And no one puts new wine into old wineskins; or else the new wine bursts the wineskins, the wine is spilled, and the wineskins are ruined. But new wine must be put into new wineskins.

Mark 2:22, New King James Version¹

In 1901 financier J. P. Morgan orchestrated the creation of US Steel, then by almost any measure the largest company in the world. Two years earlier, John D. Rockefeller had consolidated his activities into Standard Oil of New Jersey, which controlled around 90 per cent of refined oil products in the United States. Steel and oil were essential elements in the rise of the automobile industry, which would transform both everyday life and the ways in which people thought about business.

Business historian Alfred Chandler documented the rise of the modern managerial corporation in his magisterial Strategy and Structure (1962).² The book showcased General Motors, along with chemical giant DuPont, retailer Sears Roebuck and Standard Oil of New Jersey. These companies dominated their industries in the United States and increasingly operated internationally. They exerted political influence, and their turnover exceeded the national product of many states. Their combination of economic and political power seemed to secure their dominance in perpetuity.

It didn’t. In 2009 General Motors (GM) entered Chapter 11 bankruptcy. GM is still – just – the top-selling US automobile supplier, but its global production lags far behind that of Toyota and Volkswagen. DuPont has broken itself up, and Sears Roebuck is more or less defunct. These failures are not because people have ceased to drive cars and shop or because business no longer requires chemical products. Incumbents lost out because other businesses met customer needs more effectively. Among Chandler’s examples only Standard Oil of New Jersey – now ExxonMobil – continues to enjoy its former leadership status. Somewhat quixotically, in view of the widespread demand for a transition from fossil fuels.

In the 1970s you might presciently have anticipated that information technology would be key to the development of twenty-first-century business. And many savvy investors did; their enthusiasm made IBM the world’s most valuable corporation. The leading computer company of the age would surely lead the race to the new frontier. That wasn’t how it worked out.

On Wall Street they called the upstarts ‘the FAANGs’ – Facebook (Meta), Apple, Amazon, Netflix and Google (Alphabet). Then the fickle fashion of finance favoured the ‘Magnificent Seven’, with Netflix replaced by Nvidia, and Tesla and Microsoft added to the list – the latter restored to fortune after missing out on the Apple-led shift to mobile computing in the first decade of the new century. Microsoft is actually the longest established of these titans of the modern economy, famously founded in 1975 by Harvard dropouts Paul Allen and Bill Gates. Four of these businesses companies began trading only in the twenty-first century. None of the FAANGs is a manufacturer (I will explain Apple later.) The employees of these companies are not the labouring poor, victims of class oppression; many hold degrees from prestigious universities. (I will come back to Amazon later.) The workers are the means of production.

In 2023 investors believed that the ‘Magnificent Seven’ represented the future of business. They clamoured to buy their stock, as they had once clamoured to buy US Steel, General Motors and IBM. And these investors are likely to be right – for a time. But experience suggests the dominance of the seven is likely to be as transitory as that of the large businesses of earlier generations. As I write this, negotiations are proceeding for the rump of US Steel to be bought by Nippon Steel of Japan, and Andrew Carnegie and the Gilded Age have become a footnote to history. Thus the mighty fall – or just slowly fade away.

A central thesis of this book is that business has evolved but that the language that is widely used to describe business has not. The world economy is not controlled by a few multinational corporations; such corporations have mostly failed even to control their own industries for long. In the nineteenth and twentieth centuries capital was required to build, first, textile mills and iron works, then railways and steel mills and subsequently automobile assembly lines and petrochemical plants. These ‘means of production’ were industry-specific – there is not much you can do with a railway except run trains along it, and if you want to be an engine driver you need to seek employment with a business that operates (but, as I will explain, does not necessarily own) a track and a train.

The leading companies of the twenty-first century have little need of such equipment. The relatively modest amounts of capital they raise are used to cover the operating losses of a start-up business. The physical assets required by twenty-first-century corporations are mostly fungible: they are offices, shops, vehicles and data centres which can be used in many alternative activities. These ‘means of production’ need not be owned by the business that uses them and now mostly they are not.

