capitalist_and_entrepreneur_klein

26
different from the other factors. In an ownership approach, money capital
is treated as a unique factor of production, the “controlling factor”; the
investor is both ultimate decision-maker and residual claimant. e firm’s
objective is to maximize the return on the owner’s investment. Because
the owner delegates certain functions to managers, a central focus of the
theory of the firm becomes the problem of corporate governance: how do
suppliers of capital structure their arrangements with managers in a way
that maximizes their returns?
is chapter argues that the most interesting problems in the theory
of the firm relate to the intersection between the entrepreneurial function
and the capitalist function. Indeed, as Mises argued, the driving
force behind the market economy is a particular type of entrepreneur,
the capitalist-entrepreneur, who risks his money capital in anticipation of
future, uncertain, returns. Moreover, as discussed below, the entrepreneur
is nearly always also a capitalist, and the capitalist is also an entrepreneur.
Economists now increasingly recognize the importance of the capitalist
in the direction of the firm’s affairs. In the introduction to his influential
book Strong Managers, Weak Owners, Mark Roe (1994, p. vii) makes the
point succinctly:
Economic theory once treated the firm as a collection of machinery,
technology, inventory, workers, and capital. Dump these inputs
into a black box, stir them up, and one got outputs of products
and profits. Today, theory sees the firm as more, as a management
structure. e firm succeeds if managers can successfully coordinate
the firm’s activities; it fails if managers cannot effectively
coordinate and match people and inputs to current technologies
and markets. At the very top of the firm are the relationships among
the firm’s shareholders, its directors, and its senior managers. If
those relationships are dysfunctional, the firm is more likely to
stumble.
As Roe suggests, the relationships between the firm’s owners (shareholders)
and its top managers are centrally important in determining firm performance.
3
3 For surveys of the literature on corporate governance see Gilson (1996); Shleifer and
Vishny (1997) and Zingales (1998).