Thorstein Veblen
"The Industrial System and the Captains of Industry"
"DIAL. A Fortnightly", (New York: The Dial Publishing Company, Inc.)
Vol. LXVI (Dec., 28, 1918, to June, 28, 1919)
May 31, 1919, pp. 552-557
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[552]
The Industrial System and the Captains of Industry

IT HAS BEEN USUAL, and indeed it still is not unusual, to speak of three 
coordinate "factors of production": land, labor, and capital. The reason for 
this threefold scheme of factors in production is that there have been three 
recognized classes of income: rent, wages, and profits; and it has been 
assumed that whatever yields an income is a productive factor. This scheme 
has come down from the eighteenth century. It is presumed to have been true, 
in a general way, under the conditions which prevailed in the eighteenth 
century, and it has therefore also been assumed that it should continue to be 
natural, or normal, true in some eminent sense, under any other conditions 
that have come on since that time. 

Seen in the light of later events this threefold plan of coordinate factors 
in production is notable for what it omits. It assigns no productive effect 
to the industrial arts, for example, for the conclusive reason that the state 
of the industrial arts yields no stated or ratable income to any one class of 
persons; it affords no legal claim to a share in the community's yearly 
production of goods. The state of the industrial art is a joint stock of 
knowledge derived from past experience, and is held and passed on as an 
indivisible possession of the community at large. It is the indispensable 
foundation of all productive industry, of course, but except for certain 
minute fragments covered by patent rights or trade secrets, this joint stock 
is no man's individual property. For this reason it has not been counted in 
as a factor in production. The unexampled advance of technology during the 
past one hundred and fifty years has now begun to call attention to its 
omission from the threefold plan of productive factors handed down from that 
earlier time.

Another omission from the scheme of factors, as it was originally drawn, was 
the business man. But in the course of the nineteenth century the business -
man came more and more obtrusively to the front and came in for a more and 
more generous portion of the country's yearly income which was taken to argue 
that he also contributed increasingly to the yearly production of goods. So a 
fourth factor of production has provisionally been added to the threefold 
scheme, in the person of the " entrepreneur," whose wages of management are 
considered to measure his creative share in the production of goods, although 
there still is some question as to the precise part of the entrepreneur in 
productive industry.

"Entrepreneur" is a technical term to designate the man who takes care of the 
financial end of things. It covers the same fact as the more familiar 
"business man," but with a vague suggestion of big business rather than 
small. The typical entrepreneur is the corporation financier. And since the 
corporation financier has habitually come in for a very substantial share of 
the community's yearly income he has also been conceived to render a very 
substantial service to the community as a creative force in that productive 
industry out of which the yearly income arises. Indeed it is nearly true that 
in current usage "producer" has come to mean "financial manager," both in the 
standard economic theory and in everyday speech.

There need of course be no quarrel with all this. It is a matter of usage. 
During the era of the machine industry which is also the era of the 
commercial democracy business men have controlled production and have managed 
the industry of the commonwealth for their own' ends, so that the material 
fortunes of all the civilized peoples have continued to turn on the financial 
management of their business men. And during the same period not only have 
the conditions of life among these civilized peoples continued to be fairly 
tolerable on the whole, but it is also true that the industrial [553] system 
which these business men have been managing for their own private gain all 
this time has continually been growing more efficient on the whole. Its 
productive capacity per unit of equipment and man power has continually grown 
larger. For this very creditable outcome due credit should be, as indeed it 
has been, given to the business community which has had the oversight of 
things. The efficient enlargement of industrial capacity has, of course, been 
due to a continued advance in technology, to a continued increase of the 
available natural resources, and to a continued increase of population. But 
the business community have also had a part in bringing all this to pass; 
they have always been in a position to hinder this growth, and it is only by 
their consent and advice that things have been enabled to go forward so far 
as they have gone.

