By: Adam Stromme

Joseph Schumpeter is, without reservation, widely held to have been one of the greatest economists of the 20th century, and arguably all time. The Harvard Professor demonstrated an astonishing range and scope of analysis, taking his initial education as an economist and extending it to matters that ranged from psychology and sociology, to history and international relations. Paul Kennedy, the famous Yale historian, consequently listed him amongst the Big Four in economics: alongside Adam Smith, John Maynard Keynes, and Karl Marx.

His most famous contribution to economics was the concept of “Creative Destruction”, which referred to the process by which Capitalism destroys inferior or outdated industries and constantly revolutionizes the production process. It is only under the “perennial gale” of Creative Destruction, he wrote in 1944, that Capitalism can be understood. One may very well have the most competitive rotary phone business in the world, the argument goes, but that doesn’t stop the advent of the cell phone from utterly reshaping the phone industry.

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Joseph Schumpeter

Schumpeter is perhaps less well known outside of academic circles today because the line of thinking which he helped shape is out of fashion with contemporary economic thinking. But as an assiduous student of the historical record, he understood that the benefits of economies of scale and extensive state intervention in the economy were the driving force behind much of the development of capitalist economies across Europe and in the United States. Consequently, he held that the combination of industries into monopolies, provided that they operate efficiently and within the law, was a natural consequence of capitalist development which could be harnessed for the collective benefit of a country. In this respect, as he was the first to admit in his magnum opus Capitalism, Socialism, and Democracy, he was in agreement with another one of the Big Four: Karl Marx.

The consequence of this argument is extremely relevant to today. Centralization of industry is an acknowledged fact, and although much of the economics profession continue to be trained to view the world through the prism of innumerable small scale enterprises operating without market power, this is a fiction which Schumpeter ridiculed even back in his day, dismissing the concept with the conclusion that “If we look more closely at the conditions…that must be fulfilled in order to produce perfect competition, we realize immediately that outside of agricultural mass production there cannot be many instances of it.”

Centralization of industry is an acknowledged fact

One might naturally hold that Schumpeter’s faith in centralization of industry would best be countered by economists which stressed the essential role of the market in decentralizing economic power and preventing the abuses, inefficiencies, and excesses which are associated with monopoly capitalism. This argument is quite natural, as far as it goes. The ghosts of Friedrich von Hayek, Ludwig von Mises, and Milton Friedman could then be conjured up to throw light on the dark side of Schumpeter’s approach to economics: its apathy to concentrated private power via oligopoly and monopoly.

But Schumpeter would likely have none of it. As he astutely noted within the very same pages, the image of competition as a source of efficiency is much more powerful than the reality. “It might seem at first sight that a system conforming to [perfect competition] would display remarkable absence of some of the major sources of social waste. As a little reflection should show, this is really but another way of stating the content of the preceding sentence.” Given the apostles of competition base their logic on a tautology, and one wholly inadequate for the industrial age at that, the direction and regulation of enterprise has to come from another source.

But there is another critique of concentrated private power which takes an entirely different route, one which challenges the logic of both Schumpeter and the protegés of the Manchester school of free competition as represented by Mises, Hayek, and the like in equal measure. This approach concerns not the democracy of money that is the marketplace, but rather the democracy of the firm itself.

It is a critique of the traditional logic of property.

The Traditional Logic of Property
The idea of the “traditional logic of property” is very simple. It was given its best expression by a corporate lawyer named Adolf Berle, a member of Roosevelt’s brain trust, and his associate at Columbia University, the economist Gardiner Means. Berle and Means wrote around the same time as Schumpeter, and their own seminal contribution, The Modern Corporation and Private Property, is deeply concerned with many of the same processes— industrialization, concentration, industrial democracy, and so on— as Schumpeter’s Capitalism, Socialism, and Democracy.

In particular, Berle and Means took pains to demonstrate that the rise of the modern corporation was incompatible with what they called the “traditional logic of property”. This logic, which they trace back to Adam Smith and indeed colors much of the lay person’s conception of property, assumes that the people who run a firm are doing so by disposing of their own personal property: a concept that invokes the romanticized image of a small business owner seeking to gain riches through hard work and determination. In reality, write Berle and Means, the modern corporation has “tens and hundreds of thousands of owners”, meaning individuals with stock or claims on the firm, contributing their savings to a small coterie of managers who actually “control” the firm: the so-called “dictators of industry”.

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Adolf Berle

Because ownership is so heavily dispersed, owners have very little say over how the firm is to be run, and, furthermore, very little interest in investigating how it is run provided it generates a sufficient return. This introduces a separation between ownership of a firm and control of it which is of groundbreaking consequences. In the world of corporate governance, where ownership is dispersed and control able to be exercised by a board which, as they continually demonstrate, can effectively insulate themselves from the public pressure of all but the most powerful members of the investor class, and with very little direct stake in the firm on their part, the result is that “these great associations are so different from the small, privately owned enterprises of the past as to make the concept of private enterprise an ineffective instrument of analysis.”

