The Managerial Revolution in American Business: The Ascendancy of the Manager

Historians as well as economists have failed to consider the implications of the rise of modern business enterprise. They have studied the entrepre- neurs who created modern business enterprise, but more in moral than in analytical terms. Their concern has been more whether they were exploiters (robber barons) or creators (industrial statesmen). Historians have also been fascinated by the financiers who for brief periods allocated funds to transportation, communication, and some industrial enterprises and so appeared to hâve control of major sectors of the economy. But they have paid almost no notice at all to the managers who, because they carried out a basic new economic function, continued to play a far more central role in the operations of the American economy than did the robber barons, industrial statesmen, or financiers. When they have looked at the development of the American economic system, historians have been more concerned about the continuing of family (that is, entrepreneurial) capitalism or of financial capitalism than about the spread of managerial capitalism.

At the beginning of this century the American economic system still included elements of financial and family capitalism. Managerial capitalism was not yet fully dominant. Where the initial cost of facilities was high, as was the case with the railroad, the telegraph, urban traction lines, and other utilities, investment bankers and other financial intermediaries who had played a major role in raising funds for the enterprise continued to participate in decisions on the allocation of resources for the future. Where, as was the case with the mass marketers, initial capital costs were low and high volume output generated funds for expansion, the entrepreneurs who created the firm and their families continued to have a say in top management decisions. But by 1917 representatives of an entrepreneurial family or a banking house almost never took part in middle management decisions on prices, output, deliveries, wages, and employment required in the coordinating of current flows. Even in top management decisions concerning the allocation of resources, their power remained essentially negative. They could say no, but unless they themselves were trained managers with long experience in the same industry and even the same company, they had neither the information nor the experience to propose positive alternative courses of action.

The relationship between ownership and management within the in- tegrated industrial firm reflected the way in which it became large. The experience of those that expanded initially by building an extensive mar- keting and purchasing organization paralleled that of the mass marketers. Because internally generated funds paid for the facilities and financed continued growth, the founder and his family retained control. Even when the enterprise went to the money markets for funds to supplement retained earnings for expansion, the family continued to own a large minority and nearly always controlling share of its stock.

Nevertheless, members of the entrepreneurial family rarely became ac-tive in top management unless they themselves were trained as professional managers. Since the profits of the family enterprise usually assured them of a large personal income, they had little financial incentive to spend years working up the managerial ladder. Therefore, in only a few of the large American business enterprises did family members continue to participate for more than two generations in the management of the companies they owned.

The descendants of the founders of and early investors in such industrial enterprises continued to reap the profits of successful administrative coordination. Indeed, the majority of American fortunes came from the building and operation of modern business enterprises. These families re- main the primary beneficiaries of managerial capitalism, but they are no longer involved in the operation of its central institution. By mid-twentieth century few had any direct say in the decisions concerning current flows and future allocations so essential to the operation of the American economy.

A comparable pattern occurred in those industrial enterprises that grew large through merger rather than through internal growth. The financiers who provided or arranged to obtain funds to rationalize and centralize production and to create new marketing and purchasing organizations re- mained on the boards of consolidated industrial enterprises. They rarely, however, had as strong an influence on the boards of directors of industrial enterprises as they had on the boards of railroad companies. The capital needed for the initial reorganizations was less than that required for railroad system-building, and the profits for internal financing generated by these industrials was higher. In a few of the largest and best- known mergers—General Electric, United States Steel, International Harvester, and Allis Chalmers—outside directors from the financial community outnumbered insiders taken from management. But on the boards of a much greater number of food, machinery, chemical, oil, rubber, and primary metals enterprises, outside financiers were very much in the minority. Their influence was significant only when the enterprise decided to go to the money markets to supplement retained earnings. With a few notable exceptions, such as United States Steel, managers soon came to command those enterprises where financiers were originally influential. Financial capitalism in the United States was a narrowly located, shortlived phenomenon.

By mid-century even the legal fiction of outside control was beginning to disappear. A study of the 200 largest nonfinancial companies in 1963 indicates that in none of these firms did an individual, family, or group hold over 80 percent of the stock.3 None were still privately owned. In only 5 of the 200 did a family or group have a majority control by owning as much as 50 percent of the stock. In 26 others a family or group had minority control by holding more than 10 percent of the stock (but less than 50) or by using a holding company or other legal device. In 1963, then, 169 or 84.5 percent of the 200 largest nonfinancial companies were management controlled. In 5 of these firms families did still have influence, but because they were professional, full-time salaried executives, not because of stock they held. Thus by the 1950s the managerial firm had become the standard form of modern business enterprise in major sectors of the American economy. In those sectors where modern multiunit enterprise had come to dominate, managerial capitalism had gained ascendancy over family and financial capitalism.

