Pageiii

TheModernCorporationandPrivateProperty

AdolfA.BerleandGardinerC.Means

WithaNewIntroductionbyMurrayL.WeidenbaumandMarkJensen

Pageiv

Thirdprinting1999Newmaterialthiseditioncopyright1991byTransactionPublishers,NewBrunswick,NewJersey08903.Originallypublishedin1932byHarcourt,Brace&World,Inc.Copyright1968byAdolfA.Berle.

AllrightsreservedunderInternationalandPanAmericanCopyrightConventions.Nopartofthisbookmaybereproducedortransmittedinanyformorbyanymeans,electronicormechanical,includingphotocopy,recording,oranyinformationstorageandretrievalsystem,withoutpriorpermissioninwritingfromthepublisher.AllinquiriesshouldbeaddressedtoTransactionPublishers,RutgersTheStateUniversity,NewBrunswick,NewJersey08903.

ThisbookisprintedonacidfreepaperthatmeetstheAmericanNationalStandardforPermanenceofPaperforPrintedLibraryMaterials.

LibraryofCongressCatalogNumber:9048752ISBN:0887388876PrintedintheUnitedStatesofAmerica

LibraryofCongressCataloginginPublicationData

Berle,AdolfAugustus,18951971.Themoderncorporationandprivateproperty/AdolfA.BerleandGardinerC.MeanswithanewintroductionbyMurrayL.WeidenbaumandMarkJensen.p.cm."Originallypublishedin1968."Includesindex.ISBN:08873888761.CorporationsUnitedStates.2.CorporationlawUnitedStates.3.CorporategovernanceUnitedStates.I.Means,GardinerCoit,1896.II.Title.HD2795.B531991338.7'4'0973dc209048752CIP

Pagev

CONTENTS

TablesandCharts vii

IntroductiontotheTransactionEdition ix

ByAdolfA.Berle

Property,ProductionandRevolutionAPrefacetotheRevisedEdition

xix

ByGardinerC.MeansImplicationsoftheCorporateRevolutioninEconomicTheory xli

Preface(1932) li

BookIPropertyinFlux:SeparationoftheAttributesofOwnershipundertheCorporateSystem

I:PropertyinTransition 3

II:TheAppearanceoftheCorporateSystem 11

III:TheConcentrationofEconomicPower 18

IV:TheDispersionofStockOwnership 47

V:TheEvolutionofControl 66

VI:TheDivergenceofInterestbetweenOwnershipandControl 112

BookIIRegroupingofRights:RelativeLegalPositionofOwnershipand''Control"

I:EvolutionoftheModernCorporateStructure 119

II:PoweroverParticipationsAccruingtoSharesofStock 141

III:PowersovertheRoutingofEarningsAsbetweenSharesofStock 171

IV:PowertoAltertheOriginalContractRightsofSecurityHolders 186

Pagevi

V:TheLegalPositionofManagement 196

VI:TheLegalPositionof''Control" 207

VII:CorporatePowersAsPowersinTrust 219

VIII:TheResultantPositionoftheStockholder 244

BookIIIPropertyintheStockMarkets:SecurityExchangesAsAppraisersandLiquidators

I:TheFunctionofthePublicMarket 255

II:FlotationandBankers'Disclosure 264

III:DisclosurebytheCorporationtotheMarket 278

IV:ManagementintheMarket 286

BookIVReorientationofEnterprise:EffectsoftheCorporateSystemOnFundamentalEconomicConcepts

I:TheTraditionalLogicofProperty 293

II:TheTraditionalLogicofProfits 299

III:TheInadequacyofTraditionalTheory 303

IV:TheNewConceptoftheCorporation 309

Appendixes 317

ByGardinerC.MeansStatisticalAppendixtoRevisedEdition 343

TableofCases 363

TableofCompanies 367

Index 375

Pagevii

TABLESANDCHARTS

TableI:The200LargestNonbankingCorporationsintheUnitedStates,Jan.1,1930

20

TableII:GrossAssetsof150IdenticalCorporationsCommontoBoth1919and1928Listof200LargestAmericanCorporations

35

TableIII:ComparisonofGrowthofLargeCorporationswithGrowthofAllCorporations

36

TableIV:GrowthofLargeCorporationsAsIndicatedbyRelationofTheirStatutoryNetIncometoThatofAllCorporations

39

TableV:144Outof200LargestCompaniesDistributedAccordingtoNumberofStockholders

49

TableVI:StockholdingsbyManagement 50

TableVII:StockholdersoftheThreeLargestAmericanCorporations 52

TableVIII:EstimatedNumberofBookStockholdersofAmericanCorporations(19001928)

56

TableIX:EstimateoftheNumberofBookStockholdersofAmericanCorporationsin1922byIndustries

57

TableX:20LargestStockholdersofthePennsylvaniaRailroadCo.(AsofDec.31,1929)

79

TableXI:UnitedStatesSteelCorporation,StockholdingsofBoardofDirectors

81

TableXII:Controlofthe200LargestCorporations 86

TableXIII:SummaryAccordingtoTypeofUltimateControlof200LargestCorporations

106

TableXIV:SummaryAccordingtoTypeofImmediateControlofthe200LargestCorporations

107

ChartI:RateofGrowthinNumberofBookStockholders 55

ChartII:DistributioninOwnershipofCorporateStocks 61

ChartIII:MajorElementsintheControloftheVanSweringenSystemofRailroads

70

Pageviii

StatisticalAppendix

TableI:The100LargestManufacturingCorporationsin1962MeasuredbySizeofAssets

347

TableII:AdjustedAssetsofthe100LargestManufacturingCorporationsin1962andtheAssetsofAllManufacturingCorporations

351

TableIII:ManufacturingConcentrationin1929 353

TableIV:ComparisonofTotalAssetsHeldbythe100LargestManufacturingCorporationswithAssetsHeldbyAllManufacturingCorporationsandAllManufacturingEnterprise

354

TableV:ChangeinConcentration19501965DerivedfromStatisticsofIncome

356

TableVI:The200LargestNonfinancialCorporationsClassifiedbyTypeofUltimateControl,1929and1963

358

ChartI:ShareofValueAddedbyManufactureAccountedforby200LargestManufacturingCompanies,19471963

354

Pageix

INTRODUCTIONTOTHETRANSACTIONEDITION

BerleandMeans'monumentalworkonthecorporationhasbecomeoneofthoseenduringclassicsthatmanycitebutfewread.Aswouldbeexpected,acurrentrereadingrevealsthatmuchofthebookhasbecomeaperiodpiece.Inpart,itssuccesshasbeenitsundoing.Theinitialreactiontoitspublicationledagenerationofresearcherstoanswerquestionsraisedinthebook.Consequently,muchofthefieldofstudyfocusingonthecorporatesystemhasmovedbeyondthepointatwhichlawyerAdolfBerleandeconomistGardinerMeanswroteaboutit.

Also,theeconomyhasevolved.Who,writinginthedepthoftheGreatDepressionofthe1930s,wouldhaveanticipatedthedoubledigitinflationofthelate1970s?Nevertheless,thisclassicraisesmanyofthefundamentalquestionsthatstillbesetthoseconcernedbothwiththeroleofbusinessinsocietyandthegoverningpowerofthelargecorporation.Infact,thebookissorichwithinsightsandthoughtprovokinganalysisthat,inthisintroductoryessay,wecandolittlemorethanwhetthereader'sappetite,whilesimultaneouslywarningaboutthehostoflegalandstatisticaldetailwhichisnowmainlyofhistoricalinterest.

TheRoleoftheCorporation

ThemostenduringthemeofTheModernCorporationandPrivatePropertyisthedivorceofownershipfromthecontrolofthemoderncorporation.Itistheviewoftheauthorsthat,asapracticalmatter,stockholdershavetradedtheirlegalpositionofprivateownershipfortheroleofrecipientofcapitalreturns(BookI,ChapterI).Inaddition,acloseparallelisdrawnbetweenworkerswhosurrenderthedirectionovertheirlaborandshareholderswhobecomemerelyrecipientsof''thewagesofcapital."

Withoutusingtheterm,BerleandMeansshowakeenawarenessoftheconcernofmodern"agency"theory:theinterestsofthedirectorsandmanagerscandivergefromthoseoftheownersofthefirm,andtheyoftendoso.ThisseparationbetweenownershipandcontrolofacorporationthroughexpandedownershipofthecompanycreateswhatBerleandMeanscallthequasipubliccorporation.Thecharacteristicsfoundinaquasipubliccorporationareitstremendoussizeanditsrelianceonthepublicmarketforcapital.

InBookI,ChapterII,BerleandMeanspredict,onthebasisofhistoricalexperience,that"practicallyall"economicactivitywillbecarriedonunder

Pagex

thisquasipubliccorporateform.Thatforecasthassufferedfromtherapidriseoftheservicesectoroftheeconomy.There,individualproprietorshipsandpartnershipsremainwidelyusedmethodsoforganizingbusinessactivity,anddependenceonorganizedcapitalmarketsisfarlessthaninthecaseofthelargecorporation.

Nevertheless,BerleandMeansareclosertothemarkthanthemorerecentandwidelycirculatedprojectioninthelate1970sbyMichaelJensenandWilliamMeckling,that''Thecorporateformoforganizationislikelytodisappearcompletely....thelargercorporationsasweknowthemaredestinedtobedestroyed."

Giventheeffectiveseparationofownershipfrommanagement,BerleandMeansnotedthelikelycharacteristicincreaseinthesizeofthemoderncorporationandtheconcentrationoftheeconomy.However,twomorerecentdevelopmentsshouldbekeptinmind.AstheauthorsproperlyperceivedinBookI,ChapterIII,mergersandacquisitionsareanimportantmethodofincreasingcorporatesize.However,changesincorporatecontrolcanalsoleadtoreducingthesizeofthecompany.Anexampleduringthe1980swasthesplitupofBeatriceFoodsintoavarietyofsmallercompanies,whichoccurredinconnectionwiththat$12billiongiantcorporationgoing"private."

Table1

MergersandAcquisitionsOver$1Billion,19821989

YearNumberofDeals

Value($millions)

1982 10 $19,440.3

1983 6 9,110.5

1984 19 55,178.5

1985 26 61,458.6

1986 31 67,932.4

1987 30 62,175.9

1988 42 96,399.4

1989 35 117,477.4

Source:ComputedfromMergersandAcquisitions,variousissues.

AmorebasiccriticismoftheBerleandMeansapproachisthatmergersamongexistingfirmsdonotnecessarilymeanthattheeconomyisbecomingmore"concentrated."Inthedynamicindustrialsocietythatcharacterizesthe

Pagexi

UnitedStates,theriseofnewcompaniesovershadowsthedeclineoftheold.Thus,BerleandMeanscouldaccuratelybemoanthedemiseoffortynineofthelargest200corporationswithinonedecade.Yet,wecancelebratethefortunesofmanyoftoday'sgiantsthatarenotontheirlistIBM,PhilipMorris,Boeing,UnitedTechnologies,DowChemical,Xerox,Pepsico,DigitalEquipment,HewlettPackard,SaraLee,Conagra,Unisys,Lockheed,Motorola,Monsanto,TRW,andTextron.EvenBerleandMeanswouldhavetoadmitthatthisisanimpressivearrayof''newcomers."

Mergersandacquisitionscontinuetobeanimportantforceinmaintainingadynamiceconomy.In1989alone,thirtyfivegiantmergersoccurredwithanaggregatevalueofover$117billion(seeTable1).Attimes,changesincontrol,oreventhreatsofhostiletakeovers,mayservetoincreasetheefficiencyandprofitabilityofindividualfirms.

TheManagementoftheCorporation

BerleandMeansmadeafundamentalcontributionintheiranalysisoftheextenttowhichmanagementofthemoderncorporationhasbeenseparatedfromitsownership.Buttheymayhavegoneoverboardinstatingthatthepowerandcontrolhasshiftedawayfromthecommonstockholders(BookI,ChapterIV).BerleandMeansstatethatthisseparationhastotallyeliminatedthechecksandbalancesthatownersonceexercisedovermanagement.Withthisundauntedpower,managementsupposedlypursuesitsowninterest,oblivioustothewelfareoftheowners.Acontraryviewhasbeendevelopedinmorerecentyears.AccordingtoHaroldDemsetz,"Inaworldinwhichselfinterestplaysasignificantroleineconomicbehavior,itisfoolishtobelievethatownersofvaluableresourcessystematicallyrelinquishcontroltomanagerswhoarenotguidedtoservetheirinterest."

Asthereadermightsuspect,neitherpolaralternativeaccuratelydescribesthecomplexrealityoftheworldofcorporatedecisionmaking.Topmanagementsdopossesssignificantdiscretionovertheuseofcorporateresources.MerelyconsidertheabilityoftheCEOofamajorcompanytosatisfyhiswhimintermsoftheselectionofcharitiesandpetcausesthattheorganizationwillsupport.However,shareholdersarenotleftpowerless.Ampleevidenceisfurnishedbytheproxyfightsandtakeoverbattlesbetweendifferentgroupsofownersgrapplingforcontrolthat,onoccasion,brightenthefinancialpagesofthedailynewspapers.Clearly,thepowerofmanagementisfarfromtheabsolutepositionthatBerleandMeansforecast.