This sustained advance in productive capacity, due to the continued advance 
in technology and in population, has also had another notable consequence. 
According to the Liberal principles of the eighteenth century any legally 
defensible receipt of income is a sure sign of productive work done. Seen in 
the light of this assumption, the visibly increasing productive capacity of 
the industrial system has enabled all men of a liberal and commercial mind 
not only to credit the businesslike captains of industry with having created 
this productive capacity, but also to overlook all that the same captains of 
industry have been doing in the ordinary course of business to hold 
productive industry in check. And it happens that all this time things have 
been moving in such a direction and have now gone so far that it is today 
quite an open question whether the businesslike management of the captains is 
not more occupied with checking industry than with increasing its productive 
capacity.

This captain of industry, typified by the corporation financier, and latterly 
by the investment banker, is one of the institutions that go to make up the 
new order of things, which has been coming on among all the civilized peoples 
ever since the Industrial Revolution set in. As such, as an institutional 
growth, his life history hitherto should be worth looking into for anyone who 
proposes to understand the recent growth and present drift of this new 
economic order. The beginnings of the captain of industry are to be seen at 
their best among those enterprising Englishmen who made it their work to 
carry the industrial promise of the -Revolution out into tangible 
performance, during the closing decades of the eighteenth and the early 
decades of the nineteenth century. These captains of the early time are 
likely to be rated as inventors, at least in a loose sense of the word. But 
it is more to the point that they were designers and builders of factory, 
mill, and mine equipment, of engines, processes, machines, and .machine 
tools, as well as shop managers, at the same time that they took care, more 
or less effectually, of the financial end. Nowhere do these beginnings of the 
captain of industry stand out so convincingly as among the English tool-
builders of that early time, who designed, tried out, built, and marketed 
that series of indispensable machine tools that has made the practical 
foundation of" the mechanical industry. Something to much the same effect is 
due to be said for the pioneering work of the Americans along the same 
general lines of mechanical design and performance at a slightly later 
period. To men of this class the new industrial order owes much of its early 
success as well as of its later growth.

These men were captains of industry, entrepreneurs, in some such simple and 
comprehensive sense of the word as that which the economists appear to have 
had in mind for a hundred years after, when they have spoken of the wages of 
management that are due the entrepreneur for productive work done. They were 
a cross between a business man and an industrial expert, and the industrial 
expert appears to have been the more valuable half in their composition. But 
factory, mine, and ship owners, as well as merchants and bankers, also made 
up a vital part of that business community out of whose later growth and 
specialization the corporation financier of the nineteenth and twentieth 
centuries has arisen. His origins are both technological and commercial, and 
in that early phase of his life history which has been taken over into the 
traditions of economic theory and of common sense he carried on both of these 
lines of interest and of work in combination. That was before the large 
scale, the wide sweep, and the profound specialization of the advanced 
mechanical industry had gathered headway. But progressively the cares of 
business management grew larger and more exacting, as the scale of things in 
business grew larger, and so the directive head of any such business concern 
came progressively to give his attention more and more exclusively to the 
"financial end." At the same time and driven by the same considerations the 
businesslike management of industry has progressively been shifting to the 
footing of corporation finance. This has brought on a further division, 
dividing the ownership of the industrial equipment and resources from their 
management. But also at the same time the industrial system, on its 
technological side, has been progressively growing [554] greater and going- 
farther in scope, diversity, specialization, and complexity, as well as in 
productive capacity per unit of equipment and man power.