Thus the owners of tangible capital, such as real estate companies and vehicle lessors, no longer derive control of business from that ownership. Labour is no longer subjected to the whims of capitalist owners of the means of production. Often workers do not know who the owners of the physical means of production are, or who the shareholders of the business they work for are, and they don’t know because it doesn’t matter. They work for an organisation that has a formal management structure but whose hierarchy is relatively flat and participative.

Necessarily so. In modern businesses the ‘boss’ can’t issue peremptory instructions to subordinates, as Andrew Carnegie and Henry Ford did, because modern bosses don’t know what these instructions should be: they need the information, the commitment and, above all, the capabilities which are widely distributed across the organisation. The modern business environment is characterised by radical uncertainty. It can be navigated only by assembling the collective knowledge of many individuals and by developing collective intelligence – a problem-solving capability which distinguishes the firm from its competitors, and even its own past. Relationships in these businesses cannot be purely transactional: they require groups of people working together towards shared objectives, and such cooperative activity necessarily has a social as well as a commercial dimension.

Collective knowledge is the accumulation of the facts and theories we can find in libraries and on Wikipedia, augmented by insights from our own experience and that of others. Other animals mostly know what they have learned for themselves. We understand science and appreciate art because of the endeavours of great scientists and famous artists and the efforts of our teachers to explain their achievements to us. Collective knowledge also includes what we have learned about ourselves and each other through our social and business interactions. When to praise and when to criticise, when to follow and when to lead. Collective knowledge is sometimes described as ‘the wisdom of crowds’, but the wisdom of crowds lies in the aggregate of knowledge rather than the average of knowledge. No one knows everything about anything or much about everything.

The twenty-first-century corporation is defined by these human capabilities, not its physical capital. The successful firm builds distinctive capabilities and distinctive collections and combinations of capabilities – capabilities such as supplier or customer relationships, technical and business process innovations, brands, reputations and user networks. These things can only be – at most – approximately replicated by competitors. Such differentiation among firms means that the structure of modern industry is very different from that of the past, which featured an economy in which essentially similar farms, mills and steelworks competed in the production of essentially similar products in capital-intensive and purpose-specific facilities.

As a result, what we call ‘profit’ is no longer primarily a return on capital but is ‘economic rent’. The term ‘economic rent’ came into use in what was still a predominantly agricultural economy to describe the return that accrues to landowners because some lands are more fertile or better located than others. Today economic rent is used to describe the earnings that arise because some people, places and institutions have commercially valuable talents which others struggle to emulate. Economic rent accrues to silver-tongued attorneys, brilliant brain surgeons, dashing dealmakers and to sports and film stars. Economic rent is earned by Taylor Swift, and by businesses and house owners in Silicon Valley; economic rent is derived from the unique attractions of Venice and the enthusiasm of worldwide supporters of Manchester United.

But economic rent also describes and explains the revenue that is generated because some firms are better than others at providing the goods and services that their customers want. The economic rent earned by Apple and Amazon, like the economic rent accruing to Swift and Manchester United and arising in Silicon Valley and Venice, is the result of doing things better than other people, places and organisations. All these people, places and organisations have monopolies – of being their impressively differentiated selves. The traditional association of economic rent with monopoly is thus true, but trivial.

And we should welcome that differentiation and its associated ‘monopolies’. The perfectly competitive market in which every product is homogeneous and every producer is equally efficient is not an ideal but a stationary equilibrium in which enterprise and innovation are absent. The purpose of economic organisation is to create combinations of factors of production that yield more value than the same factors would in alternative uses. And to do so successfully is to create a source of economic rent.

