Newsletter #63: Understanding the Managerial Revolution

The transition from capitalism to managerialism

I have already discussed how industrialization led to the fall of the household. This newsletter is about how industrialization led to the managerial revolution.

The managerial revolution is, in essence, the rise of managers or bureaucrats to supplant business owners or political leaders as the de facto ruling class in America.

The Revolution in Scale and Speed

Prior to circa 1830, America was a capitalist country, but the economy consisted of a vast number of small-scale businesses or household enterprises. Only a handful of businesses – a couple of armories and textile mills – had as many as 100 employees. Essentially no businesses operated in a multi-site, multi-unit, or vertically integrated manner apart from the short-lived Second Bank of the United States. Production, distribution, and sales happened through market transactions, facilitated by an array of trading companies, jobbers, agents, etc.

The important takeaway is that these firms were small and could be managed entirely by their owner (or owners in the case of a partnership). Record keeping needs were limited to simple double-entry financial accounting of the type in use for hundreds of years previously.

Industrialization changed this through enabling a revolution in scale and speed, which portended a radical change in the structure of the economy.

The railroads were the first modern corporations. By their very nature they spanned long distances across multiple locations, requiring tight coordination of scheduling, ticketing, maintenance, etc. Railroads involved massive capital investments that needed new forms of accounting. Railroads had to hire managers to oversee each aspect of their business, organized on geographic and departmental lines. This led to not just senior management reporting to an owner or president, but to development of middle management as well.  Though expansion, mergers, etc. the railroads grew into gigantic firms like the Pennsylvania and Union Pacific.

The railroads’ need for new forms of managerial control is most famously illustrated by the institution of time zones and uniform timekeeping in the United States in 1883. This illustrates how the needs of modern business reshaped governance in America.

Similar stories were repeated in other industries like the telegraph, steel, oil, chemicals, tobacco, packaged food and consumer goods, electricity, and retail. These drove the development of vertical integration (where a company owns everything from raw materials, through to production, distribution, and sales), cost accounting and the rise of the public accounting firm, the professionalization of management, the modern consulting industry – and of course a vast explosion in the number of managers.

At the same time, the country began urbanizing, and there was a similar revolution in scale in cities. In the nation’s first census in 1790, the largest city in the country was New York City (Manhattan) – with only 33,000 residents, a small town by today’s standards.  By 1890, Manhattan Island had 1.5 million residents.

These large cities required extensive public services – waterworks, police, sanitation, transportation.  These required a large, professionalized government workforce, and thus also a large number of managers. The kind of self-government and democracy Tocqueville extolled in the small New England township became obsolete and impractical. Additionally, state and federal government had to grow too, in order to regulate and oversee these new, large industrial concerns.

The Managerial Revolution

By the early 20th century there had been a radical change in the nature of corporate and governmental control. James Burnham called it “the managerial revolution” in his 1942 book of the same name.

Burnham was a former Trotskyite who later became a major contributor to National Review. The thesis of his book was that while capitalism was indeed failing, socialism would not be the replacement system. Rather, the replacement would be managerialism, or rule by the managers.

In capitalism, or the bourgeois economy, control is in the hands of the business owner. The business owners or bourgeoise are the ruling class. Burnham believed this economic system created ideologies and governance structures that favored business owners: individualism, sacredness of private property, freedom of contract, “the pursuit of happiness,” the nation-state, limited government or “laissez-faire” economics, and parliamentary sovereignty over a hereditary aristocracy. This was the system of classical liberalism we had in the 19th century, with our robber barons and whatnot.

Burnham took it as axiomatic that the bourgeois economy was doomed because of its recurring crises. But he observed that rather than a turn towards socialism, something else was happening.

The early 20th century saw the emergence of the separation of ownership and control in major corporations. Rather than an all-powerful owner like John D. Rockefeller or Andrew Carnegie running the company, professional managers ran it on behalf of the owners (often second or third generation heirs more interested in dividends from their trust fund than operating a family firm, or else a widely dispersed set of stockholders). As is still the case today, while the stockholders may legally have owned the firm, the management team, who themselves owned only a small amount of stock, controlled the corporation. In Burnham’s view, this made them the real owners.

