The Modern Corporation and Private Property (1930s)
Adolf Berle set out to discuss the “fission” of property, whereby the traditional rights associated with property get split into two factions: possession and ownership. He takes pains to explain that property as traditionally conceived was a very simple concept, and classically defined private property would refer to either real property (”land or rights derived from land”) or personal property (”mobile, capable of being used, taken away, moved, transferred”) [Berle 1968: xi]
Property was traditionally possession, and possession was assumed to mean ownership. He claims “private property was that of things in possession of one or more individuals. Current semantics conjures up this picture even now.” [Berle 1959: 61] “From earliest times the owner of property has been entitled to the full use or disposal of his property, and in these rights the owner has been protected by law.” [Berle 1968: 294] “To Adam Smith and to his followers, private property was a unity involving possession. He assumed that ownership and control were combined. Today, in the modern corporation, this unity has been broken.” [Berle 1968: 304] Actual possession of a corporation could be said to fall in the hands of the night watchman who handles the physical property, but the ownership belongs to the stock holders, who may never physically possess the property or even see it. Directors, presidents, employees are all handling the property — they have possession — but even buying and selling is done on behalf of the corporation and the stockholders who own everything despite perhaps never even seeing it or meeting the employees. An employee may use “his” forklift or office desk, but although he has usage over it, he has no real ownership. Berle is careful to note that using the word “owner” for a stockholder may be debatable. The important part is that “private property” no longer has the common sense definition it once held.
When a corporation is created, legal rights of property are transferred from the person or family to the corporation and the stockholders. Even if the family has majority stock and can effectively make the decisions, the legal entity is now the corporation, not the family.
Berle defines property as a “relationship between an individual (or perhaps a group of individuals) and a tangible or intangible thing.” [Berle 1959: 60] “Things” can be incorporeal or physical. They may even include “bodies of knowledge, written or unwritten”. I would point out that employees who develop ideas on the job generally have their ideas patented by their company, not themselves.
Berle says that “private property, as understood in the capitalist system, is rapidly losing its original characteristics.” [Berle 1968: 219] In short, “private property” has a whole new meaning under the corporation.
Active Versus Passive Property
Berle distinguishes between what he calls “passive” and “active” property, technical terms for his divisions of property. Passive includes having shares in stocks and bonds, where one can be an “owner” but have little or no control and no responsibility. The active property is the holding of the plant but by people who have little ownership interest in it.
“When active and passive property relationships attach to the same individual or group, we have private property as conceived by the older economists.” [Berle 1968: 305]
The Benefits of the New Concept
Traditionally, “property like a factory or a mine which cannot be cut up, is rarely sold.” [Berle 1968: 249] “The owner of non-liquid property is, in a sense, married to it.” [Berle 1968: 249] “To some extent, non-liquid property immobilizes the owner by its own immobility.” [Berle 1968: 250] If you at one point were the owner of a mine, you probably had to live nearby and would have to make constant inspections. Passing ownership to another would be difficult unless they, too, wanted to remain nearby. The solution, of course, was to put ownership in one hand and possession/management in another.
“The separation of ownership from management and control in the corporate system has performed this essential step in securing liquidity. It is the management and ‘control’ which is now wedded to the physical property. The owner has no direction personal relation to it and no responsibility toward it. The management is more or less permanent, directing the physical property which remains intact while the participation privileges of ownership are split into innumerable parts — ’shares of stock’ — which glide from hand to hand, irresponsible and impersonal.” [Berle 1968: 250]
“Wherever one man or a group of men entrusted another man or group with the management of property, the second group became fiduciaries. As such they were obliged to act conscionably, which meant in fidelity to the interests of the persons whose wealth they had undertaken to handle.” [Berle 1968: 295] There is, of course, no guarantee that management will act as owners would like, but if they wish to maintain their careers, their best interest is to act in their owner’s best interest.
Criticisms
In some sense, this division of property is nothing new — landlords had ownership of homes and land they did not personally possess for centuries or longer. The only difference here is that the property becomes more abstract — stockholders have no direct link to the property, and much of the property is not necessarily physical, as it may include patents.
Others have said the argument is not new in other ways. “The Berle-Means argument essentially rephrased the Marxist thesis of the rupture, under capitalism, between labor and the ownership of the means of production.” [Pipes: 234]
Pipes argues that, “The notion that corporate managers operate free of control of the shareholders is obviously false: by virtue of owning huge blocks of corporate stocks, pension funds and mutual funds enjoy considerable leverage over corporate management.” [Pipes: 234] He is correct on this one, but it is worth noting that Berle did not, so far as I know, say that the managers operated free of owners’ control. As I mentioned above, a manager clearly knows he is at risk of losing his job if caught acting against the interests of the business.
Pipes further accuses the authors of a Marxist bias. “Another flaw of the Berle-Means thesis lay in its definition of property. Possibly under the influence of Marxist theory dominant in the Soviet Union at the time of writing, the authors limited this concept to ‘rights in the instruments of production’, whereas in the real world it applies to any asset that yields the owner material rewards. Money, stocks, bonds, and real estate, ‘passive’ though they may be, cannot be arbitrarily excluded from the concept; the same, of course, applies to incorporeal assets such as copyrights and patents.” [Pipes: 235] I find this criticism flawed, as I believe Berle was quite aware of intangible property and considered it to be property in a very real sense. Otherwise, I do not know why he would go through such pains to explain how modern concepts of property differ from classic, Adam Smith era definitions. I do not feel that Berle finds “passive” property any less real than “active”.
George J. Stigler and Claire Friedland outlined in 1983 the lasting impact of Berle-Means: “Our own statistical analyses, using only data and methods familiar to economists of the time, yield no clear evidence that the manager-dominated corporations differed much from owner-dominated companies in practices of executive compensation or in the utilization of assets to produce profits. The main tradition of economic theory was perhaps instinctively recognizing these facts when it continued to work in complete disregard of The Modern Corporation.” [Pipes: 236]
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Other stuff I have to throw in:
“the corporate profit stream in reality no longer is private property, and that claims on it must be adjusted by some test other than that of property right.” [Berle 1968: 219]
“Conceived originally as a quasi-partner, manager and entrepreneur, with definite rights in and to property used in the enterprise and to the profits of that enterprise as they accrued, [the stock holder] has now reached an entirely different status.” [Berle 1968: 245]
Sources
Berle, Jr., Adolf A. Power Without Property: A New Development in American Political Economy. Harcourt, Brace and Company, 1959.
Berle, Adolf A. and Gardiner C. Means. The Modern Corporation and Private Property. Revised Edition. Harcourt, Brace & World, Inc., 1968. (originally 1932)
Pipes, Richard. Property and Freedom. Alfred A. Knopf, 1999.