The last named item of change, the progressive increase of productive 
capacity, is peculiarly significant in this connection. Through the earlier 
and pioneering decades of the machine era it appears to have been passably 
true that the ordinary routine of management in industrial business was taken 
up with reaching out for new ways and means and speeding up production to 
maximum capacity. That was before standardization of processes and of unit 
products, and fabrication of parts had been carried far, and therefore before 
quantity production had taken on anything like its later range and reach. 
And, partly because of that fact because quantity production was then still a 
slight matter and greatly circumscribed, as contrasted with its later growth 
the ordinary volume of output in the mechanical industries was still 
relatively slight and manageable. Therefore those concerns that were engaged 
in these industries still had a fairly open market for whatever they might 
turn out, a market capable of taking up any reasonable increase of output. 
Exceptions to this general rule occurred; as, for example, in textiles. But 
the general rule stands out obtrusively through the early decades of the 
nineteenth century so far as regards English industry, and even more 
obviously in the case of America. Such an open market meant a fair chance for 
competitive production, without too much risk of overstocking. And running to 
the same effect, there was the continued increase of population and the 
continually increasing reach and volume of the means of transport, serving to 
maintain a free market for any prospective increase of output, at prices 
which offered a fair prospect of continued profit. In the degree in which 
this condition of things prevailed a reasonably-free competitive production 
would be practicable.

The industrial situation so outlined began visibly to give way toward the 
middle of the nineteenth century in England, and at a correspondingly later 
period in America. The productive capacity of the mechanical industry was 
visibly overtaking the capacity of the market, so that free competition 
without afterthought was no longer a sound footing on which to manage 
production. Loosely, this critical or transitional period falls in and about 
the second quarter of the nineteenth century in England; elsewhere at a 
correspondingly later date. Of course the critical point, when business 
exigencies began to dictate a policy of combination and restriction, did not 
come at the same date in all or in most of the mechanical industries; but it 
seems possible to say that, by and large, the period of transition to a 
general rule of restriction in industry comes on at the time and for the 
reason so indicated. There were also other factors engaged in that industrial 
situation, besides those spoken of above, less notable and less sharply 
defined, but enforcing limitations of the same character. Such were, for 
example, a rapidly gaining obsolescence of industrial plant, due to 
improvements and extensions, as also the partial exhaustion of the labor 
supply by persistent overwork, under-feeding, and unsanitary conditions but 
this applies to the English case rather than elsewhere.

In point of time this critical period in the affairs of industrial business 
coincides roughly with the coming in of corporation finance as the ordinary 
and typical method of controlling the industrial output. Of course the 
corporation, or company, has other uses besides the restrictive control of 
the output with a view to a profitable market, but it should be sufficiently 
obvious that the combination of ownership and centralization of control which 
the corporation brings about is also exceedingly convenient for that purpose. 
And when it appears that the general resort to corporate organization of the 
larger sort sets in about the time when business exigencies begin to dictate 
an imperative restriction of output, it is not easy to avoid the conclusion 
that this was one of the ends to be served by this reorganization of business 
enterprise. Business enterprise may fairly be said to have shifted from the 
footing of free-swung competitive production to that of a conscientious 
withholding of efficiency, so soon and so far as corporation finance on a 
sufficiently large scale had come to be the controlling factor in industry. 
At the same time and in the same degree the discretionary control of 
industry, and of other business enterprise in great part, has passed into the 
hands of the corporation financier.

Corporate organization has continually gone forward to a larger scale and a 
more comprehensive coalition of forces, and at the same time, and more and 
more visibly, it has become the ordinary duty of the corporate management to 
adjust production to the requirements of the market by restricting the output 
to what the traffic will bear, that is to say, what will yield the largest 
net earnings. Under corporate management it rarely happens that production is 
pushed to the limit of capacity. It happens, and can happen, only rarely and 
intermittently. This has been true, increasingly, ever since the ordinary 
productive capacity of the mechanical industries seriously began to overtake 
and promised to exceed what the market would carry off at a reasonably [555] 
profitable price. And ever since that critical turn in the affairs of 
industrial business somewhere in the middle half of the nineteenth century it 
has become increasingly imperative to use a wise moderation and stop down the 
output to such a rate and volume as the traffic will bear. The cares of 
business have required an increasingly undivided attention on the part of the 
business men, and in an ever increasing measure their day's work has come to 
center about a running adjustment of sabotage on production. And for this 
purpose, evidently, the corporate organization of this business, on an 
increasingly large scale, is very serviceable, since the requisite sabotage 
on productive industry can be effectually administered only on a large plan 
and with a firm hand.

