The Modern Corporation and Private Property is a book written by Adolf Berle and Gardiner Means published in 1932 regarding the foundations of United States corporate law. It explores the evolution of big business through a legal and economic lens, and argues that in the modern world those who legally have ownership over companies have been separated from their control. The second, revised edition was released in 1967. It serves as a foundational text in corporate governance, corporate law (company law), and institutional economics.
Berle and Means argued that the structure of corporate law in the United States in the 1930s enforced the separation of ownership and control because the corporate person formally owns a corporate entity even while shareholders own shares in the corporate entity and elect corporate directors who control the company's activities. The Modern Corporation and Private Property, first brought forward issues associated with the widely dispersed ownership of publicly traded companies. Berle and Means showed that the means of production in the US economy were highly concentrated in the hands of the largest 200 corporations, and within the large corporations, managers controlled firms despite shareholders' formal ownership. Compared to the notion of personal private property, say as one's laptop or bicycle, the functioning of modern company law “has destroyed the unity that we commonly call property.” This occurred for a number of reasons, foremost being the dispersal of shareholding ownership in big corporations: the typical shareholder is uninterested in the day-to-day affairs of the company, yet thousands of people like him or her make up the majority of owners throughout the economy. The result is that those who are directly interested in day-to-day affairs, the management and the directors, have the ability to manage the resources of companies to their own advantage without effective shareholder scrutiny.
“The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital... [Such owners] have surrendered the right that the corporation should be operated in their sole interest...” at 355 of the 1932 edition“the owners most emphatically will not be served by a profit seeking controlling group”.114
The implications of their work were clear. Berle and Means advocated embedded voting rights for all shareholders, greater transparency, and accountability. However, with the release of the revised edition, Berle and Means also pointed to the disparity that existed between those who did have shareholdings and those who did not.
Introductory Introduction by Murray Weidenbaum and Mark Jensen Murray Weidenbaum and Mark Jensen have added their introduction to more recent editions of the text. It casts a thoroughly skeptical perspective on the book, since the two came from very different academic perspectives, generally more orthodox and conservative in their outlook politically.
Property, Production and Revolution - A Preface to the Revised Edition by Adolf A. BerleThis was an article published separately and earlier as AA Berle, 'Property, Production and Revolution' (1965) 65 Columbia Law Review 1 For the 1967 Revised Edition, Berle added a new Preface, updating the picture and bringing in new arguments and observations. He summed up the whole point of the book at the same time, making it a valuable adjunct to the text. "Why have stockholders?" he asked.
"What contribution do they make, entitling them to heirship of half the profits of the industrial system, receivable partly in the form of dividends, and partly in the form of increased market values resulting from undistributed corporate gains? Stockholders toil not, neither do they spin, to earn that reward. They are beneficiaries by position only. Justification for their inheritance must be sought outside classic economic reasoning.”xxiii
The position of stockholders' profit, said Berle,
“can be founded only upon social grounds. There is... a value attached to individual life, individual development, individual solution of personal problems, individual choice of consumption and activity. Wealth unquestionably does add to an individual’s capacity and range in pursuit of happiness and self-development. There is certainly advantage to the community when men take care of themselves. But that justification turns on the distribution as well as the existence of wealth. Its force exists only in direct ratio to the number of individuals who hold such wealth. Justification for the stockholder’s existence thus depends on increasing distribution within the American population. Ideally the stockholder’s position will be impregnable only when every American family has its fragment of that position and of the wealth by which the opportunity to develop individuality becomes fully actualized.”
Implications of the Corporate Revolution in Economic Theory by Gardiner C. Means
Preface (1932)
Tables and charts
Book I, Property in Flux Book I is entitled, "Property in Flux: Separation of the attributes of ownership under the corporate system" and provides a general picture of the shifting economic power structure that Berle and Means observed.
I Property in transition This first chapter explores the basic thesis of Berle and Means, that with the emergence of the corporation, the very institution of private property has been fundamentally altered.
