Burnham, Elon, and the Revenge of Entrepreneurial Capitalism

In recent pieces, we’ve been analyzing elite behavior. We’ve discussed why elites pick beliefs that are non-obvious to normies, why they do so subtly as to not trigger normie ire, and why our elites prioritize egalitarianism even at their own expense (even if some of them may be faking it).

Over the next few weeks, we’ll dive under the hood on elite theory to understand how elites have evolved over the years, and how that’s affected our underlying institutions. 

But first, let’s start with a history lesson on James Burnham.

James Burnham is one of the leading political philosophers in elite theory — and he’s been misunderstood by both the left and right. Burnham predicted the rise of managerialism in the 40s — a trend that would go on to characterize the decades to come.

Orwell observed the rise of managerialism: “Capitalism is disappearing, but Socialism is not replacing it. What is now arising is a new kind of planned, centralized society which will be neither capitalist nor, in any accepted sense of the word, democratic.” 

Burnahm’s book, The Managerial Revolution, argued that Marx had misconceived the true nature of the revolution — it wasn't the proletariat that was overthrowing bourgeois capitalism but a new group of people called the professional-managerial class (PMC).

Burnham claimed that there are two different kinds of capitalism: Bourgeois/Entrepreneurial capitalism and Managerial capitalism.

You could think of Bourgeois capitalism as Robber Baron capitalism (think Atlas Shrugged) — industrialists like Ford, Rockefeller, Carnegie building up their empires and retaining a controlling stake in them. What’s differentiating about Bourgeois capitalism is that the owners are also the managers. The people who own the company also run the company. There’s total alignment between managers and shareholders. 

Managerial capitalism, by contrast, is defined by the split between ownership and control — on both the founder and investor side. Instead of owners having direct control, you have layers of intermediary managers (e.g. board of directors, executive teams, hired CEOs) who are running the company on behalf of the shareholders and original owners, but who also have different incentives as a result of having less ownership. They may be more short-term driven than long-term driven, for example, since they are incentivized by their salary instead of their equity ownership. 

You also have this same dynamic on the investor side, too. Instead of investors putting their own money to work, you have investors investing other people’s money on behalf of their LPs, which means they also have different incentives since it’s not their capital and their incentive often comes in the form of fees.

So what we see as a result is professional managers on both the founder side and professional managers on the investor side representing an increasing number of shareholders who have smaller and smaller stakes in the companies. This means the people with almost no skin in the game represent a dispersed base of shareholders that hold basically no power. 

It’s the principal-agent problem on both sides: major corporations are nominally owned by passive shareholders but actually controlled by credentialed professionals who own a much smaller percentage of stock and thus have very different incentives (optimizing for the short-term over the long-term, among other things).

But what led to the shift to Managerialism? Well, businesses started getting much bigger. As a result, those same businesses needed to hire more people and develop scaling expertise, which is very different from early stage company building expertise. These growing businesses also needed to raise more capital, which required more investors and thus more intermediaries. 

That wasn’t all though. Mid century was an era of peak centralization across the board: the coordination of massive systems — mass production and consumption, mass politics, mass armies, and so on — that necessitated distinctively managerial competencies. Peak centralization meant tons more shareholders, which meant way less accountability. Paradoxically, the introduction of more people to the game meant less eyes on the ball and thus less individual skin in the game. 

Even Joseph Schumpeter, the father of creative destruction, noticed a drastic change. He came out and said the Age of Entrepreneurship is over — that from here on out, it will be only big industrial multinational companies run by professional managers.

But the same characteristics that led to the rise of managerialism has also paved the way for the return of entrepreneurial capitalism. As it turned out, these large managerial companies may be good at running at scale (which is kind of why they got so big) but they're bad at innovating so they often miss the train on big technological innovations. This is The Innovator’s Dilemma at work. It’s often so hard for these organizations to change, which is why they get disrupted regularly. As we mentioned earlier, building (0->1) and managing (1->100) are two very different skill sets.

Managerialism has other unique downsides as well. Managers, consciously or unconsciously, are more likely to create invisible problems to justify their job. Or worse, they prevent real problems from being solved in order to preserve their scope. They are incentivized to do so: If someone is in charge of a problem, and that problem is solved, they no longer have a job. So the perverse incentive is to expand the scope of the problem for which they are the solution. Success looks like having more and more problems that justify the department getting bigger and bigger every year. These bureaucracies, because they are optimizing for their own survival, end up selecting for loyalty over competence, which means they get worse and worse every year. This describes both big corporations and big government. 

