Chapter 1

Introduction

Industrial economics is a distinctive branch of economics which deals with the

economic problems of firms and industries, and their relationship with society. In
economic literature it is known by several names with marginal differences such as
Economics of Industries Industry and Trade Industrial Organization and Policy
Commerce and Business Economics etc. The name Industrial Economics was
adopted in the early fifties perhaps through the writings of P.W.S. Andrews.
Although this name is becoming popular day by day some authors particularly in
the American circle, prefer Industrial Organization as a title of the subject. At
present there is no clear-cut consensus on the name of the subject.
There are two broad elements of industrial economics. The first one, known as the
descriptive element, is concerned with the information content of the subject. It
aims at providing the industrialist or businessman with a survey of the industrial
and commercial organizations of his own country and of the other countries with
which he might come in contact. It would give him full information regarding the
natural resources, industrial climate in the country, situation of the infrastructure
including lines of traffic, supplies of factors of production, trade and commercial
policies of the governments and the degree of competition in the business in which
he operates. In short, it deals with the information about the competitors, natural
resources and factors of production and government rules and regulations related
to the concerned industry. The second element of the subject is concerned with the
business policy and decision-making. This is the analytical part dealing with topics
such as market analysis, pricing, choice of techniques, location of plant,
investment planning, hiring and firing of labour, financial decisions, product
diversification and so on. It is a vital part of the subject and much of the received
theory of industrial economics is concerned with this. However, this does not mean
that the first element, i.e. descriptive industrial economics, is less important. The
two elements are interdependent, since without adequate information no one can
take proper decision about any aspect of business.
To view industrial economics as a development of microeconomics is quite
understandable. Both are concerned with the economic aspects of firms and
industries seeking to analyse their behaviour and draw normative implications.
However, there are some differences between the two. Microeconomics is a
formal, deductive and abstract discipline. Industrial economics on the other hand is
less formal, more inductive in nature. Microeconomics by and large assumes profit
maximization as the goal of the firm and tells us to maximize it subject to given
constraints. It is passive in approach. Industrial economics does not believe in
single goal of profit maximization. It searches the goals of the firm from the
revealed facts. It concentrates on the constraints which impede the achievement of
the goals and tries to remove them. It is an active discipline in this sense.
Microeconomics, being abstract, does not go into operational details of production,
distribution and other aspects of the firms and industries. Industrial economics
does go into the depth of such details. Further, the conclusions derived from the
microeconomics may not be testable empirically and therefore we may not assess
their predictive efficiency.

Framework In Industrial Economics:

