RetroBlogging: Berle and Means (1932) Quote on Motivations

Berle and Means (1932) The Modern Corporation and Private Property is one of those books everyone cites and few people read. So, in parallel to a literature review I’m working on, I decided to read it. I also justified it on the grounds that Gardiner Means was the lead author on a 1939 FDR administration report (“The Structure of the American Economy”) that shows up in my own research. Anyway, it’s a fascinating book about the consequences of the changing nature of ownership of large firms – what does it mean to own something you can’t control and vice versa?

The book has a few threads – first, laying out the evidence that most large firms were no longer controlled* by their owners (the famous “separation of ownership and control”), and second, tracing the history of the corporation in law. The last section of the book lays out three possibilities going forward, one based on the tradition of property law (“the logic of property”, which suggests managers should be disciplined and all profits should accrue to the shareholders), another based on a reading of economic theory (“the logic of profits”, which suggests managers should receive the profits to incentivize their efficient management and shareholders should get only a reasonable return), and a third way that asserts that the fundamental concepts underlying the first two no longer appy.

Berle and Means argue that economics needs to re-assess the concepts handed from Adam Smith through to the contemporary economic theories. For Smith, an enterprise was something small and manageable – a small group of workers and a collection of machinery owned by a single person or small group. The AT&Ts and US Steels of the world don’t make a lot sense in that model, and Berle and Means suggest we start by throwing out an understanding of the corporation as a purely economic tool for small groups to collaborate. Instead, we must think of the corporation as a political entity – an organization that dominates economic life, and a prominent institution for the redistribution of resources on the order of the state. In that context (with probably more lead-up than is needed), Berle and Means suggest that pure profits don’t motivate the large firm CEO the way they do the small shopkeeper:

“Just what motives are effective today, in so far as control is concerned, must be a matter of conjecture. But it is probable that more could be learned regarding them by studying the motives of an Alexander the Great, seeking new worlds to conquer, than by considering the motives of a petty tradesman of the days of Adam Smith.” (p. 308)

A lot has changed since Berle and Means wrote their book, and while their analysis that holds up remarkably well compared to the experiences of the 1940s-1970s (I would argue), the world starts to change in the late 1970s and early 1980s. For one thing, Berle and Means premise their book on the non-existence of a market for corporate control – a market which emerges in earnest in the early 1980s. For another, a new dominant theory of the firm has arisen (agency theory) around a new logic (what I would call “the logic of contracts”) which starts from the premise that the firm-as-institution is a myth – there is nothing but a nexus of contracts. Thus theorizing has had significant consequences of workers, executives, shareholders, etc. For the best review of this turn, see Jerry Davis’ Managed by the Markets. Anyway, today I’m going to be thinking about what this new model of the firm does to Berle and Means’ insistence that we think of firms as political, and managers as motivated in particular, power-oriented ways.

* As Mizruchi (2004) notes in an excellent review of the book and its impact on Sociology, control for Berle and Means is operationalized as the power to appoint the board of directors who are assumed to manage the firm. Later work in the corporate governance tradition assumes the board are not managers, but rather the voice of owners or the pawns of CEOs who actually run things, and this assumption leads to a misreading of Berle and Means.

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2 Comments

  1. I like this book and the short commend above. It has a very strong impact to the social business activities nowdays and sociiology science.
    I should like to say like that because I need some informations about the agency theory, especially for the early ideas of it.
    See again,
    frans b

  2. I need to know what really means of socializing finance. Is it meant behaviuor finance ? Tell me what does it mean.

    Thank you so much
    frs