Personal Capitalism as Charismatic Authority

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Personal Capitalism asCharismaticAuthority: The Organizational Economics

of a Weberian ConceptRICHARD N. LANGLOIS

(Department of Economics, The University of Connecticut, U63 Storrs,CT 06269-10 63, USA)

This article is dedicated to the memory of Laszl6 Csontos.

1. IntroductionWhat kind of capitalism creates rapid and sustained economic growth? Oneperspective on this question, going back at least to Adam Smith, has focusedon those background institutions of civil society that are able to channel therent-seeking proclivities of individuals into the production of new wealthrather than into the redistribution of existing wealth. Somewhat morerecently, however, a perspective has arisen that stresses the role in economicgrowth not of abstract institutional structures but of the concrete institutionsof business organization, notably the modern business firm. Pre-eminent

m among living proponents of this latter view is Alfred Chandler (1977, 1990),- who retells the story of recent (nineteenth- and twentieth-century) economic~Z growth in the now-developed countries as a history of the rise of managerial| capitalism. In at least some understandings of Chandler, this managerialcapitalism, in which trained professional managers run large multidivisional| organizations, is to be contrasted with the more backward structures of5 'personal' capitalism, in which individual owner-managers continue to control. business firms.0 Before there was Chandler, of course, there was Schumpeter, whose work is1 a source not only of an important view similar to that of Chandler but< 5 alsoperhaps astonishingly of the opposite view, namely that the source of| economic growth is indeed to be found in the behavior of individualsofJ entrepreneurswho create new wealth, often at the expense of old wealth,3 Oxford Univenity Preu 1998

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Personal Capitalism as Ch arismatic Authoritywithin the constraints of a particular kind of civil society. In an earlier paper(Langlois, 1987), I presented an argument that, contrary to conventionalwisdom, these two visions of capitalism and economic growth do not trackthe difference between an earlier (or 'Mark I") and a later (or 'Mark II')Schumpeter; rather, these two views coexist in a way that is remarkablyconsistent over time in Schumpeter's work. Like Chandler (McCraw, 1988),Schumpeter was heavily influenced by Max Weber's theory of bureaucracyand social progress (Csontos, 1991). In both his early (1934) and his later(1950) work, Schumpeter consistently espoused the view that 'progressiverationalization' in Weber's sense would make innovation a matter of routine,thus rendering obsolete the personal capital ism of the entrepreneur andbringing to dominance in economic growth the role of the large bureaucraticorganization.

In that earlier paper, I criticized Schumpeter's account of the obsolescenceof the entrepreneur on the grounds that it reflects an illegitimate shift ofunderlying epistemology or, to put it another way, that it rests on a confusionabout the nature of scientific knowledge and its role in what we wouldnowadays call the competences of the firm. In this paper I take up theargument again, moving it away from the realm of the doctrinal-historicaland the epistemological into the provinces of the economics of organization.I will suggest that the notion of personal capitalism is a far more subtle andcomplex one than its detractors have recognized. Moreover, far from being aprimitive holdover from precorporate times, personal capitalismproperlyunderstoodis in fact an important engine of economic change and growth.

2. One Schumpeter not TwoLet me begin by summarizing my argument about the obsolescence of theentrepreneur in Schumpeter. First off, the thesis that the individualentrepreneur will come to be replaced by corporate bureaucracy does not inany sense reflect a chan ge of hea rt on S chu mp eter's p art: it was there from thebeginning, and its expression remained remarkably unchanged between thesecond German edition of The Theory of Economic Development (1926; Englishtranslation 1934) and Capitalism, Socialism, and Democracy (1942; third edition1950). The following is from the earlier book.

And if the com petitive economy is broken up by the growth of the greatcombines, as is increasingly the case today in all countries, then this mustbecome more and more true of real life, and the carrying out of newcombinations must become in ever greater measure the internal concernof one and the same economic body. Th e difference made is great enough196


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Personal Capitalism as Charismatic Authorityto serve as the water-shed between two epochs in the social history ofcapitalism. (Schumpeter 1934, p. 67)

In view of how clear the text is on this matte r, it is indeed astou ndin g tha t theconventional wisdom should have developed as it did: perhaps it is an instanceof'social contagion. '1

For Schumpeter, the reasons behind the obsolescence of the entrepreneur(in later capitalism, not the 'later Schumpeter') are to be found in the logic ofeconomic development itself, namely the 'progressive rationalization' ofbourgeois capitalist society. The following passage is from the ' later 'Schumpeter:

This social function [cntrcpreneurship] is already losing importance andis bound to lose it at an accelerating rate in the future even if theeconomic process itself of which entrepreneurship was the prime moverwent on unabated. For, on the one hand, it is much easier now than ithas been in the past to do things that lie outside the familiarroutineinnovation itself is being reduced to routine. Technologicalprogress is increasingly becoming the business of teams of trainedspecialists who turn out w hat is required and m ake it work in predictableways. The romance of earlier commercial adventure is rapidly wearingaway, because so many things can be strictly calculated that had of oldto be visualized in a flash of genius. (Schum peter 1950, p. 132)

Schumpeter quickly goes on (p. 133) to liken the changes he foresees in theentrepreneur's role with those that have already taken place in the function ofmilitary commander. Now consider the following passage from the 'early'Schumpeter :

The more accurately, however, we learn to know the natural and socialworld, the more perfect our control of facts becomes; and the grea ter theextent, with time and progressive rationalisation, within which thingscan be simply calculated, and indeed quickly and reliably calculated, themore the significance of this [entrepreneurial] function decreases.Therefore the importance of the entrepreneurial type must diminish justas the importance of the military commander has already diminished.(Schumpeter 1934, pp. 85 -86 )

Not only do the passages in Capitalism, Socialism, and Democracy not contradictthe ones from The Theory of Economic Development, those later passages areclearly cribbed from the earlier ones.

1 In my 1987 paper, I document in detail the extent to which the conventional wisdom hai uniformlybought into the view that Schumpeter 'changed ha mind.'

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Personal Capitalism as Charismatic Authority

3 . Schumpeter and W eberThe broad outl ines of Schumpeter 's theory of entrepreneurship are ofWeberian provenance.2 Indeed, one m ight say that Sc hum peter 's schema is anapplication of Weber's social theory to the problem of economic growth.Schumpeter 's innovation is to associate Weber's category of charismaticleadership with the concept of entrepreneurship.

As it is for Weber, capitalist development is for Schumpeter a march fromtraditional behavior to rational behavior. In 'the circular flow of economic life',Schumpeter's version of equilibrium in early capitalism, behavior is rationalonly within the bounds of traditional or habitual behavior.

The assumption that conduct is prompt and rational is in all cases afiction. B ut it proves to be sufficiently near to reality, if things have tim eto hammer logic into men. Where this has happened, and within thelimits in which it has happened, one may rest content with this fictionand build theories upon it. It is then not true that habit or custom ornon-economic ways of thinking cause a hopeless difference between theindividuals of different classes, times, or cultures, and that, for example,the 'economics of the stock exchange' would be inapplicable say to thepeasants of to-day or the craftsmen of the Middle Ages. On the contrarythe same theoretical picture in its broadest contour lines fits theindividuals of quite different cultures, whatever their degree ofintelligence and of economic rationality, and we can depend upon it tha tthe peasant sells his calf as cunningly and egotistically as the stockexchange mem ber his portfolio of shares. But this holds good only whereprecedents without number have formed conduct through decades and,in fundamentals, through hundreds of thousands of years, and haveeliminated unadapted behavior. (Schumpeter, 1934, p. 80)This picture of economic behavior as guided by routinesindeed, by routinesth at seem to be the result of som e kind of selection processis the inspirationfor much of the association of Schumpeter with modern evolutionaryeconomics (Nelson and Winter, 1982), an association that, pace H odgson(1993) , is not at all unwarranted despite Schumpeter 's negative remarksabout evolutionary biology (Langlois and Everett, 1994).

Econo mic grow th can take place only when the circular flow is up set, w hichrequires the entrepreneur. Sincein early capitalism, at leastrational actioncan occur only within the bounds of evolved habit, the behavior of theentrepreneur must be non- or extra-rational; i t must be a matter of intuition.

1 The influence of Weber is explicit in the second German edition, but the reference! were largelyexpunged from the English translation, probably because Schumpeter saw methodological fashions, andhis intended audience, as having changed in the interim (Csontos, 1991).

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Personal Capitalism as Charismatic AuthorityWhat has been done already has the sharp-edged reality of all thingswhich we have seen and experienced; the new is only the figm ent of ourimagination. Carrying out a new plan and acting according to acustomary one are things as different as making a road and w alkingalong it.

How different a thing this is becomes clearer if one bears in mind theimpossibility of surveying exhaustively all the effects and counter-effectsof the projected enterprise. Even as many of them as could in theory beascertained if one had un limited time and means must practically remainin the dark. As military action m ust be taken in a given strategic positioneven if all the data potentially procurable are not available, so also ineconomic life action must be taken without working out all the detailsof what must be done. Here the success of everything depends onintuition, the capacity of seeing things in a way which afterwards provesto be true, even though it cannot be established at the moment, and ofgrasping the essential fact, discarding the unessential, even though onecan give no account of the principles by which this is done. Thoroughpreparatory work, and special knowledge, breadth of intellectual under-standing, talent for logical analysis, may under certain circumstances besources of failure. (Schum peter, 1934, p. 85)

I will return to the cognitive implications of this view presently. For themoment, however, the important point is that entrepreneurial action is aninstance of charismatic leadership, which, for Weber as for Schumpeter, iscentral to the theory of social change (Parsons, 1949, p. 663).