The SCP paradigm assumes that the market structure determines the conduct of the
organization. This conduct, in turn, is the determinant of market performance.
Examples of market performance include efficiency, profitability and growth. The
framework seeks to establish that certain structures of the industry can lead to certain
kinds of conduct or behaviour which then leads to various types of economic
performance. The SCP paradigm was developed through evaluation of empirical
studies involving American industries. Theoretical models were not used to support the
paradigm. The conclusion that was drawn from empirical studies was that market
structure determined performance. This is caused by the belief that the laws of
competition should not be based on behavioural models but rather on structural
remedies. According to J.S. Bain who developed the paradigm in the 1950s, most
industries became concentrated than necessary (Ferguson & Ferguson, 1994). In
concentrated industries, there are high barriers to entry. New firms cannot enter these
markets that easily.
The SCP approach has been subjected to criticism in the recent years. Some critics say
that the relationships between structure, conduct and performance are more
complicated than originally thought (Ferguson & Ferguson, 1994). Attempts are being
made to link the framework back to the neoclassical theory. However, industrial
organizations still use the SCP approach for analysis and as a tool in policy
formulation. The SCP paradigm remains to be a basic tool used by industrial
organizations in competition analysis.
Structure is defined as the components and characteristics of the various markets and
industries in an economy. Structure also involves the different sectors of the economy.
In the SCP approach, structure is described as the characteristics and relevance of
individual markets operating within the economy (Papatheodorou, 2006). It provides a
description of the environment in which organizations operate within a specific
market. The said structure can be identified by considering the size and number of
buyers and sellers in the market. The structure can also be identified based on product
differentiation, market barriers and the extent of integration or diversification of firms.
Conduct in the SCP approach involves all actions and behaviour of organizations
regarding the decisions being taken and the reasons behind them. Conduct focuses on
how organizations set prices. Organizations will have to determine whether these
prices are in collusion with other firms in the market (Perloff et. al., 2007). Industrial
economists are concerned with the performance of organizations. Firms should be able
to identify whether their activities and operations will improve economic welfare.
Firms should also satisfy and meet customer demands within a specific period. The
SCP approach helps organizations analyse whether their processes and products are
produced efficiently. Organizations should determine whether the allocation of
resources is efficient and effective. The right approach is not to waste resources and
produce the right products in just the right quantities. Firms should also look at the
other aspects of performance like the relationship between price and cost of product as
well as the profits earned (De Jong & Shepherd, 2007).
In the current market, consumer tastes do not change that much. Producers and
consumers are said to be perfectly informed. Because of the market conditions, the
economic welfare can be maximized using the Pareto analysis in which marginal
conditions are expected to be fulfilled. Under marginal conditions, firms are expected
to set prices so that they will be equivalent to marginal cost. Using the neoclassical
perfect competition model, firms can maximize their profits by ensuring that price will
equal marginal cost. This will result in an effective combination of price and output
(Ferguson & Ferguson, 1994).
The SCP approach states that performance should be determined by the conduct of
organizations. This conduct is then determined by the characteristics of market
structures. The relationships between structure, conduct and performance will then
match the models of monopoly, perfect competition, oligopoly and monopolistic
competition. The traditional SCP approach is attractive since it is straightforward in its
line of reasoning and is comfortable with the identification of structural characteristics
(Jones & Sufrin, 2010). This kind of approach provides clear guidelines to firms
regarding policymaking decisions. The performance of the firm can be further
improved by taking actions that are designed to influence the current structures of a
specific market. In most cases, performance can be predicted by considering structural
conditions of the market. Such conditions can provide sufficient information and
predict how organizations should behave. Ignoring conduct in all market conditions
can lead to misleading predictions in markets operating under oligopoly. However,
modern economists no longer believe that structures determine the performance of
firms (Papatheodorou, 2006). Still, they accept the idea that market structures are
important for firms to not behave competitively.
The traditional SCP paradigm has two main aspects. The first involves firms obtaining
measurements of performance. This can be done by getting a direct measurement
rather than just an estimate. The second aspect involves economists using observations
gathered from across industries. This is done to create a regression of performance
measures on various structures to be used in explaining market performance
differences between industries (Papatheodorou, 2006). The measures of market
performance can determine whether market power operates in an industry.
Measurements of direct or indirect profit are indicators of the performance of an
industry against competitive benchmarks. Some of these measurements are rate of
return and price-cost margin.
To determine how performance is different from structure, industrial economists will
need to know the measures of market structure. One common measure of market
structure is firm size distribution. This is concerned with the most important issue
involving market structure. The relative size and number of firms are indicators of
market structure. Organizations will exert more market power when there are few
firms in the market. In most SCP research, industry concentration is a term used to
measure the market shares of firms in the market (De Jong & Shepherd, 2007).
SCP studies have ignored the issue regarding exogenous measures relating to market
structure. Common concentration measures are not considered as exogenous measures.
Another serious issue in relation to this type of measure for market structure is bias.
Most concentration measures are said to be biased due to improper descriptions in the
market. Since international trade is more significant in other countries than just in US
markets, another bias can come from ignoring exports and imports (De Jong &
Shepherd, 2007). Domestic concentration measures may not be significant measures of
market power in such international industries.
The Chicago School Critique. The Chicago School is a school of free-market
economics. Unlike the Harvard University which was where the SCP paradigm
originated, the foundations for competition analysis were based on the theoretical
model of neoclassical theory rather than on empirical studies (Cseres, 2005). The
Chicago School believed in the establishment of anti-trust laws. Economic efficiency
should be the exclusive goal. Economic efficiency has two parts namely productive
efficiency and allocated efficiency. In some instances, practices that can improve the
organizations productive efficiency can lower the allocated efficiency of the
market (Perloff et al., 2007). The Chicago School also believe that most markets are
competitive in nature. Even if some markets have a few sellers, the market remains
competitive. Product differentiation is less likely to undermine competition. Product
differentiation and high market concentration do not contribute to anti-competitive
issues (Perloff et al., 2007).
Modern Theory of Industrial Organization. The modern theory of industrial
organization is a combination of the SCP and Chicago paradigms into a more
comprehensive and successful approach (Jones & Sufrin, 2010). This is known as the
contract-based approach to industrial organization. The SCP paradigm still provides
the guidelines but the analysis of conduct is extended from pricing theory to more
contract behaviours. In conclusion, the traditional SCP paradigm is still useful for
firms as a tool for analysis but other tools or measurements are needed to support the
SCP approach. Static economic theories state that profits in the long-run may vary
with market structures.

