NEOCLASSICISM AND THE SEPARATION OF OWNERSHIP AND CONTROL Herbert Hovenkamp ABSTRACT The separation of ownership and control is a phrase that will forever be associated with Adolf A. Berle and Gardiner C. Means The Modern Corporation and Private Property (1932), as well as with Institutionalist economics, Legal Realism, and the New Deal. Neoclassical economists have generally been sharply critical, both of the historical facts that Berle and Means purported to describe and of the conclusions that they drew. In fact, however, the separation of ownership and control had already been an essential element of the neoclassical theory of corporate governance and corporate finance. This paper explores the history of the concept of separation of ownership and control within neoclassical economics, starting with Yale economist Irving Fisher’s separation theorem developed early in the twentieth century, which held that a corporation’s profit function could not be derived from shareholders’ utility function; Ronald Coase’s Nature of the Firm, which applied purely marginalist analysis to the determinants of the horizontal and vertical structure of the corporation; and then to the great corporate finance theorems and hypotheses of the 1950s and 1960s. These concluded that ownership and capital are nothing more than alternative, fungible sources of capital, and that a profitable stock ownership strategy involves no knowledge whatsoever about the firms in which one is investing.
- Berle and Means,
- corporate finance,
- Legal Realism
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