A Capital Idea: Modern Management in a Free Society

A Capital Idea: Modern Management in a Free Society

Benefits for workers are the real success of modern management in free market societies, writes Professor Bradley Bowden 

(originally published in the October 2018 IPA Review).

Management, as a discipline and an occupation, has become a ubiquitous feature of the modern world. Among university students, business and management is now the most commonly studied degree.

For those of us who work, a manager allocates the tasks we perform and assesses our performance. Managers are also held accountable for the ultimate success or failure of a business; an accountability that reflects Peter Drucker’s maxim in his classic study, The Practice of Management, that ‘the quality and performance of its managers is the only effective advantage an enterprise in a competitive economy can have’.

Evidence of the benefit of modern managerial performance is found in the social opportunities that today surrounds even the world’s developing economies. In the developing world, literacy and attendance at school—rather than a life of toil—are now the norm for most adolescents. Even in Sub- Saharan Africa, by 2015 some 80 per cent of children were regularly attending school.

Despite its central placement in our lives, many assumptions about ‘management’ do not survive elementary scrutiny. In most university textbooks, ‘management’ is associated with four core functions: planning, organising, leading and controlling. A modicum of thought, however, soon reveals the inadequacy of this definition; a definition that would equate the functions of managers in democratic market economies with those in totalitarian regimes. In describing, for example, the systems of management involved in building the Moscow-Volga Waterway—a marvel that permanently protected Moscow from shortages—Karl Schlogel’s study, Moscow 1934, recounts how:

“The commandants of the individual sectors competed with one another to increase productivity, i.e. to exploit slave labour … Many prisoners, exhausted by the work, fell into the concrete foundations and were buried in them; many terminally sick workers were buried alive because hospital beds had to be kept free for those still capable of work.”

Attribution of modern management’s distinctive character to its association with ‘capitalism’ is also unconvincing. In their Communist Manifesto, Karl Marx and Frederick Engels praised capitalism for having created ‘during its rule of scarce one hundred years … more massive and more colossal productive forces than have all preceding generations together’. The problem with this assertion is that capitalism existed for centuries before the Industrial Revolution. As Fernand Braudel demonstrated in The Mediterranean and the Mediterranean World in the Age of Philip II, by the 16th century, commercial capitalism— characterised by sophisticated finance and banking systems, domination of long-distance trade and control of luxury goods’ markets—clearly existed in an ‘already modern and indisputably effective form’. Participation in global systems of trade is, moreover, something … undertaken by unfree societies (the slave-owning economies of the Americas in the 19th century, Nazi Germany) as well as democratic nations.

If association with capitalism cannot, by itself, explain the transformative capacities of modern management, it is also true material success cannot be simply ascribed to technology. In the early stages of the Industrial Revolution, when economic expansion was particularly pronounced, the availability of steam-powered machines was modest. In Britain’s textile industry, the first to experience large-scale mechanisation, initial technological advance was confined to spinning. Even in 1835, steam-powered looms were—as Sidney Pollard observed— ‘relatively rare’, leaving ‘large weaving sheds full of hand looms’.

BY THE 16TH CENTURY  COMMERCIAL CAPITALISM CLEARLY EXISTED IN AN ALREADY MODERN AND INDISPUTABLY EFFECTIVE FORM.

Just as the transformative effects of modern management cannot simply be attributed to either capitalism or technology, bureaucratic rules and rationality are necessary but not sufficient conditions. There is a marked difference between the role of a manager who is producing goods or services for sale in a market economy to that performed by a public sector tax collector, army administrator or civil service bureaucrat—categories of people whose roles remain essentially the same as they were in ancient Rome.

The dichotomy that exists between the civil service bureaucrat and the private-sector manager is one that was well-understood by German sociologist Max Weber, arguably the most thoughtful writer on bureaucratic norms. As Weber observed in Economy and Society, ‘in an increasingly expanding market those who have market interests constitute the most important group’. Unlike their civil service counterparts, it is this group of private-sector managers who are gauged according to the performance—and survival—of their organization under the pressure of market forces.