Alternative motives for firms:

The basic model of behaviour in the Theory of the Firm assumes companies are
trying to maximise profits. Strong candidates can identify other motives under the
surface too. These make interesting and effective evaluation points when
explaining what firms might be up to.The Economist describes as sensible those
firms that survived the 2007-08 crash by avoiding too much debt, keeping their
costs under control and their eyes on long-term opportunities in emerging markets.
This sounds like confirmation that the best companies are long term profit
maximisers. But in the era of weak growth and low interest rates that has come
since then, those same firms have become fixated with the growing practice
of share buy-backs..

According to the article, over the past 12 months American firms have bought
more than $500 billion of their own shares, close to a record amount. IBM spends
twice as much on share repurchases as on research and development. Exxon has
spent over $200 billion buying back its shares, enough to buy its arch-rival BP. The
phenomenon is less extreme in other countries, but even Japanese companies are
getting hooked. Why?.When firms buy their own shares in the open market they
return surplus cash to their remaining shareholders by pushing up share prices,
rather than paying out dividends.And if firms cant find opportunities for
profitable investment, handing cash back to investors is the right thing to do. So in
many ways the surge in buy-backs is a symptom of the rich worlds feeble growth
prospects.But the article also spots how this is probably at odds with long run
profit maximisation. Buy-backs may well come at the expense of long-term
investment projects. There is a clear evidence of the so-called principal agent
problem at work here. By reducing the number of shares outstanding, buy-back
schemes can also artificially boos

a firms earnings per share. This helps explain why managers whose pay depends
on reaching specific earnings-per-share targets like to buy back shares.

Many firms finance buy-backs out of profits, which is fair enough. But in 2013,
38% of firms paid more in buy-backs than their cashflows could support, an
unsustainable position. Instead, they are borrowing heavily to pay for buy-backs. If
firms are overdoing buy-backs and starving themselves of investment, artificially
propped-up share prices will eventually tumble.
Industrial Efficiency:

The basic concept of industrial efficiency is related to the idea that a limit exists to
the.possibility of existing technology with any given set of input factors.
This limit can be expressed by a Frontier Production Function and the efficiency of
a productive unit can be measured by reference to the distance by which it falls
short of the frontier. The frontier
represents the performance of the best firm or firms in the industry.

Measurement of Efficiency:
There are two principal approaches to the measurement of efficiency. One set of
approaches use the statistical analysis of production data using the theoretical
foundation of econometrics or the mathematical programming techniques of
Operation Research/ Management Science. These measurement methods are
heavily dependent on the quality of the data used and in spite of an extensive
application of the principles the results remain short on conclusiveness, timeliness
and consensus. The second set of approaches reflect a more broadly based concept
of efficiency performance and tackles the problem from an analysis of the drivers
of efficiency as well as the traditional input factors of production. These methods
give qualitative as well as quantitative measures of performance and can be
applied in a shorter time frame than can conventional statistical data.

