Mises Wire

What Entrepreneurs Can Learn from the Cummins Engine Company

Why do individuals on a weight-loss campaign often loudly announce this fact to social media friends, and how does this curious phenomenon shed light on Columbus, Indiana’s world-class architecture collection?

The easier part of the question first: individuals announce their fitness plans to raise the cost of quitting. After all, foresighted individuals can accurately predict that the going won’t always be easy or fun. Shamelessly proclaiming one’s goals creates a credible commitment to persevere even when quitting would otherwise become the easier option. Economist Justin Wolfers used the tactic to motivate himself to run the Stockholm Marathon, for instance.

In 1954, J. Irwin Miller, then-CEO of Cummins Engine Company, headquartered in Columbus, Indiana, also made a credible commitment. That was the year he launched the Cummins Foundation which, in 1957, began paying the architectural fees of world-renowned architects should they design a public building in the small town. The result was that between the mid-1950s and the mid-1980s, the town averaged two new architectural masterpieces annually. Today, the town is home to more than 90 buildings and parks designed by internationally renowned architects and attracts some 50,000 tourists annually. It was featured in the 2017 Sundance film, “Columbus.”

According to official city sources, the architects who have built in the small city comprise a virtual encyclopedia of notable 20th century architects: Eliel and Eero Saarinen, I.M. Pei, Walter Gropius, Harry Weese, Cesar Pelli, Richard Meier, Gunnar Birkerts, John Carl Warnecke, Robert Venturi, Kevin Roche, and dozens of others. Architectural critic Paul Goldberger comments in Dwell Magazine that, “There is really no equivalent of Columbus anywhere — there is no other place in which a single philanthropist has placed so much faith in architecture as a means of civic engagement.”

All large corporations conduct significant philanthropic endeavors, even if only for tax purposes and to generate goodwill, but how many companies have financed infrastructure development in their communities? Why did Cummins select the unique philanthropic approach that it did?

My answer comes from an unlikely source: the co-winner of the 2009 Nobel Prize in economics, Oliver E. Williamson, who argued that one party will often make a credible commitment to convince a potential exchange partner that she has no intention of behaving opportunistically. As Thomas Hobbes remarked: “The bonds of words are too weak to bridle men’s avarice.”

A commitment becomes credible when it’s in the best interests of the committer to follow through. For example, economists have long argued that advertising serves as a credible commitment to long-run quality because fly-by-night, low-quality firms will be driven from the market before they can recoup significant advertising costs. The advertising firm now has an incentive to follow through on a promise to provide quality. Consumers, knowing this, have less to fear when buying. Both parties benefit.

What does this have to do with Cummins turning Columbus, Indiana, into the architectural museum it is today? As Aaron Renn comments, “J. Irwin Miller didn’t start his architecture program as an act of charity.” Correspondence between Miller and long-time confidante George Newlin echoes this sentiment. Newlin wrote to Miller that Cummins, “should expect neither appreciation nor applause for doing what is in our best interest,” and that Cummins has “an enormous stake in the quality of this community.”

Miller was concerned that Cummins lacked the ability to attract an elite workforce to a small, unknown city relatively lacking in amenities. The company’s leadership could have selected any myriad of programs to attract high-quality employees. But they chose the architecture program — why?

Only the architecture program could serve as a credible commitment to maintain the company’s headquarters in the town.

It’s understandable that prospective employees would be hesitant about moving to an unknown Midwestern city, especially with the threat that Cummins might relocate its headquarters to a large city. How could Cummins credibly commit to retaining its headquarters in Columbus? One way was to make costly investments that only pay off if Cummins stays in town. Such is the case for the architecture program — Cummins only derives value from its infrastructure investments by retaining its headquarters in the town. Cummins leadership has, like the individual announcing new weight-loss plans on social media, tied its own hands.

In so doing, Cummins transformed Columbus into a more desirable destination for prospective employees not simply by improving public infrastructure, but by sending a message that they were committed to the town for decades to come. Potential employees could be reasonably certain that the town would continue to flourish — due to Cummins’s commitment — and thus be a low-risk destination to establish a family.

The credible commitment also sends a message to prospective entrepreneurs. In most cases, the prospect of a company town is a risky proposition for small-time business-owners. Should the company fold or leave, the town predictably becomes a ghost. Credible commitments can mitigate one of these risks — the threat of the firm leaving, thus incentivizing entrepreneurs to select the location for opening shop. While this logic is supported by economic theory, it’s more than speculation in the Cummins-Columbus case. Here are the words of a local bakery owner: “[Cummins has] got hundreds of millions invested in the city. They’re not going to leave it. They’re not going anywhere.”

Other philanthropic efforts, while undoubtedly conferring goodwill and tax benefits on the company pursuing them, would have failed to achieve Cummins’s most pressing need: a highly skilled workforce willing to forsake the job opportunities inherent in large cities for the relative risk of an otherwise unknown Midwestern town.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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