Thorstein Veblen

Absentee Ownership

(1923)

 



Note

Thorstein Veblen sketches here the passage from an economy where the artisan is in direct contact with the production and sale of goods and is still the owner of the tools for making objects, to a situation where new figures intervene to mastermind the production and sale of goods on a much larger scale, requiring more expensive means (plants, machines, transport).

In the words of the author "Instead of continuing to act as foreman of the shop, ... the owner began to withdraw more and more from personal contact and direction of the work in hand and to give his attention to the financial end of the enterprise and to control the work by taking care of the running balance of bargains involved in procuring labor and materials and disposing of the product."

This new scenario can be called "capitalism," something quite different from what Adam Smith described in his Wealth of Nations, in which the small independent producer emerges free from the shackles of the state mercantilistic policies.

 


 

From Part I, Chapter III

Very much as was the case in the petty trade of the Middle Ages, so also in the handicraft industry; by degrees but unavoidably, absentee ownership came in so soon and so far as the scare of operation advanced to such a point that trade or industry became a matter of teamwork.

With the advance of specialisation and division of labor the equipment required for carrying on any given line of work presently became larger than what a workman could ordinarily provide out of his own work as he went along, at the same time that the equipment took more and more of the character of a "plant" designed for the joint use of a number of workmen. Such a plant would ordinarily be the property of a master workman or of a partnership of such masters, who thereby and in that degree became absentee owners of the plant. The like is true for the ownership of the materials employed and of the finished product.

Yet it was still the tradition in Adam Smith's time, at the close of the handicraft era in England, that the wealth so invested in trade and industry was, in the natural and normal run of things, an accumulation of useful goods saved out of the productive work of its owner, and it was likewise the tradition that the owner whose savings were so employed in production should « naturally » direct and oversee the work in which his savings were employed. What was "natural" in the Eighteenth century was that which had the sanction of unbroken tradition; and so far as touches the economic life in that time, that was "natural" which was attested by unbroken habituation under the regime of handicraft.

Adam Smith spoke the language of what was to him the historical present, that is to say the recent past of his time, and he has left a luminous record of the state of things economic in his time as formulated in terms of the habit of thought with which the recent past had invested the generation of men. But in the historical sequence of things he stood at the critical point of transition to a new order in industry and in ownership, and what was « natural » in his view of things, therefore, ceased to be the common run of things from and after the date at which his luminous formulation of economic laws was drawn up. What had gone before was the era of handicraft and the petty trade, the habitual outlook of which had become (second) nature to the thoughtful men of that time; what has followed after it is the era of the machine industry and business enterprise, in which the natural laws and rights handed on from the era of handicraft are playing the role of a « dead hand. »

From and after Adam Smith's date (last quarter of the eighteenth century) a new era sets in in industry and business. As an incident of the new era there sets in also a visible and widening division between industrial work and business enterprise. The era of the machine industry opens in England in that time, and it opens presently after for the other civilised peoples also; at the same time that the businesslike management of industrial concerns begins to shift from a footing of workday participation in the work done, to that of absentee ownership and control. Instead of continuing to act as foreman of the shop, according to the ancient tradition, the owner began to withdraw more and more from personal contact and direction of the work in hand and to give his attention to the financial end of the enterprise and to control the work by taking care of the running balance of bargains involved in procuring labor and materials and disposing of the product. Instead of a master workman, he became a business man engaged in a quest of profits, very much after the pattern of business men engaged in commercial enterprise. The result was that investment and absentee ownership presently became the rule in the mechanical industries, as it already was the rule in commerce and as it had long been the rule in husbandry.

This rearrangement of economic factors, and division of economic activities, was brought on by the increasing scale of the industrial plant and operations, wherever and so far as the new technology of the machine process took effect. And the characterisation just offered is intended to apply only so far and so fast as the new mechanistic technology gradually took over the industries of the country. There came on a progressive, but none the less revolutionary, change in the standard type of industrial business, as well as in the ways and means of industrial work; and the same line of change has gone forward unremittingly from that time to the present, as it is also visibly running on into the future.