“In its new aspect the corporation is a means whereby the wealth of innumerable individuals has been concentrated into huge aggregates and whereby control over this wealth has been surrendered to a unified direction. The power attendant upon such concentration has brought forth princes of industry, whose position in the community is yet to be defined. The surrender of control over their wealth by investors has effectively broken the old property relationships and has raised the problem of defining these relationship anew. The direction of industry by persons other than those who have ventured their wealth has raised the question of the motive force back of such direction and the effective distribution of the returns from business enterprise.”4
“Such an organization of economic activity rests upon two developments, each of which has made possible an extension of the area under unified control. The factory system, the basis of the industrial revolution, brought an increasingly large number of workers directly under a single management. Then, the modern corporation, equally revolutionary in its effect, placed the wealth of innumerable individuals under the same central control. By each of these changes the power of those in control was immensely enlarged and the status of those involved, worker or property owner, was radically changed. The independent worker who entered the factory became a wage laborer surrendering the direction of his labor to his industrial master. The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital.”5
Berle and Means continue by emphasizing how increasing dispersion of stock ownership under a shareholder public is necessary for those in control to enforce their position. Even if they have minority shareholding, the public so widespread is not in a position to be organized to hold those who handle their investments to account.6 The divergence of interest between owners and controllers,
“has destroyed the unity that we commonly call property - has divided ownership into nominal ownership and the power formerly joined to it. Thereby the corporation has changed the nature of profit-seeking enterprise.”7
“Private enterprise, on the other hand, has assumed an owner of the instruments of production with complete property rights over those instruments... Whereas the organization of feudal economic life rested upon an elaborate system of binding customs, the organization under the system of private enterprise has rested upon the self-interest of the property owner - a self-interest held in check only by competition and the conditions of supply and demand... Such self-interest has long been regarded as the best guarantee of economic efficiency. It has been assumed that, if the individual is protected in the right both to use his own property as he sees fit and to receive the full fruits of its use, his desire for personal gain, for profits, can be relied upon as an effective incentive to his efficient use of any industrial property he may possess.”9
Shareholders, it is stated
“cannot be motivated by those profits to a more efficient use of the property, since they have surrendered all disposition of it to those in control of the enterprise.”
II The appearance of the corporate system The second chapter puts forward the view that corporations have entered, grown and become dominant first in the fields of public utilities, common carriers, banks and insurance companies and last in the areas of personal service and agriculture.
It also goes on to emphasize the fact that the date of its appearance and degree of its dominance have in general varied with two factors The public character of the activity in question The amount of fixed capital required to carry on business
III The concentration of economic power This part proceeds to emphasize the ubiquity of corporations in production in the modern economy.
“These great companies form the very framework of American industry. The individual must come in contact with them almost constantly. He may own an interest in one or more of them, he may be employed by one of them, but above all he is continually accepting their service.”19
“In conclusion, then, the huge corporation, the corporation with $90m of assets or more, has come to dominate most major industries if not all industry in the United States.”44
A number of consequences result, the fifth being that,
“The economic power in the hands of the few persons who control a giant corporation is a tremendous force which can harm or benefit a multitude of individuals, affect whole districts, shift the currents of trade, bring ruin to one community and prosperity to another. The organizations which they control have passed far beyond the realm of private enterprise - they have become more nearly social institutions.”46
IV The dispersion of stock ownership In this Chapter, Berle and Means present considerable statistical evidence of the growing dispersion of stock ownership around the economy. They draw a distinction between "passive" property, or that which merely sits idle or is consumed, and "productive" property, which is actually employed to create more wealth. They say,
“over the enterprise and over the physical property - the instruments of production - in which he has an interest, the owner has little control. At the same time he bears no responsibility with respect to the enterprise or its physical property. It has often been said that the owner of a horse is responsible. If the horse lives he must feed it. If the horse dies he must bury it. No such responsibility attaches to a share of stock. The owner is practically powerless through his own efforts to affect the underlying property... Physical property capable of being shaped by its owner could bring to him direct satisfaction apart from the income it yielded in more concrete form. It represented an extension of his own personality. With the corporate revolution, this quality has been lost to the property owner much as it has been lost to the worker through the industrial revolution.”64