AfundamentaldevelopmentnotforetoldinTheModernCorporationandPrivatePropertyistheusebyinstitutionalinvestorsofthelatentpowerstheypossess.AlthoughBerleandMeanswereawareoftheroleofpensionfundsandinsurancecompanies,theydidnotforeseeeitherthegrowing

Pagexii

importanceoftheseinvestorsortheirdesiretoparticipateincorporatedecisionmaking.

AccordingtoaColumbiaLawSchoolInstitutionalInvestorProject,thetoptwentypensionfundsin1989owned10.6percentofGeneralMotorscommonstockand9.1percentofIBM.Inaddition,institutionsownedatleastonehalfofthestockoftwentysevenofthetopfiftyU.S.corporationsandatleastonethirdoffortysevenofthetopfifty.

PeterDruckerhasreferredtothisphenomenonas"pensionfundsocialism."Thetermmayhavebeenmoreprescientthanheanticipated.Themostactivistrolehasbeenthoseofgovernmentpensionfunds.Thirteenofthetoptwentypensionfundsarecontrolledbystateorlocalgovernments.ThetopfivestatepensionfundsthreefromNewYorkandtwofromCaliforniacontrol$202billion,orroughly8percentoftotalpensionfundassetsof$2.5trillion.

ByformingaCouncilofInstitutionalInvestors,agroupofmanagersoflargestatepensionfundshavecreatedamechanismwherebyasmallnumberoflargeshareholders(orrathertheiragents)canworktogether.Inafewrecentcases,someofthelargestinstitutionalinvestors,notablystategovernmentemployeepensionfunds,haveenteredintospecifictakeoverbattles.Inthecaseoftheattemptin1990totakeoverLockheed,severallargeinstitutionalinvestorssupportedthemanagementslateaftergainingassurancethatinthefuturetheycouldnamethreemembersoftheboardofdirectors.

Inabroadersense,theincreasedactivismofinstitutionalinvestorsisaresponsetotheauthors'concernabouttheeuthanasiaoftheshareholder.

The"Control"oftheCorporation

BerleandMeansvaguelydefinetheconceptof"thecontrol"ofthecorporation.Theyrefertoasubgroupofthestockholderswhohavetheactualpowerofselectingtheboardofdirectorsthroughanyofthefollowingways:(1)completeownershipofcommonstock,(2)majoritycontrol,(3)legaldevices,(4)minoritycontrol,and(5)managementcontrol.TheauthorsnoteinBookI,ChaptersVandVI,thattheinterestsofthosein"control"differfromtheprofitmaximizingdesiresoftheotherownersand,astheseinterestsmovefurtherapart,"thecontrol"willultimatelylieinthehandsofthemanagement.BerleandMeansprovideanearlyandearthystatementoftheagencyproblem:thosewhocontrolthecorporation,eveniftheyownalargeblockofstock,"canservetheirownpocketsbetterbyprofitingattheexpenseofthecompanythanbymakingprofitsforit."Thisraisesaseriousquestionabouttheincentivesformanagersofthemoderncorporationtoconductbusinessinaccordancewiththewelfareoftheowners.

Pagexiii

Boardsofdirectorshaverespondedtotheseconcernsinavarietyofways.Grantingkeyexecutivesoptionstopurchasethestockatsomefixedpriceabovethecurrentmarketvalueprovidesthemwithapowerfulincentivetomaximizeshareperformance.Bonusesintheformofstockensurethattherecipients,atleasttosomedegree,willstarttothinklikeshareholders.Predictably,however,corporateactivists(corporatecriticswouldbeamoreaccuratephrase)opposethesemethodsofcompensationwhenevertheissueispresentedatacorporateannualmeeting.Yet,shareholderapprovalisoverwhelminginvirtuallyallcases.

Nevertheless,manyseriousanalystsofthecorporationcontendthatthenormalincentivespreviouslydescribedarenotsufficient.Theywritefavorablyabout''leveragedbuyouts"and"goingprivate,"methodsofincreasingtheownershippositionofmanagementbyanorderofmagnitude.IfthesetypesofresponsestothefundamentalissuesraisedbyBerleandMeansbecamemorewidespread,theywouldmakethecorporationalessattractiveplaceformanyprivateinvestorswhohavenointerestin"controlling"theaffairsofthecompanywhosestockorbondstheybuy.

ThePositionoftheShareholder

Berleandmeansbemoanthechanged,morepassive,roleoftheshareholderofthemoderncorporation.Theynotetheextenttowhichthebondholderissuperior,beingguaranteedafixedreturnonthefundsinvestedinthecorporation.Incontrast,thestockholderisinalessdesirableposition,notknowingwhethertherewillbeanyreturnatallontheinvestment(BookII,ChaptersVIVIII).

Thisportionofthebookmayhaveweatheredleastwell.Atthepresenttime,wehearsooftenofthebondholderswhohavesufferedanerosionofthemarketvalueoftheprincipalbecausethemanagershavesohighlyleveragedthefirm.Typically,thishasbeendonebyissuinghighyieldingbutveryrisky"junkbonds."

Eveninmorestablecorporaterelationships,stockholderscanreceivebenefitsnotavailabletobondholders,notablyparticipatinginthegrowthofthefirm.WritingintheGreatDepression,BerleandMeanscouldnotenvisiontherapidinflationofthepostWorldWarIIperiod,whenstocksbecameamajorhedgeagainsttheerosionofrealvalue.Atthesametime,bondholdersoftenexperiencedseriousdeclinesinthemarketvalueoftheirportfolios,evenwhenthenominalvalueoftheirassetsandincomestreamsremainedunimpaired.

Pagexiv

StockExchangesandStockMarkets

BerleandMeansconsideredthelistingofcorporatesharesonastockexchangeandtheresultantopenmarketforthesesecuritiesasessentialto,andasaproductof,theriseofthemoderncorporation.Intheirview,dispensedshareholdershaveexchangedcontrolforliquidity.

Theauthorsdiscussthemanypossiblemechanismsthatthedirectorspossessinaffectingtheassetvalueofthestockorthedistributionofcompanyearnings(BookII,ChaptersIIandIII).Basedontheimperfectionsofnormaljudicialprotectionofshareholderrights,TheModernCorporationandPrivatePropertypresentsthecaseforsubstantialregulationofsecuritymarkets(BookII).

Aswehaveseeninthemorethanhalfcenturysinceitspublication,suchprotectioncanbeexercisedbybothprivatesectorandpublicsectorinstitutions.Thus,theprivateNewYorkStockExchange(NYSE)determinesmany''rulesofthegame,"and,accordingtotheauthors,makes"slowbutsteadyprogress"inensuringtheavailabilityofsecuritiesattheirmarketvaluetoallpotentialinvestors.Furthermore,itistheNYSEthatrequiresalllistedcompaniestosetupauditcommitteesstaffedentirelybyoutsidedirectors.Simultaneously,theU.S.SecuritiesandExchangeCommissionplaystheroleof"coponthebeat,"toensureanadequateflowofinformationtotheprospectivepurchasersandcurrentownersofcorporateshares.

TheprescienceoftheauthorsisespeciallyevidentinBookIII,ChapterIII,wheretheydescribetheproblemofinsiderinformation.Theystatethatthelegalsystemcanonlychooserandomlyofthemanyunethicalactscommittedinsecuritiesmarketsandoccasionallysettleononespecialcaseonwhichtoactupon.However,BerleandMeansreachaconclusionmoreoptimisticthanexperiencetodatecanjustify:"Asthestandardsofdisclosureofcorporateaffairsbecomemoreexacting,theproblemofthedirectorsandmanagersinthemarketwillbecomeincreasinglylessimportant."

WithoutdefendingtheunethicalpracticesofsuchslickoperatorsasIvanBoesky,thefactisthatin1990nolegaldefinitionofinsidertradingexiststoguidethehonestmarketparticipantwhowantstoobeythelaw.Instead,legaladviserscanonlyprovideexamplesofthekindsofbehaviorthathaveresultedingovernmentprosecutionandthosethathavenot.

CorporationResponsibility

Forwhosebenefitdoesthecorporationoperate?BookIV,ChapterI,raisesthisfundamentalissue.Thetraditionallegalansweristhatthecorporationisconductedforthebenefitoftheowners.BerleandMeansviewcorporateresponsibilitytoshareholdersinthesenseof"equitable

Pagexv

control''wheremanagers,havingobtainedpowerfromthedispersedgroupofstockholders,actinthebestinterestoftheownersofthefirm.Theauthorsthenquestionthisbyanalyzingtheprofitincentivetotheexecutives.Accordingtotheauthors,executiveshavesuchan"insignificant"fractionoftraditionalpropertyrightsthattheincentiveofprofitsisnotstrongenoughtoinsurethattheywillmakeeffectiveuseofcorporateproperty.

Thelargedegreeofmanagerialdiscretionovercorporateresourcesisborneoutbyavarietyofcasestudies.ResearchersattheHarvardBusinessSchoolreportedthatnoneofthetopexecutivesoftwelvesuccessfulAmericancompanieswasveryconcernedaboutthemarketvalueofthecompany'sstock.Onechiefexecutivestatedthispositionveryforcefully:

Thehighestprioritywithmeisperpetuationoftheenterprise.I'dliketoleavethisjointinbettershapethanwhensomeonepassedmethebaton.Ihavetotakecareoftheshareholdersinthis,butIdon'tsweattheshareholderstoomuch.

Overtheyears,afarbroaderdefinitionoftheresponsibility,somecallitthesocialresponsibilityofthecorporation,hasdeveloped.Inaninfluentialandwidelycitedreportonthesubject,theCommitteeforEconomicDevelopment(CED)describestheprofessionalmanagerasa"trustee"balancingtheinterestsofmanydiverseparticipantsandconstituentsintheenterprise,includingcustomers,employees,suppliers,andthecommunity.Shareholdersarelistedonlyasoneamongthoseworthygroupsandtheyarelistedlast.

ItturnsoutthattheCEDstatementisnottoodifferentfromthedescriptionprovidedinTheModernCorporationandPrivateProperty:"Newresponsibilitiestowardstheowners,theworkers,theconsumers,andtheStatethusrestsupontheshouldersofthoseincontrol."

BerleandMeanscontendedthatthedivorceofownershipfrommanagementdestroyedthetraditionalbeliefthatprofitmaximizationwilldrivethecorporationtomostefficientlyuseitsassets(BookIV,ChapterII).Ingoodmeasure,thewaveofhostiletakeoversinthelate1980swasaresponsetomanagerswhopaidinsufficientattentiontotheconcernsoftheshareholders.Toomanychiefexecutivesfocusedonthetheaterandoperaastheepitomeofacorporation'sresponsibilitytosociety.Theyseemedtoforgetthatabusinessisaneconomicinstitution,designedtoprovidegoodsandservicesforconsumersinordertobenefitthestockholders.

BerleandMeansforecastthat,asthesizeofthecorporationandthenumberofholdersofitsstockgrew,apointwouldbereachedwhere"thecontrol"wouldbeheldbyaselfperpetuatingboardofdirectors.Sincethejudicialprocess(alongwiththeauthors'understanding)isunabletodealwithintricaciesandvagariesofcorporate"control,"theauthorssawnowaythatlawswouldbeestablishedtopreventsuchsituationsfromoccurring.

Pagexvi

Hence,thefiduciaryroleofthecorporateboardofdirectors(BookII,ChapterV)deservescontinuousattentionandneedstobeupdatedfromtherathersimpleviewheldbyBerleandMeans.

Bothinlegaltheoryandbusinesspractice,theboardisthelinkbetweentheshareholderswhoowntheenterpriseandtheexecutiveswhomanageit.Untilthepastdecadeortwo,theseniorexecutivesoftheenterpriseoftencomprisedthemajorityofthetypicalcorporateboard,withthefirm'sattorneysandbankers(commercialandinvestment)servingasoutsidedirectors,togetherwithimportantcustomersandpoliticalfiguresinthelocalityinwhichthecompanymaintaineditsheadquarters.

Inrecentyears,however,mostoftheboardsofthelargercompaniesconsistprimarilyofoutside(nonmanagement)directors,mostofwhomatleastnominallyareindependentofthemanagement.However,thechiefexecutive(CEO)usuallyservesaschairmanoftheboard,settingtheagendaformeetingsandpresidingoverthedeliberations.

Currently,theboardsofdirectorsofabout60percentofthelargercorporationshavesetupnominatingcommitteestoproposebothcandidatesfortheboardandseniorofficersofthecompany.Thesecommitteesusuallyhaveastrongmajorityofoutsidedirectors,typicallyfouroutoffive.However,thesestatisticsdolittletoilluminatethecontinuingpowerfulroleofthechiefexecutiveininitiatingorapprovingcommitteeselections.Inpractice,approximately80percentofoutsidedirectorsarechosenbythechairmanchiefexecutive,whousuallyexercisesaneffectivevetoovertheotherselections.