If the word be defined to suit the case, "capitalism" in industry may be said to have arisen in that time and out-of the circumstances described. Until the machine process had made serious inroads in the standard industries, and until things had consequently begun to shift to the new scale, the business man in industry continued, in the typical case, to be personally concerned with the work in hand; and until this change took effect, therefore, the employer-owner answered quite reasonably to the character which Adam Smith assigned him, as a master workman who owned certain industrial appliances which he made use of with the help of hired workmen. But from this time on he became, in the typical case, an absentee manager with a funded interest in the works as a going business concern. The visible relation between the owner and the works shifted from a personal footing of workmanship to an impersonal footing of absentee ownership resting on an investment of funds. Under the new dispensation the owner's guiding interest centered on the earnings of the concern rather than on the workmen and their work. The works - mill, factory, or whatever word may be preferred - became a business concern, a « going concern » which was valued and capitalised on its earning-capacity; and the businesslike management of industry accordingly, centered upon the net earnings to be derived in a competitive market, - earnings derived from the margin of the sale price of the product over the purchase price of the labor, materials, and equipment employed in its production. Industrial business became a commercial enterprise, and the industrial plant became a going concern capitalised on its earning-capacity. [1]

It is not that nothing of the kind is to be found in the practice of earlier times. Indeed it is quite easy so to analyse the facts of property-holding in any age as to show that the value of absentee ownership always and everywhere is necessarily a matter of the capitalisation of the earning-capacity of the property so held. It is more difficult, perhaps it would prove impracticable, to apply the same line of reasoning to the same end in the case of other than absentee ownership. At any rate the matter is fairly obvious in the case of absentee ownership, early or late, to anyone who has occasion to see it from that point of view. But with the advance into the new era, into what is properly to be called recent times in business and industry, the capitalisation of earning-capacity comes to be the standard practice in the conduct of business finance, and calls attention to itself as a dominant fact in the situation that has arisen. The value of any investment is measured by its capitalised earning-capacity, and the endeavors of any businesslike management therefore unavoidably center on net earnings.[2]

 


 

From Part II, Chapter X

An earlier chapter has endeavored to describe the rise to dominance, and eventual decline or disintegration of the Captain of Industry, considered as one of the major institutions of civilised life. As the name implies, he set out with being a pioneer in industrial enterprise, a designer,
builder and manager of industrial equipment and a foreman of the work in hand.[3] At the same time he was a business man and took care of the financial end of the enterprise, buying and selling, « hiring and firing », investment and promotion. Presently, as the mechanical industries of which he was a captain grew greater and advanced to a larger scale, with an increasingly detailed and exacting specialisation and standardisation of processes and products, and with an increasing resort to credit, the Captain of Industry under the pressure of circumstances gradually divested himself of his technical or industrial functions and tapered off into a business man of the commercial type. His attention and energies were taken up more and more exclusively with the run of the market, with margins of cost and profit, and especially with ever-increased exactions and opportunities of credit investment. By the middle of the nineteenth century the captain of industry, considered as a staple article of institutional furniture, had in effect run out or gone in the in the discard in the British industrial community; and by the same date he had risen into dominance and was beginning to disintegrate in the American world of affairs.[4] As a business proposition, « that is to say as a staple requisite among the ways and means of profitable business, the captain of industry was already beginning to shift over into, or to be displaced by, the company promoter, the financial magnate, and the corporation financier. It could scarcely be necessary to trace the course of his disguises and mutations from that point on, through the succeeding half-century of projects, promotions, and corporation finance that has eventually given rise to the captain of solvency, investment-banker, and corporation executive of the twentieth century.

The discontinuance and disintegration of the captain of industry was due to the continued advance of the industrial arts. This advance took such a turn, in the way specialisation and complexity, that no industrial enterprise of standard size and grade could continue to be competently managed under the divided attention of any man; divided between the mechanical requirements of the industry and the financial requirements of the business. It was an advance in the scale and complication of equipment and work, in specialisation and standardisation, in applied mechanics and chemistry, which entailed the substitution of technical precision in the place of rule of thumb; and along with this progressive change in the technical complexion of the case there was a similarly exacting growth in the business to be done, an increasing volume and an increasing nicety and multiplicity of details. Out of this increasing recourse to detailed, exact, objective knowledge there arose the industrial experts, engineers, technicians, who progressively took over the industrial functions of the captain of industry and left him free to devote his attention to business alone.

In the third quarter of the century chemical science also began to take effect as a material factor in technology, and about the same time electrical science rose into consequence as an industrial force. Chemical processes had of course had their part in the industrial arts before that date, but it had on the whole been a matter of chemical rule-of-thumb rather than of chemical science, of general information and common notoriety rather than exact and calculable processes worked out by detailed experiment and computation in the chemical laboratory. Neither the industrial chemist nor the industrial laboratory had been counted in among the ways and means of production.

