Dean, Corey November 9, 2006 Managerial Capitalism
In 1776 Adam Smith once said, “... being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners of a private copartnery frequently watch over their own ... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” In this quote Smith complains and denounces managers and the agency problem. The agency problem has existed as long as men have allowed others to act on their behalf. In corporations, it arises between stockholders and managers.
According to Wikipedia, capitalism is an economic system in which the means of production are mostly privately owned, and capital is invested in the production, distribution and other trade of goods and services, for profit in a competitive free market. These include factors of production such as land and other natural resources, labor and capital goods. Various theories have tried to explain what capitalism is, to justify, or critique the private ownership of capital, and to explain the operation of markets and guide the application or elimination of government regulation of property and markets. Capitalism is grounded in the concept of free enterprise, which argues that government intervention in the economy should be restricted and that a free market, based on supply and demand, will ultimately maximize consumer welfare. Managerial Capitalism is where professional managers centrally control the corporation while pretending that they are under the authority of shareholder-owners.
In The Modern Corporation and Private Property authors Adolf A. Berle and Gardiner C. Means (1932) note, “Under such conditions, control may be held by the directors or titular managers who can employ the proxy machinery to become a self-perpetuating body, even though as a group they own but a small fraction of the stock outstanding.” Means and Berle wrote this idea 150 years after Smith denounced the idea of managerial capitalism---even before it was actually defined. In 1977, Alfred D. Chandler was the first to actually defined managerial capitalism in The Visible Hand: The ManagerialRevolution in American Business. Chandler’s definition did not exist in Adam Smith’s time period. In his day, shareholders controlled corporations. The agency problem was actually managers not displaying enough of anxious vigilance toward the corporation.
On the contrary, Chandler saw that under managerial capitalism, shareholders were no longer in control; they surrendered control to managers. Also, the agency problem is “one of managers enriching themselves to the extent applicable laws will allow.” Berle and Means came up with a variety of ways and devices managers could go through with enriching themselves to the extent applicable laws will allow. Like most things in life, laws have evolved, improved and changed since the days of Berle and Means; yet, similar devices still exist. All in all, managerial capitalism can now be defined as a way for managers to pay themselves exorbitant compensation.
Another figure that impacted managerial capitalism is Joseph Schumpeter. Schumpeter's vast erudition is apparent in his posthumous History of Economic Analysis, although some of his judgments seem quite idiosyncratic and sometimes cavalier. For instance, Schumpeter thought that the greatest 18th century economist was Turgot, not Adam Smith, as many consider. Some of these judgments are partly explained by his opinion that there is one general system of economic analysis, and Léon Walras found it. Other economists are rated by how much of Walras' theory could be read into them. Schumpeter criticized John Maynard Keynes and David Ricardo for the "Ricardian vice". According to Schumpeter, Ricardo and Keynes reasoned in terms of abstract models, where they would freeze all but a few variables. Then they could argue that one caused the other in a simple monotonic fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model (Wikipedia.com). Invented a century ago, managerial capitalism was created for different people, different markets, and different needs. The last fifty years have seen the rise of a new society of individuals, but corporations continue to operate according to the logic of managerial capitalism. Nowadays, managerial capitalism just cannot comply with businesses and their new defined ethics. A century ago people wanted a lot more things and mass consumption was on the rise. Back then, companies and corporations just chose to produce more goods at an even lower cost-mass production. Production and distribution were the main means of managerial hierarchy---both designed and invented to provide an inward focus on the complex processes of production and distribution. In the past, there was usually a single owner who oversaw everything. This new ways of managerial capitalism was a massive innovation over the older model of business administration. Ownership was not as prominent as control in the management group in managerial capitalism.
Through the “new way” of doing business, management’s innovative focus allowed it to succeed exceedingly. Yet, many problems would soon arise in managerial capitalism. The success insulated managers from the society they were supposed to serve. The majority of the management groups were elite hierarchy and the self-interest male. The needs of their consumers were not being met. Women suffered the most. Men would not open their eyes to see what others needed in society other than themselves. It also prevented them from grasping the revolutionary potential of the new digital medium. The problem as a whole then evolved to corporations failing to adapt to the “true nature” of their markets in the 21st century. Unfortunately, the problems and tribulations of managerial capitalism run too deep in the structure. Organizational change programs, visionary leadership, or increased regulation can not fix this situation. Almost any business decision can be analyzed with managerial economics/capitalism techniques, but it is most commonly applied to: • Demand estimation - statistical techniques such as regression analysis are used to determine the level of demand for a product, service, or brand. • Risk analysis - various uncertainty models, decision rules, and risk quantification techniques are used to assess the riskiness of a decision. • Production analysis - microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function. • Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method. • Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.
Managerial capitalism made it where organizations created value on the inside through the production and distribution of goods and services. The organization and its top management are at the center of the commercial solar system. With management in control they prescribed organizational boundaries and antiquated conceptions of ownership. Managerial capitalism cannot work out anymore. They are a generation behind. We are well into the start of the Knowledge Integration Era. That is going to require management structures that will let talented people work creatively, be geography-neutral, operate in flexible, entrepreneurial virtual teams and gain their own mix of intellectual, social and financial reward from their work while still being accountable to goals. The old ways of managerial capitalism where the rewards of managers were tied to measures of bottom-line success, such as stock options and performance bonuses, has now diminished.
Works Cited
1. Berle, Adolf A. and Gardiner C. Means (1932). The Modern Corporation and Private Property, New York: MacMillan.
2. Britt, Blaser. “Would You Really Follow a Manager into Battle?”. January 11, 2003. Stable URL: http://www.blaserco.com/blogs/2003/01/11.html>.
3. Calhoun, Craig. "Capitalism". Dictionary of the Social Sciences. Oxford University Press 2002. Oxford Reference Online. Oxford University Press.
4. Chandler, Alfred D. Jr. (1977) The Visible Hand: The Managerial Revolution in American Business, Cambridge: Harvard University Press.
5. Wikipedia Contributors. “Capitalism”. Wikipedia, The Free Encyclopedia. 10 November 2006. http://en.wikipedia.org/w/index.php?title=Capitalism&oldid=86840565.
6. Wikipedia Contributors. “Managerial Economics”. Wikipedia, The Free Encyclopedia. 6 November 2006. http://en.wikipedia.org/w/index.php?title=Managerial_economics&oldid=86043709.
External Resources
Britt, Blaser. “Would You Really Follow a Manager into Battle?”. January 11, 2003. Stable URL: http://www.blaserco.com/blogs/2003/01/11.html>.