Although interaction with market forces is a defining feature of modern private-sector management it is nevertheless mistaken to see managers as mere ‘agents’ of investors. Irish writer Dionysius Lardner was in 1840 arguably the first to identify a fundamental conflict between managers ‘interested in the maintenance of capital’ and investors concerned with ‘securing large dividends’. As Lardner correctly identified, most private-sector organisations can only prosper and grow if they ignore the short-term interests of investors, diverting money into investment rather than dividends. The fact that managers have interests separate to those of investors subsequently became the central theme in what is arguably the most important business history, Alfred Chandler’s magisterial study, The Visible Hand. A professor of business history at Harvard, Chandler’s central thesis was that ‘managerial capitalism’ has replaced ‘market capitalism’ in all advanced societies. In Chandler’s opinion, this managerial revolution ushered in ‘a new form of capitalism’ in which the ‘business enterprise’ largely replaced the market in coordinating flows of goods and services.

In putting forward ideas about ‘managerial capitalism’ Chandler was not arguing in favour of some sort of Soviet-style state or corporate capitalism, whereby market forces were driven into the outer edges of the economy. Nothing could have been further from his mind. This was, after all, a well-connected New England blue-blood who spent most of his life within Harvard and Johns Hopkins Universities, and whose family had close ties with the Du Pont business dynasty.

Chandler’s understanding that market forces remain central to modern, democratic societies is also well stated in the opening pages of The Visible Hand, where he notes that the ‘new bureaucratic enterprise’ has not—and should not—‘replace the market as the primary force’ in creating demand for goods and services and in ultimately adjudicating a firm’s capacity to meet that demand. For once we move away from the idea that individual consumer choice is the main driver of economic demand then we are on a slippery slope to Soviet-style controls with all the inefficiencies that entails. Rather, what Chandler was highlighting is that managers in modern firms are not mere market ciphers, tossed hither and yon by blind market forces.

MANAGERS HAVE TO BALANCE THE NEEDS OF THREE DISTINCT INTERESTS: SHAREHOLDERS, WORKERS AND CONSUMERS

What makes management so effective in our world is its role as a social institution, located at the point where the productive functioning of our economy comes together. Managers have to balance the needs of three distinct interests: shareholders (who want dividends to be as large as possible), workers (who want wages to be as high as possible), and consumers (who want goods to be as cheap as possible). What makes management such a socially progressive force is that these competing interests can only be balanced through productive workplaces and motivated workforces; workforces that always have the capacity—unlike in China or North Korea—of walking away.

One of the best ways to understand the socially progressive role of management in democratic, market-based societies (Australia, the United States, Japan, Britain etc) is to understand what it is not. It is not simply planning, organising, leading and controlling. Short-term productive efficiency is also an insufficient guide. For the history of the last 200 years is that totalitarian societies (Nazi Germany, Soviet Russia) ultimately fail in their contest with democratic societies because free societies are better able to mobilise a motivated population.

If we are to argue that enduring models of management can only exist in free societies then we must logically exclude those societies in today’s world that are also characterised by large-scale use of unfree or partially free labour. Prominent among this latter category is the People’s Republic of China. As a report commissioned for the World Trade Organization, undertaken by the International Trade Union Confederation (ITUC) in 2010, reveals, ‘forced labour’ is still a common feature of China’s ‘commercial enterprises’. China is also characterised by ‘the worst forms of child labour’.

Under the Chinese ‘hukou’ (household registration) system, the ITUC report also notes, Chinese workers are legally denied freedom of movement. Those working in cities in breach of their registration—a group estimated to comprise 35 per cent of China’s urban workforce (130 million people)—suffer from what the ITUC refers to as ‘institutionalised discrimination’. ‘Many employers’, the ITUC concluded, ‘withheld employees’ payments until the contract’s expiration’; a condition that the ITUC believes places workers in circumstances akin to de facto forced labour. The ITUC also found trafficking in human beings to be ‘a serious problem’.

Far from being an age-old phenomenon found in all cultures, management as we understand it is a unique outcome of the innovative and democratic market societies that emerged in Western Europe and North America in the 18th and early 19th centuries; societies characterised by respect for private property, individual rights and the free movement of capital and labour.

In terms of economic performance, as Sidney Pollard accurately observed in his classic study, The Genesis of Modern Management, the system of management that first emerged in Britain’s factories between 1760 and 1830 profoundly differed from that found in previous epochs in that they not only had to sell their goods at a ‘profit’ but also ‘to relate them to costs, and sell them competitively’.

