20 ECONOMIC ESSAYS IN HONOR OF JOHN BATES CLARK
ML
The great changes in industry which embody themselves in the
shift from the individual or partnership entrepreneur to the cor-
porate form have been gradual. The adherents of the business
management theory had to face the facts, since already when
Walker and Marshall were formulating the management theory
of profits the corporate form was growing in importance. Walker
regarded the corporation, apparently, as a development of minor
importance and explained the profits of stockholders as sheer
exploitation of business ability. In an article in the Quarterly
Journal of Economics entitled “The Doctrine of Rent and the
Residual Claimant Theory of Wages,” he said:
Disguised profits also enter into the dividends of many companies
or corporations which have had the good fortune, good sense and good
feeling to retain, as managers, men of the highest business ability,
born captains of industry who yet, by considerate treatment and high
salaries (the force of habit and perhaps pride in the work concurring)
are induced to remain long after they have reached the pitch of
reputation which would give them command of the situation if they
chose to set up as manufacturers for themselves.
Marshall also was aware of the fact that in the corporation
there existed a formal allocation of profits inconsistent with its
inclusion in “earnings of management.” In them, he recognized
a new distribution of the various parts of the work of manage-
ment, but he entertained grave doubts as to the possibilities of
their wide extension.” It was apparently only his skepticism as
to the future growth of the corporate form of organization which
enabled him to regard the business management theory as an
adequate explanation of the facts.
IV
The history of the theory of profits, if the foregoing is correct,
has been determined not by increasing accuracy of economic
analysis, but by great industrial and credit changes which from
time to time have shifted the ownership of the product. The
really important historical question has been: Under a given set
of conditions to whom do profits come, not what does the entre-
preneur do to get them. When conditions were such that business
ability was usually able to secure the profits, a theory that profits
are the reward of business ability came into existence; when
' Dewey’s ed. of Walker's Discussions, Vol. 1, p. 427.
2 Principles, p. 382.