Additionally, because large corporations (and governments) are so complex, they require specialized technical skills to administer. Only the managers possess the requisite skills, which makes them irreplaceable. Even were the owners to oust the management, they could do nothing but replace them with other managers. An owner could only manage the company if he acquired the necessary skills and experience to do so. And even if an owner were a technically skilled manager and CEO, as happened with some family-controlled firms, this process of acquiring managerial skills would have given him the outlook and disposition of a manager. And if he somehow retained the mentality of an old school capitalist-owner, he would still have to depend on an armada of other senior and middle managers to administer the company’s sprawling operations. It would be impossible for even a new and determined CEO to turn a large bureaucratic corporation like General Motors into an instrument of the CEO’s personal will. (This focus on management in general versus senior executive ranks distinguishes Burnham from E. Digby Baltzell or “power elite” theorists like C. Wright Mills).

The Impact of Managerialism

Burnham’s managers preferred an administrative, bureaucratic approach to directing corporations and governments on grounds of greater efficiency. While we associate bureaucracies with inefficiency today, the reality is that the economies of scale achieved by large corporations make it difficult or impossible for smaller firms to compete in many key fields. That’s why over half of US workers are employed at establishment with more than 500 employees, and almost 30% work for companies with at least 10,000 employees.  Some businesses employ hundreds of thousands of people and operate globally – a far cry from pre-1850 America.

As managers gained control of both corporations and the government (civil service), they began changing the ideologies and governance structures of society away from classical liberalism. Some of these changes have been: a shift towards administrative governance, the rise of global governance, a symbiotic relationship between business and the state, the shift in the distribution of wealth towards managers, and the therapeutic turn.

1. The Shift to Administrative Governance. Managers prefer administrative law and procedure to formal lawmaking and politics. Thus Congress has become nearly inert, and the workings of government are increasingly insulated from the voters and elected officials through a wide range of mechanisms.  This is the creation of what conservatives complain about as “the administrative state.” The ideologies of the managerial class – globalization, wokeness, gay rights, climate change mitigation, etc. – are treated as moral imperatives not subject to ordinary political debate. Should an election go the “wrong” way or elected officials go against one of these ideologies, those actions are considered “illegitimate.”

2. The Rise of Global Governance. While they may not (at least not yet) support world government, managers support global governance, because lots of small countries with unique legal and cultural regimes are inefficient and painful to deal with. Hence we see the rise of the “rules based international order” of international governance and regimes ranging from the WTO to the International Seabed Authority. The European Union is probably the best example of this, as it created a single economy out of many nominally independent states.

One of Burnham’s spectacular misses in the book was his prediction that Germany and Japan would win World War 2, leading to a three-bloc world: the Western hemisphere under the United States, Europe under Germany, and Asian under Japan. (George Orwell used this as the basis of the world of 1984, with three large empires, Oceania, Eurasia, and Eastasia). However, it did come to pass that the world was largely divided into US and Soviet blocs. Modern warfare requires mass mobilization and mass deployment of technology (via revolution in scale and speed). Small countries cannot maintain full sovereignty in this environment. As political scientist Darren Beattie has noted, only the United States, China, and maybe Russia are fully sovereign nations today.

3. A Symbiotic Public-Private Partnership Approach. Rather than business being opposed to government as in the classical liberal model, in managerialism business and government collaborate. Both business and the government are run by managers, who think and operate in similar ways. Burnham believed this meant state control over the economy (as in the Soviet Union or Nazi Germany, both of which he classified as managerial). But in the US it would be in the form of a “public-private partnership” model with a de facto fusion between the state and private enterprise. While perhaps it never quite fused to the level Burnham anticipated, undoubtedly the public and private sectors are tightly interlinked and mutually interdependent today in way they were not in the 19th century. We see this, for example, in the health care system. Other countries have a government health service. We have a nominally private health service, but the government pays for about half of all health care expenses and micro-regulates every aspect of the industry. Businesses do have conflicts with the government in the US today, but the relationship is fundamentally more symbiotic than adversarial, at least for big, managerial firms.

4. Redistribution of Rewards to the Managers. Burnham defined the ruling class as the class that a) controlled the means of production and b) received a disproportionate share of society’s rewards. We certainly see today that the reward structure of society has been shifted away from workers towards managers.

Undoubtedly the plutocratic billionaire class has been enormously enriched. But the wealth flowing to the professional-managerial class has also been substantial. This group, the top 20 percent or the “9.9 percent,” has done very well for itself. Conversely, production or line workers have struggled at best.

We see this too in the response to Covid. White collar workers (managers) were heavily insulated from its effects by work from home policies and the like. Small businesses (bourgeois type enterprises) were often forced to close, and many working class people such as delivery drivers forced to risk their own health to service the managerial class.

