Rationalizing the Oldest Industry by Force
Alfred Chandler's best known book, The Visible Hand: The Managerial Revolution in American Business, describes the shift from the atomistic, entrepreneurial market described by Adam Smith to the modern economy dominated by small groups of integrated, managed firms. The references to the apparel industry can be summarized briefly since apparel is not one of the industries that became rationalized in the way he describes.
The first industrial use of non-animal energy was the water-powered automatic loom developed in England in the late 18th century and brought to New England in the early 19th century. This led to a concentration of the textile industry around water sources. There was only a slight shift in the industry when anthracite coal arrived and steam-drive replaced stream-drive.
The coal-fueled energy revolution led to the railroads becoming next big industry, not because they were using it but because they were hauling it (coal-driven locomotives didn't become widely used until the last quarter of the 19th century). Telegraphy followed the railroads in a symbiotic relationship that formed the foundation for what followed: use of all-weather, high-speed transportation and long distance communication to coordinate the flow of goods from production through distribution to consumers.
The next industries to rationalize were those that could either use heat, transportation, and/or communications. These included:
Chandler returns to apparel later in the book while looking at the most heavily capitalized and concentrated industries. He asserts that the returns to scale and capital for apparel are very low because
Not content to simply make a living, some people become enamored with the idea of getting rid of the competitors who kept them from becoming fabulously wealthy. There are few mechanisms for doing so successfully. You can try undercutting them and then buying them out, but John McGee showed that was not a feasible strategy even for Rockefeller. You can try combining with them through a cartel or horizontal merger, but the former is known not to work and Chandler showed that horizontal integration also failed; you had to both vertically integrate and develop a successful management structure to make mergers work.
Gabriel Kolko has described a third alternative; get the legislature to pass legislation ostensibly designed to help the consumer but which actually serves the interests of industry (or specific groups within industry). When rate cartels failed, the railroads ultimately turned to the federal government to act as their cartelizing agent. This function was performed by the Interstate Commerce Commission (ICC), an agency ultimately charged with responsibility for setting both maximum and minimum rates for the railroads. In time they came to serve a similar function for over-the-road trucks and served as a model for the Civil Aviation Board (CAB), which oversaw the creation of no new interstate airlines from its inception in 1938 to its demise in 1978. Meatpackers also sought protection, which they received with the help of Upton Sinclair's The Jungle, the novel which aimed at Americans' hearts but managed to cover Congress' backside. Bankers also wanted protection and got it with the Federal Reserve Act, which gave them input to a quasi-public board of governors and the US Treasury.
The Kolko Thesis describes what is happening in the apparel industry today. No firms have been able to internalize the coordination of a significant portion of the industry, either from the production or the distribution end. Though not perfect, it is surprisingly atomistic given the enormous size of the world market.
If you try to produce something of superior value and charge premium prices, there is nothing preventing someone from "knocking off" an article that required no small amount of inspiration, engineering, costly fabric and accessories (buttons, zippers, doodads) to produce. Like the Red Queen who was running as fast as she could just to stay in place, you are forced to constantly innovate in order to stay ahead. That's not a very satisfying way to get rich. The other option is to produce a commodity -- t-shirts, jeans, hoodies -- on which you make pennies on every piece and try to make it up on volume. That also is not a very satisfying way to get rich. Rather than taking either of these losing paths, it looks like a group of designers has decided to enlist the state to eliminate competition by seeking patent protection for designs.
The standard argument for copyright or patent protection is that it will encourage innovation by securing to the innovator exclusive rights to the innovation long enough to extract some monopoly rents. While that is a superficially plausible argument in this case, I'd say that Kathleen's description of the outcome of HR 2033 is much more likely:
The cell phone market consists of a few companies (Nokia, Motorola, LG, Samsung) while apparel consists of thousands of producers and thousands of retailers. Recall that small retailers have repeatedly complained about and then survived the onslaught of department stores, then mail order houses, and now big box stores. There survival has remained possible because the small retailers can still purchase from small manufacturers. When IP protection comes along, the industry will get vertically integrated and the supply for the small retailers will dry up. The companies that secure patents first will hold something over on first their competitors. Retailers will not be able to sell something from a producer who doesn't have a copyright. There will be no more than a dozen producer/retailer companies in the end: Wal-Mart, Nike, The Gap, and Target may soon be integrated apparel retailer-producers.