This isn’t all bad, though, since it offers entrepreneurs opportunity for disruption. I’ll quote Marc Andreessen, whose work introduced me to this topic: “The tendency of PMC elites to ossify the institutions they run creates the opportunity for throwback bourgeois entrepreneurs to inflict Schumpeterian creative destruction on them.” 

Corporations and the government became deeply intertwined. As corporations scale, they fear anti-trust, so they depend on the government to let them survive. Governments also depend on companies for tax dollars and support on basic services. The private sector manipulates the public sector via campaign finance and lobbyists, the public sector manipulates the private through regulation and subsidies. 

Burnham, Schumpeter, and others observed that the closer you get to government, the more you see how the government operates in conjunction with any given industry. The field of public choice has a name for this, regulatory capture: where corporations gain so much power in the government that they “capture” their regulator and end up implementing regulations in their industry that have the effect of cementing their market positions in place and preventing new competition. We see this in pharma, housing, healthcare, education, taxi cab industry — nearly every regulated industry. 

But you also see the reverse happening at the same time, where the government captures companies.

In a podcast with Richard Hanania, Marc Andreessen describes this phenomenon through the analogy of banking:

Take the three big banks: JP Morgan Chase, Bank of America and Citibank. In 2007-2008 these were the “too big to fail” banks. What everyone knew was the whole problem with the national crisis was the too big to fail banks are too big, so the obvious framing for regulation is that we can never tolerate banks this big again because big banks mean systemic risk, which therefore requires the bailouts, so we have to make sure this never happens again.

The regulatory reforms that followed were codified in this bill called Dodd-Frank. The big banks complained endlessly about how horrible Dodd-Frank was, but if you looked at the results of Dodd-Frank, the issuance of new bank charters in the US dropped to zero, and the three too big to fail banks got larger…The results were that the too big to fail banks were much larger and more systemically important than they were before. The problem has greatly increased, the exact problem the regulations were supposed to shut off.

Note that this is why companies, as they get bigger, actually want to be regulated — to help cement their dominance. Continuing Marc’s analogy:

JP Morgan, Citibank and Bank of America, they look like they're private companies, they're actually effectively adjuncts to the government. Right? They basically have the Treasury Department and the banking regulators wired to the point where the government basically won't even approve new charters for new banks anymore. Right. And then they have this of course, revolving door right thing where they say, regulatory capture, they have this thing where basically they capture the regulator's in part because they hire the regulators, right when somebody will work for the government regulating banks. And then two years later, they’ll be working for one of the banks. And you'll have this revolt, you know, it's why you always see all these government officials that have like, you know, Goldman Sachs in their resume, and then they go back to Goldman Sachs, or whatever the big bank is, yeah, when they're finished, it's like, okay, we're not up against companies. When we're not even up against the government. We're up against an oligarch structure.

Indeed: Diplomats become investment bankers, investment bankers become ambassadors, generals sit on corporate boards, and corporate executives sit on nonprofit boards.

Stepping forward to the present: let’s consider Elon Musk buying Twitter through this lens. If you look into who owned Twitter before Elon Musk got involved, it was dispersed among many different shareholders: Vanguard, Blackrock, Saudi Arabia (!), etc.

But who actually has functional control of that company? Is it the shareholders, or is it the people who sit in the executive management suite? Neither. It's the managers who have all the control.

As mentioned, the incentives of a managerial class are not the same as the incentives of the lone entrepreneur. They have different timelines, risk profiles, and diversification/skin in the game. The managerial class is often motivated by a huge salary, so they’re more likely to play it safe to preserve their job. Even if the companies fail, they’ll get extremely rich. They’re just trying to hang on for as long as they can. Owners however are often motivated by their equity, so they’re more likely to think in the long-term interests of the company.

Back to our example: this is why Elon’s move to buy Twitter can partly be seen as an attempt to reintroduce entrepreneurial capitalism to the company.

And yet, some people are terrified of Elon owning Twitter. They’d rather have Saudi Arabia and Blackrock own the company over Elon. They somehow see those entities as more “neutral” than Elon — at least on the issues they care about. 

In the case of Elon and Twitter, we see examples of a few different themes we’ve explored above. The PMC owns Twitter, Twitter is where The Current Thing is set, and so if a non-PMC owns Twitter, especially one that aims to implement a marketplace of ideas, that means we might get way more Bizarro Current Things.

Which raises the question: what other structures are available to us that might allow us to avoid the significant drawbacks of managerialism? Next week we’ll look at DAOs: new governance models which seek to expand the amount of ownership by granting control and upside to the users of a given platform. We’ll evaluate their efficacy and what they might mean for the future of managerial and entrepreneurial capitalism.

from Hacker News https://ift.tt/PrsmbTn