5. The Therapeutic Turn. In the postwar era, managerialism took a turn Burnham did not anticipate, towards a therapeutic approach to society. That is, the managers came to see society and the belief structures of the people as problematic and in need of therapy and reconstruction. Professor Paul Gottfried says that the original in the Xerox machine for this was the postwar cultural reconstruction of Germany (and Japan). This was then undertaken domestically to reconstruct American society in areas like race, sexuality, etc. Bourgeois economy norms like sexual continence and the nuclear family were subverted. Similarly, the bourgeois ideas around thrift and delayed gratification were replaced with a consumerist society more suited to a managerial age. The therapeutic regime – which operates through schools, courts, the media, etc. – had the added benefit, from the managerial perspective, of undermining potential sources of resistance by the non-managerial elements of society. A country of atomized individuals without families, deeply in debt with little savings, but still able to consume and glued to their phones scrolling through social media is not a likely source of robust political dissent.

None of these changes in ideology and governance necessarily resulted from a conspiracy or calculated self-interest. The managers are true believers, just as the people who believed in classical liberalism were. It’s just that like most of us, the managers tend to think the policies that benefit them are in fact the best policies.

The Limits and Weaknesses of Managerialism

The growth of pure managerialism was restrained for many decades by a number of forces. There were still powerful elements of the old bourgeois capitalism still remaining.  These ranged from rich families like the DuPonts to independent oil and gas billionaires in Texas. There was still a powerful WASP establishment whose social cohesion allowed them to tame managerialism for a time. The necessities of the Cold War also provided a certain level of discipline. The end of the Cold War was a watershed moment, allowing managerialism to run rampant for the past 30 years (and arguably triggering the shift to the neutral and then negative worlds religiously as well).

Although managerialism has extended its tentacles into every aspect of our society today, including the church, there’s still a vast base of resistance to it. There are a large number of small to medium sized privately held businesses – car dealers, construction firms, farms, manufacturing firms – that are still fundamentally bourgeois in their organization and outlook. (No surprise that the managerial elites have painted a target on them). Close to half the country – the core Trump voting base, for example – has stubbornly resisted at least some elements of therapeutic reconstruction.

Managerialism in the United States also has some key weaknesses. As with the bourgeois economy before it, there are now recurring crises in our managerial economy. These have mostly been addressed through vast money printing and the like. But is there a limit to how much money can be printed? Also, managerialism was legitimated by “delivering the goods” (in Marcuse’s terms). It provided for rising incomes and high levels of consumption. But real incomes for most Americans have stagnated or declined. Similarly, efficiency and competence are justifications for managerialism. This perhaps reached its peak with the Apollo project that landed a man on the moon. Today, our system is beset by poor management, as we see in everything from the problems at Boeing to the increasing unreliability of the electric grid, to rising opioid deaths and homelessness. To some extent the ideologies of managerialism are now undermining it as competence and merit are under siege.

Managerialism is based on administrative efficiency, and the resistance of the non-managerial elements throws sand in the gears. For example, the vaccine rollout was a fundamentally an administrative matter, but large numbers of people simply refused to comply. This ultimately collapsed even the attempts to impose vaccines through mandates. Our managerial system is not set up to handle widespread non-compliance, fraud, or gaming the system.

The latest populist surge, as with the previous one in the early 1990s, shows widespread discontent with managerialism among the workers. While these people can from time-to-time rally behind a charismatic leader like Trump to achieve political victory, without managerial skills they cannot govern. And the managerial apparatus itself (e.g., the government bureaucracy) is largely insulated from political control and will be a locus of the “resistance” to any non-managerial office holder.

So long as the managerial elite remain united – and they are unusually united at this time – attempts to discipline the managerial system will struggle to achieve fruit. But the failures of managerialism and the existence of a large and very unhappy population provides a potential base of resistance waiting to be activated by the right kind of leadership.

Lessons from Managerialism

An understanding that we live in a managerial system provides several key lessons for us today.

1. Small is not beautiful.  Many of you know I’m a fan of Ivan Illich and other great, incisive critics of modern industrialization and gigantism. I enjoyed reading Kirkpatrick Sale’s Human Scale. I’ve probably made many public statements extolling the virtues of human-scaled communities and urban development. But after the revolution in scale, power resides in large institutions, whether that be the government, corporations, NGOs, etc. Yes, the occasional upstart like Google can be a disruptive innovator (only to turn into a large organization itself). But small-scale organizations cannot wield the power necessary to confront the power of managerial institutions. Again, even small countries are not fully sovereign. So fantasies about microstates or seasteading and the like are just that. The idea many conservatives have of rebuilding the country bottom up through small scale community and institutions will not work.