But why now? IP was around 100 years ago; they were aware of it in the industry (you should see the number of patented fit systems from the 19th century). Here is my best guess at the relevant history (with help from my wife, who clearly understands this better than I and may not agree with all of what follows):
1) Regionalism: In the period in which Chandler describes the process of consolidation in many other industries (roughly 1880-1920), apparel was resistant to consolidation for a number of reasons.
4) Sloan Managerialism: As Bill Waddell has theorized, many manufacturing firms have been taken over by MBAs with little or no production experience and an education in an Ivy League school where they were all taught the Sloan/Dupont theory of management. Production is a cost, so keep the logo and IP, outsource the production, and rely on branding.
5) Piracy: Branding has led to the rise of piracy. If you knock off a generic piece of clothing, you make no money. Knock off a Polo shirt, you make a little less than what Ralph Lauren makes. Piracy has also proliferated as Chinese production has come onto the market.
7) Agency: Diane von Furstenburg is the new president of the Council of Fashion Designers of America (CFDA) and the perfect agent of change. Having achieved only one notable design success, she basically became a brand and now wants to take the concept to the next level: the corporation with the most lawyers gets to control fashion. The CFDA is pushing HR2033 with the help of several trial-lawyer-fueled congresspersons. She could be a character in an Ayn Rand novel.
Apparel manufacture is still one of the few manufacturing businesses that you can start in your garage and sustain profitably on a small scale. HR 2033 will effectively put an end to that.
The first industrial use of non-animal energy was the water-powered automatic loom developed in England in the late 18th century and brought to New England in the early 19th century. This led to a concentration of the textile industry around water sources. There was only a slight shift in the industry when anthracite coal arrived and steam-drive replaced stream-drive.
The coal-fueled energy revolution led to the railroads becoming next big industry, not because they were using it but because they were hauling it (coal-driven locomotives didn't become widely used until the last quarter of the 19th century). Telegraphy followed the railroads in a symbiotic relationship that formed the foundation for what followed: use of all-weather, high-speed transportation and long distance communication to coordinate the flow of goods from production through distribution to consumers.
The next industries to rationalize were those that could either use heat, transportation, and/or communications. These included:
- metal working (steel, using coal)
- wholesale & retail (using telegraphy to coordinate, trains to streamline)
- meat packing (Swift's rail cars)
- oil (first railroads, then pipelines)
Chandler returns to apparel later in the book while looking at the most heavily capitalized and concentrated industries. He asserts that the returns to scale and capital for apparel are very low because
[e]ssentially, the machines took the place of manual operations. A machine did a task comparable to that of a worker in spinning, weaving, sewing, cutting, and fabricating. The maximum speed of cutting or shaping wood, cloth, or textile products by machinery was quickly reached. Nor did the spinning and weaving of natural fibers or the tanning of natural leather lend itself to massive increase of throughput by a greater application of energy.This is entirely consistent with Kathleen's point
Sewing will always be labor intensive because cut fabric pieces cannot be smelted out like metal rods. Garments cannot be cut like sheetmetal and welded by machines. Fabric is flimsy; it must be handled by hands. No amount of technology will ever change this.So, despite being an early link between the entrepreneurial Smithian world and the managed Chandlerian world, apparel was not consolidated, streamlined, and "rationalized" when so many other goods have been.
Not content to simply make a living, some people become enamored with the idea of getting rid of the competitors who kept them from becoming fabulously wealthy. There are few mechanisms for doing so successfully. You can try undercutting them and then buying them out, but John McGee showed that was not a feasible strategy even for Rockefeller. You can try combining with them through a cartel or horizontal merger, but the former is known not to work and Chandler showed that horizontal integration also failed; you had to both vertically integrate and develop a successful management structure to make mergers work.