Weber is principally concerned with the religious leader or prophet, and toa lesser extent with military and political leadership; Schumpeter borrowsheavily from tha t analysis in his characterization of the entrep rene ur. H ere w ebegin to see the outlines of Schumpeterian 'personal capitalism', which in itspure form is the antithesis of bureaucratic organization. Consider Weber'saccount of the organization of charisma:

The corporate group which is subject to charismatic authority is basedon an emotional form of comm unal relationship. The adm inistrative staffof the charismatic leader does not consist of 'officials'; at least itsmembers are not technically trained. . . . There is no hierarchy; theleader merely intervenes in general or in individual cases when heconsiders the members of his staff inadequate to a task to which theyhave been entrusted. There is no such thing as a definite sphere ofauthority and of competence. . . . There are no established adminis-trative organs. . . . There is no system of formal rules, of abstract legalprinciples, and hence no process of judicial decision oriented to them.But equally there is no legal wisdom oriented to judicial precedent.

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Personal Capitalism as Charismatic AuthorityFormally concrete judgments are newly created from case to case and areoriginally regarded as divine judgm ents and revelations. . . . Thegenuine prophet, like the genuine military leader and every true leaderin this sense, preaches, creates, or demands new obligations. In the puretype of charisma, these are imposed on the authority of revolution [sic]by oracles, or of the leader's own will, and are recognized by themembers of the religious, military, or party group because they comefrom such a source. (Weber, 1947, pp . 36 0-36 1)

But the charismatic organization is perhaps best understood in contrast towhat it is not.

Charismatic authority is thus outside the realm of everyday routine andthe profane sphere. In this respect it is sharply opposed both to rational,and particularly bureaucratic, authority, and to traditional authority,whether in its patriarchal, patrimonial, or any other form. Both rationaland traditional authority are specifically forms of everyday routinecontrol of action; while the charismatic type is the direct antithesis ofthis. Bureaucratic authority is specifically rational in the sense of beingbound to intellectually analysable rules; while charismatic authority isspecifically irrational in the sense of being foreign to all rules. Traditionalauthority is bound to the precedents handed down from the past and tothis extent is also oriented to rules. Within the sphere of its claims,charismatic authority repudiates the past, and is in this sense aspecifically revolutionary force. (Weber, 1947, pp . 36 1-36 2)

It is the charismatic, and therefore revolutionary, quality of entrepreneurshipthat makes it a source of economic growth, that allows it to play the role of' industr ial m utat io n if I may use that biological term tha t incessantlyrevolutionizes the industrial structure from within, incessantly destroying theold one, incessantly creating a new one' (Schumpeter, 1950, p. 83, emphasisoriginal).

Recast in these explicitly Weberian terms, Schumpeter's theory of entre-preneurship looks something like this. In its undeveloped state, an economyis based largely on traditional behavior, which bounds the possibilities forconscious economic activity. Under the right institutional settingbourgeoiscapitalismcharismatic leadership arises, in the form of the entrepreneur, tobreak the crust of convention and to create new wealth by '"lead[ing]" them eans of prod uction into new channels" (Schumpeter, 193 4, p. 89). Charismais personal and revolutionary; 'in its pure form charismatic authority may besaid to exist only in the process of originating. It cannot remain stable, butbecomes either traditionalized or rationalized, or a combination of both'

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Personal Ca pitalism as Charismatic Authority(Weber, 1947, p. 364). In the economic sphere, of course, the tendency istowards rationalization. Not only do imitators rush in once the entrepreneurhas blazed the trail, but also the problem of succession within theentrepreneurial organization leads (if the organization is to continue) tobureaucratization, i.e. to the substitution of rules for personal authority; tothe creation of abstract offices divorced from their individual holders; andto the increasing pre-eminence of specialized knowledge and spheres ofcompetence (Weber, 1947, pp. 330-334).

4 . Progressive RationalizationThe transformation from the traditional to the rational takes place at twolevels. At the level of each entrepreneurial organization, charismatic authority,having destroyed the traditional, must eventually give way to bureaucracy asthe problem of succession arises. It is here that we can locate Chandler 'snotions of personal and managerial capitalism. What Chandler finds wantingin perso nal capitalism is precisely the extent of rationalization in the Weberiansense. Com pared with the foremost examples of managerial capitalism (e.g. inthe Uni ted Sta tes) , the Brit ish, he argues, failed adequately to extendhierarchical control and to create management based on abstract rules andspheres of competence.