Studies in Industrial Efficiency:

The econometric studies of efficiency have represented a major investment of
intellectual input by researchers but the results are not commensurate with the
effort. The principal outcomes are highly academic in nature and provide little
concrete information to policy makers and to industrialists. There are some
conclusions that have proved statistically robust in the work of Caves and his
associates (1992). These relate to the strong relationship that exists between
concentration in an industry and efficiency levels and also to the relationship
between age of equipment and efficiency.The management based studies ,on the
other hand, are a much more recent approach which point up many of the
deficiencies in performance in some European firms and sectors as compared
against competitors in Japan and the US. The thrust of many of these studies is the
comparison of processes and practices as the principal manifestation of efficient
behaviour in firms. The main results here show that the best of Europe is a match
for the best anywhere, but the second and third divisions lag their counterparts in
Japan and the US.

Major Influences on Efficiency:

The report has focused on Innovation and Human Resources Management as the
most important influences on efficiency. The literature yields a wealth of analysis
on the strategic integration of technology and administrative and organisational
innovation required in a modern industrial situation.Technology is a key
component of the industrial input mix and the environment in which it is being
developed is rapidly changing. The need for international linkages and alliances is
clear but equally important is the knowledge and understanding of the processes
and systems by which technology can be integrated into organisations. The human
resource management requirements for efficient operations call for radical
overhauls of the traditional forms of work organisation adopted in industrial
companies. The implications of such changes for education and training remain to
be determined and will demand a deep understanding of the processes by which
the development of technology and the skills base of the work force needed to
operate new technologies can be appropriately integrated with the necessary forms
of work organisation.

Industrial Policy:
Industrial policy will have to be carefully designed if it is to adequately support
the necessary changes in industrial infrastructure and environment for the future.
The main areas of economic activity in which industrial policy can support
efficient performance are:

Investment
Technology (include. R&D and technical innovation)
Skills Base Development
Competition.

The necessary balance which must be maintained by policy makers between these
areas calls for a deeper knowledge and understanding of the processes by which
industrial policy implementation is carried out. This will demand a concentrated
dialogue between the industry and the various agencies of government to ensure
the flexibility of approach and climate of experimentation likely to be needed.

Theory of PROFITABILITY:

Profit is an excess of revenues over associated expenses for an activity over a

period of time. Terms with similar meanings include earnings, income, and
margin. Lord Keynes remarked that Profit is theengine that drives the
business enterprise. Every business should earn sufficient profits to survive
and grow over a long period of time. It is the index to the economic progress,
improved national income and rising standard of living. No doubt, profit is the
legitimate object, but it should not be over emphasised. Management should
try to maximise its profit keeping in mind the welfare of the society. Thus, profit
is not just the reward to owners but it is also related with the interest of other
segments of the society. Profit is the yardstick for judging not just the
economic, but the managerial efficiency and social objectives also.

CONCEPT OF PROFITABILITY:
Profitability means ability to make profit from all the business activities of an
organization, company, firm, or an enterprise. It shows how efficiently the
management can make profit by using all the resources available in the
market. According to Harward & Upton, profitability is the the ability of a
given investment to earn a return from its use.However, the term Profitability
is not synonymousto the term Efficiency. Profitability is an index of efficiency;
and is regarded as a measure of efficiency and management guide to greater
efficiency. Though, profitability is an important yardstick for measuring the
efficiency, the extent of profitability cannot be taken as a final proof of
efficiency. Sometimes satisfactory profits can mark inefficiency and
conversely, a proper degree of efficiency can be accompanied by an absence
of profit. The net profit figure simply reveals a satisfactory balance between
the values receive and value given. The change in operational efficiency is
merely one of the factors on which profitability of an enterprise largely
depends. Moreover, there are many other factors besides efficiency, which
affect the profitability.