The bell tolls for the traditional logic of property.

This process, however, is neither wholly undesirable nor avoidable without a radical regression in economic progress. The corporatization of the economic sphere is a necessary institutional reform to pool the savings of tens of thousands of individuals and gather the capital necessary for large-scale industry. Insofar as it accomplishes this, it centralizes production and greatly increases the efficiency of industry. But insofar as the separation of ownership from management allows the former to drive the latter to emphasize profitability over all else, its social effects are anything but efficient.

the rise of the modern corporation was incompatible with what they called the “traditional logic of property”

Ownership and Control 
Far from being considered a radical text, The Modern Corporation and Private Property is today regarded as the seminal text of corporate governance. In addition to its fascinating discussion of the separation of ownership from control, it also provides extensive empirical evidence for the spread of the corporate form of industry, the inherent tendency of corporate industry to concentrate itself, the oppositional interests of control and ownership, and a fruitful discussion of the consequences of their analysis, particularly for the traditional logic of property. In these regards, it is standard canon for economists and corporate lawyers alike.

But there is a powerful conclusion embedded in this train of argument. If corporations are in fact constituted of the savings of the masses, and industry is becoming a socialized process, then there is little reason to assert the primacy of the interests of the control group, the managers, over the wider community from which their resources are inevitably drawn, including the workforce itself. “Just as there is a continuous desire for power” they assert, “so also there is a continuous desire to make that power the servant of the bulk of the individuals it affects.”

Additionally, while Berle and Means were keen to note some of the dissemination of ownership which the corporate form encouraged, the reality on the ground remained that the savings of a large part of the population remained heavily concentrated within a small fragment of society. The social justification for retaining these rentiers, “passive property” owners, cannot be made with recourse either to their contribution of the management of capitalist firms, which is now done by a professional class of managers, or through any other socially necessary function but the mere fact of owning capital. The logic of how they come to lay a claim on all future profits from their investments on the basis of, at most, a discrete amount of previous labor is entirely circular. To own in itself does not entitle one to appropriate the earnings of others, least of all, one would think, from those who own very little or anything at all: the majority of the workforce.

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Richard Tawney: Guild Socialist

As a result, the entire existence of these large-scale “passive property” owners is little more than a private monopoly tax levied upon all productive enterprise, masquerading as the cause of rather than an impediment to production. As they distort the entire purpose of production from providing necessary goods and services to producing profits, this sort of “functionless property”, to quote the Guild Socialist Richard Tawney, becomes “the greatest enemy of legitimate property itself. It is the parasite which kills the organism that produced it.” It follows that their existence is not only unnecessary, but extremely wasteful for society as a whole, and on precisely the grounds defenders of modern capitalism naïvely defend it.

Berle and Means’ empirical corroboration of capitalism’s tendency to centralize production and disseminate ownership was also likely an indirect inspiration for Schumpeter’s argument asserting capitalism has a tendency to dissolve itself. “The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property.” Similarly, Marx spoke of this tendency latent within the industrial form of property as the “self-abolishing contradiction” which lay at the heart of capitalism.

Berle and Means discovered that by the separation of ownership and control which the corporate form demands, property no longer carried its traditional significance

If there is to be justice with respect to both democratic accountability and the will of the more diffuse class of property owners, some fundamental reform must occur. Since those who own the firm in the literal sense are so diffuse so as to be unable to exercise any meaningful control over its operation, while the very essence of the modern firm has been to enable us to carry out production on a massive scale, for the whole of society, the remedy of this assumes grand dimensions. The structure of production must not make a cosmetic change— such as altering the size of the standard economic unit, which is a necessary prerequisite for industrial society— but rather a constitutional change, by changing how the firm is to be owned and directed.

Berle and Means close their study of the topic in frank terms: “The future may see the economic organism, now typified by the corporation, not only on an equal plane with the state, but possibly even superseding it as the dominant form of social organization. The law of corporations accordingly, might well be considered as a potential constitutional law for the new economic state, while business practice is increasingly assuming the aspect of economic statesmanship.” Industry must change its form to reflect both its newfound responsibility to society as a whole and the changed nature of its operation, based around mass production.

The structure of production must not make a cosmetic change… but rather a constitutional change, by changing how the firm is to be owned and directed.

To be blunt, the logical outcome of this process is the socialization of industry, with a society of producers taking the place of passive property owners and the state in the administration of social affairs. The fetters imposed upon production by private enterprise and the rentier class, backed by endless political manipulation, would no longer be necessary. By such an act, income and wealth inequality, the poor provision of public services, the democratic deficit, and more are all addressed at once: all by simply recognizing that what has really always been the public domain be recognized and administered as such. And the result, as the French Socialist Henri de Saint-Simon presciently put it, is clear: “The art of governing men will disappear. A new art will take its place, the art of administering things.”

Such an idea is a truly inspiring vision for the future, and it is not a utopian conception of society, but the real, beating, soul of industry today which has the potential to bring it forth.

Schumpeter photo source
Adolf Berle photo source

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