" The leaders in business are men who have studied and thought all their 
lives. They have thus learned to decide big problems at once, basing their 
decisions upon their knowledge of fundamental principles." Jeremiah W. Jenks. 
That is to say, the surveillance of this financial end of industrial 
business, and the control of the requisite running balance of sabotage, have 
been reduced to a routine governed by settled principles of procedure and 
administered by suitably trained experts in corporation finance. But under 
the limitations to which all human capacity is subject it follows from this 
increasingly exacting discipline of business administration that the business 
men are increasingly out of touch with that manner of thinking and those 
elements of knowledge that go to make up the logic and the relevant facts of 
the mechanical technology. Addiction to a strict and unremitting valuation of 
all things in terms of price and profit leaves them, by settled habit, unfit 
to appreciate those technological facts and values that can be formulated 
only in terms of tangible mechanical performance; increasingly so with every 
further move into a stricter addiction to businesslike management and with 
every further advance of the industrial system into a still wider scope and a 
still more diversified and more delicately balanced give and take among its 
interlocking members.

They are experts in prices and profits and financial maneuvers, and yet the 
final discretion in all questions of industrial policy continues to rest in 
their hands. They are by training and interest captains of finance, and yet, 
with no competent grasp of the industrial arts, they continue to exercise a 
plenary discretion as captains of industry. They are unremittingly engaged in 
a routine of acquisition, in which they habitually reach their ends by a 
shrewd restriction of output, and yet they continue to be entrusted with the 
community's industrial welfare, which calls for maximum production.

Such has been the situation in all the civilized countries since corporation 
finance has ruled industry, and until a recent date. Quite recently this 
settled scheme of business management has shown signs of giving way, and a 
new move in the organization of business enterprise has come in sight, 
whereby the discretionary control of industrial production is shifting still 
farther over to the side of finance and still farther out of touch with the 
requirements of maximum production. The new move is of a twofold character: 
(a) the financial captains of industry have been proving their industrial 
incompetence in a progressively convincing fashion, and (b) their own proper 
work of financial management has progressively taken on a character of 
standardized routine such as no longer calls for or admits any large measure 
of discretion or initiative. They have been losing touch with the management 
of industrial processes, at the same time that the management of corporate 
business has, in effect, been shifting into the hands of a bureaucratic 
clerical staff. The corporation financier of popular tradition is taking on 
the character of a chief of bureau.

The changes which have brought the corporation financier to this somewhat 
inglorious position of a routine administrator set in along with the early 
growth of corporation finance, somewhere around the middle of the nineteenth 
century, and they have come to a head somewhere about the passage to the 
twentieth century, although it is only since the latter date that the outcome 
is becoming at all clearly defined. When corporate organization and the 
consequent control of output came into bearing there were two lines of policy 
open to the management: (a) to maintain profitable prices by limiting the 
output, and (b) to maintain profits by lowering the production cost of an 
increased output. To some extent both of these lines were followed, but on 
the whole the former proved the more attractive; it involved less risk, and 
it required less acquaintance with the working processes of industry. At 
least it appears that in effect the preference was increasingly given to the 
former method during this half-century of financial management. For this 
there were good reasons. The processes of production were continually growing 
more extensive, diversified, complicated, and more difficult for any layman 
in technology to comprehend and the corporation financier was such a layman, 
necessarily and increasingly so, for reasons indicated above. At the same 
time, owing to a continued increase of population [556] and a continued 
extension of the industrial system, the net product of industry and its net 
earnings continued to increase independently of any creative effort on the 
part of the financial management. So the corporation financier, as a class, 
came in for an "unearned increment" of income on the simple plan of "sitting 
tight." That plan is intelligible to any layman. All industrial innovation 
and all aggressive economy in the conduct of industry not only presumes an 
insight into the ' technological details of the industrial process, but to 
any other than the technological experts, who know the facts intimately, any 
move of that kind will appear hazardous. So the business men who have 
controlled industry, being laymen in all that concerns its management, have 
increasingly been content to let well enough alone and to get along with an 
ever increasing overhead charge of inefficiency, so long as they have lost 
nothing by it. The result has been an ever increasing volume of waste and 
misdirection in the use of equipment, resources, and man power throughout the 
industrial system.