In most British enterprises senior executives worked closely in the sameoffice building, located in or near the largest plant, having almost dailypersonal contact with, and thus directly supervising, middle and oftenlower-level managers. Such enterprises had no need for the detailedorganization charts and manuals that had come into common use inlarge American and German firms before 1914. In these Britishcompanies, selection to senior positions and to the board depended asmuch on personal ties as on managerial competence. Thefoundersandtheir heirs continued to have a significant influence on top-leveldecision-making even after their holdings in the enterprise werediminished. (Chandler, 1990, p. 242)

British personal capitalism thus represented a kind of half-way house betweenthe charismatic founders and full rationalization on the American model.At another level, however, resides the claim th at progressive rationalization

affects the entire economic society, eventually displacing traditionalismcompletely. The ent repreneur is bo th the agen t and the victim of thistransformation. In uprooting the deeply planted traditional ways of life, the

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Personal Capitalism as Charismatic Authorityentrepreneur prepares the field for rational authority.3 Butand this is theheart of Schumpeter's thesisonce the hard work of crust-breaking has beendo ne , charismatic leadership is no longer necessary, and the en trep rene ur m ustride into the sunset. The entrepreneurial role is then taken up by largebureaucratic firms, organized along rational lines, who can engineer changewithout need for charisma. The final result of the process of progressiverationalization, indeed , is a kind of bureaucratic socialism, since, w itho ut anysubstantive function or source of legitimacy, entrepreneurial capitalism as asystem must ultimately follow the entrepreneur westward.

At first glance, Schumpeter's brief in favor of large organizations seemsconsistent with Weber, who praised the efficiency of rational bureaucracy inthe most lavish terms:4

Experience tends universally to show that the purely bureaucratic typeof administrative organizationthat is, the monocratic variety ofbureaucracyis, from a purely technical point of view, capable ofattain ing the highest degree of efficiency and is in this senseformallythemost rational known means of carrying out imperative control overhuman beings. It is superior to any other form in precision, in stability,in the stringency of its discipline, and in its reliability. It thus makespossible a particularly high degree of calculability of results for the headsof the organization and for those acting in relation to it. It is finallysuperior both in intensive efficiency and in the scope of its opera tions,and is formally capable of application to all kinds of administrative tasks.(Weber, 1947, p. 337)Notice, however, that this paean does not portray bureaucracy as innovative.It is precise and reliable, but not necessarily dynamic. 'Both rational andtraditional authority', as we saw, 'are specifically forms of everyday routinecontrol of action' (Weber, 1947, p. 361). Bureaucracy is designed for'imperative control over human beings', i.e. making people do what the bosswants, but not necessarily for performing the multifold tasks of an entireeconomy. And it produces results that are 'calculable' because it reducesintern al variance, not necessarily b ecause it (or rationalization m ore generally)extends the scope of human ability to 'calculate' or predict the future.

Indeed, one could argue that Schumpeter goes well beyond Weberinto3 'A high degree of traditionalism in hab its of life, such u characterized th e labouring classes in eailymodern times, has not sufficed to prevent a great increase in the rationalization of economic enterprise

under capitalist d ir ec ti on .. . . Nevertheless, this tradirionalistic attitude had to be at least partly overcom ein the TOstern world before the further development of the specifically modern type of rational capitalisteconomy could take place' (Weber, 1947, p. 167).

4 WcbeT did n ot, how ever, see bureaucracy as generally g oo d, and he worried about its stultifying effecton hu manity (Coif man, 19 90 , p. 95).

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Personal Capitalism as Charismatic A uthoritywhat, in my view, is illegitimate territory. Recall that, for Schumpeter, pro-gressive rationalization seems to mean more than the Weberian idea ofdemystification; it seems also to mean that the grow th of scientific know ledgewill extend the bounds of rationality in the sense of Herbert Simon: withprogressive rationalization, our 'control of facts' becomes more perfect, and webecome able 'quickly and reliably' to calculate what had previously requiredintuition and a 'flash of genius' . Schumpeter is thus ma king a claim abo ut thecognitive, not merely the command-and-control, possibilities of bureaucracy.

