Ludwig Lachmann’s Review of Business Leadership in the Large Corporation (1946)

Ludwig Lachmann’s journal book review assesses Robert Aaron Gordon’s explanation of leadership in large American corporations. Its central concern is what becomes of the entrepreneurial function when ownership is dispersed and decision-making passes to professional managers. Lachmann strongly endorses Gordon’s empirical investigation and account of organizational change, while questioning his conceptual reticence and closing proposals for public control. The review proceeds from the historical significance of the “Managerial Revolution” through the distribution of entrepreneurial authority, the declining influence of banks, and the political problem of managerial accountability.

Lachmann opens by comparing earlier interpreters of the managerial revolution to historians of the French Revolution. The analogy frames corporate transformation as a phenomenon requiring more than a dramatic historical narrative: researchers must scrutinize evidence, explain causes, and identify what can be analyzed theoretically. Gordon earns praise for undertaking all three tasks:

In attacking all three tasks in one book Professor Gordon has shown a boldness quite unusual in this age of specialists; in having accomplished them with so much success he has earned more than the gratitude of his fellow economists.

The substantive explanation begins with corporate scale. Gordon argues that large firms require professional leadership both because ownership becomes dispersed and because even concentrated owners cannot personally make every entrepreneurial decision. Lachmann accepts the importance of this transfer of authority but distinguishes it from a more precise analytical question:

"Separation of ownership and management" tells us nothing about the location of the entrepreneurial function within the managerial hierarchy.

The distinction is the review’s core conceptual move. Identifying managers as the successors to owners does not establish who initiates decisions, who approves them, or who coordinates the organization. Gordon’s concept of “business leadership” separates these activities and describes an entrepreneurial function partly distributed through delegation, yet partly retained by the chief executive. Lachmann welcomes this differentiation but criticizes Gordon’s refusal to settle its relationship to management, administration, and conventional definitions of entrepreneurship. Avoiding terminological controversy can become excessive when it leaves the conceptual boundaries unresolved.

Lachmann finds Gordon most persuasive when showing how professional leadership and the decomposition of entrepreneurial activity accompany industrial maturity. The historical material from major American corporations gives substance to this argument, with railways and public utilities appearing especially advanced in the process. Yet organizational development does not simply eliminate the commanding individual entrepreneur. In crises demanding drastic action, the older form of business leadership can return. The examples of Samuel Zemurray at United Fruit and S. B. Colgate at Colgate-Palmolive-Peet qualify the structural account: delegated routines coexist with circumstances that call forth concentrated initiative.

The discussion of financial groups extends this explanation of corporate maturation. As firms accumulate reserves, they become less dependent on banks, reducing bankers’ influence. Lachmann explicitly connects Gordon’s conclusions with his own earlier study of finance capitalism. Corporate autonomy here arises from changing financial resources, not merely from a redistribution of formal offices.

The final section turns from explanation to public policy. Gordon is troubled by managers’ power and the weakness of effective supervision, while maintaining that business leadership properly belongs to the executive group. Lachmann presents the transformation as irreversible:

The Managerial Revolution cannot be unmade.

Restoring shareholder authority therefore offers no straightforward solution. Gordon doubts the suitability of boards nominally appointed by shareholders and suggests that a government agency, possibly the Securities and Exchange Commission, might approve directors selected by management. Lachmann closes with a pointed recommendation that Gordon examine German company legislation and practice under the Nazis. He does not develop an alternative institutional scheme; instead, the comparison warns against treating governmental approval as an uncomplicated remedy for managerial domination. The review’s lasting relevance lies in its separation of entrepreneurial function from ownership status, and of the economic explanation of managerial authority from the political question of how that authority should be controlled.