The Modern Corporation and Private Property by Adolf Augustus Berle
My rating: 5 of 5 stars

The Blind Will Not See

Around the turn of the 20th century a profound shift occurred in the world-economy but few noticed and no one recognised its significance: the world had become corporate. From a position of insignificance 50 years before, the institution of the modern corporation had grown to encompass the majority of human economic activity. To understand the importance and import of The Modern Corporation & Private Property it is essential to grasp its context.

Thorstein Veblen, the first institutional economist, noticed the corporate shift. But he could only characterise it as the birth of “absentee ownership” and bemoan the consequences in terms of lack of public accountability and the creation of enormous cartels, or trusts, for the production and distribution of basic commodities like oil, sugar, grain and meat. But no one in the Law, government, or particularly the profession of economics knew what corporate dominance meant.

The corporation as a legal entity had been around conspicuously since the 13th century when the newly formed ‘mendicant’, or begging, religious orders of friars - particularly the Franciscans and Dominicans - were sweeping through the Europe of the Roman Church. These religious communities recognised that the principle reason for the constant need for reform of the establishments of their co-religionist, monastic forbears, the Benedictines and their off-shoots, was their spectacular economic success. Although individual monks took a vow of poverty, the monastic institution did not. As this institution prospered, its denizens tended repeatedly to loose their spiritual focus and religious zeal.

The mendicants needed a way to extend the individual commitment to poverty to an institutional level. They wanted to establish some entity which could own things like buildings and land and various other economic assets, but which could itself not be owned in order to eliminate the problem of success. To achieve this end they had to overcome an enormous impediment: the traditions of Roman Law, which held as a fixed principle, that whoever got the benefit of any wealth or asset - in terms of use, income, or control - owned that asset. In technical terms: usufructus (benefit) and dominium (control) were inseparable.

Over a period of almost exactly a century from the year 1220, the Franciscans led the way in creating such an institution. By trying various legal approaches, they finally hit upon a solution that was acceptable to the Roman Curia, the effective world court of the day. They had found a loophole in Roman Law, a well-known but archaic legal device called the peculium, which had allowed the separation of usufructus and dominium within a family in order to facilitate international trade throughout the empire. The Franciscans successfully raised this exception to the status of rule, and voila, the modern corporation was born.

Once endorsed by the Curia, this new entity, the corporation, spread rapidly among monarchal governments interested in doing generally nefarious things with Crown lands which they wanted to treat as the personal royal property. The corporation then evolved, as in the East India and other merchant-adventurer companies, as a way for government to control and directly benefit from international trade.

Until the late 18th century, the corporation remained a monopoly of the state. Most private business activities were organised as partnerships in which dominium and usufructus remained tightly locked together. But then the American Revolution ripped the bottom out of much of English Common Law, especially as it applied to corporations. From the point of view of economics, the revolution was fought for three reasons: land to the West, a coherent currency, and the liberalised right to incorporate. The Founders were especially clear about this last. Alexander Hamilton designed the state of New Jersey explicitly to accommodate the creation and safeguarding of corporate enterprise. The Americans didn’t have any experience with things corporate but they were willing to learn by experience.

The inexperience of the American legal system in dealing with the nuances of the corporate ‘person’ provoked what is most accurately termed a race to the bottom of corporate liberality. During the early 19th century, restrictions and requirements for the creation of corporations were progressively relaxed. By mid-century in the United States and then in England, incorporation had become a routine legal procedure. More importantly, the law had evolved such that the concept of ‘limited liability’ could be used to insulate corporate shareholders from the liabilities of corporate failure.

Limited liability is an attractive feature for investors of course. It is probably the principle reason for the incredibly rapid spread of the corporation around the world during the 19th century. But it was the separation of usufructus and dominium which was the most important consequence with which the world had to deal. And at this the world did not do very well, and still doesn’t, particularly in terms of economics.

It is crucial to understand that the shareholders of a corporation do not own the corporation, even if the shares are owned by a single person. The shareholder owns two things: the right to appoint directors, and the right to an ‘equitable’ distribution of dividends. These are the principle components of corporate usufructus. The corporation itself is an independent entity, an artificial person in legalese, which has its own interests that are quite separate legally and practically from those of shareholders - or for that matter from the interests of creditors, suppliers, employees, or the people who live next door to the corporate manufacturing facility. These interests are determined and pursued by corporate management. This is corporate dominium.

Neither classical liberal economics nor socialist theory copes very well with the existence of the corporation. Both capitalist and socialist theories presume a set of self-interested players - producers, consumers, governments - who interact according to their ownership interests. The separation of those interests, shareholders’ from corporate, and the control of the latter by an independent class of people called corporate managers, throws capitalist and socialist economists into an intellectual black hole.

Effectively Marx turned out to be correct, the owners of wealth, the shareholders, have become subordinate to those who create their wealth, corporate managers. But Marx only knew of the factory. He died before the corporation had become widely established. So while he was right, he was also wrong - the proletariat turned out to be quite a different tribe that he anticipated.

Meanwhile, contrary to all the presumptions of classical economists, the corporation had consolidated and concentrated economic activity within itself. This activity was insulated entirely from the liberal market, that is it was non-contractual and dependent upon central direction. Very much in fact like the operation of a socialist state!

It is this development of the corporate world that Berle, a lawyer, and Means, an economist, analysed for the first time in 1933. They pointed out the essential characteristic of the corporation as the separation of usufructus and dominium, without any apparent recognition that they were re-inventing the medieval arguments of the Franciscans. They pointed out the consequences of the separate interests of shareholders and the corporations in which they held shares. And they realised the profound effect that the corporation had already had on economic and wider social life.

But no one really paid much attention, in 1933 or since. True, economic theorists do worry about the so-called Agency Problem, the difference in interests of shareholders and corporate managers. But they misdirect the issue by presuming that the shareholders interests are the same as those of the corporation, which they are not either in practice and in law in any jurisdiction in the world (with the possible exception of places like Sark in the Channel Islands that don’t recognise the existence of the corporation at all, a playground therefore for tax accountants).

Consequently The Modern Corporation & Private Property is one of those books, perhaps like the Bible, which is often quoted and revered but not often understood. It provides wisdom for an audience that is unprepared to accept it and prefers instead to create mythical economic stories of competitive freedom or social control. How long, oh Lord, how long?

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