PROFIT & PROFITABILITY:

Sometimes, the terms Profit and Profitability rea used interchangeably. But in
real sense, there is a difference between the two. Profit is an absolute term,
whereas, the profitability is a relative concept. However, they are closely related
and mutually interdependent, having distinct roles in business.Profit refers to the
total income earned by the enterprise during the specified period of time, while
profitability refers to the operating efficiency of the enterprise. It is the ability of
the enterprise to make profit on sales. It is the ability of enterprise to get
sufficient return on the capital and employees used in the business
operation.As Weston and Brigham rightly notes to the financial management
profit is the test of efficiency and a measure of control, to the owners a
measure of the worth of their investment, to the creditors the margin of safety,
to the government a measure of taxable capacity and a basis of legislative
action and to the country profit is an index of economic progress, national
income generated and the rise in the standard of living, while profitability is an
outcome of profit. In other words, no profit drives towards profitability.Firms
having same amount of profit may vary in terms of profitability. That is why R.
S. Kulshrestha has rightly stated, Profit in two separate business concern
may be identical, yet, many a times, it usually happens that their profitability
varies when measured in terms of size of investment.

ANALYSIS OF PROFITABILITY OF GSRTC:

Apart from the short term and long term creditors, owners and management or
a company itself also interests in the soundness of a firm which can be
measured by profitability ratios. Profitability ratios are of two types those
showing profitability in relation to sales (revenue in case of GSRTC) and those
showing profitability in relation to investment. Together, these ratios indicate
firms overall effectiveness of operation.With a view to appraise profitability of
GSRTC, the analysis has been made from the point of view of management
and shareholders. The management of the firm is naturally eager to measure
its operating efficiency.

Gross Profit Ratio:

Gross profit ratio is important for management because it highlights the

efficiency of operation and also indicates the average spread between the
operating cost and revenue. Any difference position in this ratio is the result of
a change in the operating cost or revenue or both. The main objective of
computing this ratio is to determine the efficiency with which operations are
carried on.The Gross Profit Ratio expresses the relationship between gross
profit and net sales. As GSRTC is a service sector, net sales is replaced by net
revenue. Moreover, in the present study, gross profit is taken as the excess of
total revenue over operating expenses. It is figured as shown below:

Gross Profit Ratio =

Gross Profit
100
Net Revenue
Gross Profit = Total Revenue Operating Expenses

Gross Profit Ratio (percentages) in GSRTC

 From 1996-97 to 2005-06 (Rs. in lacs)

Sr. no. Year Gross Profit Net Revenue Ratio

1 1996-97 -4713.89 80868.41 -5.83

2 1997-98 -17536.51 86208.27 -20.34

3 1998-99 -11037.44 94939.69 -11.63

4 1999-00 -28812.13 107233.27 -26.87

5 2000-01 -20552.15 124854.28 -16.46

6 2001-02 -25209.93 122666.38 -20.55

7 2002-03 -12213.56 130824.01 -9.34

8 2003-04 -1184.55 141540.43 -0.84

9 2004-05 -4955.49 137070.71 -3.62

10 2005-06 -5345.35 143016.76 -3.74

Average -13156.10 116922.22 -11.92

SD 9501.58 23099.90 8.77

CV % -72.22 19.76 -73.57

Compound Annual 10.49 7.70 29.53

Growth Rate %

Source: Computed from the annual reports and accounts of the GSRTC, Ahmedabad
 Gross Profit Ratio in GSRTC

Approaches to Industrial Location Theory:

Over the years, geographers have taken numerous approaches as they sought to illuminate the
various factors that influence the location of industries and businesses.During this time, several
identifiable approaches have come to the forefront. These rather distinct approaches to spatial
analysis include least-cost theory and market-area analysis. Additionally, geographers have
increasingly focused on the impacts of human behavior relative to the analysis of locational spatial
patterns.

Least Cost Theory:

Von Thnen made the first efforts to identify the factors that account for the locations of industries.
His ideas gave rise to the subsequent work of German geographers such as William Lanyard and
Alfred Weber who were instrumental in the development of Least Cost Theory.

Alfred Weber first major work on industrial location theory was published in 1909. Weber sought
to create a pure theory of industrial location that could be applied to any system without regard for
political or social orientation. Therefore, he eliminated any elements that were unique to capitalist or
socialist systems, including the impacts of demand. He did this because he wanted to uncover the
basic laws of industrial location, and he also wanted to understand the ways in which they operate.

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As Weber set about his work, he was intent upon creating a general theory that could be applied to
all kinds of industries. His idea was to eliminate all complicating distractions by setting forth a set of
basic assumptions. His final theory was deductive in nature in that it began with a set of fundamental
basic premises.

