November 1995 | Volume 46, Issue 7
Although this will come as a surprise to most academic economists, economics is .one of the biological sciences. Free markets operate according to the rules that govern life itself, rules that are not always fair. And just as in a biological ecosystem, the fit (and the lucky) survive the test of the market; the rest do not. Nowhere is this clearer, in both biology and economics, than when a new technology punctuates the equilibrium and changes what is possible. In both cases there is a flurry of creation as new creatures and products come into being and a rapid evolution as they compete. By the time the dust settles, most will have died out, leaving only the best-designed and most efficient models surviving.
The most famous example of this in the history of biology is known as the Cambrian explosion. It happened between 535 and 530 million years ago when the first multicellular organisms evolved. In only 5 million years virtually all basic multicellular body plans that still exist (along with many more that no longer do) came into being. As the paleontologist Stephen Jay Gould has noted, the whole history of life since has really been nothing but endless refinements on Cambrian themes.
In the economic ecosystem, the development of the microprocessor—really a tiny, dirt-cheap computer—in the early 1970s likewise made possible many new things under the sun. In no time the hand-held calculator made the slide rule extinct, and the word processor sent the typewriter into irreversible decline.
The new technologies, of course, also competed among themselves, and many have already vanished. The word processor is now only a niche technology, supplanted by the personal computer, and Wang Laboratories, one of the great success stories of the 1970s, is now in bankruptcy. Visicalc, the first all-purpose spreadsheet, is long gone. WordPerfect and Ashton-Tate, software giants of the 1980s, are no longer independent companies.
But the computing power that twenty years ago would have cost a million dollars is now to be found on the desktops of half the teenagers in the country. What they will do with it over the next few years is anybody’s guess, but I would strongly advise everyone to step back smartly.
At the turn of this century, the automobile appeared and also underwent a rapid evolution, proliferation, and partial extinction. In 1903 alone fifty-seven automobile companies came into existence and twenty-seven went bankrupt. Today there are fewer than two dozen major car companies in the entire world. The rest, from the Stanley Steamer to the Henry T, have all gone extinct.
One brand of car that survives from 1903 is the Cadillac. In the last few years Cadillac has seen its market share sharply eroded by sleeker, smaller luxury cars from Japan and Europe, and it is now rapidly evolving to meet the new competition. The old Cadillacs, beloved of elderly couples and the size of tennis courts, will soon disappear. But this is not the first time Cadillac has had to radically change course to survive. In the early 1930s it was rescued at the last second by Nicholas Dreystadt, a man who found, in the midst of the Great Depression, a whole new market for luxury cars and developed a whole new way of making them.
The Cadillac came into existence, ironically enough, because Henry Ford walked out of a deal. Several rich men had set up a company called the Henry Ford Company, in hones of turning his already undoubted mechanical gifts into automotive gold. But Ford refused to do things their way and quit. In an effort to salvage something from their investment, they brought in Henry M. Leland, a machine maker who had developed a new type of engine, one built to unusually fine tolerances. Leland quickly designed a new car, built around his engine, and called it the Cadillac, after the French explorer who first came ashore at what is now Detroit.
The Cadillac would long have a reputation for being mechanically innovative. In 1912, three years after the company was acquired by General Motors, it introduced the first electric starter, which quickly caused the difficult and dangerous starting-crank technology to become extinct. In 1914 the Cadillac Model 51 offered the first commercially available V-8 engine.
But all this innovation came at a price. By 1921 the top-of-the-line Cadillac was the most expensive car GM produced, at a snappy $5,190.
Although Henry Ford and his next company revolutionized the way in which mass-market cars were built, luxury cars such as Cadillacs were still made the old-fashioned way, more or less one at a time. The 1920s, of course, were the golden age of luxury automobiles, vehicles of such beauty and style that they still move the hearts of even the most nonmechanical. But the onset of the Great Depression caused the automobile market as a whole to shrink drastically, while its luxury segment virtually collapsed.