Underthecircumstances,manycriticschargethatthetypicaldirectoractsasarubberstamp,quicklyapprovingtherecommendationofthechairmanCEO.Althoughthischargedoesnotlacksubstance,realityisfarmorecomplicated.Virtuallyallmodernauthoritiesoncorporategovernanceagreethatintimesofcrisistheboard,ledbytheoutsidedirectors,exercisesitspowers,usuallytotheacclaimofimpartialobservers.However,shortofemergencies,theboardisreluctantandfindsitdifficulttooverridetherecommendationsofthemanagement.

Intheir1989studyofcorporateboards,JayW.LorschandElizabethMacIverreportawidelyheldviewofdirections:''...toadvisethemanagement...hecan'tdomuchmorethanthat."Therearemanyreasonsforthatsituation,severalaltogethersensible.Themanagementknowsmoreaboutthedetailsofthecompany'soperationsthantheoutsidedirectorsandthereisanaturaltendencytodefertotheinsidedirectors.Morefundamentally,acommitteecansetpolicybutitcannotrunanorganization,onlyoneleadercan.Hence,awiseboarddoesnotattempttocompetewiththechairmanCEO,butviewsitsroleasprimarilyprovidingadviceandcounsel.

Pagexvii

Allthatiscorrect.Nevertheless,thereareoccasionswhentheboardshouldturndowntheproposalsbythemanagementbecausetheinterestsoftheshareholdersdictatesuchaction.Examplesincludearecommendedacquisitionthatwouldundulydilutethevalueofthestockholders'investment,orarequestbyastrongdivisionchiefforacapitalinvestmentthatwouldnotlikelyyieldareturnadequatetocoverthecostofcapital.

Sadlytoreport,itistherareboardthat,underthosecircumstances,cansay''no."Onthepositiveside,wiseCEOsinformallyreviewcontroversialproposalswithkeyoutsidedirectorspriortoformalpresentationtotheboard.Thus,theyavoidsituationswheretheyforcetheirboardstoturnthemdownonimportantmatters.Toofrequently,however,theCEOchairmansimplydominatestheboard'sdecisionmaking,eventhoughindependentoutsidedirectorsconstituteaclearmajority.

InBookIV,ChapterIII,theauthorsreturntoanalyzingtheroleofandthemotivatinginfluenceontheprofessionalmanager.Inmorerecentyears,clearevidencehasbeendevelopedonthemotivationsthatcomprisethedrivingforceofmoderncorporations.Corporatemanagersarenotfundamentallydifferentfromotherindividualsnordotheydifferfromthoseofthepast.Selfinterestdoesandshouldbeexpectedtodominatetheirdecisionmaking.

Thesamefactorsthatencouragemanagerstobegeneroustothemselvesinallocatingcorporateresourcescanalsobethedrivingforcebehindcorporateacquisitions.Afterall,acquisitionsdoincreasetheamountofcorporateresourcesinthewinningmanagement'sspanofcontrol.StudiesbytheConferenceBoardconfirmwithtellingstatisticswhatmostpeopleinstinctivelyknow:topexecutivesinlargercompaniesarepaidmorethantheircounterpartsinsmallerfirms.Sizeoffirmisthemostcompellingfactor.

Tobesure,profitabilityandotherfactorshelptodeterminemanagementpayandfringebenefits.But,onaverage,thechiefexecutiveofa$10billioncompanygetspaidmuchmorethantheheadofafirmwhoseyearlysalesareonly$5billion.InplainEnglish,thebiggerthecompany,thelargertherewardstotopmanagement.Theintangiblemanagementbenefitsfromcontrollinglargeenterprisealsoaresubstantial.BeingonthecoverofFortuneorBusinessWeekisaheadyexperience.

TheFutureoftheCorporation

BerleandMeanswrotethatthecorporationasaninstitutionmaybecomenotonlyanequaltothestate,butevensupersedeitasthedominantsocialorganization(BookIV,ChapterIV).Fromaneconomicviewpoint,theyarecorrect.Theprivatelyownedcorporationistheprevailingformoforganizingtheproductionanddistributionofgoodsandservicesinthe

Pagexviii

UnitedStates,andinothercapitalistnationsaswell.Thecorporationislikelytocontinueplayingthisrolefortheindefinitefuturebecause,asthelateNeilJacobystated,''Thereissimplynopromisingalternativewayoforganizingandcarryingoutmostofthetasksofproduction."

Moreover,theriseofpoliticalactioncommitteeswithlargebudgetsforpoliticalcontributionshasgivenmanycorporationsdirectaccesstopowerfulgovernmentaldecisionmakers.Also,thelackofgeographiclimitstotheexerciseofcorporatepower,acharacteristicnotedinpassingbyBerleandMeans,hasgivenrisetothemultinationalenterprise.Yetthecontrastbetweengovernmentandbusinesspowersremainsstriking.Thelargestcompanycannottaxusthesmallestunitofgovernmentcan.Themostprofitablecorporationcannotthrowusinjailthesmallestmunicipalitycan.

Ahalfcenturylater,whatcanwesayaboutBerleandMeans'TheModernCorporationandPrivateProperty?Despiteitsmanyspecificshortcomings,thebookremainsausefulintroductiontotheinternalorganizationofthecorporationinmodernsociety.Theanalysisbythisuniquecombinationoflawyerandeconomistisstillrelevanttoexploringtherelationshipsbetweentheownersofthefirmanditsmanagers.

Toextendanoldphrase,manyoftheanswersprovidedbythisbookhavebeensupersededbymorerecentevents,butthequestionsraisedcontinuetobeworthyoftheattentionofscholarandpractitioneralike.

MURRAYL.WEIDENBAUMMARKJENSEN

Pagexix

PROPERTY,PRODUCTIONANDREVOLUTION:APREFACETOTHEREVISEDEDITION

Thirtysixyearsafteritsfirstpublication,thereisherepresentedarevisededitionofTheModernCorporationandPrivateProperty.BecauseitwascausativebothindevelopmentoflegalandeconomictheoryandinpoliciesandmeasuresoftheUnitedStatesgovernment,includinglawscreatingtheSecuritiesandExchangeCommission,theoriginaltextisreproduced.Itisadocumentinthehistoryofthepastgeneration.

ToitisaddedmyprefacereviewingsomeofthedevelopmentsforecastinthefirsteditionalsoaddedisDr.Means'summaryofcontrastofcorporateconcentrationasitappearedwhenwefirstplottedit,andasitappearsin1968.IamindebtedtotheColumbiaLawReviewforpermissiontoreprintinmyownprefatorystatementmaterialfirstappearinginthatreview.

Noattemptisheremadetodescribethedevelopmentofeconomictheory,orlistthegreatnumberofbooksandarticlesbasedonorcarryingforwardtheconceptionssetoutinthefirstedition.Enoughtosaythattheirimpetusisfarfromspent.Institutionssuchasthemoderncorporationhavenotonlyaffectedeconomiclifetheirstudyhasdemandedplacein(iftheyhavenotrecast)agooddealofeconomicandpoliticaltheory.

Morethanthirtyyearsago,intheprefaceofthisbook,Iwrote:

Thetranslationofperhapstwothirdsoftheindustrialwealthofthecountryfromindividualownershiptoownershipbythelarge,publicly

Pagexx

financedcorporationsvitallychangesthelivesofpropertyowners,thelivesofworkers,andthemethodsofpropertytenure.Thedivorceofownershipfromcontrolconsequentonthatprocessalmostnecessarilyinvolvesanewformofeconomicorganizationofsociety.

Dr.MeansandIhadpointedoutthatthetwoattributesofownershipriskingcollectivewealthinprofitseekingenterpriseandultimatemanagementofresponsibilityforthatenterprisehadbecomedivorced.Accordinglyweraisedthequestions:

Mustwenot,therefore,recognizethatwearenolongerdealingwithpropertyintheoldsense?Doesthetraditionallogicofpropertystillapply?Becauseanownerwhoalsoexercisescontroloverhiswealthisprotectedinthefullreceiptoftheadvantagesderivedfromit,mustitnecessarilyfollowthatanownerwhohassurrenderedcontrolofhiswealthshouldlikewisebeprotectedtothefull?Maynotthissurrenderhavesoessentiallychangedhisrelationtohiswealthastohavechangedthelogicapplicabletohisinterestinthatwealth?Ananswertothisquestioncannotbefoundinthelawitself.Itmustbesoughtintheeconomicandsocialbackgroundoflaw.

Webasedthesequestionsonthegrowingdominanceofthecorporateform,theincreasingdecisionmakingpowerofcorporatemanagement,theincreasinglypassivepositionofshareholders,andtheincreasinginapplicabilityoftheethicalandeconomicjustificationsgiven(rightlyenoughatthetime)byclassiceconomics.

Theobjectofthisprefacetotherevisededitionistoreviewsomeaspectsofthisconceptioninthelightofagenerationofexperienceandconsequentdevelopments.

ITheContinuingCurrentofChangeto''CollectiveCapitalism"

Factually,thetrendtowarddominanceofthatcollectivecapitalismwecallthe"corporatesystem"hascontinuedunabated.Evolutionofthecorporationhasmadestockandsecurityownershipthedominantformbywhichindividualsownwealthrepresentingpropertydevotedtoproduction(ascontrastedwithpropertydevotedtoconsumption).ThelastgreatbastionofindividuallyownedproductivepropertyagriculturehasbeendramaticallydeclininginproportiontothetotalproductionoftheUnitedStates,andeveninagriculture,corporationshavebeensteadilymakinginroads.Outsideofagriculture,wellover90percentofalltheproductioninthecountryiscarriedonbymorethanamillioncorporations.Inallofthem,managementistheoretically

Pagexxi

distinctfromownership.Thedirectorsofthecorporationarenotthe''owners"theyarenotagentsofthestockholdersandarenotobligedtofollowtheirinstructions.Thisinitselfisnotdeterminative.Numericallymostofthemillioncorporationsare"close"thestockholdersarealsothedirectorsoraresorelatedtothemthatthedecisionmakingpowerrestswiththestockholders.Quantitatively,however,athousandorsoverylargecorporationswhosestockholders'listsrunfrom10,000upto3,200,000,asinthecaseofAmericanTelephoneandTelegraph,accountforanoverwhelminglylargepercentagebothofassetholdersandofoperations.FortuneMagazinetabulatedthe500largestUnitedStatesindustrialcorporationsandfoundtheircombinedsaleswere245billiondollarsin1963orabout62percentofallindustrialsales.Thefactorofconcentrationis,ofcourse,higherinthepublicserviceindustries:communications,transportationandpublicutilities.Itisnotunfairtosuggestthatiftheseindustrieswereincluded(theyarenotintheFortunetabulation),600or700largecorporations,whosecontrolnominallyisinthehandsoftheir"public"stockholders(actually,oftheirmanagers),accountfor70percentofcommercialoperationofthecountryagricultureaside.Therehasbeenaslowbutcontinuingtrendtowardcorporateconcentrationreckonedbythepercentageofindustrythuscontrolled.Actuallythetotaltrendismoremarkedbecause,incontrasttototaleconomicgrowth,theproportionofAmericaneconomicactivityrepresentedbyindividuallycontrolledagriculturehasbeenrelativelydeclining.Americaneconomicsatpresentisdominantly,perhapsoverwhelmingly,industrial.

TheeffectofthischangeuponthepropertysystemoftheUnitedStateshasbeendramatic.Individuallyownedwealthhasenormouslyincreased.Itistodayreckonedatmorethan1,800billiondollars.Ofmoreimportanceisthedistributionofthatfigure.Relativelylittleofitis"productive"propertylandorthingsemployedbyitsownersinproductionorcommercethoughfiguresarehazyattheedges.Thelargestitemofindividuallyownedwealth,exclusiveofproductiveassets,isdescribedas"owneroccupiedhomes"(approximately520billiondollars).These,ofcourse,areprimarilyforconsumption,thoughafractionofthemareprobablyfarmsteads.Thenextlargestitemconsumerdurablesaccountsfor210billiondollarsmorethesearechieflyautomobilesandhomeequipment,againchieflyusedforpersonalconvenienceandnotforcapitalorproductivepurposes.

Thepropertysystemasappliedtoproductiveassetsbreaksdown(asoftheendof1963)asfollows:525billiondollarsofsharesof

Pagexxii

corporatestock210billiondollarsinfixedincomefinancialassets(federal,stateandlocalgovernmentsecurities,corporateandforeignbonds,lifeinsurancevalues,etc.)and360billiondollarsinliquidassets,chieflycashinbanks.Thesefiguresmeanthat,farandaway,thelargestitemofpersonallyowned''property"representingproductiveassetsandenterpriseisintheformofstockofcorporations.Inaddition,asubstantialamountofotherassetsheldbyindividualsconsistsofclaimsagainstintermediatefinancialinstitutionsbanks,insurancecompaniesandthelike,whoseholdingsincludelargeamountsofcorporationstocks,bondsandsecurities."Individuallyowned"enterpriseisthussteadilydisappearing.Increasingly,theAmericanownshishome,hiscar,andhishouseholdappliancestheseareforhisconsumption.Simultaneously,heincreasinglyownsstocks,lifeinsurance,andrightsinpensionfunds,socialsecurityfundsandsimilararrangements.Andhehasajob,payinghimawage,salaryorcommission.