As the influence of the families and the financiers grew even weaker in the management of modern business enterprise, that of the workers through representatives of their union increased. Union influence, how- ever, directly affected only one set of management decisions—those made by middle managers relating to wages, hiring, firing, and conditions of work. Such decisions had only an indirect impact on the central ones that coordinated current flows and allocated resources for the future.

Except on the railroads, the influence of the working force on the de- cisions made by managers of modern business enterprises did not begin until the 1930s. Before then craft unions had some success in organizing the workers in such labor-intensive skilled trades as cigar, garment, hat, and stove marking, shipbuilding, and coal mining—trades in which modern business enterprise rarely flourished. They organized the workers in the shops of small, single-unit, owner-managed firms into local, city, and state unions. These regional organizations were represented in a national union which was, in turn, loosely affiliated with other craft unions in the American Federation of Labor.

The craft unions, however, made little effort to unionize those industries where administrative coordination paid off. Workers in the mass pro- duction industries, where the large modern industrial enterprises clustered, Were primarily semiskilled and unskilled workers. Those industries em- ployed few skilled craftsmen. With the coming of the modern factory, the plant manager and his staff took over from the foreman the decisions concerning hiring, firing, and promotion, as well as those on wages, hours, and conditions of work. As the enterprise grew, such decisions were placed in the hands of middle management. Policy matters were determined by executives in new personnel departments housed in the central office. And until the 1930s, these middle managers were rarely forced to consider seriously the demands of labor unions to represent the workers in making such decisions.

Even with the strong support of the Roosevelt administration, the American Federation of Labor was unable to meet the challenge of or- ganizing the mass production industries.4 The success of such an organiz-ing drive required the restructuring of its unions along industrial—plant and enterprise—rather than geographical—city and state—lines. In ad- dition, the craft unions had difficulty in devising a program that appealed to the semi- and the unskilled workers and still met the needs of their skilled members. Only in 1936 after the creation of the Committee for Industrial Organization, after its split from the A F of L, and after the re- sulting “civil war” in the ranks of labor, did the mass production industries begin to be extensively unionized. Only then did the managers of large enterprises in the automobile, machinery, electrical, chemical, rubber, glass, and primary metals industries begin to share their decisions with representatives of their working forces.

Even so, union leaders, during the great organizing drives of the late 1930s and immediately after World War II, rarely, if ever, sought to have a say in the determination of policies other than those that directly affected the lives of their members. They wanted to take part only in those concerning wages, hours, working rules, hiring, firing, and promotion. Even the unsuccessful demand “to look at the company’s books” was viewed as a way to assure union members that they were receiving a fair share of the income generated by the company. The union members almost never asked to participate in decisions concerning output, pricing, scheduling, and resource allocation.

A critical issue over which labor and management fought in the years immediately after World War II was whether the managers or the union would control the hiring of workers. With the passage of the Taft- Hartley Act of 1947, the managers retained control over hiring, a prerogative that has never been seriously challenged since. And since that time the unions have made few determined efforts to acquire more of “management’s prerogatives.”

The actions of government officials, particularly those of the federal government, have had an increasingly greater impact on managerial decisions than have those of the representatives of workers, owners, or financiers. By and large, however, their impact has been indirect. They have helped to shape the environment in which management makes its decisions, but, except in time of war, these officials have only occasionally participated in the making of the decisions themselves. And since the market has always been the prime factor in management decisions, the government’s most significant role has been in shaping markets for the goods and services of modern business enterprise.

Prior to the depression and World War II, the impact of the state and federal government on the modern corporation was primarily through taxes, tariffs, and regulatory legislation. Taxes remained low until the war and had a minimal impact on the direction and rate of growth of the modem managerial enterprises and the sectors they administered. Tariffs, which protected all industries, were of more help in maintaining small- unit, competitive enterprises than in assisting those that exploited the economies of speed and sold their products on a global scale. Antitrust legislation and, since its founding in 1914, the Federal Trade Commission have continued to discourage monopoly and encourage oligopoly. The Federal Reserve Board, formed in 1914, has affected the interest rates and money markets and therefore the managers’ financial environment. The wave of regulatory legislation passed during the New Deal reduced the choices open to management in transportation, communications, and utilities enterprises. However, except in the issuance of securities, the new legislation placed few limitations on the discretionary power of mass marketers and mass producers to coordinate flows and allocate resources.

The government’s role in the economy expanded sharply in the 1930s and 1940s. With the coming of World War II, the federal government became for the first time a major customer of American business enter- prise. Before that time, except for a brief period during World War I, government buyers, including the military forces, provided only a tiny market for the food, machinery, chemical, oil, rubber, and primary metal companies that made up the roster of American big business. The sugges- tion that the rise of big business has any relation to government and mili- tary expenditures (or for that matter to monetary and fiscal policies) has no historical substance. Only during and after the Second World War did the government become a major market for industrial goods. In the postwar years, that market has been substantial, but it has been concentrated in a small number of industries, such as aircraft, missiles, instruments, communication equipment, electronic components, and shipbuilding.5 Outside these industries, output continues to go primarily to non- government customers.

