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Jones has sold out to Mr. Smith and Mr. Smith carries on the same enterprise.

The CHAIRMAN. Suppose you had a line on that chart which indicated the number of failures in each of these years. How different would it be from the line showing the discontinuances?

Dr. THORP. I can only answer that in terms of individual groups. In manufacturing, about 20 enterprises discontinue for every one case that disappears through court actions by the use of the bankruptcy procedure. In retailing, 45 cases close for every one which uses bankruptcy. In other words, most of these are cases where the doors are closed, presumably the bills are paid or they are not large enough to concern anyone, and there is no legal problem involved.

Senator KING. Voluntary liquidation.

Dr. THORP. They are voluntary liquidations.

One other thing is important. The bankruptcies show much wider changes from year to year. You see even here in our worst year, 1932, we had something like 300,000 new enterprises starting, but the number of bankruptcies in that year was almost at an unprecedented peak.

SURVIVAL OF NEW ENTERPRISES

Dr. THORP. I should like to call your attention now to this chart. This is introduced as an illustration. It happens to introduce some evidence on a subject about which our knowledge is rather limited and on which further studies may modify the exact figures.

This is a chart entitled, "Length of survival of business concerns, Poughkeepsie, N. Y., 1843-1926," and it is a study of the changes in business in Poughkeepsie from 1843 to 1926. In this case, changes in the form of ownership were not included.

(The chart referred to was marked "Exhibit No. 53" and appears on this page.)

EXHIBIT No. 53

LENGTH OF SURVIVAL OF BUSINESS CONCERNS
POUGHKEEPSIE, N. Y. 1843-1926

NOT COUNTING CHANGES IN PROPRIETORSHIP

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Dr. THORP. You will notice, of the enterprises which started in the manufacturing field, 53 out of each 100 lasted over 3 years; 25 out of each 100 lasted 10 years; and 12.6 out of each 100 lasted 20 years.

Wholesale concerns showed a better record of survival. In retail trade, on the other hand, less than half survived 3 years; less than 22 percent, more than 10 years; and less than 10 percent, more than 20 years.

The crafts in this case, including such groups as barbers and tailors, showed even a lower percentage of survival, and the service industries, restaurants and such, also showed a relatively low survival. Taking all types of business, 46.9 percent lasted more than 3 years; 21.4 per cent, more than 10 years; and 9.7 percent, 20 years or more.

I might say that similar studies have been made not covering quite so wide a field for other areas. The McGarry study for Buffalo and the Boer study for Pittsburgh both show a much higher rate of mortality than is shown here. So I think that if any thing these figures for Poughkeepsie, which is probably a relatively stable community, at least economically speaking, would be a conservative picture of mortality.

Dr. LUBIN. Mr. Thorp, in essence this means that more than one out of two firms that started in that city died within 3 years. Dr. THORP. That is correct.

Senator KING. Is that a manufacturing center or largely dependent upon agricultural surroundings?

Dr. THORP. It is a fairly diversified center. It has some manufacturing industries. I should say, if anything, it has more than the average for a community of its size. Its population is about 40,000. The CHAIRMAN. But I don't regard it as typical of the country at large.

Dr. THORP. I don't know any community that is typical of the country at large except Middletown. I do regard this chart as typical, and it perhaps shows a longer survival than would be true for the country at large. There are studies that show, for example, that in certain communities in the survival of grocery stores only half of the grocery stores will survive 1 year. Our records at Dun & Bradstreet show that in Los Angeles for example there is a turn-over in total business enterprises of about 100 percent per year.

The CHAIRMAN. This chart in other words presents an unusually good record of survival.

Dr. THORP. Yes, sir; I think this is probably an unusually good record of survival.

FREEDOM OF BUSINESS OPPORTUNITY

Dr. THORP. This raises a problem that I would like to discuss briefly for a moment before we come to our next main topic. This evidence certainly shows that there is in the country a continual flow of enthusiastic and hopeful individuals starting out into business; that from the point of view of freedom of opportunity this is a demonstration of the fact that at least 400,000 people feel that they have an opportunity in the business world, and they start out each year.

The record also shows that in most cases they were somewhat too optimistic, that when their working capital and all the working capital

available from all their relatives is exhausted, the doors are shut and and they return to some other kind of occupation.

I don't think it would be fair to leave the picture there. At the other extreme there are certain situations in which it is virtually impossible for a new enterprise to appear. For example, the natural resources required in many industries are now largely held by existing enterprises. We haven't any completed studies on the holding of reserves, but I think for our purposes it is sufficient to indicate that in certain types of industries it would be very difficult to enter because existing reserves are already generally held."

In other cases, patent situations may be an effective bar to entering a particular type of business activity.

Then in the third case there are many situations where outlets are controlled, or there has been built up such a consumer acceptance by existing enterprises that it is difficult, at least, for a new enterprise to break into the market.

I am not saying that it can't be done, but as against a product which has existed for many years, which is vigorous in its advertising, which is sold throughout the country and widely known, obviously it is difficult for a new enterprise, particularly if it is producing virtually an identical commodity, to enter into that activity.

The CHAIRMAN. In this sense, the phrase "new enterprise" refers solely to a new concern dealing in an old industry or an old activity. You don't mean to indicate that there is any obstacle to the starting of an industry or a business which has never been undertaken before? Dr. THORP. NO; I have no intention of indicating that, although I do think that, to the degree to which new enterprises and new industries may grow up on the basis of technological development, patent controls may tend to limit the number of people who can, at least for a period of time, participate in the development of that new industry. Now, in between these two groups

Mr. OLIPHANT (interposing). Looking over a period of time, do you notice any difference in that mortality rate of failures? Take, for instance, the retail grocery outlet. Is there any difference in the mortality rate with the development of chain stores?