Comparablefiguresdonotrunbackto1932noonepriortoFranklinD.Roosevelthadbeenvividlyinterestedindevelopingafirstratesystemofsocialstatistics.Myowncrudefigures,workedoutin1934attheColumbiaLawSchoolinalittlenotedvolume,LiquidClaimsandNationalWealth,showedthatthetotalofalldomesticstocksandbondsreachedapeakof100.7billiondollarsin1929mustbeadded54billiondollarsofnetliquidclaims(chieflybankbalances),and12.6billiondollarsoflifeinsurancevaluesbuttherewasnodivisionbetweenindividuallyownedandcorporateownedwealthatthattime.Mycoauthor,V.E.Pederson,andIestimatedthatinasingledecade(19221932)morethanonesixthoftheentirenationalwealthhadshiftedfromindividualhandsintomanagerialthatis,corporatehands,andwesuggestedthatatthatratefortyyearswouldseethewealthoftheentirecountrysplit,mostofitbeingoperatedbycorporatemanagement,thoughits"ownership"wouldberepresentedbyindividual"holdings"ofstocks,bonds,andotherliquidclaims.

Basedonthefigurestodate,thatdevelopmenthasgonefartowardaccomplishment.Incrudesummation,most"owners"ownstock,insurancesavingsandpensionclaimsandthelike,anddonotmanagemostmanagers(corporateadministrators)donotown.Thecorporatecollectiveholdslegaltitletothetangibleproductivewealthofthecountryforthebenefitofothers.

Theword"revolutionary"hasbeenjustifiablyappliedtolessfundamentalchange.TheUnitedStatesisnolongeranticipatingadevelopment.Itisdigestingafact.

Pagexxiii

IITheEmergingConceptionofProperty

Lawyersareaccustomedtoconceiveofpropertyintermsofancientclassification.Iftangible,itwas''real"thatis,landorrightsderivedfromlandoritwas"personal"mobile,capableofbeingused,takenaway,moved,transferredandsoforthbyitsowners.Ifintangible,itwasa"choseinaction"aclaimonoragainstotherindividualsorentitiescapableofbeingenforcedorprotectedinthecourts.Someofthiswas"negotiable,"passingunderthelawmerchantoradaptationsthereof.Theproprietas(therelationoftheindividualorownertothispropertyreal,personalorclaims)wasassumedtobefixed.

Thereisnooccasiontochangetheseclassicdefinitions.Theydoquitewellforthepurposesofdefiningrights,methodsoftransfer,handlinginterveningclaims,andthemyriadminorproblemsoftransmissionandadjustment.Whathaschangedistheconceptionofproprietas.Iheresuggestthatanewclassificationhasbeensuperimposedontheoldtheory.

Mythesisisthat"property"isnowdividedintotwocategories:(a)consumptionpropertyontheonehandand(b)productivepropertyontheotherpropertydevotedtoproduction,manufacture,serviceorcommerce,anddesignedtooffer,foraprice,goodsorservicestothepublicfromwhichaholderexpectstoderiveareturn.

Inrespectofproductiveproperty,theproprietashasnowbeenmadesubjecttoanoverall,politicaldeterminationastothekindofcivilizationtheAmericanstateinitsdemocraticprocesseshasdecideditwants.Thisisanongoingprocess,notyetcomplete.

Asacorollary,productivepropertyhasbeendividedintotwolayers:(1)thatfractionwhich,thoughnotmanagedbyactiveowners,isadministeredtoyieldareturnbywayofinterest,dividendsordistributionofprofit,and(2)thatlayerdominatedandcontrolledbytherepresentativesordelegatesofthepassiveowners,whosedecisionsarenowsubjecttothepoliticalprocessjustnoted.Inthiscategory,socialdevelopmentisatpresentintenseandlikelytocontinue.

Thisessaydoesnotdealwithforcespresentandemergingthatnowbearonorwilllateraffectconsumptiveproperty.Unquestionablytheseexist.Aspopulation,urbanizationandcongestionsteadilyincrease,oneman'sconsumptiveusemaybecomeanotherman'sprivation.Enjoymentofconsumptivepropertymaydependuponfacilitiesaswellasregulationsprovidedbythestate.Thusautomobilesrequirebothroadsandtrafficrulessuburbanhomescanbecomeuntenantableunlesslandusecontrolisprovidedbythecommunityandtherighttosellortransfermayberestrictedbyantidiscriminationlaws.

Pagexxiv

Ingeneral,however,theimpactofmodernandeconomicevolutionseemstobeanexpansionofaveryoldcommonlawmaxim:Useyourownpropertysoasnottoinjureothers.Theessentialaimistopreservethegreatestavailabledegreeofconsumptionandchoiceasemptylandfillsup,roadsbecomecongested,andthecapacitytoinvadeothers'livesbyesthetichorrorsisenlargedbytechnique.Americanlawandlawschoolshave,happily,developedagrowingnumberofscholarsandexpertsinthisfield.Letusconfine(thewordisscarcelyapt)ourselvestotheimpactofeconomicandsocialevolutiononproductivepropertyinitstwoaspects:(1)managerialproductive(management)and(2)passivereceptive(stockandsecurityownership).

IIITheChangingContentofProperty*

Wemustnoteanenormousexpansionofthescopeoftheterm''property"inthisconnection.Notonlyisitdivorcedfromthedecisionmakingpowerofitssupposedlybeneficialholders(stockholdersandtheirvariousremoves),butithascometoencompassasetofconceptionssuperimposeduponthecentralrealityofdominationovertangiblethings.Businessmendescribeanenterprise,greatorsmall,as"theproperty."Theydonotmeanmerelythephysicalplant.Theyincludeaccesstoallthefacilitiesnecessarytoproduce,transport,distributeandsell.Theymeananentireorganizationofpersonnelwithoutwhichthephysicalplantwouldbejunktheymeanahierarchyofexecutives,technicalexperts,salesmanagersandmenaswellasthedealerorganizationandthelaborrelationshabits.Theserelationshipsareincreasinglyprotected,notmerelybythelawofcontract,butbyanincreasingbodyoflawimposinguponindividualsameasureofloyaltytothecentralenterprise.Forexample,theymaynotacquireandselltoothers,aspartoftheirpersonalcapacityorequipment,confidentialtechnicalinformation,dataonsales,orcustomergoodwill.Underlyingthisextensionofthepropertyconcepttomanagementrelationshipsisrecognitionofthefactthatthe"capital"hasbeenprojectedfarintotherealmofintangibles.Thecentralenterpriseisspendinggoodmoneyofteninimmenseamountsbuildingthisorganization,

*Therapidincreaseintechnicaldevelopmentnecessarilydowngradesthepositionofphysicalortangiblethingsandupgradesthefactorsoforganizationandtechnicalknowledge.Organizationisnotreducibletoaformula.Technicalknowledgeisrarelyifeverassignabletoanysingleindividual,groupofindividualsorcorporation.Itispartoftheheritageofthecountryandoftherace.Inneithercasedothetraditionalformulaeapplicabletocommonlawpropertyfitthecurrentfact.

Pagexxv

thistechnicalinformation,theserelationshipsitisentitledtobeprotectedagainsttheirappropriationbyindividuals.

Acounterforceregisterstheimpactofthisextension.Literallyenormousquantitiesoftechnicalinformationhavebeenaccumulatedbygovernmentandthrustintofieldsofnonstatistenterprise.Resourcesofnuclearenergyandnuclearphysicsarethemostdramaticbutbynomeanstheonlyorevenperhapsthemostsignificantoftheseintrusions.Nearlytwothirdsofalltechnicalresearchisnowfinancedbythefederalgovernment.Throughagreatnumberofmodernindustriesonethinksatonceofelectronics,ofaviation,andofspacesatellitecommunicationthisgovernmentfinancedtechniqueenterstheprocessofcorporateexplosion.Bynostretchofimaginationcanitbedescribedaspropertyprimarilycreatedbyprivateenterprise.Likeitornot,theseassetsaresocialandstatistinorigin.Completeturnoveroftheseassetsto''private"(thatis,nonstatist)ownershipseemswhollyunlikely.IllustrationoftheimpactandofacompromiseisfoundintheCommunicationsSatelliteActauthorizingcreationofComSat,acorporationownedonehalfbythefederalgovernmentandonehalfbyprivateinvestors.TheproportionofinvestmentbycurrentcommunicationsenterprisessuchasA.T.&T.wasseverelylimited,despitethefactthattheprimaryfunctionofthenewfacilitiestobeprovidedinouterspacewastoofferA.T.&T.andlikecorporationsnewavenuesofcommunication.

Earlierdiscoverythatelectromagneticenergycouldbeusedforradioandlatertelevisionresultedinanoddandundeterminednewformofproperty.Ittooktheformofshorttermexclusivelicenses,grantedbytheFederalCommunicationsCommission,tousespecificwavelengths.Theseweregrantedtoprivatecompaniesbutrapidlyripenedintoanuncodifiedbutthoroughlyrecognizedexpectancy(ifnotright)thatthelicenseecompanies,throughrenewaloftheirlicenses,wouldcontinuetoenjoythewavelengthfrequenciesassignedthem.Temporarylicenses,plusexpectancyoftheirrenewal,becamethebasisfordollarvaluemarketsforradioandTVstations,bigandlittle.Thestatistrightthusbecameengulfedina"privateproperty"institution.TheComSatdebateandtheresultingstatutesufficientlyindicateresistancetothisprocess,andthecompromisesreachedbetweenthestateandthenonstatistusersoftheassetsdevelopedbythestate.

"Property"whenusedinconnectionwithandasadjuncttolegal(thatis,corporate)ownershipisthuschangingitsimportnotbecausetheoldrulesrelatingtoownershipofaplanthavechanged,butbe

Pagexxvi

causeoftheadditionofanenormousproportionofnewcontentdifferingbothinkindandinoriginfromtheold.TheResearchInstituteofAmerica*inaprivatereportobserved:

Athirdindustrialrevolutionisinthemaking,asdramaticasthosewhichfollowedtheharnessingofsteampowerandtheproliferationofelectricity.Thisonewillbesiredbythereleaseofnuclearandthermonuclearenergy,theelectronicconversionofenergytowork,andtheuseofcyberneticsandcomputerstofreehumanenergyfromroutinedecisionmaking.By1980,theindustrialworldwillbeasdifferentfromtoday'sastodayisdifferentfromthe19thcentury.

Toprojectthisdiscussionwouldtakeusintotherealmofsciencefictionfarbeyondthecompetenceofthiswriter.Oneobservationneverthelessappearswarranted.Whateverthefantasyofthesciencefictionwriters,itwillprobablybeoutstrippedinbothscopeandspeedbythefact.Inthelightofwhathasalreadybeenachieved,theJulesVernesandtheH.G.Wellsesofyesterdayseemlikechildren.Canthesciencefictionwritersoftodayexpectabetterfate?

Astechnologyanditsorganizationforproductionanduseevolve,sowillproperty.The''private,"and,stillmore,individualized,aspectswillbecomeincreasinglyattenuated.ElishaGray,havingdevelopedtheembryonicideaoftelecommunication,organizedaprivatecompanytoputittoproductiveuseandaskedprivateinvestorstojoinhimandrisktheircapitalintheventure.Today'sElishaGrayorAlexanderGrahamBellwouldbeateam,workinginagreatresearchcenter,moreoftenthannotfinancedbythefederalgovernment.Suchtechniquesastheyemergeare"property"ofagovernmentthatdoesnotneedtheprivateinvestortosupplyriskcapitalalthoughasagesturetowardoldtimes,itmayofferparticipation,aswasdoneintheComSatlegislation.PlainlywearemovingtowardanewphasefundamentallymorealientothetraditionofprofiteventhanthatforecastinTheModernCorporationandPrivateProperty.

Ashiftinattitudetowardcorporatepropertyarisesinpartfromthechangedoriginoffinancecapital.Thepropertyofcorporationsisdedicatedtoproduction,nottopersonalconsumptionbut,evenmoresignificant,thatpropertyisnolongertheresultofindividualeffortorchoice.Thischangehascomesilently.Itsimplicationsevenyetarenotunderstood.

Corporationswereoriginallygroupsofinvestorspoolingtheirindividualcontributionsofriskcapitaltoorganizeandcarryonan

*ResearchInstituteofAmerica,YourBusinessintheNext15Years,June30,1964.

Pagexxvii

enterprise.Sincetheyhadsavedtheirearningsorgainsandhadriskedthemintheundertaking,theywereassimilatedtotheownerofland,whoclearedandcultivatedit,andsolditsproducts.Astheeconomicsofthetimewent,thiswasjustifiable.Theyhadsacrificed,riskedand,tosomeextent,workedatthedevelopmentoftheproduct.Presumablytheyhaddonesomethingusefulforthecommunity,sinceitwaspreparedtopayfortheproduct.

