This article was last modified on April 23, 2011.


The Modern Corporation and Private Property (1930s)

“The modern corporation may be regarded not simply as one form of social organization but potentially (if not yet actually) as the dominant institution of the modern world… Where its own interests are concerned, it even attempts to dominate the state.” – Berle and Means

Adolf Berle set out to discuss the “fission” of property, whereby the traditional rights associated with property get split into two factions: possession and ownership. He takes pains to explain that property as traditionally conceived was a very simple concept, and classically defined private property would refer to either real property (“land or rights derived from land”) or personal property (“mobile, capable of being used, taken away, moved, transferred”) [Berle 1968: xi]

Property was traditionally possession, and possession was assumed to mean ownership. He claims “private property was that of things in possession of one or more individuals. Current semantics conjures up this picture even now.” [Berle 1959: 61] “From earliest times the owner of property has been entitled to the full use or disposal of his property, and in these rights the owner has been protected by law.” [Berle 1968: 294] “To Adam Smith and to his followers, private property was a unity involving possession. He assumed that ownership and control were combined. Today, in the modern corporation, this unity has been broken.” [Berle 1968: 304] Smith was actually concerned about the corporation in his day (1776), too, before the modern version even emerged:

“The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.”

Today, actual possession of a corporation could be said to fall in the hands of the night watchman who handles the physical property, but the ownership belongs to the stock holders, who may never physically possess the property or even see it. Directors, presidents and employees are all handling the property — they have possession — but even buying and selling is done on behalf of the corporation and the stockholders who own everything despite perhaps never setting foot on the premises or meeting the employees. An employee may use “his” forklift or office desk, but although he has usage over the equipment, and can prevent others from using it, he has no real ownership. Berle is careful to note that using the word “owner” for a stockholder may be debatable. The important part is that “private property” no longer has the common sense definition it once held.

When a corporation is created, legal rights of property are transferred from the person or family to the corporation and the stockholders. Even if the family has majority stock and can effectively make the decisions, the legal entity is now the corporation, not the family. There is also the side effect of a firm and its owners being distinct in the eyes of the law, with a corporation assuming the role of “a person”. While this divests the family of certain privileges, it also serves to safeguard them from litigation and liability.

Berle correctly defines property as a “relationship between an individual (or perhaps a group of individuals) and a tangible or intangible thing.” [Berle 1959: 60] A “things” can be incorporeal or physical. Such things may even include “bodies of knowledge, written or unwritten”. I would point out that employees who develop ideas on the job generally have their ideas patented by their company, not themselves. The important point here is that property is the relationship and not the thing. Therefore, redefining property changes the nature of the relationship and not the objects involved.

Berle says that “private property, as understood in the capitalist system, is rapidly losing its original characteristics.” [Berle 1968: 219] For Berle, “modern capitalism is characterized by the simultaneous concentration of production in the large corporation and the dispersion of ownership among hordes of shareholders.” This was a “profound transformation” in the way we conceive of property. [Henwood: 252]
In short, “private property” has a whole new meaning under the corporation.

Active Versus Passive Property

Berle distinguishes between what he calls “passive” and “active” property, technical terms for his divisions of property. Passive includes having shares in stocks and bonds, where one can be an “owner” but have little or no control and no responsibility. The active property is the holding of the plant but by people who have little ownership interest in it.

“When active and passive property relationships attach to the same individual or group, we have private property as conceived by the older economists.” [Berle 1968: 305] “Holders of private property, [Berle] argued, have three functions in business enterprises: providing capital for the enterprise, having power over it, and acting with respect to it. Before the Industrial Revolution, all three functions were performed by the same individual.” [Munzer: 320] Now, shareholders (the owners) “have no right to sell corporate property”, but managers who own nothing do have this right. [Henwood: 254] The owner’s only recourse is to sell their shares.

The Benefits of the New Concept

Traditionally, “property like a factory or a mine which cannot be cut up, is rarely sold.” [Berle 1968: 249] “The owner of non-liquid property is, in a sense, married to it.” [Berle 1968: 249] “To some extent, non-liquid property immobilizes the owner by its own immobility.” [Berle 1968: 250] If you at one point were the owner of a mine, you probably had to live nearby and would have to make constant inspections. Passing ownership to another person through sale or inheritance would be difficult unless they, too, wanted to remain nearby. The solution, of course, was to put ownership in one hand and possession/management in another.