Gabriel Kolko has described a third alternative; get the legislature to pass legislation ostensibly designed to help the consumer but which actually serves the interests of industry (or specific groups within industry). When rate cartels failed, the railroads ultimately turned to the federal government to act as their cartelizing agent. This function was performed by the Interstate Commerce Commission (ICC), an agency ultimately charged with responsibility for setting both maximum and minimum rates for the railroads. In time they came to serve a similar function for over-the-road trucks and served as a model for the Civil Aviation Board (CAB), which oversaw the creation of no new interstate airlines from its inception in 1938 to its demise in 1978. Meatpackers also sought protection, which they received with the help of Upton Sinclair's The Jungle, the novel which aimed at Americans' hearts but managed to cover Congress' backside. Bankers also wanted protection and got it with the Federal Reserve Act, which gave them input to a quasi-public board of governors and the US Treasury.
The Kolko Thesis describes what is happening in the apparel industry today. No firms have been able to internalize the coordination of a significant portion of the industry, either from the production or the distribution end. Though not perfect, it is surprisingly atomistic given the enormous size of the world market.
If you try to produce something of superior value and charge premium prices, there is nothing preventing someone from "knocking off" an article that required no small amount of inspiration, engineering, costly fabric and accessories (buttons, zippers, doodads) to produce. Like the Red Queen who was running as fast as she could just to stay in place, you are forced to constantly innovate in order to stay ahead. That's not a very satisfying way to get rich. The other option is to produce a commodity -- t-shirts, jeans, hoodies -- on which you make pennies on every piece and try to make it up on volume. That also is not a very satisfying way to get rich. Rather than taking either of these losing paths, it looks like a group of designers has decided to enlist the state to eliminate competition by seeking patent protection for designs.
The standard argument for copyright or patent protection is that it will encourage innovation by securing to the innovator exclusive rights to the innovation long enough to extract some monopoly rents. While that is a superficially plausible argument in this case, I'd say that Kathleen's description of the outcome of HR 2033 is much more likely:
I realize that sounds like a dramatic and exaggerated claim but if this legislation passes, contractors, pattern makers and even retailers will be exposed to liability. Let's say you have this nifty design that you claim you made up all on your own, with no inspiration from anybody anywhere and you hire one of us to make it up for you and you sell it and make your pile. Then, somebody comes out of the woodwork and claims it is their design, they own it and now you owe them. Problem is, you likely don't have much money, they'll want to sue everyone in your production and retail chain. That means me, your contractor and the stores who bought your stuff. After all, we "enabled" you. So, in order to avoid exposure, any contractor, pattern maker, sales rep or store owner -in the interests of avoiding law suits or facing criminal prosecution for dealing in pirated goods- is going to require you to prove ownership of your concept before they'll have anything to do with it. Minimally, you'll have to hire a lawyer, pay for searches through a design database of all existing design registrations. I cannot even begin to imagine how long this would take. You thought a trademark or logo search was bad? I have no doubt there's over 10,000 clothing designs out there for every logo. This will cost a fortune. But, you'll have to do it. No one will take your work otherwise. And because we'll have to have our own lawyers to check up on you and draw up contracts, the prices we charge you will at least double. We operate on tiny margins. I charge $50 an hour for patterns. IP attorneys get $250+, I'll have to triple my prices just to break even. Even with proof in hand, you will have no recourse other than to produce your registered design exactly as sketched. No design changes or iterations in process are allowed, otherwise you'll have to start all over again. Forget shortening that sleeve, changing the shape of that neckline or tapering the pant leg of that prototype. So what if it ends up looking lame and you have to start all over? That's the new cost of doing business. Feeling protected yet?But hasn't IP protection been good for those industries that use it most? Perhaps, but the temptation is to say, "Look at the cell phone industry: there seems to be no shortage of innovation there." Ah, yes, but compared to what, exactly? What does cell phone innovation look like in an atomistic, entrepreneurial economy instead of in the oligopolistic, state-capitalist economy we (and Japan and Finland and South Korea) have now? Indeed, there was lots of innovation in the industry: as Bell's original patents expired, there were something like 200 telephone companies operating in Illinois, Indiana, Iowa, Missouri, and Ohio alone (from Adam Thierer's "Unnatural Monopoly"), but AT&T appealed to the federal government in 1913 and had themselves set up as a protected monopoly. You might remember that we had one phone company for the next seventy years.
