Theory of the Growth of the Firm

by Edith Penrose

  270 As we have noted, the innovating competition of the big firms can degenerate into almost senseless competition to be first to introduce the ‘new’, exciting, or the ‘original’, of which the chief contribution to consumers’ ‘satisfaction’ seems to lie in its ability to satisfy a restless desire for the ‘latest’—whatever that may be. If this is a senseless procedure, it is made possible only by the folly of consumers, which it is difficult for the economist to appraise; even though he may be unhappy over what he feels is the ‘waste’ of resources involved, and may condemn it in the light of criteria of ‘welfare’ other than those traditionally accepted in economies. It should be clear that the mere fact that consumers’ market demand appears to be ‘satisfied’ is insufficient to elicit ‘approval’ from the social scientist, particularly since the very desires of contumers are powerfully influenced by the actions of producers and by the competitive processes described.

  271 It was largely for this reason that John G. McLean and Robert W. Haigh concluded from their studies of the growth of corporations that ‘... as a matter of national policy we should proceed with the utmost caution in placing restraints on the avenues of growth and development open to industrial corporations. By imposing such restraint we may interfere with the processes of business evolution and thereby preclude the development of new corporate structures that would be ideally suited and perhaps essential to conditions of the future which none of us can now foresee. Moreover, management’s experiments with different types of corporation structures are in themselves an important aspect of competition. If, therefore, we limit the types of growth corporations may undertake, we may modify in significant degree the vigor of competition in our industrial society.’ John G. McLean and Robert W. Haigh, ‘How Business Corporations Grow’, Harvard Business Review, Vol. 32, No. 6 (Nov.-Dec. 1954), pp. 92–3.

  Compare also the discussion of Corwin D. Edwards, Maintaining Competition (New York: McGraw-Hill, 1949), pp. 120 ff.

  272 ‘ ... if we look at the facts realistically, we are bound to conclude, I believe, that even some of our biggest corporations are rapidly getting too small to do all of the things that are expected of them... it would seem that we are now witnessing another significant step in the evolution of big business. First came the individual entrepreneur; then the partnership in which a number of people pooled their resources and their managerial skills; then the modern corporation where hundreds of thousands of persons provide the necessary capital and share the risks involved; and now we see these great corporations themselves necessarily forming partnerships—for one reason and one reason alone: to do the job that is expected of them in an enterprise system where size and responsibility are companion words.’ ‘Great Expectations,’ speech by Roger M. Blough, Chairman of the Board, United States Steel Corporation published by the Corporation, 1957. On the other hand, Mr. Blough also regards competition as ‘the key to America’s industrial success’, which is not quite the same thing as the spirit of responsibility to the public, and would presumably be somewhat impaired by the suggested ‘partnership’.