But when the term ‘economic rent’ is mentioned in modern texts on economics, business and politics, it is most often in the context of ‘rent-seeking’: the attempt by individuals and companies to appropriate some of the value created by other individuals and companies, by establishing monopolies or providing unneeded intermediary services. Such rent-seeking is indeed a major blight on modern economies, and a better appreciation of the nature and origins of economic rent will better equip us to tackle it. We need to rein in the excesses of financial intermediation. We need to limit the use of political influence to gain favoured positions; to win contracts, to establish monopolies, to secure incumbent-friendly regulations. It is not the purpose of this book to propose remedies for rent-seeking: the implications of my analysis for business and public policy, both of which should promote the rents that arise from innovative differentiation and eliminate the ones that are the result of the abuse of political institutions, will be the task of a successor volume. My objective here is to promote what I regard as an essential preliminary: a better understanding of how business works, and an explanation of how it does not work in the ways many people – both critics and apologists – think.

An understanding of the concept, origins and effects of economic rent is essential to understanding not only the financial accounts of firms but also the distribution of income and wealth in the modern economy. But the inherited terminology of capital and capitalism gets in the way of that understanding. Even sophisticated investors examine ‘return on capital employed’ (ROCE), although the return often has no more connection to the capital employed than it has to the amount of water used (ROW) or the number of meetings held (ROM).

Economic rent is not an anomaly but a central and valuable feature of a vibrant economy. Economic advance occurs when people and businesses create rents by doing things better, and it progresses further by inspiring others to try to compete them away. If this is capitalism, then I am a supporter of capitalism. But the process I describe has very little to do with ‘capital’ and nothing whatsoever to do with any struggle between capitalists and workers for control of the means of production. The economic system I favour and the one described in this book is better described as a market economy, or better still a pluralist economy, than as a capitalist economy. A pluralist economy is one in which people are free to do new things (and often fail at them) without requiring the approval of some central authority. A pluralist economy is a system in which consumers are able to make their wants known in a competitive environment that rewards success in meeting those wants.

But the pluralism of a market economy also requires a discipline in which failure is acknowledged and leads to change. Bureaucratic organisations find such self-awareness hard. IBM, General Motors and US Steel failed economically for more or less the same reasons that the Soviet Union failed economically: the difficulty centralised authorities encounter in adapting to changing technologies and changing needs. These institutions were slow to move and slow to acknowledge failure. However, the economic underperformance of IBM, GM and US Steel led only to the decline of these companies. Microsoft and Apple, Toyota and Tesla, Nucor and Arcelor Mittal were able to take their place. But the economic underperformance of the Soviet Union led to the decline, and ultimately demise, of an entire political system.

The term ‘capitalism’ came into being to describe an economy designed and controlled by a bourgeois elite. Both supporters and critics of modern business frequently conflate this historic caricature of ‘capitalism’ with today’s reality of a market or pluralist economy, whose essential characteristic is that it is not controlled, or not controlled for long, by anyone at all. The mismatch of language and reality extends further. In the second half of the twentieth century, business evolved from an industrial structure characterised by large-scale production facilities staffed by low-skilled workers to one populated by knowledge workers sharing their collective intelligence in a cooperative environment. But the dominant narrative of how the business world did and should work evolved in the opposite direction. Economic relations were defined in purely transactional terms; intrinsic motivation and professional ethics were replaced by targets and bonuses. The purpose of business, MBA students were told, was not to meet the needs of customers and society but to create ‘shareholder value’ for anonymous stockholders.

The further, but closely related, paradox is that as capital became less central to the operation of business, the financial sector expanded greatly in size and remuneration. And the degraded values of parts of the financial sector spread to business. Both business founders and senior executives rewarded themselves handsomely for their profession of devotion to the cause of shareholder value. As a result of the erosion of business ethics and the evidence of indefensible inequalities, the twenty-first-century corporation faces a crisis of legitimacy. Today the public hates the producers even as it laps up the products. And, as I shall describe all too graphically, the managerial proponents of shareholder value often ended up destroying not only shareholder value but also the very businesses that their abler and better-motivated predecessors had created.