The cell phone market consists of a few companies (Nokia, Motorola, LG, Samsung) while apparel consists of thousands of producers and thousands of retailers. Recall that small retailers have repeatedly complained about and then survived the onslaught of department stores, then mail order houses, and now big box stores. There survival has remained possible because the small retailers can still purchase from small manufacturers. When IP protection comes along, the industry will get vertically integrated and the supply for the small retailers will dry up. The companies that secure patents first will hold something over on first their competitors. Retailers will not be able to sell something from a producer who doesn't have a copyright. There will be no more than a dozen producer/retailer companies in the end: Wal-Mart, Nike, The Gap, and Target may soon be integrated apparel retailer-producers.
But why now? IP was around 100 years ago; they were aware of it in the industry (you should see the number of patented fit systems from the 19th century). Here is my best guess at the relevant history (with help from my wife, who clearly understands this better than I and may not agree with all of what follows):
1) Regionalism: In the period in which Chandler describes the process of consolidation in many other industries (roughly 1880-1920), apparel was resistant to consolidation for a number of reasons.
- The returns to scale limited as Chandler asserts
- Regional weather differences - cold, wet, dry, hot, windy all require different dress schemes.
- Resistance to rail distribution for various practical reasons. You wouldn't want to get the clothing near a coal-fired steam locomotive because it would be filthy upon delivery. You also couldn't effectively fill the box cars. In the steam rail era, it would have been much better to ship stacked bolts of cloth (only the outsides would get dirty, you could fill a box car) and produce garments on site.
- Shipping cotton and cotton cloth had occurred since the late 18th century, but there were still regional resource differences. Wool, cotton, leather would not have been equally available everywhere.
- Regional preference differences based on, for example, what they did for a living. Cowboys don't dress like bankers.
- Foreign influences - Texans met different people than New Yorkers
- Increased prosperity. Prior to 1950, people generally only had a limited wardrobe. More disposable income set the stage for change.
- The washing machine. Prior to the 1950s, you had to wash it all by hand. More appliances lowered the cost of ownership.
- War: The federal government became the single largest consumer of clothing both through WWII and the Cold War. This meant the government set certain design and production standards, and as the single largest consumer, the various related industries (sewing machine manufacturers, for example) followed orders (in both senses). Women started wearing pants.
- Television and the interstate highway system: Prior to that, there was more regionalism in speech, food, and clothing. The decline of those barriers through television allowed more mass distribution, and that meant shifting from catering to local tastes to catering to the lowest common denominator. The interstate system lowered the cost of trucking. Hats and dress gloves became passe.
4) Sloan Managerialism: As Bill Waddell has theorized, many manufacturing firms have been taken over by MBAs with little or no production experience and an education in an Ivy League school where they were all taught the Sloan/Dupont theory of management. Production is a cost, so keep the logo and IP, outsource the production, and rely on branding.
5) Piracy: Branding has led to the rise of piracy. If you knock off a generic piece of clothing, you make no money. Knock off a Polo shirt, you make a little less than what Ralph Lauren makes. Piracy has also proliferated as Chinese production has come onto the market.
7) Agency: Diane von Furstenburg is the new president of the Council of Fashion Designers of America (CFDA) and the perfect agent of change. Having achieved only one notable design success, she basically became a brand and now wants to take the concept to the next level: the corporation with the most lawyers gets to control fashion. The CFDA is pushing HR2033 with the help of several trial-lawyer-fueled congresspersons. She could be a character in an Ayn Rand novel.
Apparel manufacture is still one of the few manufacturing businesses that you can start in your garage and sustain profitably on a small scale. HR 2033 will effectively put an end to that.
Labels: Baptists_Bootleggers, centralization, history, IP, management, state-capitalism