In time, that is to say within the last few years, the resulting lag, leak, 
and friction in the ordinary working of this mechanical industry under 
business management have reached such proportions that no ordinarily 
intelligent outsider can help seeing them wherever he may look into the facts 
of the case. But it is the industrial experts, not the business men, who have 
finally begun to criticize this businesslike mismanagement and neglect of the 
ways and means of industry. And hitherto their efforts and advice have met 
with no cordial response from the business men in charge, who have, on the 
whole, continued to let well enough alone that is to say, what is well enough 
for a short-sighted business policy looking to private gain, however poorly 
it may serve the material needs of the community. But in the meantime two 
things have been happening which have deranged the regime of the corporation 
financier: industrial experts, engineers, chemists, minerologists, 
technicians of all kinds have been drifting into more responsible positions 
in the industrial system and have been growing up and multiplying within the 
system, because the system will no longer work at all without them; and on 
the other hand, the large financial interests on whose support the 
corporation financiers have been leaning have gradually come to realize that 
corporation finance can best be managed as a comprehensive bureucratic 
routine, and that the two pillars of the house of corporate business 
enterprise of the larger sort are the industrial experts and the large 
financial concerns that control the necessary funds; whereas the corporation 
financier is little more than a dubious intermediate term between these two.

One of the greater personages in American business finance took note of this 
situation in the late nineties and set about turning it to account for the 
benefit of himself and his business associates, and from that period dates a 
new era in American corporation finance. It was for a time spoken of loosely 
as the Era of Trust-Making, but that phrase does not describe it at all 
adequately. It should rather be called the Era of the Investment Banker, and 
it has come to its present stage of maturity and stability only in the course 
of the past quarter-century.

The characteristic features and the guiding purpose of this improved method 
in corporation finance are best shown by a showing of the methods and 
achievements of that great pioneer by whom it was inaugurated. As an 
illustrative case, then, the American steel business in the nineties was 
suffering from the continued use of out-of-date processes, equipment, and 
locations, from wasteful management under the control of stubbornly ignorant 
corporation officials, and particularly from intermittent haphazard 
competition and mutual sabotage between the numerous concerns which were then 
doing business in steel. It appears to have been the last-named difficulty 
that particularly claimed the attention and supplied the opportunity of the 
great pioneer. He can by no stretch of charity be assumed to have had even a 
slight acquaintance with the technological needs and shortcomings of the 
steel industry. But to a man of commercial vision and financial sobriety it 
was plain that a more comprehensive, and therefore more authoritative, 
organization and control of the steel business would readily obviate much of 
the competition which was deranging prices. The apparent purpose and the 
evident effect of the new and larger coalition of business interests in steel 
was to maintain profitable prices by a reasonable curtailment of production. 
A secondary and less evident effect was a more economical management of the 
industry, which involved some displacement of quondam corporation financiers 
and some introduction of industrial experts. A further, but unavowed, end to 
be served by the same move in each of the many enterprises in coalition 
undertaken by the great pioneer and by his competitors was a bonus that came 
to these enterprising men in the shape of an increased capitalization of the 
business. But the notable feature of it all as seen from the point of view of 
the public at large was always the stabilization of prices at a reasonably 
high level, such as would always assure reasonably large earnings on the 
increased capitalization.