Weber did not try to explain actual real-world locations, but instead concentrated on identifying those
factors that influence all industrial-location patterns. He defined locational factors as forces that
are the economic causes of locational decisions.

Weber stated that locational factors represent savings in costs that a business can gain from
producing in one place over another. As he applied his theory, he took care to make sure that his
comparisons involved only identical products.

Weber classified locational factors in several ways. In the first place, he noted the difference
between special and general factors. Special factors refer to the things that apply to a
specific industry. For example, the perishability of a product may require unique shipping procedures
(e.g., refrigeration). General factors on the other hand apply to all industries. These include the
costs associated with transportation, rent, and labor.

Weber also employed a classification system based upon local and regional factors. Local
factors included the influences of agglomeration and deglomeration. As discussed above,
like businesses normally gain an advantage when the cluster or agglomerate in a specific location.
Deglomeration is the tendency of industries to disperse from a given location when the perceived
advantages of agglomeration (demand) drove rents for the locations to levels that adversely
impacted profits.

n the world of industrial site selection, the old adage location is everything has never been
more apt. Companies recognize that being in the right place at the right time, nonetheless
is essential to success. For any industrial client determining a location for a new facility, a
successful and comprehensive site selection process is vital. In the Q4 2013 issue of Area
Development, economic development leader Courtney Dunbar discussed why it is crucial to
forego assumptions regarding site preparedness and perform due diligence. She noted that
because site selection timelines are much shorter now than they used to be, important factors
and site attributes such as incentives, zoning policies, and optimal tract size are often
overlooked. The fact of the matter is that most organizations direct a great deal of effort toward
site selection but still struggle to properly evaluate all possible considerations. The list of criteria
to be reviewed is seemingly endless, and the traditional site selection process can sometimes be
overwhelming.

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Striking the Right Balance:

Before a company can dig down into the specifics of certain site options, it must first decide on a
region, state, and community to locate its operations. It has to consider access to the market
(clients, partners, and suppliers), access to infrastructure, and the available labor pool. The
company wants a skilled work force that is capable of upholding its product quality and
reputation. But it must also consider the cost of labor and the competition for that labor. If the
firm selects a city with an abundance of workers but also an abundance of other manufacturing
employers, it has to constantly worry about staff that could potentially be hired away. Its all
about striking the right balance.To help make these decisions, many large industrial companies
opt to hire consultants associated with large global organizations that also provide accounting,
legal, or real estate services. These groups have extensive resources available to help determine
an optimal location. But small- to medium-sized companies often dont have the ability to spend
six figures on their next location decision, so they utilize a more focused and personalized
organization to assist them. James Blair represents one such organization; hes the managing
director for GACC South Services, LLC, a for-profit subsidiary of the German American
Chamber of Commerce of the Southern United States, Inc., which provides customized site
selection services for European and particularly German companies seeking to establish a
manufacturing presence in the United States. Considering the difficulty that even an American
company faces when it comes to site selection, its easy to see how a foreign or international
company would feel daunted. The sheer size and scope of the U.S. means there are near limitless
site options to consider, in both big cities and rural communities.

Analyzing Multiple Layers of Data:

As a site selector, Im dependent on states and communities across the country to provide me
with good, accurate information regarding the sites they have available, the qualifications of
their available work force, tax rates, incentives, and so forth, says Blair. Of course, these states
and communities are working hard to attract new business, so they make a point to offer up
highly competitive data. My biggest challenge is verification of their information; I have to weed
out the superfluous marketing statistics and zoom in on the essential figures. When I present
site options to my clients, I want to make sure Ive performed due diligence and corroborated all
of the facts.
Now more than ever, geographic information systems (GIS) - like Area
Developments www.FastGIS.biz - can maximize results by streamlining the site selection
process described by Blair. GIS provides the ability to quickly and efficiently consider multiple
layers of data simultaneously to make well-informed and objective site decisions. As a result,
users dont need to rely exclusively on data supplied by individual communities, which are often
subjective and less robust. The once-arduous process of evaluating an entire countrys viable

