The Schumpeterian shock at General Motors in the 1920’s
| Published date | 04 December 2018 |
| Date | 04 December 2018 |
| DOI | https://doi.org/10.1108/JEPP-D-18-00048 |
| Pages | 320-335 |
| Author | Seth W. Norton |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
The Schumpeterian shock at
General Motors in the 1920’s
Seth W. Norton
Wheaton College, Wheaton, Illinois, USA
Abstract
Purpose –The purpose of this paper is to examine the link between Joseph Schumpeter’s economics and the
rise of General Motors (GM).
Design/methodology/approach –The paper uses regression analysis and time series analysis of market
synchronization.
Findings –There is a strong link between GM rise to dominance of the domestic automobile industry and
nuanced features of Schumpeterian economics.
Research limitations/implications –The paper furthers the examination of the role of information
economics on marketing channel performance.
Practical implications –Information helps in production decisions by synchronizing production with
consumer demand.
Social implications –Economic efficiency enhances the human welfare for better forecasting, lower
inventories and greater profits.
Originality/value –This topic has been explored before but methodology used in this paper is innovative.
The paper uses Granger causality.
Keywords Information, Consumer demand, Forecasting, Granger-Sims causality, Leading indicator,
Information processing, Market share, Schumpeter
Paper type Research paper
1. Introduction
In recent years, General Motors (GM) has had a grim history. The firm has endured severe
contraction and bankruptcy. Indeed, the economic downturn of 2007–2009 rocked the firm into
financial reorganization. In fact, GM’s recent problems were not a transitory occurrence. In his
presidential address to the American Finance Association in 1993, Michael Jensen examined
the large winners and losers in corporate performance for American firms circa 1980.
Compared to its opportunity cost of capital, GM’s investment in R&D and capital budgeting
expenditures was the biggest loser in his sample of large publicly held American firms.
It was not always so. In the mid-1920s, GM emerged as the largest assembly
manufacturer in the world, passing the American Ford Motor Company and becoming the
celebrated prototype of the large multidivisional firm with persistent innovation in products,
organization and sustained dominance. The present paper focuses on the rise of GM rather
than its protracted dominance or its demise in the last quarter of the twentieth century.
The fundamental contention is that the rise of GM can be well characterized as a
“Schumpeterian shock,”an aberration in normal economic activity that fundamentally
restructures an industry. The other accounts of GM’s remarkable performance are decidedly
non-Schumpeterian in that they all imply some measure of incremental change. Proponents
of these views all point to continuity in strategic dominance, not a revolutionary change.
The innovative discontinuity stressed here is essentially part of the view of
entrepreneurship associated with Joseph Schumpeter’s view of competition. Schumpeter’s
construct eschews theoretical approaches and stresses generalizations based upon historical
analysis. Ironically, the particular discontinuity examined in this paper is that the
revolutionary changes at GM in the mid-1920s are attributable to information processing –a
prominent feature in Frank Knight’s theory of the firm. The role of the firm and information
Journal of Entrepreneurship and
Public Policy
Vol. 7 No. 4, 2018
pp. 320-335
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-18-00048
Received 30 September 2018
Accepted 3 October 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
JEL Classification —D22, D83, L23, L62, O31
320
JEPP
7,4
gets much less attention in Schumpeter’s economics. Moreover, Knight and Schumpeter are
often seen as having conflicting views of entrepreneurship. Nevertheless, the events in the
mid-1920s at GM demonstrate two essential features of Schumpeterian economics –
revolutionary change and new forms of economic organization. The two features provide a
foundation to understand GM in the 1920s.
The contention that GM incurred a radical discontinuity is a simple testable hypothesis
via descriptive statistics. In addition, two other hypotheses exist. First, GM enhanced its
ability to predict consumer demand for motor vehicles and to respond to unanticipated
demand shocks more quickly. These changes reflect the intent of a series of strategic
measures designed by Alfred P. Sloan in response to financial crises at GM in the wake of
demand shocks associated with macroeconomic downturns in 1920–1921 and 1924. Second,
Sloan’s information processing reforms were central to the rise of GM and can account for a
substantial part of its extraordinary performance.
The first hypothesis is testable and in fact has already been examined (Kashyap and
Wilcox 1993; Norton 1997, 2004). The distinction in this paper entails using advanced time
series analysis to examine the nexus between GM and its dealers. The approach is similar to
that of Kashyap and Wilcox, but focuses more precisely on the months around GM’s
ascendancy. More specifically, the empirical analysis follows Doane and Spulber (1994) who
employ advanced time series techniques to define the geographic extent of the market for
natural gas production. The logic is that vertical market coordination between a
manufacturer and its dealers is akin to geographic market definition. A zero-transaction
costs vertical market arrangement would entail a perfect synchronization between a
manufacturer and its dealers. There would be no marketing channel slack –much like
sellers in separate states but selling in the same market.
The second hypothesis has also been tested. Norton (1997) shows that Sloan’s
information processing reforms occurred simultaneously with increased financial
performance. Norton (2004) shows that accounting rates of return are positively related
to the synchronization of GM’s sales with its dealers’sales.
The remainder of the paper is organized as follows. Section 1 reviews some of GM’s
history. Section 2 discusses Schumpeterian competition. Section 3 contains empirical tests
and Section 4 contains a summary and conclusion.
1.1 History
Formal attentionto the sources of GM’s successmay be traced to Alfred Chandler (1962,1977).
Chandler andAlfred Sloan (1963) provide detailed accounts of GM’shistory leading to serious
scholarly interest among various institutional approaches to economics as in Williamson
(1975, 1985).Chandler documented numerouscompetitive advantages of GM –including scale
economies, the multidi visional form, and product polic y, and managerial controls. More
generally, Chandler noted that the rise of the large industrial enterprise in the USA often
stemmed from the economies of continuous process manufacturing and coordination of the
production process with fluctuationsin demand. Thus, a part of Chandler’sanalysis could be
linked to information processing advantages.
Sloan’s analysis is similar to that of Chandler[1]. Indeed, there is a strong overlap
between their respective accounts. However, Sloan offers more detail of the rise of GM and
its continuous dominance. Moreover, Sloan also offers greater breadth, including issues in
consumer financing, compensation, labor relations, corporate governance and others.
Sloan’s account, like Chandler’s analysis, may fit better with GM’s subsequent dominance
of the motor vehicle industry than GM’s initial ascendancy in the 1920s. Moreover, their
multifaceted approach to GM’s performance obscures the unique set of events that
characterized the mid-1920s. The revolutionary quality of the transformation of GM
merits closer attention[2].
321
Schumpeterian
shock at GM
To continue reading
Request your trial