Also, while I support a revival of anti-trust enforcement and the potential deconsolidation or regulation of some industries, the reality is that we need large corporations. Big companies are necessary to achieve economies of scale, operate on a global basis, and compete geo-strategically. We need American tech giants in order to compete with China’s rising state backed tech sector. We need big pools of financial capital to fund the investments we need to make.

2. Big government is here to stay. In an era of big corporations, big cities, and a very large country, we are inevitably going to have big government. The idea of rolling back the clock to some materially smaller government or laissez-faire type system is a fantasy. Also, the nature of the revolution in scale leads to the logic of the international bloc system. It’s not clear that America could realistically walk away from its empire – and make no mistake, we are an empire – to become just another ordinary country even if we wanted to.

3. The “administrative state” is a misleading term. Conservatives love to complain about the administrative state, or the way that government agencies and bureaucrats make rules (laws, really) and control the economy and our lives. That’s true, but by singling out the managers in the government, they ignore the private sector managers who think and act in very similar ways. Private sector managerialism is part of our regime. Also, singling out an “administrative state” implies it could conceivably be eliminated, which it can’t. We are going to have big government (see point #2), and it needs to be administered. The term administrative state is designed specifically to retain the legacy conservative view that big business are the “good guys” and governments are the “bad guys.” Reality is much more complex. (See Julius Krein below).

4. Executives matter, but perhaps not as much as we think. I happen to think Burnham underrates the continued power of plutocrats, presidents, etc. Today we see that tech executives like Mark Zuckerberg or Jeff Bezos can wield enormous power over their organizations. But look how limited even they are. Zuckerberg controls a majority of Facebook’s voting rights. But even he is hemmed in by managerial elements – by his own employees, by the media, by the government. Look at how a relentless series of attacks by the major press, employee “leaks” orchestrated in careful concert with connected PR firms, Congressional hearings, etc. have put him on the defensive. Zuckerberg, like Twitter’s Jack Dorsey before him, had a vision of free speech, yet Facebook is extremely censorious today. This is the triumph of the managers. As another example, Elon Musk recently took nearly a 10% stake in Twitter. Revolver News took a look at what might happen he if bought the company and tried to restore free speech to the platform. It will be interesting to watch this one.

Conservatives love to focus on electing a new president, a new governor, etc. But a change at the top only accomplishes so much. The president has to make about 4,000 political appointments, but how many competent and qualified people do would-be reformers have in their rolodex to put into even the limited number of political positions?

That’s not to say that pursuing executive change is not worthwhile in many cases. But don’t think that fundamentally changing a company or a government is as simple as replacing the CEO.

5. The conundrum of resisting managerialism. Only a large organization can go toe-to-toe with other large organizations. The labor movement, for example, understood this. But becoming a large organization turns it into a managerial organization. This neuters it as a force of resistance. Again, the labor movement is a good example. Labor unions today are just another node in the managerial network, and often don’t represent the preferences or interests of their members but rather those of the managerial elite. Similarly, religious institutions have become managerial. Historian Christopher Schlect made the intriguing argument that managerialism even paved the way for women’s ordination. Once churches and denominations became dominated by administrative, functional roles, restricting office to men only made less intuitive sense. The elite-base split in evangelicalism can also be seen as an artifact of managerialism. The elites are part of the managerial class, and thus share its class outlook and interests.

I want to conclude by departing from managerialism in a key respect. I don’t think power elites are as irrelevant as Burnham’s theory might suggest. The billionaire class in America wields immense power. Bill Gates has been able to effect a large scale transformation of primary and secondary education in America through his promotion of Common Core, Social and Emotional Learning, etc. However, these elites, other than a handful of dissidents like Peter Thiel, tend to follow the managerial line. Their own positions are not really secure. Should Jeff Bezos be caught on tape making a “racist” statement, he might well be finished, for example. But billionaire money, particularly deca-billionaire money, matters a lot. Also, Presidents still retain vast formal power that can be used in ways that matter, even when the bureaucracy is opposed.

While managerialism is not an all-powerful explanatory lens that explains every aspect of our society, it’s an important concept that is seldom known. Thinking seriously about the implications of the revolution in scale and speed driven by the Industrial Revolution is necessary to make full sense of what we see around us.

