporations but also government agencies, armies, and churches became large and centralized. In all such cases, it has been rational and efficient to do so. High transaction costs create strong incentives to bring critical activities controlled by others inside the organization, thereby growing it. And by the same token, the more the pattern of transaction costs made it rational for organizations to grow large by integrating vertically, the more daunting an obstacle this growth represented for new rivals trying to gain a foothold. It is harder for a new rival to challenge an existing company that also controls the main source of raw materials, for example, or has internalized the main distribution channels or retail chain. The same applies to situations in which one army has exclusive control over the procurement of its weapons and technology and a second army is forced to depend on another nation's arms industry. Thus, the transaction costs that some organizations are able to minimize by “internalizing” or controlling the provider or the distributors constitute one more barrier to potential new rivals and a barrier to gaining power more generally—and scale boosted by vertical integration provides a high
protective barrier for incumbents inasmuch as newer, smaller players have a lesser chance to compete and succeed. It is worth noting that until the 1980s many governments were tempted to “integrate” vertically and own and operate airlines, smelters, cement factories, and banks. Indeed, governments' quest for efficiency and autonomy often masked other motivations such as public sector employment creation and opportunities for patronage, corruption, regional development, and so on.

Though not commonly thought of as such, transaction costs are indeed determinants of an organization's size and, often, of its power. And as discussed below, since the nature of transaction costs is changing and their impact is dwindling, the barriers that used to shield the powerful from their challengers are falling. And this is not happening only in the realm of business competition.

In process and outcome, World War II reinforced the equation of size with power. The US “arsenal of democracy” that fueled the Allied victory nearly doubled the size of the US economy over the course of the war and nurtured corporate giants that were paragons of mass production. And who were the ultimate winners of this conflict but the United States and the USSR—countries that spanned whole continents, not island-nations like Japan or even Great Britain, beggared by the costs of the fighting into second-class status. At war's end, pent-up American consumer demand, supported by wartime savings and new, generous government programs, allowed big companies to grow even bigger. More broadly and more ominously, as the Good War segued into what John F. Kennedy would call the “long, twilight struggle,” the contest for mastery between the capitalist West and the communist East fed huge security establishments on both sides of the Cold War divide, each guided by its own ideology, with bureaucratic imperatives stretching far beyond the purely military into science, education, and culture. As the historian Derek Leebaert put it in
The Fifty-Year Wound
, his wide-ranging tally of the costs of the Cold War, “Emergency played into the penchant for bigness that was a child of earlier industrialization, of the radical insecurity that the Depression inflicted on small organizations, and of the cooperative giantism of World War II: big unions, big corporations, and big government, with little concern for the market.”
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