“The separation of ownership from management and control in the corporate system has performed this essential step in securing liquidity. It is the management and ‘control’ which is now wedded to the physical property. The owner has no direction personal relation to it and no responsibility toward it. The management is more or less permanent, directing the physical property which remains intact while the participation privileges of ownership are split into innumerable parts — ‘shares of stock’ — which glide from hand to hand, irresponsible and impersonal.” [Berle 1968: 250]

“Wherever one man or a group of men entrusted another man or group with the management of property, the second group became fiduciaries. As such they were obliged to act conscionably, which meant in fidelity to the interests of the persons whose wealth they had undertaken to handle.” [Berle 1968: 295] There is, of course, no guarantee that management will act as owners would like, but if they wish to maintain their careers, their best interest is to act in their owner’s best interest.

The idea of how the stock-holding owner has evolved over time is also of interest here. “Conceived originally as a quasi-partner, manager and entrepreneur, with definite rights in and to property used in the enterprise and to the profits of that enterprise as they accrued, [the stock holder] has now reached an entirely different status.” [Berle 1968: 245]

Criticisms

In some sense, this division of property is nothing new — landlords had ownership of homes and land they did not personally possess for centuries or longer. The only difference here is that the property becomes more abstract — stockholders have no direct link to the property, and much of the property is not necessarily physical, as it may include patents.

Others have said the argument is not new in other ways, criticizing the intent of Berle/Means rather than the lack of novelty in their words. “The Berle-Means argument essentially rephrased the Marxist thesis of the rupture, under capitalism, between labor and the ownership of the means of production.” [Pipes: 234]

Pipes argues that, “The notion that corporate managers operate free of control of the shareholders is obviously false: by virtue of owning huge blocks of corporate stocks, pension funds and mutual funds enjoy considerable leverage over corporate management.” [Pipes: 234] He is correct on this one, but it is worth noting that Berle did not say that the managers operated free of owners’ control. As mentioned above, a manager clearly knows he is at risk of losing his job if caught acting against the interests of the business.

Pipes further accuses the authors of a Marxist bias. “Another flaw of the Berle-Means thesis lay in its definition of property. Possibly under the influence of Marxist theory dominant in the Soviet Union at the time of writing, the authors limited this concept to ‘rights in the instruments of production’, whereas in the real world it applies to any asset that yields the owner material rewards. Money, stocks, bonds, and real estate, ‘passive’ though they may be, cannot be arbitrarily excluded from the concept; the same, of course, applies to incorporeal assets such as copyrights and patents.” [Pipes: 235] This criticism is flawed, as Berle was quite aware of intangible property and considered it to be property in a very real sense. Otherwise, why would he go through such pains to explain how modern concepts of property differ from classic, Adam Smith era definitions? Berle did not find “passive” property any less real than “active”.

George J. Stigler and Claire Friedland outlined in 1983 the lasting impact of Berle-Means: “Our own statistical analyses, using only data and methods familiar to economists of the time, yield no clear evidence that the manager-dominated corporations differed much from owner-dominated companies in practices of executive compensation or in the utilization of assets to produce profits. The main tradition of economic theory was perhaps instinctively recognizing these facts when it continued to work in complete disregard of The Modern Corporation.” [Pipes: 236] This analysis fails to account for why profits should go towards “executive compensation” rather than stock-holders when the ownership has shifted.

Pipes is not off-base to compare the Berle-Means critique to other Marxist critiques, as this example from Sydney Olivier shows:

“But that element in our private property system which is at present the main object of the Socialist attack, the individual ownership of the instruments of production, land and capital, in an age when the use of those instruments has become co-operative, results, and must inevitably result… in the division of society into two classes, whose very livelihood is ensured to them by methods essentially different. The livelihood of the typical proletarian is earned by the exercise of his faculties for useful activity: the livelihood of the typical capitalist, or owner of property, is obtained, without any contribution of his or her activity, in the form of a pension called rent, interest, or dividend, guaranteed by law out of the wealth produced from day to day by the activities of the proletariat.” [Olivier: 146-147]

Olivier was no ordinary critic, but a baron and a member of the Labour Party in Britain. Olivier would be the governor of Jamaica and the Secretary of State for India. He was also the uncle of actor Sir Laurence Olivier and a colleague of H. G. Wells. Regardless, Pipes is wrong to compare Marxist critiques with Berle and Means for one simple reason: the intent. Olivier clearly wishes to point out the flaws of modern capitalism. Berle and Means were less concerned with the flaws than simply pointing out the facts of the matter. Nothing they wrote is polemic, but simple undeniable observation. Those familiar with Pipes know he has a tendency to see a Communist lurking in every shadow, so his cries of “socialism” should not be taken too seriously.

Thorstein Veblen

Thorstein Veblen (July 30, 1857 – August 3, 1929) was an American economist and sociologist, and a leader of the so-called institutional economics movement. Besides his technical work he was a popular and witty critic of capitalism, though also an opponent of Marxism. Veblen died prior to the writings of Berle and Means, so his criticisms cannot be seen as directed at them — but they are still a scathing attack on the industrialism of the era.