I dou bt t ha t we live in a wiser age; but I do think th at we are perh aps mo reaccustomed today than in Schumpeter 's t ime to quest ion the cognit ion-expanding character of conscious, scientific knowledge. The best and thebrig htes t have too often failed to live up to their billing. As F. A. H aye k(1948) argued in the context of the socialist calculation debate, such stoutclaims for conscious scientific knowledge (on which the possibility of socialistcalculation depends) are an insupportable hubris that ignores the large andineradicable role of rules, of routine, of tacit knowledge. Rationalityor,more correctly, cognitive abilityis perhaps even more bounded today, in theavalanche of information that 'progressive rationalization' has generated, thanit was in more traditional times.

Interestingly, it is far from clear that Weber would have been onSch um peter's side in this matter. For one thin g, W eber, as we saw, stressed thestatic character of bureaucracy. Bureaucracy is abou t im posing rules, not abo utchanging the rules. It is a way to marshal well-defined means in service of awell-defined end; but, like the ideal type of traditional authority, rationalauthority is not dynamic. On the matter of bureaucracy replacing entre-preneurial cap italism, we can note th at W eber came dow n explicitly against thepossibility of socialist calculation, effectively endorsing the views of von Mises.5

5. Organizational CapabilitiesWe learn the most from writers like Weber and Schumpeter not when weapproach them from the perspective of the antiquarian or of the adoringdisciple but when we treat them as capable of engaging our own researchprograms. How, then, can we apply their ideas to the present-day discussionof capitalism, organizational form and economic growth?

' This w i) not in intellectually fashionable view in the 19 30s and 194 0s, when Wcbm-'i ideas beganfiltering into the English-speaking academic world. In a fit of eaxly political correctness, indeed, TalcottParsons found it necessary to insert into his translation of Weber a footnote apologizing for his author'sfailure to hold views in accord with 'the principal weight of technical opinion' on the subject (Wcbcr 1947,p. 194n ). That w eight mu st n ot have been tied dow n very tightly, however, as it has lately shifted decidedlyto Wtber's side.

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Personal Capitalism as Charisma tic AuthorityMuch of the modern literature has focused on the idea of organizational

capabilities, which provides a language large enough to encompass the ideasof Weber and Schumpeter. Broadly speaking, organizational capabilities arewhat organizat ions can do well ; and Weber was arguably talking aboutorganizational capabilit ies when he described the efficiency of rationalbureaucracy.

The term 'capabilit ies ' was first used by G. B. Richardson (1972, p. 888)to refer to 'the knowledge, experience, and skills' of the organization. InRichardson, however, the import of the concept was not to emphasize theextent of organizational capabilit ies but rather to stress their limitations.Because of what are effectively cognitive constraints, all organizations mustspecialize; and, since the chain of produ ction in an advanced econom y requiresa diversity of very different capabilities, the costs of integrating across manylinks in that chain are necessarily high, and firms must rely on various kindsof market arrangements to coordinate their activities even in the face of the'contractual hazards' emphasized in transaction-cost economics.

This point has also been made in a slightly different way by Nelson andW inte r (19 82) an d to some extent by the 'dynam ic capabilit ies ' l i terature theyhelped to inspire (Teece and Pisano, 1994; Langlois and Robertson, 1995). InNelson and Winter, economic action, even within large organizations, is amatter of rule-following behavior. Agents possess repertoires of routines,w hich are ha bitu al p atte rns of behavior th at consist in tacit , skill-likeknowledge. These agents are 'boundedly rational ' and do not consciouslysurvey their environments and choose a substantively rational course ofaction, except within the bounds of what routine behavior has made possible. 6The parallels here with Schumpeter's account of traditional behavior in thecircular flow should be obvious. The crucial difference, however, is thatNelson and Winter see such behavior not as limited to earlier society but asan inescapable implication of the mechanics of human cognition. Agents inadvanced capitalism also follow rules and abide by habits. By implication,economic change in Nelson and Winter is a non-rational or entrepreneurialactivity: it is taking a leap into the unknown, not a matter of consciousplanning.

There are, however, some present-day writers who are inclined to takethe notion of organizational capabilities in a different direction and to extractfrom it some very large claims for the efficacy of large organizations andfor their superiority to individual action and to smaller, more personalenterprises.

6 To put it another way, substantive or 'optimizing' rationality of the neoclassical tort is itself a learnedroutine or let of routines.

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Personal Cap italism as Charism atic AuthorityFor example, William Lazonick (1991) offers what is arguably a historicist

account of the progressive development of capitalism, which reaches its apexin 'collective capitalism'.

7As in Schumpeter 's portrayal of later capitalism,large organizations in Lazonick's collective capitalism are not only effective at

managing existing structures but are also prime engines of innovation. And,as in Schumpeter, the basis for the innovativeness and the wealth-creatingcharacter of large organizations resides in their ability effectively to breakcognitive boundaries and consciously to reinvent the division of labor.