Amaturecorporationtypicallydoesnotcallforinvestorsuppliedcapital.Itchargesapriceforitsproductsfromwhichitcanpaytaxation,costs,depreciationallowances,andcanrealizeaprofitoverandabovealltheseexpenses.Ofthisprofititem,approximatelyhalfgoesasincometaxestothefederalgovernment,and60percentoftheremaininghalfisdistributedtoitsshareholders.Itaccumulatesforcapitalpurposestheundistributed40percentanditsdepreciationcharges.Thisisaphenomenonnotof''investment,"butofmarketpower.Sincecorporationslegallyhaveperpetuallife,thisprocesscancontinueindefinitely.Theresulthasbeenthatmorethan60percentofcapitalenteringaparticularindustryis"internallygenerated"or,moreaccurately,"pricegenerated"becauseitiscollectedfromthecustomers.Another20percentofthecapitalthecorporationusesisborrowedfrombankschieflyinanticipationofthisaccumulativeprocess.Thecorporationsinaggregatedoindeedtapindividual"savings,"butforonlyalittlelessthan20percentoftheircapital,andmainlythroughtheissuanceofbondstointermediatesavingscollectinginstitutions(lifeinsurancecompanies,trustfunds,pensiontrustsandsavingsbanks).

Thecorporationbecomesthelegal"owner"ofthecapitalthuscollectedandhascompletedecisionmakingpoweroveritthecorporationrunsonitsowneconomicsteam.Ontheotherhand,itsstockholders,bynowgrandsonsorgreatgrandsonsoftheoriginal"investors"or(farmoreoften)transfereesoftheirtransfereesatthousandsofremoves,haveandexpecttohavethroughtheirstockthe"beneficialownership"oftheassetsandprofitsthusaccumulatedandrealized,aftertaxes,bythecorporateenterprise.Managementthusbecomes,inanoddsortofway,theuncontrolledadministratorofakindoftrusthavingtheprivilegeofperpetualaccumulation.Thestockholderisthepassivebeneficiary,notonlyoftheoriginal"trust,"butofthecompoundedannualaccretionstoit.

Notsurprisingly,therefore,wediscoverabodyoflawbuildinguptoprotectanddealwiththisremarkablephenomenon.Tothatfactitselfperhapsisdueacontinuingtendency:subjectionofproperty

Pagexxviii

devotedtoproductionthatis,chieflyinmanagerialhandstolegalrulesrequiringauseofit,moreorlesscorrespondingtotheevolvingexpectationsofAmericancivilization.

IVDevelopmentofPropertyLaw

Inevitably,thecommonlawlegalsystemmovestonormalizethenewareasthuscomprehendedwithinthegeneralheadof"productiveproperty."Twomajorlinesareobserved.Thefirst(primarilyoutsidethescopeofthisessay)proceedsthroughtaxation.Theprinciplehasbeenestablishedthatthefederalgovernmentand,inlessermeasure,stategovernmentsbothmayandshouldtakeaportionoftheprofitsofcorporationsthroughthedeviceofdirectcorporateincometax.Undertherecenttaxreduction,thefederalgovernmentpresentlytaxescorporateprofitsabove$25,000attherateofabout50percent.Thisvirtuallymakesthestateanequalpartnerasfarasprofitsareconcerned.Factually,thoughsilently,theprocessrecognizesafundamentalandentirelydemonstrableeconomicpremise.Corporationsderivetheirprofitspartlyindeedfromtheirownoperations,butpartlyalsofromtheirmarketpositionandincreasinglyfromtechniquesresultingfromstateexpendituresoftaxpayers'money.Inthissense,theAmericanstateisaninvestorinpracticallyeverysubstantialenterprisewithoutitsactivity,theenterprise,ifitcouldexistatall,wouldbeorwouldhavebeencompelledtospendmoneyandefforttocreateposition,maintainaccesstomarket,andbuildtechnicaldevelopmentitcurrentlytakesforgranted.Underthesecircumstances,thereislittlereasonorjustificationforassumingthatallprofitsshouldautomaticallyaccruetostockholders.Putdifferently,stockholdersnothavingcreatedtheentireenterprisearenolongerthesoleresiduarylegatees(afterproductioncostsanddepreciation)ofalltheprofitsofanindustrialprogress,muchofwhichisderivedfromstateoutlay.

Asecondlineofdevelopmentimpingesdirectlyonmanagementoperation.ItarisesfromanevolvingsocialconceptofwhatAmericancivilizationshouldlooklike.ItbeganwiththeminimumwagelegislationandtheWagnerAct,laterrevisedbytheTaftHartleyActandmodifiedbytheLandrumGriffinAct.Thesestatutes,andthegrowingbodyofcaseandadministrativelawunderthem,limitthedecisionmakingpowerofcorporatemanagementswithrespecttowagesandlaborrelations.Ofinterestisthefactthattheselawsinthemain(thoughnotuniversally)areappliedtogeneralenterpriseforprofitmakingoperationsinproductionorcommerce.Slowlyadistinctionbegantodevelopbetweenbothexpendituresandactivitiesforpersonal

Pagexxix

consumption,andenterprisesdirectedtowardtheofferofgoodsorservicestothepublicfromwhosepurchaseorpaymentaprofitisexpected.

Thelatter,itincreasinglyappears,aresubjecttotheimpositionofrulesderivedessentiallyfromtheBillofRights.Theserulesaredesignedtoassurethatthemarketpowerofenterpriseshallnotbeusedsoastocreateorperpetuateconditionswhichthestateitselfisforbiddentocreateormaintain.In1952,thewriterdrewattentiontothistendency,noting:

[T]hereisbeinggeneratedaquiettranslationofconstitutionallawfromthefieldofpoliticaltothefieldofeconomicrights.Themainoutlinesofthisnewbodyoflawareonlyscarcelydiscerniblenowyetitsfuturehistoryiscertaintobeimportant....Theemergingprincipleappearstobethatthecorporation,itselfacreationofthestate,isassubjecttoconstitutionallimitationswhichlimitactionasisthestateitself.Ifthisdoctrine,nowcomingintoview,iscarriedtofulleffect,acorporationhavingeconomicandsupposedlyjuridicalpowertotakeproperty,torefusetogiveequalservice,todiscriminatebetweenmanandman,groupandgroup,raceandrace,toanextentdenying''theequalprotectionofthelaws,"orotherwisetoviolateconstitutionallimitations,issubjecttodirectlegalaction.

ThedoctrinehadbeenappliedtomunicipalcorporationsbytheSupremeCourtandextendedtoaprivatecorporationperformingtheequivalentofpublicfunctionsthroughtheoperationofacompanytown.Ithasbeengraduallyexpandedinanumberofdirections.

Dramatically,therecentlyenactedCivilRightsActhasforthrightlymovedintothisfield.Itprovidesamongotherthingsthatcertainenterprisesofferinggoodsandservicesoraccommodationstothepublicmaynotdiscriminateagainstanymemberofthepublicbecauseofracialorigin.Goneistheoldrulethatmerchandiser,purveyorofaccommodationsorproviderofservices(aboveaninsignificantsize)maydowhathelikeswithhisown,maysellordeclinetosell,serveordeclinetoserve,choosebetweencustomerandcustomeratleastonthebasisofrace.StatestatuteslikethoseprevailinginNewYorkhadalreadysetupthisrule.Nowthefederalgovernmententersalongsidethestate.

Propertydevotedtootherthancommercialorproductiveuseisnotdealtwithinasimilarmanner.Amanmayrefusetoentertainanyonewithinhishomeoradmitanyonetorideinhiscar.Consumptionforpersonaluseisanexpressionofpersonality,guardedfrominvasion.Property(intheextrudedsensewehavebeenusingtheterm)devotedtoproductionandcommerceisnotneitherinemploy

Pagexxx

mentoflabornorinthesaleofgoodsandservicescantheancientabsolutepropertyrightofdominationdecisionmakinginthecurrentphasebeunqualified.Whathappenedissufficientlyclear.ThepoliticalidealinvestedintheConstitutionandreflectedintheBillofRights,andthefourteenthandfifteenthamendments,contemplatedindividualswhosepersonalitywasnottobeinvaded,saveforpolicepurposesdesignedtoprotectotherpersonalitiesfrominvasion.Inthesimplerdaysoftheeighteenthcentury,thestatewastheprincipalthreat:theBillofRightsrestrainedthefederalgovernmentandbythefourteenthamendmentextendedtherestraintstothestategovernments.Asthetwentiethcenturyentereditslaterhalf,itwasclearthatpersonalfreedomcouldbeabridgedorinvadedbydenialofeconomicfacilitiesofferedorprovidedbyprivatelyownedenterprises.Suchfacilitiesindeedwerechieflyinprivatehandsoverwhelmingly,infact,offeredorconductedbycorporations.Yettheywereessentialtolifeandpersonality.Theresultwasgradual,judicialextensionofconstitutionallaw,complementednowbysuchstatutesastheCivilRightsActof1964,whichcoversthefieldsoflodging,restaurantfacilities,placesofentertainment,establishmentsservingorofferingtoservefood,gasolineorotherproducts.TheCivilRightsActdoesnotextend,evenremotely,tothewholefieldofcommerceitdoesnotaffectallproductiveproperty.Yetthepointisclear:suchpropertymaybystatute,ifnotbyconstitutionalextension,bemadesubjecttothoselimitationswhichinhibitstateactiontoprotectindividualfreedom.

AthirdstateconstraintuponmanagementresultsfromthecurrentinterpretationoftheantitrustlegislationandmorespecificallytheClaytonAct.TheSupremeCourthasestablishedthatanymergerwhichappreciablylimitscompetitionisprohibited.Thewriterconsidersthepolicyretrogressivecompetitionenforcedtothatextentismorelikelytocrippleproductionanddistributionthanincreaseit.That,however,isamatterforlegislativedetermination,whetherjudicialorcongressional.Thesignificantfactisthatthelawendeavorstoassurethatproductivepropertywillnotbeusedtopreventcarryingonproductionalongthelinesandsubjecttotheconditionsofthecompetitiveprocessasconceivedbyclassicaleconomics.ItthusseekstomaintainapictureofcivilizationtowhichapowerfulcurrentofAmericanthoughtappearstobecommitted.Rightly,thisisnotconstruedasaninvasionoflibertyorpersonalright.Itisconstruedasand,ofcourse,isadirectattempttomold,controlorinhibitcertaindispositionsofproductiveproperty,maintainingthehistoricalconceptionthathighlycompetitivemarketsaregenerallybeneficialtohumanliberty.Inmoderncontext,thepremisemay,ofcourse,bedisputed.

Pagexxxi

Yettheenforcementofsuchaconceptionunquestionablyimposeslimitationsonthedispositionandoperationofproductiveproperty.Cognatelimitationshavenotyetbeenappliedtopropertyusedonlyforindividualconsumption.Althoughthestateconsidersthatitcancontroltheframeworkandbasesofproductionandcommerce,ithasnotattempted(asidefrompolicelimitations)totellamanwhatorhowheshouldconsumethatwouldconstituteanintolerableinvasionofhisprivatelife.

VTheInstitutionofPassiveProperty

IncreasedsizeanddominationoftheAmericancorporationhasautomaticallysplitthepackageofrightsandprivilegescomprisingtheoldconceptionofproperty.Specifically,itsplitsthepersonalityoftheindividualbeneficialownerawayfromtheenterprisemanager.The''things"themselvesincludingtheintangibleelementsnotedearlierinthisessay"belong"tothecorporationwhichholdslegaltitletothem.Theultimatebeneficialinterestembodiedinashareofstockrepresentsanexpectationthataportionoftheprofitsremainingaftertaxeswillbedeclaredasdividends,andthatintherelativelyunlikelyeventofliquidationeachsharewillgetitsallocablepartoftheassets.Theformerexpectationisvividthelattersoremotethatitplayslittlepartingivingmarketvaluetoshares.Stockholdersdohavearighttovote,whichisofdiminishingimportanceasthenumberofshareholdersineachcorporationincreasesdiminishinginfacttonegligibleimportanceasthecorporationsbecomegiants.Asthenumberofstockholdersincreases,thecapacityofeachtoexpressopinionsisextremelylimited.Nooneisboundtotakenoticeofthem,thoughtheymayhavequasipoliticalimportance,similartothatofconstituentswhowriteletterstotheircongressman.Finally,theyhavearight,difficulttoputintooperation,tobringastockholders'actionagainstthecorporationanditsmanagement,demandingthatthecorporationbemadewholefromanydamageitmayhavesufferedincaseoftheft,fraud,orwrongdoingbydirectorsoradministrators.Suchactionsarecommon,thoughfewstockholdersareinvolvedinthem.Theyareausefuldeterrenttodishonestyanddisloyaltyonthepartofmanagement.