[557] Since then this manner of corporation finance has been further 
perfected and standardized, until it will now hold true that no large move in 
the field of corporation finance can be made without the advice and consent 
of those large funded interests that are in a position to act as investment 
bankers; nor does any large enterprise in corporation business ever escape 
from the continued control of the investment bankers in any of its larger 
transactions ; nor can any corporate enterprise of the larger sort now 
continue to do business except on terms which will yield something 
appreciable in the way of income to the investment bankers, whose continued 
supply is necessary to its success. The financial interest here spoken of as 
the investment banker is commonly something in the way of a more or less 
articulate syndicate of financial houses, and it is to be added that the same 
financial concerns are also commonly, if not invariably, engaged or 
interested in commercial banking of the usual kind. So that the same well-
established, half-syndicated ramification of banking houses that have been 
taking care of the country's commercial banking, with its center of credit 
and of control at the country's financial metropolis, is ready from 
beforehand to take over and administer the country's corporation finance on a 
unified plan and with a view to an equitable distribution of the country's 
net earnings among themselves and their clients. The more inclusive this 
financial organization is, of course, the more able it will be to manage the 
country's industrial system as an inclusive whole and prevent any hazardous 
innovation or experiment, as well as to limit production of the necessaries 
to such a volume of output as will yield the largest net return to itself and 
its clients. Evidently the improved plan which has thrown the discretion and 
responsibility into the "hands of the investment banker should make for a 
safe and sound conduct of business, such as will avoid fluctuations of price, 
and more particularly avoid any unprofitable speeding-up of productive 
industry. Evidently, too, the initiative has hereby passed out of the hands 
of the corporation financier, who has fallen into the position of a financial 
middleman or agent, with limited discretion and with a precariously doubtful 
future. But all human institutions are susceptible of improvement, and the 
course of improvement may now and again, as in his case, result in 
supersession and displacement. And doubtless it is all for the best, that is 
to say, for the good of business, more particularly for the profit of big 
business.

But now as always corporation finance is a traffic in credit; indeed, now 
more than ever before. Therefore to stabilize corporate business sufficiently 
in the hands of this inclusive quasi-syndicate of banking interests 'it is 
necessary that the credit system of the country should as a whole be 
administered on a unified plan and inclusively. All of which is taken care of 
by the same conjunction of circumstances; the same quasi-syndicate of banking 
interests that makes use of the country's credit in the way of corporation 
finance is also the guardian of the country's credit. From which it results 
that, as regards those large-scale credit extensions which are of substantial 
consequence, the credits and debits are, in effect, pooled within the 
syndicate, so that no substantial derangement of the credit situation can 
take effect except by the free choice of this quasi-syndicate of investment 
banking houses; that is to say, not except they see an advantage to 
themselves in allowing the credit situation to be deranged, and not beyond 
the point which will best serve their collective purpose as against the rest 
of the community. With such a closed system no extension of credit 
obligations or multiplication of corporate securities, with the resulting 
inflation of values, need bring any risk of a liquidation, since credits and 
debits are in effect pooled within the system. By way of parenthesis it may 
also be remarked that under these circumstances "credit" has no particular 
meaning except as a method of accounting. Credit is also one of the timeworn 
institutions that are due to suffer obsolescence by improvement.

This process of pooling and syndication that is remaking the world of credit 
and corporation finance has been greatly helped on in America by the 
establishment of the Federal Reserve system, while somewhat similar results 
have been achieved elsewhere by somewhat similar devices. That system has 
greatly helped to extend, facilitate, simplify, and consolidate the unified 
control of the country's credit arrangements, and it has very conveniently 
left the substantial control in the hands of those larger financial interests 
into whose hands the lines of control in credit and industrial business were 
already being gathered by force of circumstances and by sagacious management 
of the interested parties. By this means the substantial core of the 
country's credit system is gathered into a self-balanced whole, closed and 
unbreakable, self-insured against all risk and derangement. All of which 
converges to the definitive stabilization of the country's business; but 
since it reduces financial traffic to a riskless routine it also converges to 
the conceivable obsolescence of corporation finance and eventually, perhaps, 
of the investment banker.

THORSTEIN VEBLEN.
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