Metallurgy, e. g., as well as much of the work in dyeing, tanning, baking, brewing, and the like, have always been of the nature of chemical industry; but it was not until the middle of the nineteenth century and after that these things began to bulk large in the industrial arts and then fell into the hands of the chemical technicians and took their place in the technological scheme as recondite matters of applied science. All these things had been matters of accumulated experience and had held their place in the common sense of the day's work, along with the familiar use of the mechanical principles and appliances, - familiar in their elements to all men by common notoriety. They were matters which any intelligent layman could understand and turn to account on a footing of workday information helped out by some slight touch of special experience, of the nature of an informal apprenticeship. But by insensible process of growth all these matters of technological use and wont took on a more exacting character, such as gradually to take them out of the untrained reach of businesslike laymen, however ingenious and intelligent, and thereby gave rise to a new factor of production, the technicians, engineers, experts, men grounded in the material sciences and instructed in the specialised application of them.

So the interval since the middle of the nineteenth century stands in contrast to what went before, as a more or less sharply defined period of special growth in the industrial arts, during which the mechanical industry has progressively shifted to a footing of applied science, and during which also the immediate designing and conduct of the work has progressively been taken over by the technicians. At the same time and by force of the same drift of circumstance the captain of industry, the owner-employer, business manager, has progressively been shifted to one side, - to the business side, the « financial end.» Being a layman in matters of industry - that is to say in matters of technically applied science - the business man has perforce become an absentee, an outsider so far as concerns any creative work. Though he is an outsider with a deciding vote on what goes on inside. The « division of labor » has taken this turn. It has progressively eliminated and removed the businesslike layman from the effectual personnel of industry and has progressively vested the effectual management of production in these technical men.

Not that this progressive elimination of the laymen has yet been completed, even as regards responsible work of a technical nature. Indeed, it is still an article of popular belief, grounded in traditional common sense, that the control of productive industry must in the nature of things be entrusted to absentee laymen, even in those lines of production where the work can not effectually be carried on without the constant attention of technically trained men. Even within the mechanical industries the displacement of businesslike laymen by competent technicians has not yet gone so far as to vest full discretion in the technical experts, even in the conduct of mechanical details. At the best or farthest it can be said that the technicians decide in detail what is to be done, if anything, and how it is to be done; while the absentee laymen decide summarily what and how much is not to be done. Such is the state of the case in detail in those lines of production where the mechanical industry has already taken effect in a passably complete degree. But in the large, in what may be called industrial affairs, in the planning and execution of projects that call for a comprehensive technical balancing and articulation of large industrial processes, - in these larger conjunctures, where any lack of technical insight and sobriety will have particularly grave and far-reaching consequences, - there the discretion and control continues to be exercised by absentee laymen who take measures on other than technical grounds.

It will be seen that neither the induction of technicians into the responsible conduct of industry nor the elimination of laymen from work that is of a technical nature is yet nearly complete. Nor, it should be added, is such outcome desired. It is contrary to common sense and would not be allowed by law and custom. Indeed, it is a safe presumption that any outspoken proposal or project to hasten or precipitate this progressive retirement of businesslike laymen from the superior management of these technical affairs would turn out to be seditious, as soon as the jurisdiction of the courts could be brought to bear on the question. It would involve the abrogation or disallowance, in whole or in part, of the rights of absentee ownership; and absentee ownership is safe-guarded by a special clause of the American constitution. There need be no apprehension that the present unreserved control of the industrial arts by businesslike laymen will be discontinued, just yet. While it is quite evident that the conduct of productive industry, especially in its larger and more difficult undertakings, calls progressively for a more profound and wider technical insight and a more single-minded technical discretion and control, yet the general staff of the industrial system continues to be made up of businesslike laymen.

 


Notes

[1] The economists and others who discuss business and industry as carried on in that time - late eighteenth and early nineteenth century - do not speak of "capitalisation of earning-capacity"; but business practice at the time gives evidence of the fact. Then as always the theoretical discussions endeavored to formulate the new facts in terms derived from an earlier state of things. Indeed, it has taken something like a hundred years for the formulas of the economists to adapt themselves to the new run of facts in business and industry which set in in the days of Adam Smith. Right lately the economists have begun to recognise that "capital" means « capitalisation of earning-capacity »; but when seen in the long perspective of history it is evident that the business men who had to do with these things were learning to do business on that footing something over a hundred years ago.

[2] Cf. The Theory of Business Enterprise, ch. vi; W. H.; Lyon, Capitalisation, chs. ii and iii.

[3] Cf. J. W. Roe, English and American Tool Builders, (Yale University Press, 1916)

[4] Beginning with the civil-war period the center of the American stage is occupied by a swiftly increasing company of financial magnates and manipulators, e. g., "Commodore" Vanderbilt, Jay Cooke, « Jim » Fiske, Oakes Ames, Jay Gould, and presently John D. Rockefeller, Andrew Carnegie, J. J. Hill. - Cf. Burton J. Hendrick, The Age of Big Business; Isaac Lippincott, Economic Development of the United States.

 

 


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