The more technologically complex the innovation, the greater the needfor innovative skills and the more extensive the specialized division oflabor required to develop and utilize these skills. The organization mustnot only develop these specialized skills so that they can contribute tothe innovation, but also coordinate them so that they constitute acollective productive power. Organizational capability permits the enterpriseto plan and coordinate the development of these innovative skills,integrating them into an enterprise-specific collective force. As far as theinnovation process is concerned, therefore, organizational capab ility permitsthe planned coordination of the horizontal and vertical division of laborrequired to generate an innovation. (Lazonick, 1991, p. 203, emphasisaltered)

It is not clear w hat are the details of how this plan ning and coord ination takesplace, but we are left with the strong impression that it is decidedly not thehandiwork of some charismatic central individual, or of the firm's owners inany sense, but is instead the product of professional managers.

In this respect, Lazonick has chosen Schumpeter over Chandler. Despitetheir similar Weberian influences, the Sc hum peterian story of the obsolescenceof the entrepreneur is not identical to the Chandlerian account of the rise ofthe visible hand. In Chandler, as in Weber, the emphasis is not on theinnovative character of the large bureaucratic organization but on its abilityto deliver the goods. The managers 'administer, monitor, coordinate, andplan' . They do not carry out new combinations. For Chandler, economicgrowth is underpinned by an imperat ive to high-volume throughput; thepersonal element in organization stands in the way of fully realizing thisimperative, for which an abstract and professional structure is required.

7 More recently, Lazonick has made clear that he includes in collective capitalismor 'organizationalintegra tion', u he now terms it the activities of 'individuals and groups who are emp loyed by legallydistinct firms that pursue common goals' (Lazonick and Wew, 199), p. 231). Taken seriously, however, thisidea renders unhelpful if not tautological the notion of 'collective capitalism', since it embraces activitiesthat economists have viewed, and ought rightly to view, as reflecting the capabilities of markets (properlyunderstood) rather than of firms, and thereby calls into question any implications in the analysis for theadvantages of large firms ptru. On this point see Louby (1993) and Langlois (1994).

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Personal Capitalism as Charismatic AuthorityAs we saw, however, Schumpeter's claims are much different. He associates

'personal' capitalism with charismatic leadership. It is the entrepreneur whomakes dramatic, and often creatively destructive, changes. In Schumpeter,those who come along and fill in the details are important, but it is thechanges that really matter. The obsolescence thesis is a claim not that large,fully articulated enterprises may be necessary to realize the vision of anindividual entrepreneur; rather, it is a claim that those enterprises will be thesources of change. Let us put it succinctly. In Chandler, large organizationsare the result of economic change; in Schumpeterian later capitalism,economic change is the result of large organizations.

6 . The Rationality of the Personal ElementLess than a decade ago, the late sociologist James Coleman (1990) attackedthe legacy of Weber in the analysis of organizational design. In Weber'sschema, the functional goals of organizationscarrying out a narrow set ofpurposescan best be attained only by a mechanical bureaucratic structure.As we saw, this is the legacy that influenced Chandler: the residual charismaticelemen ts of personal capitalism stand in th e way of the full dep loym ent of thearticulated, professionally managed structure of modern industrial capitalism.For Coleman, however, this approach to organizational analysis and design isboth misleading and dangerous, as it fails to understand what economists callthe principal-agent problem: agents in a bureaucracy do not act as cogs in amachine but have purposes and interests that may diverge from those of theorga nization . C oleman uses the theo ry of principals and agents to suggest whyman y different kind s of well-functioning organ izations me rchant ban ks,diamon d m ercha nts, Japanese manu facturing systems are not structured asmachine bureaucracies but retain a personal element as a necessary conditionof smooth operation.

Most interestingly, perhaps, Coleman (1990, pp. 99-101) suggests thateven fully charismatic authority can be a rational (economists would say'efficient') structure of organization. This is so because charismatic authoritysolves a coordination problem in a situation of 'chaos' in which rights, rolesand responsibilities are in flux. All participants would prefer some structureor constitution; but the costs of coordination are high, as each is willing toconstrain himself or herself to a new order only if many others simultaneouslyagree to do so. Charismatic authority cuts through these costs and establishesa structure, which then presumably evolves in a Weberian way as stability isachieved. The parallel with Schumpeter's theory of entrepreneurship is clear.