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locations becomes more about objective data analysis and less about legwork. Users can
prescribe very specific criteria for their site search. For instance, they can specify a site in a
community where the work force is comprised of at least 25 percent manufacturing industry
jobs but no more than 50 percent. They can specify a site thats no more than 10 miles from a
certain supplier or in a spot thats no farther than a days drive from at least four clients. Much
of this relevant data is readily available from public sources, such as the U.S. Census,
Department of Labor, and local governments. Moreover, GIS applications even make it possible
to prioritize or assign extra weight to certain categories. For example, a user wants to find a
flat parcel in a community located close to a supplier, but feels that being located directly off the
interstate is a non-negotiable; the analysis can be configured to assess data based on those
priorities.

Selecting the Optimal Location:

Once the data for all available sites is analyzed using the criteria specified by the user a list
could be generated that ranks sites based on their score basically, how well each site
matches the criteria. The sites with the best scores represent a short list of the best options.
From there, the location team can evaluate those options and use other resources to help select
the optimal site from the short list. The point is that an advanced GIS approach is designed to
objectively and comprehensively identify the best possible candidate locations for industrial
companies in the quickest and easiest way. As a site selection tool, there are limitless
possibilities for GIS. The downside is that while some of the site selection data is readily
available, certain information requires a more rigorous process of development. For that reason,
its still important to work with a solid partner who has a good understanding of what important
data might be missing. But as use of GIS becomes more widespread, the database of pre-existing
information continues to grow. Its development and increased use means industrial companies
are able to search for and evaluate sites more proactively, and thus are more likely to end up
choosing the best possible location. Its a fantastic way to save time and money, with the end
result of improving long-term performance and growing the bottom line.

The Concentration of Economic Power:

Three Swiss experts on complex network analysis have recently examined the
architecture of international ownership, analyzing a large database of transnational
corporations. They concluded that a large portion of control resides with a relatively
small core of financial institutions, with about 147 tightly knit companies controlling
about 40 percent of the total wealth in the network. ... An article in the British
magazine New Scientist describes the research as evidence of a global financial

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oligarchy. ...A recent article in the socialist journal Monthly Review, by John Bellamy
Foster, Robert W. McChesney and R. Jamil Janna, criticizes both mainstream and left-
wing economists for their lack of attention to monopoly power.Focusing on the United
States, they note that the percentage of manufacturing industries in which the largest
four companies account for at least 50 percent of shipping value has increased to
almost 40 percent, up from about 25 percent in 1987.Even more striking is the
increase in retail consolidation, largely reflecting a Wal-Mart effect. In 1992, the
top four companies accounted for about 47 percent of all general merchandise sales.
By 2007, their share had reached 73.2 percent.Banking, however, takes the cake.
Citing my fellow Economix blogger Simon Johnson, the Monthly Review article notes
that in 1995, the six largest bank-holding companies (JPMorgan Chase, Bank of
America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) had assets equal
to 17 percent of gross domestic product in the United States. By the third quarter of
2010, this had risen to 64 percent.Public concerns about economic concentration are
stoked by hard times. Congress authorized a full-scale investigation of the topic back
in days of the Great Depression. Seems like the time has come for a fully international
update.No topic could be more timely .than that chosen for your discussions fo~ this meeting-
Concentration of Eco-nomic Power. Nothing in my generl;ttiQn seems so strik-ing as the
bigness' of everything. There are certain advantages in size, readily appreciated when you are a
part of that group, whether it is a business, brotherhood, a political party or a nation. Our
forefathers came into a trackless' land of forests, great plains and lofty moun- . tains, dotted here
and there with a few unlettered, chiefly nomadic, savages. With our hands and brains we have
changed that wild continent into this civilized land. What a series of concentrations that seen:
from the wigwams of Manhattan to the Empire State Building; from Fort Dearborn to Chicago;
from a few thousand scattered Indians to a multitude of inhab-it'ants, numbered by the tens of
millions; from a lonironworker to the rolled-steel mill.Each' generation has gone through a
llietamorphosis~ The population has almost ripled in my lifetime. My father saw the first
railroad and the first aeroplane, with the telephone, the electric light and the automobile
sandwiched iil between .. Today we deal with the wonders. of electroilics and atomic energy.The
post-Revolution land speculations, the Bank of the United States under Nicholas Biddle, the
transcontinental railroads, the tariff beneficiaries, the trusts, and labor' unions have in their turn
raised fears because of their con-centrated economic power. The shift from a rural to an urban
economy not only ended Thomas Jefferson's .dream of an agricultural society, law-abiding and
moral, b~cause self-supporting, scattered and away from temptation, created apprehension as.
to sickness. and crime in more congested areas. Nom me face Megalopolis, that con-centration
of humanity that crowds the Atlantic .lit-toral from Boston through Washington, and its western
counterpart from the Golden Gate to the Mexican Border.