Both the intellectual origins and the practical application of these approaches, promoting individualism and emphasising shareholder value, come from the United States. But the influence of these ideas has been global. Business operates internationally, but all businesses are subject to the laws, regulations, customs and societal expectations both of the country in which they are registered or incorporated and of the countries in which they operate. It should hardly be necessary to say that these laws, regulations, customs and societal expectations differ from country to country. But it is necessary to say that they differ, because so much of what is written about business fails to recognise that both the legal duties and the expected behaviour of company directors and executives depend on where the company is based and where it is doing business. The relevant differences are not just those between the US and Russia, or Canada and Japan, but also between Delaware and California and – I shall give these countries specific attention – between Britain, Germany and the United States. And the differences and similarities between these jurisdictions and those of Asian societies are likely to be crucial to the development of the twenty-first-century corporation.

This is a book written by a British economist, and I offer no apology for the fact that much of my own business experience and knowledge is derived from the UK. Britain had a central role in the emergence of modern finance, modern law and modern institutions, and engaged in a colonial project that spread these developments around the world. The Industrial Revolution began in the UK, and the most influential business texts of the eighteenth and nineteenth centuries – Adam Smith’s Wealth of Nations and Karl Marx’s Capital – were written close to my boyhood home in Edinburgh and my current office in London respectively. Economics was the foundational discipline for an understanding of business for both Smith and Marx – although, as I will explain, modern economics has contributed less to an understanding of modern business than might reasonably have been hoped.

Still, if one were to seek twentieth-century works of similar significance, one would have to look to the United States. Perhaps to Chandler’s Strategy and Structure, noted above, or to The Modern Corporation and Private Property, in which Adolf Berle and Gardiner Means first documented the transition in American business from the robber barons of the Gilded Age to the managerially controlled businesses of the twentieth century.³

If any individual exemplified that transition it was Alfred Sloan, the General Motors executive who was perhaps the greatest businessman of the twentieth century. As Sloan and his Chief Financial Officer, Donaldson Brown, approached retirement, they were anxious to ensure that the lessons that they had learned would be preserved for subsequent generations. Brown hired Peter Drucker, one of the numerous Viennese intellectuals who had fled the increasingly Nazified Europe for the United States, to tell the story.

The result was a business classic, Concept of the Corporation, which made Drucker the first management ‘guru’.⁴ Sloan and his colleagues did not like the book, and publishers were sceptical that a book about business would sell. How wrong could they have been! Seventy-five years later Concept of the Corporation is still in print.

And every bookshop now has a section devoted to business books. Mostly, they fall into one of two categories. One type has titles such as ‘FlexagilityTM – the Secret of Delighting Customers and Raking in Enormous Profits’. You will find them in airport bookstalls, not far from the self-help manuals. Their authors make a living, often a rewarding one, from consultancy or the delivery of ‘motivational speeches’. The contents of these volumes are unlikely to engage your attention through even the shortest flight. Another genre comprises books with titles like ‘Fleeced, Poisoned and Spied Upon – How Capitalism is Fuelling Inequality, Damaging our Well-Being and Destroying the Planet.’ These are written for people who welcome confirmation of what they think they already know.

This book fits neither of these categories. I hope that thoughtful executives – and there are many – will find something of interest in it, but I do not set out to offer tips for ambitious young managers. My target audience is people who would never normally pick up a business book – people who read popular science or history, but might welcome an intellectually serious, even sometimes challenging, approach to a subject with whose detail they are unfamiliar. I hope this book might stimulate students and young people who might be thinking of a business career or would just like to learn more about business. I would like to think they might read it and even enjoy it – and perhaps conclude that a career in business has more to offer than just financial reward.

1. Mark 2:22. The original King James Version recites the more familiar ‘And no man putteth new wine into old bottles: else the new wine doth burst the bottles, and the wine is spilled, and the bottles will be marred: but new wine must be put into new bottles.’ The New King James Version is more faithful to the original – and makes more sense. The practice in those times was to use animal skins to store liquids, which came under pressure during fermentation. ↩︎
2. Chandler, A. D., Strategy and Structure: Chapters in the History of the American Industrial Enterprise (Boston, MA: MIT Press, 1962). ↩︎
3. Berle, A., and Means, G., The Modern Corporation and Private Property (New Brunswick, NJ: Transaction, 1932). ↩︎
4. Drucker, P., Concept of the Corporation (New York: John Day, 1946). ↩︎