In 1928 General Motors manufactured 1,709,763 vehicles in the United States, of which 41,172 were Cadillacs. By 1933 GM production was down to a dismal 779,029 vehicles, a decline of more than 54 percent. But that year Cadillac sold only 6,736 cars, a decline of fully 84 percent.
General Motors showed a profit every year of the Great Depression, but it did so only by ruthless cost cutting. Buick, Pontiac, and Oldsmobile were collapsed into one division, for instance, to save managerial overhead.
As for Cadillac, it was losing so much money that the only question was whether to kill it outright or to keep its name alive and wait for better times. The executive committee of the board of directors was meeting to decide its fate when Nicholas Dreystadt knocked on the door of the boardroom and asked to be heard for ten minutes.
Dreystadt was an unlikely GM executive. He had come to this country from Germany in 1912, at the age of twenty-two, after working as an apprentice for Mercedes-Benz, and he always spoke English with the broad accents of his native Swabia. He favored tweed sport coats—spotted with burn holes from his ever-present pipe —rather than business suits. His secretary kept a pair of men’s dress shoes handy for the days when Dreystadt showed up at the office in shoes that did not match. A gifted mechanic, however, by the early 1930s he was in charge of Cadillac service nationwide, a middle-management position of responsibility but no real importance in the politics of General Motors. So for someone like Dreystadt to crash a meeting of the GM executive committee might roughly be compared to a monsignor knocking on the door of the Sistine Chapel to make a suggestion to the College of Cardinals while it was busy electing a pope.
But Dreystadt said he had a plan to make Cadillac profitable in eighteen months, Depression or no Depression. The first part of his plan resulted from an observation he had made traveling around the country to the service departments of Cadillac dealerships. Cadillac was after the “prestige market,” and part of its strategy to capture that market was its refusal to sell to blacks. Despite this official discrimination, Dreystadt had noted that an astonishing number of customers at the service departments consisted of members of the nation’s tiny black elite: the boxers, singers, doctors, and lawyers who earned large incomes despite the flourishing Jim Crow atmosphere of the 1930s. Most status symbols were not available to these people. They couldn’t live in fancy neighborhoods or patronize fancy nightclubs. But getting around Cadillac’s policy of refusing to sell was easy: They just paid white men to front for them.
Dreystadt urged the executive committee to go after this market. Why should a bunch of white front men get several hundred dollars each when that profit could flow to General Motors? The board bought his reasoning, and in 1934 Cadillac sales increased by 70 percent, and the division actually broke even. In June of 1934 Nick Dreystadt was made head of the Cadillac Division.
He proceeded to revolutionize the way luxury cars were made. “Quality is design and tooling,” he said, “inspection and service; it is not inefficiency.” He was willing to spend money on superior design and better machine tools. He was willing to spend even more on quality control and top-notch service departments. He was not willing to spend money on production itself.
“Nick made us look closely at everything,” one Cadillac executive remembered. “If someone else made a part for two dollars, why did ours have to cost three or four?” In less than three years of this attitude at the top, Cadillac’s production costs were no higher, per unit, than those of General Motors’ low-end Chevrolets.
And because Cadillac still sold for luxury prices despite its drastically reduced production costs, it had become General Motors’ most profitable car per unit. In still-depressed 1937 more Cadillacs were sold than in roaring 1928. It is ironic that twenty years later Dreystadt’s first employer, Mercedes-Benz, would use his technique of applying mass production to luxury automobile manufacture to transform itself from a marginally profitable boutique operation into the very model of the modern luxury car maker.
But Nicholas Dreystadt would never know that irony. His astonishing turnaround of Cadillac put him on track for big things at General Motors; in 1946 he was made head of Chevrolet and was far and away a major contender for GM’s presidency in a few years, but just two years after moving to Chevrolet, he succumbed to throat cancer at the age of fifty-eight.
But for that cruel fate the whole history of the American automobile industry over the last fifty years might have been very different.