The decreasing death rate has-assuaged our fears, o f unhealthy cities, aided as it has been by
improved sani-tation. As for crime our best efforts have not slowed its increase in excess of the
growth of population. What-ever the crime, wherever its scene, available reports em-phasize the

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growth. But we should be neither surprised nor frightened. Such shifts and changes are normal.
They are the nat-ural social and economic evolutions, and they are accom-panied by political
adaptations-as well. It is Darwins theory of evolution as applied to institutions. Gone is
.the rural society -of the eighteenth century, replaced by qnechanization and urban
concentration, but that very concentration has induced many of US to turn again. to the suburbs
or to the villages, if not to the farms, to find space for our factories and our homes. We repeat
the lament of Daniel Boone in departing from Kentucky in the 1790s for thethen open prairies
of Missouri, It is too crowded here. Fortunately perfection appears only in a mirage. of the
future. Of. course, the individualism of the frontiersman has been swamped by organized groups.
Though some deplore the change, it is hard to see how even a lot of Paul Bunyans could accomplish
the myriad of tasks necessary for our present economy.

With the concentration of economic power, there has proceeded step by - step an increasing
exercise of govern-mental power-state and national. The use -of that power has varied with the
need. Political power was used to achieve federal supremacy and state control, as distinct from
district,.pr,ecinct, township or county, over human safety and welfare, roads and schools. It is an
ever-changing but never-ending force, made up of. the activities and influence of all, not of men
in public life.Actual growth of economic power 'of organizations 'in a healthy e~onomy is
natural.' It is the comparative statistics of assets, production or ,membership that aresignificant ..
The most, available synopsis of the concen-' tr~tion position of industrial producers is the
Census of'Manufactures of 1947 compared with that of 1935. Referring only to the 38 industries
wi* shipments valued at one billion dollars annually or more, this showeq, not surprisingly, that
cigarettes lead. The first four com-panies in, 1947 produced 90.4 per cent, as compared with
89.7' per. cent in 1935; Other great indus~ries, with like concentration ratios of more than 50 per
cent, were motor vehicles, blast furnaces, rubber tires,' soap, copper, motors and generators. The
percentage change~, between the years, were small, generally a slight: increase. The picture in
the smaller ~ndustries is essentially the Interestillgly mell's ,and women'~ 'clothing showed
about the lowest ratios 'of concentration. Dresses were the lowest, 2.6 per cent. With such
competition and oppor-tunity for selection, we must assume oUr wives buy at the very best
bargain prices. No figures appeared as to ladies' hats.
The concen,tration of bank resources follows the indus-trial trend. ,In 1921 the 10 largest
American banksshowed 9 per cent of all bank assets; in ~930, 21 per cent; in 1940, 26 per cent;
and in 1950, '20 per cent. The largest bank held less than 5 per cent of bank assets. You will be
interes,ted in this comment 'from the collector of these bank statistics:
"The accompanying summary table indicates that the ten largest banks held about 10 per cent of
the total resources of all commercial banks until the late 1920's, when the proportion rose to
about 20 per cent. After rising further to 26 per cent -in 1940, the ratiodeclined to 20 per cent ill'
1950. The fluctuation between 1930 alid 1950 appear~ to have been due inlarge part to changes
in the dis~ribution of banking resources. between the leading financial' centers.

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