Far more important to the spread and continued growth of modern business enterprise than direct purchases has been the government’s role in maintaining full employment and high aggregate demand. Again, it was only after World War II that the government inaugurated any sort of systematic policy to maintain demand and thereby support the mass mar- ket. One reason the federal government took on this responsibility was that the depression clearly demonstrated the inability of the private sector of the economy to maintain continuing growth of a complex, highly dif- ferentiated mass production, mass distribution economy. In the 1920s, the new corporate giants had begun to calibrate supply with demand. They had no way, however, of sustaining aggregate demand or of reviving it if it fell off. In the middle and later part of the decade, when national income stopped growing, the larger firms maintained existing output or cut back a bit. When the 1929 stock market crash dried up credit and further re- duced demand, they could only roll with the punches. As demand fell, these enterprises cut production, laid off workers, and canceled orders for supplies and materials. Such actions further reduced purchasing power and with it aggregate demand. The very ability to effectively coordinate supply with demand intensified the economic decline. The downward pressure continued relentlessly. In less than four years, the national income was slashed in half. The 1931 forecasts of General Motors and General Electric for 1932, for example, were horrendous. At best they might operate at about 25 percent of capacity.

The only institution capable of stopping this economic descent was the federal government. During the 1930s, it began to undertake this role, but with great reluctance. Politicians and government officials moved hesitantly. And managers and businessmen, those who had the most to gain, were among the most outspoken critics of the few moves that were made. Until the recession of 1937, President Franklin D. Roosevelt and Secretary of the Treasury Henry Morgenthau still expected to balance the budget and bring to an end government intervention in the economy. Roosevelt and his cabinet considered large-scale government spending and employment a temporary expedient. When Roosevelt decided in 1936 that, despite high unemployment, the depression was over, he reduced government expenditures. National income, production, and demand im- mediately plummeted. By then, a few economists and government officials and still fewer business managers began to see more clearly the relationship between government spending and the level of economic activity. Never- theless, the acceptance of the government’s role in maintaining economic growth and stability was still almost a decade away.

During World War II attitudes changed. The mobilization of the war economy brought corporation managers to Washington to carry out one of the most complex pieces of economic planning in history. That experience lessened ideological anxieties about the government’s role in stabilizing the economy. Then the fear of postwar recession and consequent return of mass unemployment brought support for legislation to commit the federal government to maintaining full employment and aggregate demand. While a few managers and businessmen favored such legislation, most continued to oppose what they considered government interference in the processes of business. The Employment Act of 1946 passed only through the concerted efforts of liberal and labor groups.6 By the 1950s, however, businessmen in general and professional managers in particular had begun to see the benefits of a government commitment to maintaining aggregate demand. They supported the efforts of both Democratic and Republican administrations during the recessions of 1949, 1957, and i960 to provide stability through fiscal policies involving the building of highways and shifting defense contracts.

In carrying out these policies, the government officials had no intention of replacing the managers as the coordinators of current demand and allocators of resources for the future. They acted only when the activities of the corporate managers failed to maintain full employment and high demand. The federal government became a coordinator and allocator of last resort.

In the United States, neither the labor unions nor the government has taken part in carrying out the basic functions of modern business enterprise as it has been defined in this study. They had had as little direct say as the representatives of the owners or financiers in decisions coordinating current flows and allocating resources for future production and distribution. Such decisions remain market- oriented. They continued to reflect the managers’ perceptions of how to use technology and capital to meet their estimates of market demand.

The appearance of managerial capitalism has been, therefore, an eco-nomic phenomenon. It has had little political support among the American electorate. At least until the 1940s, modern business enterprise grew in spite of public and government opposition. Many Americans—probably a majority—looked on large-scale enterprise with suspicion. The con- centrated economic power such enterprises wielded violated basic demo- cratic values. Their existence dampened entrepreneurial opportunity in many sectors of the economy. Their managers were not required to explain or be accountable for their uses of power.

For these reasons the coming of modern business enterprise in its several different forms brought strong political reaction and legislative action. The control and regulation of the railroads, of the three types of mass retailers— department stores, mail-order houses, and the chains—and of the large industrial enterprise became major political issues. In the first decade of the twentieth century, the control of the large corporation was, in fact, the paramount political question of the day. The protest against the new type of business enterprise was led by merchants, small manufacturers, and other businessmen, including commercial farmers, who felt their economic interests threatened by the new institution. By basing their arguments on traditional ideology and traditional economic beliefs, they won widespread support for their views. Yet in the end, the protests, the political campaigns, and the resulting legislation did little to retard the continuing growth of the new institution and the new class that managed it.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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