Thesesharesneverthelesshavebecomesodesirablethattheyarenowthedominantformofpersonalwealthholdingbecause,throughthedeviceofstockexchanges,theyhaveacquired"liquidity"thatis,thecapabilityofbeingsoldforreadycashwithindaysorhours.Thestockholder,thoughnolongerthesoleresiduarylegateeofallprofits,istheresiduarylegateeofabouthalfofthem,andthatisavaststake.

Pagexxxii

(Sophisticatedestimatesindicatethatdividendscombinedwithincreaseinmarketvalueofshareshaveyieldedbetterthan8percentperannumduringthegenerationpast.)ThepackageofpassivepropertyrightsandexpectationshasprovedsufficientlysatisfactorytohaveinducedanincreasingnumberofAmericanstoplacetheirsavingsinthisformofproperty.In1929perhapsonemillionAmericansownedcommonstock.Atthecloseof1967,aconservativeestimatewouldplacethatfigureatbetweentwentytwoandtwentythreemillionstockholders.TheseholdingsrepresentslightlylessthanonethirdofindividuallyownedwealthintheUnitedStates.Projectingthetrend,onewouldexpecttwentyyearsfromnowtofindbetweenfortyandfiftymillionAmericansdirectlyowningshares.Theaggregatemarketvalueofpersonallyownedsharesnowapproximates10to15percentmorethantheannualpersonallyreceivedincomeintheUnitedStates(thelatterwillbeover600billiondollarsfortheyear1967).Wecanexpectthatthetotalmarketvalueofpersonallyownedsharestwentyyearshencewillfarsurpassthetrilliondollarmark.

Yetthisisonlythe''toplevel"ofpassivepropertyholding.Averylargenumberofsharesarenotheldbyindividuals,butbyintermediatefiduciaryinstitutionswhichinturndistributethebenefitsofshareholdingtoparticipatingindividuals.Oneofthetwolargestgroupsofsuchintermediaryinstitutionsisthatofthepensiontrustfundsmaintainedbycorporationsorgroupsofcorporationsforthebenefitofemployeesthesecollectsavingsinregularinstallmentsfromemployerstobeheldintrustfortheiremployeesandsubsequentlypaidtothemasoldageorothersimilarbenefits.Thesecondistherelativelysmallergroupofinstitutionsknownasmutualfundsthesebuyaportfolioofassortedstocksandsellparticipationsintheportfoliotoindividualsdesiringtoholdaninterestindiversifiedgroupsofstockinsteadofdirectlyholdingsharesinoneormorecompanies.Throughthepensiontrustfundsnotfewerthantwentymillion(probablyagreatmanymore)employeesalreadyhaveanindirectbeneficialclaimbothtothedividendsproceedingfromsharesandtotheirmarketvalueinthepensionportfolioeventhoughtheirinterestisnonliquid,andisreceivedonlyonretirement,deathor(occasionally)othercontingency.Perhapstwomillionholdersofsharesinmutualfundsarelikewiseindirectbeneficiaries,althoughtheyreceivecurrentreturn,andcanpromptlyconverttheirsharesintocash.

Inadditiontothesetwocategoriesthereareotherintermediateinstitutionswhicharealsoholders(thoughlesssignificant)ofstocksnamely,lifeinsurancecompanieswhichinvestabout3percentoftheirassetsinstocks,andfireandcasualtycompanieswhichinvestacon

Pagexxxiii

siderablylargerpercentage.Comparativelyspeaking,alltheseinstitutionscombinedprobablyownarelativelysmallfractionofallstocksoutstandingperhapsbetween5and10percent.Yettherapidityoftheirgrowthespeciallystrikinginthecaseofpensiontrustsindicatesthatthisformofstockholdingislikelytobecomedominantinfutureyears.

Thesignificanceoftheintermediateinstitutionsistwofold.First,theyvastlyincreasethenumberofcitizenswho,tosomedegree,relyonthestockholdingformofwealth.Second,theyremovetheindividualstillfurtherfromconnectionwithorimpactonthemanagementandadministrationoftheproductivecorporationsthemselves.

Asmightbeexpected,thelawhasmovedtoprotecttheholdersofthisformofwealth.Ithasnotunnaturallymovedalongthelinesoftheinterestthatmostpreoccupiesshareholdersthatis,''liquidity"(capacitytoturntheholdingintocash),andmarketprice.Sinceliquidityturnsnotonunderlyingproperty,butonresaleofshares,legalprotectionischieflyinvolvedwiththeprocessesofthemarketplace.Henceitspreoccupationwithinformationenablingbuyersandsellerstodeterminethepriceatwhichtheyarewillingtobuyorsell.TheentirebatteryoflegislationsetupbytheSecuritiesandExchangeactshasessentiallylittletodowiththeconductofthecorporation'saffairsbeyondrequiringregularpublicationofinformationconsideredaccuratebyaccountingstandards,andprohibitingspeculativeactivitiesbycorporateadministrators.Evenmoredirectly,thislegislationdealswithconductofthestockexchangesthemselvesandwithpracticesoftheirmemberswhobuyorsellasbrokersforthepublic.

Inbothdirectionandeffect,thispreoccupationoftheSecuritiesandExchangeactsrecognizesaneweconomicfact:thatstockmarketsarenolongerplacesof"investment"asthewordwasusedbyclassicaleconomists.Savetoamarginaldegree,theynolongerallocatecapital.Theyaremechanismsforliquidity.Thepurchaserofstock,saveinrareinstances,doesnotbuyanewissue.Thepricehepaysdoesnotaddtocapitalorassetsofthecorporationwhoseshareshebuys.Stockmarketsdonotexistfor,andingeneralarenotusedfor(infactarenotallowedtobeusedfor),distributionofnewlyissuedshares.Theirrulescommonlypreventsharesfrombeinglistedandtradeduntilaftertheyhavebeensoldbysomeothermeans.Occasionally,itistrue,largenewissuesaredistributedwhichshortlyaftermaketheirwayintomarkets(onethinksatonceoftheAmericanTelephoneandTelegraphCompanyissueofnewstockin1964).Butsuchoperationsperformaninsignificantpercentageoftheworkofstockexchanges.Theexchangesareinstitutionsinwhichshares,arisingfrominvestment

Pagexxxiv

madelongago,areshiftedfromsellerswhowishcashtobuyerswhowishstock.PurchasesandsalesontheNewYorkandotherstockexchangesdonotseriouslyaffectthebusinessoperationsofthecompanieswhosesharesarethesubjectoftrading.

Wehaveyettodigestthesocialeconomicsituationresultingfromthisfact.Immensedollarvaluesofstocksareboughtandsoldeveryday,monthandyear.Thesedollarsindeedhundredsofbillionsofdollarsdonot,apparently,enterthestreamofdirectcommercialorproductiveuse.Thatis,theydonotbecome''capital"devotedtoproductiveuse.Asellerofstocksmorelikelydesirestobuyotherstocksthantousethecapitalforabusinesshehimselfowns.

Dr.PaulHarbrecht,atColumbiaandnowatDetroitUniversity,hasbeenelaboratingatheorythatwehaveevolvedanewwealthholdingandwealthcirculatingsystemwhoseliquidityismaintainedthroughtheexchangesbutisonlypsychologicallyconnectedwiththecapitalgatheringandcapitalapplicationsystemonwhichproductiveindustryandenterpriseactuallydepend.Ifthisisthefact,oneeffectofthecorporatesystemhasbeentosetupaparallel,circulating"propertywealth"system,inwhichthewealthflowsfrompassivewealthholdertopassivewealthholder,withoutsignificantlyfurtheringthefunctionsofcapitalformation,capitalapplication,capitaluseorriskbearing.Yetthesefunctionsweretheheartofthenineteenthcentury"capitalist"system.Boththewealthandthewealthholdersaredivorcedfromtheproductivethatis,thecommercialprocess,though,atlonglast,theestimateofthiswealthturnsonanestimateoftheproductiveness,thecharacterandeffectivenessofthecorporationwhosesharesareitsvehicles.

Now,clearly,thiswealthcannotbejustifiedbytheoldeconomicmaxims,despitepassionateandsentimentalargumentsofneoclassiceconomistswhowouldhaveusbelievetheoldsystemhasnotchanged.*Thepurchaserofstockdoesnotcontributesavingstoan

*TheconclusionandthetheorysetforthinthefirsteditionofTheModernCorporationandPrivatePropertyinspiredalively,sometimespassionate,debateamongprofessionaleconomists.TheQuarterlyJournalofEconomicspublishedthreephasesofthatdebateinVol.LXXIX,February1965,pp.151,ProfessorShoreyPetersonleadingtheattack,towhichIreplied,andinwhichProfessorCarlKaysentookamiddleground.ProfessorHenryManne,alsoaneoclassicist,attackedinanessay,"TheHigherCriticismoftheModernCorporation,"62ColumbiaLawReview399(1962).CurrentvolumesadoptthegeneralpremisesworkedoutbyDr.Meansandmyselfandcarryanalysisratherfurtherforexample,ModernCapitalism:TheChangingBalanceofPublicandPrivatePower,AndrewShonfield(London:OxfordUniversityPress,1965)TheEconomicTheoryofManagerialCapitalism,RobinMarris(NewYork:FreePressofGlencoe,1964)TheIndustrialState,J.KennethGalbraith(NewYork:Harper&Row,1967).

Pagexxxv

enterprise,thusenablingittoincreaseitsplantoroperations.Hedoesnottakethe''risk"ofaneworincreasedeconomicoperationhemerelyestimatesthechanceofthecorporation'ssharesincreasinginvalue.Thecontributionhispurchasemakestoanyoneotherthanhimselfisthemaintenanceofliquidityforothershareholderswhomaywishtoconverttheirholdingsintocash.Clearlyhecannotanddoesnotintendtocontributemanagerialorentrepreneurialeffortorservice.

Thisraisesaproblemofsocialethicsthatisboundtopushitswayintothelegalsceneinthenextgeneration.Whyhavestockholders?Whatcontributiondotheymake,entitlingthemtoheirshipofhalftheprofitsoftheindustrialsystem,receivablepartlyintheformofdividends,andpartlyintheformofincreasedmarketvaluesresultingfromundistributedcorporategains?Stockholderstoilnot,neitherdotheyspin,toearnthatreward.Theyarebeneficiariesbypositiononly.Justificationfortheirinheritancemustbesoughtoutsideclassiceconomicreasoning.

Itcanbefoundedonlyuponsocialgrounds.ThereisandinAmericansocialeconomy,therealwayshasbeenavalueattachedtoindividuallife,individualdevelopment,individualsolutionofpersonalproblems,individualchoiceofconsumptionandactivity.Wealthunquestionablydoesaddtoanindividual'scapacityandrangeinpursuitofhappinessandselfdevelopment.Thereiscertainlyadvantagetothecommunitywhenmentakecareofthemselves.Butthatjustificationturnsonthedistributionaswellastheexistenceofwealth.Itsforceexistsonlyindirectratiotothenumberofindividualswhoholdsuchwealth.Justificationforthestockholder'sexistencethusdependsonincreasingdistributionwithintheAmericanpopulation.Ideally,thestockholder'spositionwillbeimpregnableonlywheneveryAmericanfamilyhasitsfragmentofthatpositionandofthewealthbywhichtheopportunitytodevelopindividualitybecomesfullyactualized.

Privilegetohaveincomeandafragmentofwealthwithoutacorrespondingdutytoworkforitcannotbejustifiedexceptonthegroundthatthecommunityisbetteroffandnotunlessmostmembersofthecommunityshareit.Aguaranteedannualwageforall,agovernmentallyassuredminimumincome,astockholder'sshareintheUnitedStatesdistributedtoeveryAmericanfamilythesearealldifferentwaysofgivingAmericanscapacitytosettletheirownlivesratherthanhavingtheirlivessettledforthembyblindeconomicforces,bycompulsionsofpovertyorbyregulationsofasocialworkbureaucracy.

Widedistributionofstockholdingsisonewayofworkingtowardthis.

Pagexxxvi

Suchdistributionisindeedproceedingratherdramaticallyintermsofstatistics,alltooslowlyintermsofsocialethics.Thegenerationsince1932hasmultipliedthenumberofdirectstockholderstenfold.Ifindirectstockholdingsthroughintermediateinstitutionsareincluded,avastindirectsectorhasgrownupaswell.Yetdistributionofwealthgenerallyisstillinitsinfancy.OnepercentoftheAmericanpopulationownsperhaps25percentofallpersonallyownedwealth*andundoubtedlymorethanthatpercentageofcommonstocks.Plainlywehavealongwaytogo.Theintermediateinstitutions,notablypensiontrusts,justifythemselvesnotmerelybecausetheyincreasethebenefitsofthestockholderposition,butbecausetheyrationalizeitaswell.Throughdirectownership,Nymwhoboughtrailroadstockstwentyyearsagolostmoney,BardolphwhoboughtA.T.&T.trebledhisstake,whilePistolwhoboughtI.B.M.stockhasmultiplieditfiftyfold.Thisisanirrationalresult.Thepensiontrust,possiblyholdingallofthesestocks,distributesthelossesandthebenefits(thelatterbeingconsiderablygreater)amongabroadcategoryofemployees.