Unlike the builders of the pyramids and today’s managers in Communist China and Cuba, the managers who came of age in Britain’s Industrial Revolution also had to deal with free labour forces in which recruitment was undertaken ‘without powers of compulsion’. The significance of this fact cannot be understated for, as Pollard correctly noted, ‘the absence of legal enforcement of unfree work was not only one of the marked characteristics of the new capitalism, but one of its most seminal ideas, underlying its ultimate power to create a more civilised society.’

Masterly as Pollard’s analysis was it nevertheless fails to pay sufficient attention to the system of laws and respect for rights and freedoms that is the essential handmaiden for enduring managerial success. For what was unique about the societies associated with the Industrial Revolution in Western Europe and North America between 1760 and 1850 is the entrenchment of a system of legal protections that preserved property rights from arbitrary action either by monarchical (or republican) states or from more powerful fellow citizens.

GIVEN THE DARK IMAGES  THAT THE INDUSTRIAL REVOLUTION TENDS TO CONJURE UP IT IS EASY TO OVERLOOK THE FUNDAMENTALLY PROGRESSIVE ROLE MANAGEMENT PLAYED AT THIS CRITICAL MOMENT IN HUMAN HISTORY.

As John Locke famously observed in his Two Treatises on Government, ‘The chief and great end … of men uniting into commonwealth, and putting themselves under government, is the preservation of their property.’ Protection of property benefitted not only the wealthy (who seldom needed such protections), but also those of modest means – managers, workers, the self-employed – who could operate in the knowledge that the fruits of their labour would always be theirs. This is a markedly different situation to that which prevails in totalitarian societies such as China, where billionaires and senior officials are exposed in like manner to summary arrest and property confiscation.

Given the dark images that the Industrial Revolution tends to conjure up—Satanic mills, child labour, urban slums—it is easy to overlook the fundamentally progressive role management played at this critical moment in human history. That people suffered during the Industrial Revolution is regrettable but is in itself hardly newsworthy. As Braudel observed, throughout history the ‘price of progress’ was ‘social oppression. Only the poor gained nothing, could hope for nothing’. This was as true of Confucian China as it was of ancient Egypt. The economic world forged through the Industrial Revolution— in Britain in the first instance— differed in creating a society in which the poor were notable beneficiaries. Managerial emphasis on capital intensity and productivity also transformed the type of worker that factories employed. Yes, initially employers had scoured the orphanages and poor houses for children, having found that adults were reluctant to subject themselves to the discipline that factory life entailed. By 1850, however, as Hugh Cunningham observes, management were ‘seeing the advantages in an intensive rather than an extensive use of labour … In this kind of environment children were more of a hindrance than a help’.

Rather than seeking cheap labour, the managers of industrialising Europe and American instead sought out literate, skilled workers. As a result the demand for child labour plummeted. By 1851, only 30 per cent of English and Welsh children worked. Of those who did, only 15.4 per cent of males and 24.1 per cent of females were found in factories. Literacy also opened up opportunities that were previously the preserve of a tiny educated minority. The fact that paid labour was, as a result of mechanisation, less associated with physical strength also provided unprecedented opportunities for women. As labour historian E.P. Thompson noted in The Making of the English Working Class, the ‘abundant opportunities for female employment … gave women the status of wage-earners’. For the first time, the ‘spinster’, ‘widow’, and ‘unmarried mother’ had the opportunity to free themselves from reliance on male relatives and/or the parish poorhouse.

Yes, the managerial order that gave effect to the Industrial Revolution was based on competition and the pursuit of self-interest. Yes, income inequality was to remain its necessary hallmarks, John Maynard Keynes happily conceding ‘there is social and psychological justification for significant inequalities … There are valuable activities which require the motive of money-making’.

What nevertheless makes ‘modern management’ such an enduring success in free market societies is the benefits it confers on the ‘servants, labourers and workmen’ who, as Adam Smith accurately noted, ‘make up the greater part of every great political society.’ For, Smith continued, ‘No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable … what improves the circumstances of the greater part can never be regarded as an inconveniency of the whole.

Bradley Bowden is a management historian and the immediate Past Chair of the Management History division of the (American) Academy of Management.

He is Professor of Employment Relations at Griffith University, and his most recent book is Work, Wealth and Postmodernism: The Intellectual Conflict at the Heart of Business Endeavour (New York: Palgrave Macmillan).      

 

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