the nature of business has been transformed. The big corporation with shares no longer has much in common with the business of the manager-owner. By freeing itself from the boundaries of individual and family ownership, by concentrating and socializing capital from a large ‘investing public’,12 the shareholder form allowed the development of giant firms, ‘quasi-public’ institutions where thousands of workers were under the leadership of a unified management.
Here, Berle and Means agree with the industrialist and German politician Walter Rathenau: ‘The de-individualisation of ownership, the objectification of enterprise, the detachment of property from the possessor, leads to a point where the enterprise becomes transformed […] into an institution resembling the state’.13 Detached from any substantial economic anchoring in the ownership of capital, ‘control by management’ appears as a power of a governmental kind. Hence the way that, in describing it, political metaphors are used: managers are ‘new princes’ at the head of great ‘industrial empires’.
The way this phenomenon was viewed was, from the start, highly ambivalent. While some celebrated the arrival of a disinterested managerial power, others feared the rise of a new managerial despotism. In the most pessimistic view, popularized in 1941 by James Burnham, in The Managerial Revolution,14 the managers would, as Orwell summarized it in an account of these ideas, ‘eliminate the old capitalist class, crush the working class, and so organize society that all power and economic privilege remain in their own hands’.15
The discovery of Berle and Means had many implications, one of which was particularly radical on the theoretical level: ‘This dissolution of the atom of property destroys the very foundation on which the economic order of the past three centuries has rested’.16
In their crosshairs was Adam Smith and his famous ‘invisible hand’. The rich, explained the author of The Wealth of Nations, may have nothing to worry about but their ‘vain and insatiable desires’, but paradoxically they are working unintentionally, by their private greed, for the public good. Their selfish interest lies in getting the most profit from their property, so they are driven to manage it in an efficient way that will contribute to the growth of general wealth, and, in turn, to the wealth of everyone.17 But, note Berle and Means, the economist was arguing in a context where ‘the system of private enterprise has rested upon the self-interest of the property owner’.18 ‘To Adam Smith and to his followers, private property was a unity involving possession. He assumed that ownership and control were combined’.19 But ‘today, in the modern corporation, this unity has been broken’.20 Shareholders may still be motivated by profit, but this does not mean that they do in fact make ‘a more efficient use of the property, since they have surrendered all disposition of it to those in control of the enterprise’.21 As for managers, as they are no longer owners, it is difficult to see what would impel them to sweat blood so as to maximize the profits of others.
Smith, they point out, noted that company managers – a form still rare in the eighteenth century – did not show the same eagerness to make the business entrusted to them flourish as did a boss who owned his own business; so ‘he [i.e. Smith] repudiated the stock corporation as a business mechanism, holding that dispersed ownership made efficient operation impossible’.22 The classical doctrine thus itself foresaw its own dysfunctioning, for the particular case of a form that has since become dominant. Without realizing it, one continues to justify this form by anachronistically resorting to a theory which actually demonstrates its flaws.
The least motivation of the managers is one thing, but nothing further guarantees that their interests will converge with those of shareholders. On the contrary, everything suggests a problematic divergence, especially if the former realize that the most profitable way to follow their selfish interests, after all – given that, as Schumpeter writes, ‘personal gain beyond salary and bonus cannot, in corporate business, be reaped by executives except by illegal or semi-illegal practices’23 – lies in dipping their hands into the till. Ironically, if managers comply with the maxim of the rational economic agent, the system starts to go off the rails, as it is true that ‘the interests of ownership and control are in large measure opposed if the interests of the latter grow primarily out of the desire for personal monetary gain’.24
Berle and Means make no objection to classical theory. They do not say that Smith was wrong, but on the contrary that he was right – and right to foresee the possible obsolescence of his own theorem. The importance of their critique, which explains why it has led to the shedding of so much ink, lies in the fact that it was ‘the first major effort to criticize the legal structure of the modern corporation in terms of the traditional economic notions upon which this structure was premised’.25
If the justifications provided by classical theory have become inoperative, it is not because they have been refuted intellectually, but because they have been rendered obsolete by a real transformation. This is the idea of ‘the Inadequacy of Traditional Theory’.26 Shareholder capitalism, by revolutionizing the forms of ownership, has moreover brought off the feat of undermining the foundations of its own legitimizing discourse.
The problem of Berle and Means, and conversely of the subsequent reductive reinterpretations of their work, was not that of knowing how to realign managerial conduct on the interests of shareholders, but of raising yet again the question of the motives and purposes of economic activity.27 This was firstly a question of legitimacy: if a modern enterprise can no longer be thought of as ‘the enlarged figure of the classical owner-enterprise’,28 wherein will reside the legitimacy of managerial power?
Berle and Means had spotted a huge gap in the dominant economic ideology. It remained to be seen how this gap could be sealed. Some thought that the best they could do in their search for a great saviour figure was to call on morality – better yet, a version of morality fished up out of the moat of a mediaeval imaginaire.
Notes
1 1. Joseph A. Schumpeter, Capitalism, Socialism and Democracy (London and New York: Routledge, 1976), p. 142.
2 2. David T. Bazelon, ‘The Scarcity Makers’, Commentary, XXXIV, October 1962, pp. 293–304 (p. 293).
3 3. Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: Routledge, 2017; first published in 1932).
4 4. Paraphrased by Robert Hessen, ‘The Modern Corporation and Private Property: A Reappraisal’, Journal of Law and Economics, vol. 26, no. 2, 1983, pp. 273–89 (p. 273). See John Kenneth Galbraith, ‘Books review: Berle and Means, “The Modern Corporation and Private Property”’, Antitrust Bulletin, vol. 13, no. 4, 1968, p. 1527.
5 5. Adolf A. Berle, ‘Modern Functions of the Corporate System’, Columbia Law Review, vol. 62, no. 3, March 1962, pp. 433–49 (p. 434).
6 6. Hessen, ‘The Modern Corporation’, p. 280.
7 7. Berle and Means, The Modern Corporation and Private Property, p. 64.
8 8. Thorstein Veblen, Absentee Ownership: Business Enterprise in Recent Times – The Case of America (New York: Routledge, 2017; first published in 1923), p. 66.
9 9. Berle and Means, The Modern Corporation and Private Property, p. 8.
10 10. Ibid., p. 65.
11 11. Ibid., p. 113.
12 12. Ibid., p. 6.
13 13. Walther Rathenau, In Days to Come (London: G. Allen & Unwin, 1921), p. 121, quoted in Berle and Means, The Modern Corporation and Private Property, p. 309.
14 14.