Veblen says, “Ownership of natural resources — lands, forests, mineral deposits, water-power, harbor rights, franchises, etc. — rests not on a natural right of workmanship but on the ancient feudalistic ground of privilege and prescriptive tenure, vested interest, which runs back to the right of seizure by force and collusion.” [Veblen: 50] In other words, any resource grabbed is owned not by John Locke’s labor theory, but by simple claim. This puts the power into the hands of who can grab the most, not who can actually make good use of the land grabbed.

Veblen discusses how corporations own things and therefore have the power to deprive people of work. We generally think that employers provide work, but they can just as easily deny work. “Ownership of industrial equipment and natural resources confers such a right legally to enforce unemployment, and so to make the community’s workmanship useless to that extent.” [Veblen: 65] Property rights, as we have seen, are power. But here not simply the power to exclude others from ownership, but from the very ability to make useful tools of themselves.

“Ownership confers a legal right of sabotage, and absentee ownership vests the owners with the power of sabotage at a distance, by help of the constituted authorities whose duty it is to enforce the legal rights of citizens.” [Veblen: 66] By not employing people and not producing things to the full extent of what is possible, supply remains low, raising costs, while labor cost is also low. For the employer, not maximizing output is to their financial advantage. (Today, the theme is that cutting taxes for business owners will lead to them employing more people — but the reality is that if hiring more people does not increase profits, there is no incentive for an employer to hire. A business has one goal, to make money. It is not a charity that has a moral obligation to provide work.)

There are limits to the idea of “sabotage”, though. “It is to the owner’s interest to derive an income from these his legal rights; and in the long run there will be no income derivable from equipment or natural resources that are wholly unemployed, or from man-power which is not allowed to work.” [Veblen: 66] If an employer does not hire anyone or use their equipment at all, no products get made and no sales occur. Common practice is partial employment of equipment and manpower at the owner’s level of choice. Ownership would be an “idle gesture” without the power of sabotage — the goal of profit is best reached by a balance between employment and unemployment.

Ideally, for the owner, production must stop at a point that makes the product available in such a volume as to be profitable and get a good price (scarcity). At the same time, the wages must be high enough to get a worker to produce such goods. Wages that are too low may bring in workers with fewer skills or motivation, or cause them to seek work elsewhere. But in general the idea is to keep selling prices high, production costs low.

The concept of “profit before people” is a fact, devoid of moral sentiment. Ought a business to provide better wages and benefits to employees and lower costs for consumers? Certainly some people hold this view. Yet, it is the employer’s right and duty to do just the opposite.

Veblen says “investment in industrial plant and natural resources is worth while to the investor because and so far as his ownership of these useful things enables him to control and limit the operation of the industrial arts which make these things useful — that is to say, because and so far as his ownership of these things confers on him the usufruct of the community’s workmanship”. [Veblen: 68] (Usufruct is the act of making a profit from an action that is not yours.)

Conclusion

The modern corporation, which has radically changed the way we traditionally view property, is likely here to stay. Through legislation, we can alter various facets, but the general structure is now so ingrained in our society that any monumental change would be unthinkable.

All systems are flawed. The capitalists are right to criticize the socialists, just as the socialists are right to criticize the capitalists. Anyone who looks at our current system and thinks it perfect is delusional. For all the gains we have seen, there are many drawbacks. The goal is not to pick one system over another, but to work towards the answer, which probably combines two or more systems. Is there one answer, or will we always be searching? That is hard to say. But for now, we are best not to ignore the words of Berle and Means or attack their supposed intent. If what they critique is accurate, we should work to fix it.

Sources

Berle, Jr., Adolf A. Power Without Property: A New Development in American Political Economy Harcourt, Brace and Company, 1959.

Berle, Adolf A. and Gardiner C. Means. The Modern Corporation and Private Property Harcourt, Brace & World, Inc., 1968. (originally 1932)

Dahl, Robert A. After the Revolution?: Authority in a Good Society Yale University Press, 1970.

Henwood, Doug. Wall Street: How It Works and for Whom. Verso, 1999.

Munzer, Stephen R. A Theory of Property Cambridge University Press, 1990.

Olivier, Sydney. “Moral”, appearing in Fabian Essays in Socialism, edited by G. Bernard Shaw. Doubleday, 1967 (originally 1889).

Pipes, Richard. Property and Freedom Alfred A. Knopf, 1999.

Veblen, Thorstein. Absentee Ownership: Business Enterprise in Recent Times: The Case of America Sentry Press, 1964 (originally 1923)

Also try another article under Historical / Biographical
or another one of the writings of Gavin.

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