Coleman was not, of course, the first or only writer to object to the idea206


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Personal Capitalism as Charisma tic Authorityhe considers it a function of administrative leadership to define the organi-zation's mission and to promote its values (p. 26). Taking inspiration from apassage in Barnard, Selznick goes on, however, to stress that leadership isnecessary not for routine administration but for more-or-less radical change,what he calls 'dynamic adaptation' (p. 34). Barnard wrote:

The overvaluation of the apparatus of communication and adminis-tration is opposed to leadership and the development of leaders. Itopposes leadership whose function is to promote appropriate adjustmentof ends and means to new environmental conditions, because it opposeschange either of status in general or of established procedures andhabitua l routine . This overvaluation also discourages the development ofleaders by retarding the progress of the abler men and putting anexcessive premium on routine qualities. (Barnard, 1948, p. 240, citedin Selznick, 1957, p. 36)

For Selznick, the crucial issue is not the personal element per se but thenon-routine character of leadership. A personal touch can help a s tat icorganization function more smoothly; real leadership shows itself when theorganization faces a 'crucial experience' that requires the making of criticaldecisions (Selznick, 1 957 , pp . 3 6- 37 ).

Even in the relatively more arid fields of neoclassical economics, where onlyincentive models normally grow, one can also find some strains of thoughtthat s ugg est a rationality to leadership. It is a central insigh t of the econom icsof organization, going back to Knight (1921), Coase (1937) and the earlyWilliamson (1975), that a rationale for the firm may be found in itsadaptability in a chan ging w orld. Production th at is organized ' internally' anotoriously slippery ideamay be able to cut through the transaction costsof using arm's-length contracts and thus may be more efficient. Where doesleadership fit in? In what I view as a naive reading, the Coasean theory of thefirm can be understood as a vindication of central planning: in supersedingmarket forces, the organization necessarily directs resources consciously. AsCoase put it , ' If a workman moves from department Y to department X, hedoes not go because of a change in relative prices, but because he is orderedto do so' (Coase, 1937, p. 387). Notice, however, that all the illustrations inthe literature are in terms of individuals giving direction, not in terms oforganizat ions 'planning' . The economist 's models are usual ly models ofpersonal capitalism. This may be a limitation of the econom ist 's appro ach; bu t

' In this respect Selznidc dearly anticipated more recent interest among economists in the idea oforganizational constitu tions (Gifford, 19 91 ; Vinberg , 1 992 ; Langlois , 19 95) . Indeed, as ChristianKnudsen (1995) has pointed out, Selznidc anticipated not only the constitutional idea but also the notionof 'distinctive competences' that is at the heart of much present-day theory in management.

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PerstmaJ Capitalism as Cha rismatic Authorityit certainly does not give any credence to the idea that complex organizationsare instances of central plan ning .

In Knight, the superior flexibility of internal organization comes from theneed for entrepreneurial judgment in a radically uncertain situation and thecostliness of markets for such judgment (Langlois and Cosgel, 1993). Morerecent economists tell a similar tale. In the work of Oliver Hart, the necessaryincompleteness of contracts in an uncertain world requires the existence of aresidual right of controli.e. a right to make decisions in circumstancesunforeseen. T he o wne rship structure of production turns on whose possessionof tha t right minimizes the sum of pro duc tion and trans action co sts.10 UnlikeKnight and Coase, Hart and his co-authors insist on portraying the issue asone of misaligned incentives in the presence of highly specific assets. In myview, however, the real issue is that the holder of the residual rights of controlis empowered to redirect the capabilit ies of the cooperating parties insituations of novelty or chan ge situations in which contracts are not merelyincomplete but often irrelevant (Langlois, 1992).

In other words, radical change creates situations of constitutional 'chaos' (asColeman put it) that render costly any kind of highly articulated structure,whether it be a fully specified contract or a complex Weberian bureaucracy.The more radical the changethe greater the chaosthe more decision-making must be shifted into the 'residual ' category. One party must dictate;and of necessity that party's decision-making cannot be based entirely onestablished procedures, routines, or contractual provisions. It m ust be in som em e a s u r e sui generis.

Occasionally, the issue may be a clash of two cultures or corporate visionsof the Barnard sort. In the much-discussed (perhaps excessively discussed)case of General Motors's 1926 acquisition of Fisher Body, GM wished topossess the residual rights of con trol in order to impose on Fisher its co rpo ratevision of the future of automobile design and production (Langlois andRobe rtson, 1 989). The more radical the change, however, the greater m ust bethe scope of the residual rights of control and the more charismatic must bethe leadership necessary to exercise those rights. For example, the radicaltechnological change of electronic watch m ovem ents in the 1970s and 198 0s,and the chaos it created for the mechanical watch industry in Switzerland, wasmet by the rise of a single charismatic individual who tightly and personallycontrolled the residual rights in order to reshape the Swiss industry (Langlois,1998).

a For n accessible summary nd references, jee Hart (1989). Barzel (1987) offers similar theory froma slightly different perspective.