For Further Reading:

Julius Krein in American Affairs – “James Burnham’s Managerial Elite” – this excellent article makes a good complement to this piece.

References:

James Burnham – The Managerial Revolution (contains many anachronisms but a very readable book)

Alfred D. Chandler, Jr. – The Visible Hand: The Managerial Revolution in American Business - my description of the development of the economy and management was largely distilled from this award-winning book, but it is extremely dense and not recommended except for people interested in serious academic economic history.

Paul Gottfried’s Marxism trilogy – After Liberalism, Multiculturalism and the Politics of Guilt, and The Strange Death of Marxism – informed my writing on the therapeutic turn.

Input from a private email from a political scientist was also used in the section on managerialism’s vulnerabilities.

Quotations from James Burnham’s The Managerial Revolution

The easiest way to discover what the ruling group is in any society is usually to see what group gets the biggest incomes.

The truth is that, whatever its legal merits, the concept of “separation of ownership and control” has no sociological or historical meaning. Ownership means control; if there is no control, then there is no ownership.

It has always happened that servants who discover themselves to be solidly enough established gradually turn on their masters, especially if they wake up to the fact that their masters are no longer necessary to them.

The system of managerial economy might be called a type of “corporate exploitation” as opposed to the “private exploitation” of capitalism. It is by virtue of its functional status that the managing group exploits the rest of society.

Fusion of the economy with the state, expansion of the state functions to comprise also control of the economy, offers, whether or not the managers individually recognize it, the only available means, on the one hand for making the economic structure workable again after its capitalist breakdown, on the other for putting the managers in the position of the ruling class.

Very little control over the state is actually, today, possessed by Congress. The last year has shown that even the question of making war, the most crucial of all the attributes of sovereignty, is, in spite of the Constitution, in reality beyond the power of Congress.

It is clearly to the advantage of the manager that the localization of sovereignty should be shifted to the administrative bureaus. These institutions are of a sort with which the managers can most easily collaborate; in fact, these bureaus, have, in their leading staffs, got to be peopled primarily by managers – it is a managerial function that the bureaus are performing. Thus the social rule of the mangers as a class can best be assured when sovereignty is recognized as pertaining, de facto and to a considerable extent de jure as well, to the bureaus. The social position of the managers is buttressed in the bureaus both against the claims of the capitalists and also against the pressure of the masses, neither of which groups can function effectively through the bureaus.

For just as the capitalists cannot continue as the ruling class, cannot even continue to exist, under a system of state ownership and control of the economy, so they cannot rule through a structure where sovereignty is localized primarily in the bureaus.

It is perhaps worth remarking that there is an interesting piece of psychological evidence for the assured social position of the managers. The managers – the administrators, experts, directing engineers, production executives, propaganda specialists, technocrats – are the only social group among almost all of whose members we find an attitude of self-confidence….No one who comes into contact with a manager will fail to have noticed a very considerable assurance in their whole bearing. They know they are indispensable in modern society. Whether or not they have thought it out, they grasp the fact that they have nothing to fear from the immense social changes speeding forward over the whole world. When they begin to think, they get ready to welcome those changes, and often to help them along.

Democracy, within a class society, must be so limited as not to interfere with the basic social relations whereby the ruling class maintains its position of power and privilege.

Coda

It is tempting for conservatives who read The Managerial Revolution to stop here and focus exclusively on those aspects of the theory that conform most conveniently with the standard critiques of “big government” and “Progressivism.” But the managerial revolution did not stop here, and managerialism is not merely New Deal Progressivism. On the contrary, twentieth-century conservatism in many ways accelerated the development of managerial society.

None of this is to say that American conservatives have not been sincere in their desire to restore limited government or in their other professed goals. However, by failing to correctly recognize the nature of the managerial elite and its sources of power, their opposition has been misdirected. Indeed, the effect of recent conservative policy, whatever its intent, has been the strengthening of the managerial class.

“Neoconservatism,” in particular, has been criticized as a capitulation to the administrative state or managerial society. To the extent such criticism is true, however, it is not primarily a result of the neocons being insufficiently conservative but rather, paradoxically, insufficiently “neo.” In other words, neoconservatives did not fully appreciate that managerialism represented a radical historical departure and an essentially distinct economic and social system from entrepreneurial capitalism. Thus, as capitalism faded into managerialism, neoconservatism’s defense of capitalism transformed into the promotion of managerial power.

- Julius Krein, “James Burnham’s Managerial Elite”