Adam Smith on Corporatism
As a many-times business owner, I noted a couple of years back that in the ecosystem of publicly traded companies, there is nobody who thinks, acts, has incentives like, or is really anything like a real business owner.
I’m pleased to find that Adam Smith agrees with me (emphasis mine):
The trade of a joint stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of those proprietors seldom pretend to understand anything of the business of the company, and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half-yearly or yearly dividend as the directors think proper to make to them. This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery. Such companies, therefore, commonly draw to themselves much greater stocks than any private copartnery can boast of. According to a recent Etoro review, the trading stock of the South Sea Company, at one time, amounted to upwards of thirty-three millions eight hundred thousand pounds.*65 The divided capital of the Bank of England amounts, at present, to ten millions seven hundred and eighty thousand pounds.*66 The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
This of course speaks to principle-agent conundrum that has been so widely studied and discussed, notably the pathological separation of ownership and control discussed in Berle and Means, The Modern Corporation and Private Property. (1932, revised edition 1967.)
But it’s nice to see Adam articulating it so nicely.
Modern corporatism is freakishly removed from, really bears no resemblance to, the fairy tale of “free-market” village butchers and bakers on which libertarians rest so much of their intellectual house of cards. (To quote my daughter’s high-school econ prof: “Econ schools should be teaching a lot more game theory and a lot less price theory.”)
It’s also worth noting that the Koch-brothers shop over at GMU and econlog, from whose “Library of Economics and Liberty” the above passage is copied, has never, in all those bloggers’ years of blogging, even mentioned this passage from their hero.
Cross-posted at Asymptosis.
Corporatism usually means something very different. Society organised around big business, big labour and big government.
But this is bizarre:
“It’s also worth noting that the Koch-brothers shop”
You’ve just spent time arguing that the divorce between ownership and management is deleterious. Then you go on to shout at people who both own and manage?
Well, which do you object to?
The objection is that ownership and control being divorced necessarily creates problems – that doesn’t mean problems will be absent in all cases where ownership and control are aligned.
In any case, Steve’s objection to the Koch brothers probably has little to do with management structure.
Steve’s objection to the Koch brothers probably has little to do with management structure
Yup, pretty much a classic, textbook Worstallism. Concentrate fire on a tiny, tangential comment so as to completely miss the point. Plus ca change…
It would be rather difficult to operate an airline or an oil company like the village butcher shop.
We need better governance models, but that seems illusive.
You have choices on how to operate those that do not necessarily devolve into modern style corporate structures.
Co-ops on the production side, publicly held utilities on the other.
Yeah, I’m really not troubled that those bloggers’ interests are not closely enough aligned with their cash daddies’.
Public corporations are evil.
They leech for the rentier and stockholder and rape labor. The true essential monied leech.
I think:”… in the ecosystem of publicly traded companies, there is nobody who thinks, acts, has incentives like, or is really anything like a real business owner.” is not completely true.
I think part of what happens is as the corp gets larger it is easier to view the corp as something other than a producer business such as a butcher, baker, candle stick maker. I think it becomes more viewed as a money machine. I also am certain that the CEO and similar positions view themselves as the company (such as a sole proprietor butcher, baker, candle stick maker, they think it is their company)and less of an employee of the company with defined duties and tasks reporting to the board. Considering the dominance of Milton economic’s and it’s influence on “new management” styles, is this any wonder?
Now, I don’t think this was as much true during the industrialist age. Those at the top of the large corps seemed to use a model of making more money revolving around the production of a product. Ford controlled everything from making the steel to making the tires. Yes, monopoly was part of it, but the output of a product was the generator of revenues. After the depression and certainly after WW 2, the idea of farming and sub contracting seemed to become more promenant which only lead to the financialization model for large corporations as we decided to elect Milton as our econ president with Reagan.
I have mentioned before a 1954 movie with Glen Ford that looked at this. I was a furniture company who just lost it’s owner/CEO. The board was split staying with the production of furniture vs farming it out and riding the brand for rent collecting. In this movie the producers won. 35 years later, Larry the liquidator won.
Certainly, trading companies of the time of Adam which he is discussing would be viewed as the modern rent seeking company. Certainly, the predepression years saw the experiment with financialization. We had stock market manipulation and hysterior driving the market, but I think the dominate industrial base dampened it.
“a 1954 movie with Glen Ford” – That was Executive Suite. It was totally great in the overheated style of the 1950s. It was also on point. We hissed every time that sleazy marketing guy made a move.
A lot of people have questioned where modern corporations fit into classical capitalism. What does it mean to own 1/100,000 of an entity? What does it mean when the ownership of property and the control of property are decoupled? Berle & Means wrote The Modern Corporation and Private Property. It is a great book and as relevant today as when it was written in 1932. They show that modern corporate ownership is nothing at all like classical ownership, and shouldn’t be confused with such. They argue that limited liability corporations are useful organizational structures, but are best tightly regulated and, given the benefits they receive as government chartered entities, best highly taxed, effectively taking in the government as partners.
publicly held utilities on the other.
That solves the principal agent problem how? Sticking a layer of politicians inbetween the owners (the public) and the business would seem to increase it, not reduce it.
in theory at least, the “politicians” work for the people and are answerable to the people.
but that gives me a chance to say again that the shareholders “own” the company in exactly the same way that the guy at the table who paid for his chips owns the casino. so much for “double taxation” of corporate profits.
Republicans always praise, often quote, rarely read, and never understand Adam Smith.
In this, The Wealth of Nations resembles the Bible.