Onewouldexpectthereforethatthelawwouldincreasinglyencourageaneverwiderdistributionofstockswhetherthroughtaxpolicyorsomeotherdevice.Itwouldencouragepensiontrustorsocialsecuritytrustentryintostockholderposition.Thetimemaywellcomewhenthegovernmentsocialsecurityfundsareinvested,notwhollyingovernmentbondsasatpresent,butinabroadeninglistofAmericanstocks.AssocialsecurityandpensiontrustsincreasinglycovertheentireworkingpopulationoftheUnitedStates,thestockholderposition,thoughhavinglostitsancientjustification,couldbecomeavehicleforrationalizedwealthdistributioncorrespondingtoandservingtheAmericanidealofajustcivilization.Theinstitutionofpassivepropertyhasanadvantagewhich,sofarasweknow,isnewtohistoryinthatdistributionandredistributionofwealthholdingcantakeplacewithoutinterruptionoftheproductiveprocess.AncientHebrewlawrequiredredistributionoflandeveryhalfcenturythroughtheinstitutionofthe''JubileeYear,"butranintooperationaldifficulties,asmighthavebeenexpected.Thegreatrevolutionarymovementsof1848and,inourtime,inRussia,ChinaandCubainvolvedextremeproductivelosses,noneofwhichhasyetbeenrecouped(thoughafterhalfacenturytheSovietUnionmayfinallybeatthepointofdoingso).Thecorporatesystem,accompaniedbyreasonablyenlightenedtaxpoliciesandaidedbycontinuouslygrowingproductivity,canachievewhateverredistributiontheAmericanpeoplewant.

*TheShareofTopWealthholdersinNationalWealth192256,RobertJ.Lampman(Princeton,N.J.:NationalBureauofEconomicResearch,1962),p.208.

Pagexxxvii

Fewobserverswouldseriouslydenythatgreaterproductionisinevitableaswellasneeded.PresidentLyndonB.Johnsonboldlyembracedthepropositionthat"poverty"(referringtofamilieswithincomeoflessthan$3,000ayear)canandshouldbeabolished,makingafirsttentativeapproachtowardmeetingtheproblemin1964.ItisscarcelyopentoquestionthatpresentandpotentialproductivecapacityoffersadequatetoolstotheAmericaneconomywhenandiftheAmericanpublicreallydesiresto"abolishpoverty."Thatis,thetoolsareathandinsofarastheproblemsareeconomic.Actuallyitisclearthatproblemsdeeperthaneconomicforexample,problemsofeducationandautomationwillhavetobemet.Whatcanbesaidisthatthedeeperproblemscannotreadilybemetunlessproductivecapacitycanbemaintainedandincreasedtofinancetheirsolution,andunlessthepresenttechnicalorganizationofwealthcanpermittheshiftingprocesstogoonwithoutinterruptingorhandicappingproduction.Boththeseconditionsdoexist.

VITheInstitutionalEconomicRevolution

Thoughitsoutlineisstillobscure,thecentralmassofthetwentiethcenturyAmericaneconomicrevolutionhasbecomediscernible.Itsdrivingforcesarefive:(1)immenseincreaseinproductivity(2)massivecollectivizationofpropertydevotedtoproduction,withaccompanyingdeclineofindividualdecisionmakingandcontrol(3)massivedissociationofwealthfromactivemanagement(4)growingpressureforgreaterdistributionofsuchpassivewealth(5)assertionoftheindividual'srighttoliveandconsumeastheindividualchooses.

Ofthisrevolution,thecorporationhasprovedavital(albeitneutral)instrumentandvehicle.Ithasbecome,andnowis,thedominantformoforganizationandproduction.Ithasprogressivelycreated,andcontinuestocreate,apassiveformofwealth.Itis,ingreatmeasure,emancipatedfromdependenceonindividualsavingsand"capital"markets.Nevertheless,liketheslaveofAladdin'slamp,itmustincreasinglyfollowthemandateoftheAmericanstate,embodiedinsocialattitudesandincase,statuteandconstitutionallaw.ThismandatechangesandevolvesasaconsensusisdevelopedonvaluesandtheirprioritiesinAmericanlife.

Thisrevolutionisnolongerjustapossibility,aswasthecasewhenTheModernCorporationandPrivatePropertywaspublishedin1932.Itisatleasthalfwayalong.Inhistoricalterms,itismovingrapidly.Somemaydread,othersmaywelcomeit.Butitsexistenceanditsadvancecannotbeseriouslydenied.Thepropertysystemhasdecisively

Pagexxxviii

changedandthereisnogroundforbelievingthechangeisreversible.Tentativebeginningsareapparentinthecompanionareaofdistribution,chieflythroughtaxation.

Acloselyrelatedtrend(notherediscussed)is,ofcourse,emergenceoftheAmericanstatepartlyasanadministratorofwealthdistribution,partlyasadirectdistributorofcertainproducts.Innotableareasproductionforuseratherthanproductionforprofitisemergingasthenorm.Education,scientificresearchanddevelopment,thearts,andavarietyofservicesrangingfromroadsandlowincomehousingtononprofitrecreationandtelevisionconstituteafewillustrativefields.Healthwillprobablybeinpartnowissuchafield.Increasinglyitisclearthatthesenoncommercialfunctionsare,amongotherthings,essentialtothecontinuedlife,stabilityandgrowthofthenonstatistcorporateenterprise.

IntypicalAmericanfashion,therevolutionhascomenotthroughasingleideologicalorutopianburst,conceivedandimposedbyafew,butthroughanevolvingconsensusthatinsistsequallyonenjoyingtheresultsofmassproductionandontheprimacyofindividuallife.Itwillgoforwardasitinevitablymustasfastandasfarasthatconsensusdemands.

Conclusion

WearewellunderwaytowardrecognitionthatpropertyusedinproductionmustconformtoconceptionsofcivilizationworkedoutthroughdemocraticprocessesofAmericanconstitutionalgovernment.FewAmericanenterprises,andnolargecorporations,cantaketheviewthattheirplants,toolsandorganizationsaretheirown,andthattheycandowhattheypleasewiththeirown.Thereisincreasingrecognitionofthefactthatcollectiveoperations,andthosepredominantlyconductedbylargecorporations,arelikeoperationscarriedonbythestateitself.Corporationsareessentiallypoliticalconstructs.Theirperpetuallife,theircapacitytoaccumulatetensofbillionsofassets,andtodrawprofitfromtheirproductionandtheirsales,hasmadethempartoftheserviceofsupplyoftheUnitedStates.Informallytheyareanadjunctofthestateitself.The''active"thatis,productivepropertyofanorganizationincreasinglyispreventedfrominvadingpersonalityandfreedom,fromdiscriminatinginemploymentandserviceagainstcategoriesofmen,inrecklesslyusingtheirmarketcontrol.

Passivepropertynotably,stockincreasinglylosesits"capital"function.Itbecomesprimarilyamethodfordistributingliquidwealth

Pagexxxix

andachannelfordistributingincomewhoseaccumulationforcapitalpurposesisnotrequired.Thecorporationmay,andindeedisexpectedto,retainearningsforthemaintenanceandenlargementofitscapitalplantandoperations.Thestockholder'srighttospendtheincomefromorusetheliquidvalueofhissharesashepleasesisguardedasadefenseofhisrighttoorderhisownlife.

Farbeyondthissummary,therealrevolutionofourtimeisyetfaintlyperceived.Ifthecurrentestimatethatby1980ourtotalproductivitywilldouble(approximately1.2trillionof1960dollars)andpersonallyreceivedincomewillreachapproximatelyonetrilliondollarsprovestrue,theentireemphasisofAmericancivilizationwillappreciablychange.Philosophicalpreoccupationwillbecomemoreimportantthaneconomic.Whatisthispersonallife,thisindividuality,thissearchforpersonaldevelopmentandfulfillmentintendedtoachieve?Merewallowinginconsumptionwouldleavegreatnumbersofpeopleunsatisfiedtheirdemandwillbeforparticipation.Thismeans,insubstance,agrowingdemandthatsignificantjobsbeavailableforeveryone,atatimewhenautomationmaydiminishthenumberofallcommerciallycreatedjobsaswepresentlyknowthem.Itmaywellmeanthatthestatewouldbeexpectedtocreatejobswhereverasocialneedisrecognized,irrespectiveoftheclassicrequirementforacommercialbase.Isitpossible,asWaltRostowmaintains,thatthepopulationwillmerelybecomebored?Perhapsbutifso,itwillbebecauseesthetics,thearts,theendeavortounderstand,useandenjoythethrillingprospectsopenedbyscience,andtheendlesssearchformeaning,willhavetragicallylaggedfarbehindeconomicadvance.Notimpossibly,theteacher,theartist,thepoetandthephilosopherwillsetthepaceforthenextera.

ADOLFA.BERLECOLUMBIAUNIVERSITY.DECEMBER,1967.

Pagexli

IMPLICATIONSOFTHECORPORATEREVOLUTIONINECONOMICTHEORY

Thefactofthecorporaterevolutionisnowsowidelyacceptedthatstatisticalevidenceisnolongerneededtoestablishitsoccurrence.ButtherepublicationofTheModernCorporationandPrivatePropertydoesraisequestionsofhowreliableitsestimatesofcorporateconcentrationhaveprovedtobe,whathashappenedinthethirtyfiveyearssincethebook'spublication,andwhatarethemajorimplicationsofthisrevolutionastheauthorsnowseethem.

Thequestionsofreliabilityandofsubsequentdevelopmentsareconsideredinanewstatisticalappendix.Therethevariousattacksonthestatisticalfindingsofthebookareexaminedandtheconclusionisreachedthatthestatisticshavestoodupwell.Indeed,onthecrucialfindingthatthe200largestnonbankingcorporationscontrolledsomewherebetween45and53percentoftheassetsofallnonbankingcorporations,with49.2percenttheactualcrudeestimatearrivedat,asubsequentandmuchmorereliableestimatebasedonactualexaminationofthetaxreturnsofthebigcorporationsasfiledwiththeTreasuryresultedinafigureof49.4percentforthelargest200.Theverycloseagreementbetweenthecrudeandtherefinedfigureis,ofcourse,fortuitous.Butitisclearthatthecrudeestimatewasnotmisleading.

DevelopmentssinceTheModernCorporationwaspublishedhavetendedtoconfirmthetrendsindicatedthereofincreasingconcentration,increasingdispersionofstockownership,andincreasingseparationofownershipandcontrol.

Asthestatisticalappendixshows,concentrationhascontinuedtoincrease.The100largestmanufacturingcorporationsincreasedtheirproportionofallmanufacturingcorporationassetsfromapproximately40percentin1929toapproximately49percentin1962,whiletheir

Pagexlii

proportionofnetcapitalassetsincreasedfrom44percentin1929to58percentin1962.Inthefieldofpublicutilities,theHoldingCompanyActcausedabreakupofsomeofthelargersystemsandslowedupfurtherconcentration,butsince1950thedegreeofconcentrationhasbeenincreasing.Inthefieldoftransportation,publicpolicyhaslongstoodinthewayofrailroadmergers.Butmorerecently,approvedmergersoracquisitionofcontrolhasreducedthe42railroadsincludedinthe1929listofthelargest200to27,andfurtheracquisitions,alreadyapproved,whenconsummatedwillreducethelistto18.Inthesameperiodairtransporthasbecomebigbusiness,with6airlineswhichwouldalmostcertainlybeincludedinacurrentlistofthelargest200nonfinancialcorporations.

Fornonfinancialcorporationsasawholetherehasbeennorecentstudytocomparewiththatfor1929.But,asthestatisticalappendixshows,therecanbelittlequestionthatsuchastudywouldshowincreasedconcentration,thoughtherateofincreasewouldbemuchslowerthanthatofthe1920's.

SubsequentdevelopmentshavealsocontinuedtheothertwostatisticaltrendsindicatedinTheModernCorporation.Asthestatisticalappendixshows,theultimateownershipofthebigcorporationshasbecomeevermorewidelydispersed,andcontrolhasbecomeincreasinglyseparatedfromownership.Whilein1929only88ofthe200largestcorporationswereclassedasmanagementcontrolled,by1963169,or84.5percent,weresoclassed.Andin1929,22corporationswereclassedasprivatelyownedorcontrolledbytheownersthroughmajorityownership,whileonly5weresoclassedin1963.Thus,thethreetrendssofundamentallychangingthecharacteroftheeconomyconcentrationofeconomicpower,dispersionofstockownership,andseparationofownershipandcontrolhavecontinuedoverthelastthirtyfiveyears.Thecorporaterevolutionmarcheson.

