History and theory

Far from serving as a “highly specialized surrogate market,” as the market mentality leads Alchian and Demsetz to contend, the capitalist enterprise represents attempts by individuals to gain a measure of control over market forces through the ownership of productive resources other than their own labor power. As elaborated in Chapter 2, entrepreneurial individuals invest in their own firms so that they will not be dependent on the labor market to earn a living.

The history of capitalist enterprise also shows that in order to ensure the continuity of control over the productive assets in which they have invested, entrepreneurs avoid reliance on impersonal capital markets until they have transformed their firms from new ventures into going concerns – that is, firms that are generating sufficient value to finance internally their current operations. It is on the basis of this privileged access to productive and financial resources that the industrial capitalist becomes willing and able to seek funds from the capital market to finance further expansion.

It is also on the basis of control over a going concern that owner-entre-preneurs can monetize the value of their past investments by selling shares to the wealthholding public while handing over de facto control of their enterprises to career managers. As the historical argument in Chapter 1 shows, the successful transformation of a proprietary firm into a managerial enterprise required that managers, and not those who had acquired ownership by virtue of stock-market investments, retain privileged access to the organization's financial resources.