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Personal Capitalism as C harismatic Authority

7 . Towards an Economics of Charismatic AuthorityLet me conclude with some suggest ion for how further thinking aboutcharismatic authority, perhaps including explicit modeling, might proceed.The foregoing discussion suggests that an economic theory of charismaticauthority would address three tightly interrelated factors: the constitutionalelement, the transaction-cost element and the cognitive element .

The Constitutional ElementA con stitu tion is a set of rules to w hich individuals bind themselves and whichin turn guide or channel individual behavior. One aspect of this process ofcommitment is trust. And, as Frank Knight argued in a relevant context,situations of radical uncertainty necessitate that people place their trust not inrules and procedures (whose outcomes cannot be easily predicted under suchcircumstances) but in other people. Charismatic authority is an instance ofthis, in which individuals make a commitment not to a complex set of rulesbu t to a simple on e: follow the dictates of the leader. As K nig ht ( 1921 , p. 291)points out, this is not necessarily 'irrational', as it is often easier in a world ofuncertainty to judge the general capabilit ies of individuals to deal withun kn ow n future even ts than it is to pred ict th e specific cou rse of those events.

The Transaction-cost ElementCharismatic authority can also be understood as one mechanism foreconomizing on transaction costs in a situation of radical uncertainty oreconomic change. As Coleman's account hints , such authori ty would beparticularly effective in dealing with what I call 'dynamic' transaction costs(Langlois, 19 92 ), the costs of coord inating a major recom bination of economiccapabilities. Such costs are in part the costs of overcoming the resistance ofvested intereststhe aspect on which neoclassical theory has most con-sistently focused. Both Knight and Hart would argue that individuals will notput their trust in an entrepreneur in the absence of safeguards against theexpropriation of rents. Placing of the residual rights of control in the hands ofthe entrepreneur is one way of obviat ing such concerns. But dynamictransac tion c osts are often a m atte r no t of clear-cut pecuniary incentives bu trather of cognitive resistancea point both Weber and Schumpeter empha-sized. Reorganizing economic capabilities is often a process of informing,teaching and persuading those who hold complementary assets and abilit iesrather than a matter of merely aligning incentives (Silver, 1984; Langlois,1992). The benefits of charisma in such a process should be clear.

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Personal Cap italism as Charismatic A uthority

The Cognitive ElementAs Klamer and McCloskey (1995) argue, much of economic communicationin general is not a dispassionate transmission of information but rather anactive investment in persuading others and engendering their trust.Nonetheless, information and persuasion cannot be neatly separated; andpersuasion cannot take place without the transmission of ideas. AsSchumpeter pointed out, the informational demands of the circular flow arerelatively small; but information requirements rise dramatically in a situationof economic change. It is thus another benefit of charismatic leadership th at itcan economize on information costs by tapping into symbolic expressionbyusing the language of the sacred rather than that of the profane. This pointhas not been lost on organizational sociologists, who see leadership asimportantly a symbolic process (Scott, 1995). But economists have not seizedupon the idea with much vigor, apart from the literature on signaling. 11Anthony Downs (1957) recognized early on that a political ideology is aninstitution tha t economizes on information by condensing complex ideas intoa symbolic or shorthand representation so voters can more cheaply determinewhether political outcomes will favor their private interests. The symbols ofcharismatic authority arguably serve a similar function, standing as a kind ofshorthand for the instructions necessary to generate a complex reorganizationof economic capabilities.

AcknowledgementsThe author would like to thank Fred Carstensen, the late Laszl6 Csontos, andtwo anonymous referees for helpful comments. Parts of this paper draw on'Schumpeter and Personal Capitalism', which was presented at the sixthmeeting of the International Joseph A. Schumpeter Society, June 1996,Stockholm, and will appear in the conference proceedings.

ReferencesBarnard, C. I. (1948), T bt Functions if lit Extat'nt. Harvard University Press: Cambridge, MA.B a n d , Y (1 98 7) , Th e Entrepreneur"! Reward for Self-policing,1 Eammic Inquiry, 25 , 103 -116 .Chandler, A . D ., Jr (1977), T bt Vtsibk Had: tbt M nigtriti RnoUtum in Amtriun B tuintu. The Belknap Pressof Harvard University Press: Cambridge, MA.Chandler, A. D ., Jr (\990), Suit mudSapt: tbt Djnamia of inJjatrUl Ctpiulim. The B elknap Press of HarvardUniversity Press: Cambridge, MA.

11 For a promising recent effort in what is broadly the signaling tradition, see Posner (1998).

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