Liketheindustrialrevolution,whichestablishedthefactoryasapredominantformofproductionandseparatedtheworkerfromcontrolovertheinstrumentsofproduction,thecorporaterevolution,separatingownershipfromcontrolovertheinstrumentsofproduction,hascomeonusgradually.Itsbeginningsinthiscountrycanbetracedbacktotheearly19thcentury.Muchhadbeenwrittenonthebigcorporationanditseffectoncompetitioninthefreemarket,particularlyafterthegreatmergermovementattheturnofthecentury.Butneitherthemagnitudeoftheinstitutionalrevolutionnoritsprofoundlegalandeconomicimplicationshadreceivedmajorattention.InthebodyofTheModernCorporationboththeeconomicandlegalcharac

Pagexliii

teristicswerespelledoutandsomeofthemajorimplicationsoutlinedaswesawthematthattime.

Fromtheeconomicpointofview,thecrucialimplicationofthiscorporaterevolutionwastheextenttowhichitmadeobsoletethebasicconceptsunderlyingthebodyoftraditionaleconomictheorywhichwasthenthebasisofpublicpolicy.Wealth,enterprise,initiative,theprofitmotive,andcompetition,eachwasshowntohavebecomesochangedincharacterwiththerevolutionastomaketraditionaltheorynolongerapplicable.Theconclusionwasreachedthat''Newconceptsmustbeforgedandanewpictureofeconomicrelationshipscreated."

Inthethirtyfiveyearssincepublication,muchprogresshasbeenmadeindevelopingthenewconceptsandthenewpicture,butmuchstillremainstobedone.Thechangesinthinkingandpracticethathavebeenforcedbythecorporaterevolutionwillbeoutlinedforfourmajorareasofpublicpolicy.

Firstandforemost,boththetheoryandthepolicytowardemploymenthavechanged.UndertraditionaltheoryasitstoodatthetimeTheModernCorporationwaspublished,ourfreeenterpriseeconomywasassumedtocontainacyberneticmechanismwhichwouldautomaticallytendtoreestablishfullemploymentwhenanytemporarydepartureoccurred.ThiswastheguidingstarunderwhichPresidentHooverwentdowntodefeatin1932,waitingforrecovery,whichwas"justaroundthecorner."

TheNewDealrejectedthetheoryofautomaticrecovery,atfirstonpragmaticgrounds,andthentheorycametobackthispragmatism.AfterWorldWarIItheprincipleofgovernmentresponsibilityprevailed.TheEmploymentActof1946gavethenewpolicylegislativesanction.

Actually,twoexplanationsofpersistentunemploymentdevelopedandgainedwideacceptance.TheKeynesianexplanation,publishedin1936,wasconcernedwiththerelationbetweensavingandinvestment.Whileitwaspresentedintermsoflending,borrowing,andinterestrates,itrestedessentiallyonthefactthatundertheconditionscreatedbythecorporaterevolutionthebulkofsavingandinvestmentwascarriedoninadualprocessconductedbytwoindependentgroupsofindividualswhoseactionsdidnotnecessarilymeshatfullemployment.Theotherexplanationwaspresentedbythepresentwriterin1934andwasconcernedwiththeinflexibilityofadministeredprices.Initsessentialsubstance,itrestedonthefactthatundertheconditionscreatedbythecorporaterevolutionmostpriceswerenotdeterminedbytradinginthemarket,butbyadministrativeaction,and

Pagexliv

tendedtobefixedforconsiderableperiodsoftime,thusinhibitinganygeneralfallinthepricelevelandconvertingageneralfallindemandintoarecessionandunemployment.

Thisisnottheplacetodecidebetweenthesetheories.Whatisimportantisthatbothhadtheirbasisinthechangeswroughtbythecorporaterevolutionandbothsupportedmonetaryandfiscalpolicyasthemajorinstrumentforestablishingandmaintainingthelevelofaggregatedemandnecessaryforfullemployment.Andbothinvolvedarejectionoftraditionaltheory.

Inasecondareaconcernedwiththeeconomyasawhole,thatofinflation,thecorporaterevolutionhasbroughtawhollynewsetofproblems.Theselieentirelyoutsidetraditionaltheory,whichprovidedtheconventionalwisdomatthetimeTheModernCorporationwaspublished.Foraneconomyofsmallscalecompetitiveenterpriseandflexibleprices,theonlyformofinflationallowedbytheorywasoneinwhichageneralexcessindemandresultedinageneralriseinpricesandwagerates.Intheeconomyofthemoderncorporation,awhollynewtypeofinflationispossible:ariseofadministeredpriceswithoutageneralexcessofdemand.Thepowertoadministerpricesisalsoapowerwithinlimitstoraisepricesarbitrarilyandintheabsenceofanincreaseindemand.

Justsuchaninflationoccurredbetween1953and1958.IntestimonybeforetheSenateAntitrustandMonopolySubcommitteein1959,theauthorpointedoutthatthe8percentriseinthewholesalepriceindexoftheprecedingfiveyearshadoccurredinadministeredpricesandthattheaverageofflexiblemarketpricesasagrouphadnotrisenatall.Yetflexiblemarketpricesarebytheirnaturemostsensitivetodemand,andtheindustriesresponsiblefortherisewereoperatingfarbelowcapacity.Thisnewtypeofinflationmayproperlybecalled''administrativeinflation"todistinguishitfromdemandinflation.ThattheriseinthewholesaleindexwasnotademandinflationwasconfirmedbyastaffstudyoftheJointEconomicCommittee,anditwaspubliclyacknowledgedbyaleadingmemberoftheFederalReserveBoardstaffthatthiswasatypeofinflationthatcouldnotbecontrolledthroughmonetarypolicyandthelimitingofdemand.

Thisnewtypeofinflationmadepossiblebythecorporaterevolutionpresentsamajorproblemofpublicpolicyinseekingtoachievefullemployment.Ifallpricesweredeterminedbysupplyanddemandconditions,itwouldbepossiblethroughfiscalandmonetarymeasurestoprovidethatlevelofdemandwhichwouldjustsupportfullemploymentwithoutinflation.Butwellbeforefullemploymentisreached,administrativeinflationislikelytobegin.Thisisatypeofcreeping

Pagexlv

inflationwhichismostunlikelytodevelopintogallopinginflationbecauseitoperatestoreducedemand.Also,itisatypeofinflationthatcanariseeitherfromtheeffectsoflabor'seffortstoforcewagesupfasterthanproductivity,a''costpush"inflation,orfromtheeffectsofmanagement'sseekingtowidenprofitmargins,a"profitspush"inflation.The19531958inflationclearlycamefrommanagement'sside,andthereismuchevidenceinthemorerecentcreepingriseinthewholesaleindexthatrealwageshave,ifanything,laggedbehindincreasesinproductivity.

Butwhateverthesourceofadministrativeinflation,itposesamajorproblemofpublicpolicy:mustachoicebemadebetweenpricelevelstabilityandlessthanfullemploymentontheonehandandcreepinginflationandasatisfactorylevelofemploymentontheother?Oristheresomewaytopreventadministrativeinflationandobtaintheadvantagesofpricestabilityandfullemploymentwithoutinterferingexcessivelywiththeoperationofthefreeenterprisesystem?

Athirdareainwhichthecorporaterevolutionhasforcedachangeinpracticeandtheneedfornewtheoryisthatofinternationaltradeandthebalanceofpayments.Undertraditionaltheory,stabilityinexchangeratescouldbeobtainedbytheuseofgoldasthebasisofeachcountry'smoney,andanyunbalanceinpaymentswouldautomaticallybecorrectedthroughtheflowofgoldbetweencountries,accompaniedbyariseinthegeneralpricelevelinthegoldreceivingcountryandafallinthepricewagelevelinthegoldlosingcountry.

Experiencehasshownthatthemeasureswhich,withhighlyflexiblepricesandwagerates,wouldproduceageneralfallinpricelevelactuallyproducedepressionandunemployment.Asaresult,countryaftercountryshiftedfromthegoldstandardtothegoldexchangestandard,underwhichgoldcontinuedtoflowfromonecountrytoanothertosatisfyanyminorunbalanceinpayments.Butunderthegoldexchangesystemacountry'sinternalmoneystockwasnolongerdirectlyrelatedtoitsgoldholdings,andthepriceleveleffectsofgoldmovementwerelargelyinhibited.Thisremovedthebasicmechanismofadjustmentwhichhadtendedtoeliminateanyfundamentalunbalanceinpaymentsintheprecorporateeconomy.

TheagoniesofEnglandinitsrecentefforttosupportthepoundanditsfinaldevaluationillustratetheproblem.WhenthefundamentalunbalanceinBritishpaymentsdeveloped,thegovernmentsoughttocorrectitbytighteninginternalpolicyattheexpenseofemploymentandprogress.Butevensomedepressionwasnotenoughtomatchthefundamentalunbalance,andthepoundhadtobedevalued.

TheinternationalmonetaryinstitutionssetupafterWorldWarII

Pagexlvi

havegreatlyhelpedinthehandlingofshortrununbalancesinpayments.Andthenewproposalsforinternationalreserveswouldfurtherlengthentheperiodduringwhichacountrycouldincuratemporaryunbalanceinpaymentsprovidedtheunbalancewasreversedinalaterperiod.Butthereisnothingautomaticinthepresentsystemthatwouldtendtocorrectafundamentalunbalance.Timealoneisnotenough.

Thefailureoftheautomaticpriceleveladjustmentiseasilyexplainedbytheinflexibilityofadministeredprices.Butitpresentsaproblem,broughtbythecorporaterevolution,thatisstillwaitingforasolution.Canawaybeworkedouttokeeptheveryrealadvantagesofstableexchangerateswithoutthedangerofperiodicstrainsanddamagingdevaluationsinonecountryoranother?

Thefourthareainwhichthemoderncorporationhasunderminedtraditionalthinkingisinthematterofeconomicperformance.ThecentralbodyofeconomictheorytaughtatthetimeTheModernCorporationwaspublishedheldthatsolongastherewascompetitionamongproducerseconomicperformancewouldbehigh.Eachproducer'sselfishinterestwouldbesocanalizedbymarketforcesthathisactionwouldservethepublicinterest.Hewouldtendtouseavailableresourcestoproducewhatthepublicwantedatthelowestpossiblecost.Therewererecognizedexceptionsasregulationwassubstitutedforcompetitioninthepublicutilityfieldandasfreedomofenterprisewascurbedbysuchlawsasthoseagainsttheftandthebreachingofcontracts.Butonthewhole,theorytaughtthattheactionsofMr.TypicalSmallEnterpriseweresocircumscribedbythemarketthatwhatwasgoodforMr.Enterprisetendedtobegoodforthepublic.Withinthelimitsofthecompetitivemarket,economicperformancecouldbelefttothedecisionmakingofthesmallenterpriser.

Thecorporaterevolutionhaschangedallthatbycreatingcentersofeconomicpoweronascaleneverpreviouslyknown.Forthemostpart,competitionisnolongeramongthemany.Andcompetitionamongthefewisaradicallydifferentthing,asE.H.Chamberlin,intheU.S.andJoanRobinson,inEngland,pointedoutin1933.Theinflexibilityofadministeredpricesisitselfevidenceofmarketpowerandpresentsitsproblems.Buteconomicpowerisamuchmoreinclusiveconceptthanismarketpoweralone.Itinfluencestheusemadeofavailableresources,thesafetyoftheproductssupplied,theamountofwasteproductspollutingtheenvironment,theconditionsofwork,aswellasthefairnessofthewagespaidandthepricescharged.Competitionclearlycannotcontroltheuseofthispowersothattheresultissubstantiallyinthepublicinterest.Clearlythepublichasnot

Pagexlvii

receivedthefullbenefitsofthenewdrugswhichsciencehasdeveloped.Andthesafetyofcarsandtireshascalledforadegreeofgovernmentcontrol.Societyisonlyjustbeginningtostudytheperformanceofindividualindustriestoseehowwelltheyservethepublicinterest.

Atthesametimethateconomicpowerhasbuiltupinthehandsofcorporatemanagement,theseparationofownershipandcontrolhasreleasedmanagementfromtheoverridingrequirementthatitservestockholders.Profitsareanessentialpartofthecorporatesystem.Buttheuseofcorporatepowersolelytoservethestockholdersisnolongerlikelytoservethepublicinterest.Yetnocriteriaofgoodcorporateperformancehaveyetbeenworkedout.Shouldtheproblemsofbadperformancebeworkedonpiecemeal,ashasbeendonebythelawsconcerningtheftandbreachofcontract,drugdistribution,andautosafety?Orcancriteriaforgoodperformancebedevelopedtoguidecorporatemanagementandinducementsbeprovidedtoencouragethegood?Whatchangeswouldbeneededtomakeittruethatactionbycorporatemanagementinitsownselfinterestservesthepublicinterest?

Afterexaminingtheseproblemscreatedbythecorporaterevolution,onecanraisethecrucialquestionofwhetherthesystemofenterprisewhichhasresultedisworthhaving.Shouldtheclockbeturnedback?Or,ifitcannotbeturnedback,istheresomealternativesystemthatcouldbetterservethepublicinterest?

Themostarticulatecriticismofthefreecorporateenterprisesystemasasystemcomes,ofcourse,fromtheCommunists,andtheCommunistregimesofferthemostobviousalternative.Herethemajorclaimisthatcapitalismex