Capitalism and the Corporation

The Modern Corporation and Private Property has now been issued in a revised edition, 36 years after its original publication. Since the last few years have seen a revival of interest in the ideas which Berle and Means made popular, it is useful to have this opportunity to review their original work. Berle and Means (henceforth B & M) are concerned with the fact that the economic system is dominated to an increasing extent by large corporations. They contend that the large corporation, with many thousands of widely dispersed owners, differs significantly from the profit-maximizing firm that economists are (were?) wont to picture. The functions of ownership and control, united in the traditional firm, are separated in the corporation. a fully-developed corporate system there are the owners of corporate assets on the one hand and the managers on the other. The owners take no part in decisions regarding the disposal of their assets but receive income from their employment. The managers own nothing but take all the decisions. The picture is apt enough; and clearly the managers cannot be expected to prefer the owners' interests to their own. After a thorough examination of the legal position of the participants in the corporate structure, B & M conclude: In fact, if not in law, at the moment we are thrown back on the obvious conclusion that a stock-holder's right lies in the expectation of fair dealing rather than in the ability to enforce a series of supposed legal claims (p. 243). The scene is thereby set for an attack upon the traditional (circa 1930) wisdom. The proposition that corporations will be operated with the aim of maximizing managers'-not owners'-utility is now widely accepted. It has led to a series of attempts to formulate a managerial utility function and thence a new theory of the firm-a series which has been characterized more by the exercise of imagination than by the use of data. B & M are sometimes credited with initiating this line of enquiry. fact, the argument above does not require one to suppose that the elements in managers' utility functions are different from those which

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