Wednesday, November 24, 2010

The Growth of Large Formal Organizations Run by Professional Managers

Chapter 6 of Micklethwait and Wooldridge's book The Company: A Short History of a Revolutionary Idea is titled "The Triumph of Managerial Capitalism: 1913-1975". In 1975 I was 38 years old and that was the year I received my PhD from (what was then) the Graduate School of Administration of UCI, so this chapter focuses on the development of the world that seems natural to me.

By 1975, the 200 largest firms in the United States owned more than 3/5th of the corporate capital in the nation, and they were managed by a class of corporate managers. The federal government was huge, and largely managed by people quite similar to those managing the big corporations, indeed there was considerable exchange of managers between federal government and large corporations. The ownership of the corporations was widely distributed with 40% of workers owning shares and pension plans and mutual funds also managed by people from the class of corporate managers. Large labor unions represented a large portion of the workers. Corporate health insurance was the American counterpart to socialized medicine with large insurers, managed by people from the class of corporate managers, covering a majority of workers.

European governments experimented more than did the United States with state owned corporations, and lagged the United States in the growth of private corporations, but they too were dominated by big companies. Many of the large companies were multinational, escaping some of the control of national governments.

Americans worked in large corporations, bought goods and services produced by large corporations and distributed by large corporations. They put their savings in the care of large corporations. The owner manager was responsible for only a small part of the economy.

Large corporations had enormous influence in government, and not only in the military-industrial complex. In 1977, Vice President Rockefeller's former White House secretary was assigned to work with me for a couple of months on a special project. I remember being shocked when she told me that the CEOs of big corporations would call her and instead of asking for appointments, simply tell her to clear the VP's calendar so that he could meet with them at a time convenient to the CEO.

Mickelthwait and Wooldridge make the point that the America of 1975 was fundamentally different from that of 1840 in the way society was institutionalized. The large corporation which had not existed in the early 19th century had become a dominant institution at the end of the third quarter of the 20th. The authority and influence of the owner operator of the farm or small business was now eclipsed by the authority of professional managers of large, formal organizations.

This blog has often focused on technological innovation, but this book shows the enormous influence that an institutional innovation -- the creation of the professionally-managed, limited-liability stock company -- has had on modern life. I would say it was also an innovation that radically improved the productive and distributive capacity of the economy. Of course, I would also hold that large, powerful companies would not have been possible except for the evolution of the human-built world (see my previous post on that book) that Thomas Hughes has described in his book. Without the machinery for mass production and the transportation and communications infrastructure for mass markets, the large corporation would not have been possible.

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