Dr. THORP. On the basis of the Poughkeepsie record, which was broken down into three 30-year periods of time, there was a different rate. The rate of survival was better in the period 1874-1903 than it was in the first 30-year period (1844-73) or in the latest period (1904-33). These comparisons suggest that the different rates of survival are related in considerable measure to local changes in population growth, changes in business conditions, etc.

The authors of this study state that the length of life of grocery stores has apparently not been reduced by chain store competition. Mr. OLIPHANT. Suppose we concentrate on the retail field for a moment. Have there been studies of the mortality rate in the retail field?

Dr. THORP. There are studies for individual communities. The complication about that is that the mortality rate is very largely a function of the birth rate. The main part of deaths in any year depends upon how many businesses were started in that year or the year before, or the year before that.

Mr. OLIPHANT. Is the converse equally true?

Dr. THORP. I suppose the converse is partially true. The difficulty seems to be that people decide to go into business and persist in that, and regardless of whether it is 1933 or what year it is, they start in whenever they feel ready to do so.

Mr. OLIPHANT. Generally speaking, then you would say we have no figures on whether or not the chains

Dr. THORP (interposing). I would say we have no satisfactory figures. Some evidence I am going to present a little later on trends in retail outlets will have some bearing, I think, on the problem. Mr. OLIPHANT. That may answer my question.

LARGE CAPITAL REQUIREMENTS A BARRIER

Dr. THORP. I have spoken of what I might describe as the two extremes in freedom of opportunity. Another situation that is becoming increasingly important involves the cases which are controlled chiefly by the importance of research and the costliness of development. This sort of situation necessarily places the development in the hands of those who can command capital. In many lines the old and relatively successful firm is able to add products and processes where a newcomer in the field would find it extremely difficult if not impossible to obtain the large sums of capital which are required. This restricts certain types of opportunities, by and large, to the larger enterprises.

For example, the Tariff Commission records state that an average blast furnace costs $2,500,000 to construct, that in 1937 three continuous mills for hot-rolled products were completed, costing more than $20,000,000 each.

For further illustrations one merely needs to turn to current business reports. For example, consider just the synthetic textile field. The Industrial Rayon Corporation had a new plant with a new continuous spinning process, estimated cost, $11,000,000. Of course, particularly exciting is the announcement of the Du Pont Co. of its new product, Nylon, described as an organic textile fiber, prepared from raw material from the mineral kingdom-made of coal, water, air, and other substances. They announce a projected plant expenditure of $8,000,000. This, of course, does not include the millions which must have gone into research in past years.

Almost simultaneously the Celanese Corporation has announced a project for spending $10,000,000 on a new plant to produce an entirely new synthetic yarn.

These three illustrations I think serve to point out the fact that in cases where large sums of capital are required, where research over a period of time is required, our present pattern frequently-in fact, usually-is for an established enterprise in the field to be able to make the type of expansion that is called for.

Senator KING. You would include in that, would you not, the mechanisms required for the production of ores, some of the great smelters and ore-reducing plants costing several millions of dollars, so a small mining man would be unable to build the necessary plant for the reduction of his ores?

Dr. THORP. Our mining and metal treatment industries are among our industries that require large sums of capital.

Representative SUMNERS. Doctor, are you going to discuss anywhere the question as to whether or not, in the public economy, it may be possible for a people to advance their mechanical and scientific developments by patent, and so forth, more rapidly than they can take care of the consequences of such development and really bring about a battle between machinery and human beings?

Dr. THORP. I think that is a very important problem, but my own feeling is that it is so important that we will not have time to discuss it today. The whole problem of the effect of patents on our economy is a tremendous one. I am going to introduce some evidence about the degree to which patents are issued and in general the part that technology plays but I think it calls for more elaborate discussion than I can give as to its social significance.

Senator KING. Couldn't you state the generalization that the mechanization to which we have been subjected during the past few years has increased jobs to a larger extent than it has put men out of employment? For instance, the automobile industry has destroyed, perhaps, the old wagon and some of the means of transportation of earlier days, but it has given employment to millions of people in direct employment, and then in the production of gasoline and its consumption through the various filling stations.

Dr. THORP. I think the problem about the absorption of the technologically unemployed depends on the length of time you are going to use for a measure. For example, over the last hundred years it would be difficult to demonstrate technological unemployment, because in that case there would be no employed. Certainly the displacement by machinery has far exceeded the total population over a period of that length.

On the other hand, over as short a time as the last half dozen years, in which workers have not been absorbed readily, it is perfectly conceivable that any technological advances, unless they are very quickly reflected in prices, may temporarily result in increased unemployment. Representative REECE. Doctor, do you think the chart to which you have just referred has any significance in our competitive system, or the degree to which our competitive system might be interfered with by certain practices which have grown up?

Dr. THORP. I am not sure that I get the exact focus of your question, but it suggests at least two things to me that I should like to add to this discussion. The first is that inasmuch as a competitive system is supposed to adjust itself by the entrance and exit of firms, one could perhaps make the simple conclusion that this was an excellent demonstration of the competitive system at work.

However, one would need to make further studies to determine whether it was the efficient concerns, the desirable concerns, which survived or not before one could tell whether it was working efficiently. I might say that this problem has become sufficiently disturbing in some industries and areas that there are beginning to appear in certain States forms of State control which endeavor to deal with it. For example, Wisconsin now has a requirement of automobile dealers that they must obtain a certificate from the State government before they can engage in that occupation-a definite attempt, you see, to limit the turn-over and control that particular industry.

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