Historical Evolution of the Employer: From Smith to Galbraith
Historical Evolution of the Employer
The Employer: A Historical Perspective
Eighteenth Century: The Capitalist Entrepreneur as Owner (Adam Smith)
During the Industrial Revolution, the individual entrepreneur emerged. According to Adam Smith, the employer functions as a handler of the means of production. The employer is defined as the subject that compromises their ability to function, and the company faces the risk assets of the business.
Eighteenth to Nineteenth Centuries: Entrepreneur and Businessman (Cantillon and Say)
Cantillon was the first person who understood the entrepreneur as a businessman, an agent who buys the means to produce and sell at a price. This is a person who assumes business risks and does not know at what price they will recover their investment. Say regarded that the value of production has to be able to pay the costs of all factors of production and generate a profit.
Nineteenth Century: The Entrepreneur as an Organizer (Marshall)
Thanks to technological advances, better salaries, and expanding markets, more capital was needed. As a single property had difficulty meeting expenses, large companies jointly funded by various business owners appeared. This led to the birth of a new figure of the entrepreneur, separating the objectives of the entrepreneur and the capitalist.
The conception of the entrepreneur changed because of the adaptation of business to social change. The capital raised was entrusted to a professional businessman. In this way, capitalism was divided among a large number of shareholders, and the entrepreneur was chosen according to their capacity. The employer faced a professional, rather than equity risk.
The business goals could be separated between shareholders, who intended to gain benefits from investment, and the business professional, who sought continuity. For Marshall, the employer is a person who also organizes, plans, and directs factors to meet needs, distinguishing between profit.
Twentieth Century: The Entrepreneur as Risk-Taker (Knight)
According to Knight, the entrepreneur is the person who assumes the risk arising from economic activity, forwards the money, and should be rewarded with a profit. There are two types of risk:
- Technical risk: if production does not work or the expected amounts are not produced.
- Economic risk: if the income is not as expected.
Therefore, the benefit justifies the risk, as the entrepreneur is putting in real money without knowing if they will recover it. Knight distinguishes two types of activities:
- The director or business professional: a person who gives orders, manages the company, and develops the role of the organization.
- The employer’s property: a person who assumes the risk and chooses the person who directs and orders the company management.
Twentieth Century: The Entrepreneur as Innovator (Schumpeter)
For Schumpeter, irrigation is not the factor explaining the profit of the entrepreneur, but innovation and technical progress. The capitalist system generates a process of technological change, and innovation in the market leads firms to innovate to be more competitive. The employer must invent and innovate until imitation, when the extra benefits will be reduced.
Twentieth Century: The Technocrat Entrepreneur (Galbraith)
According to Galbraith, economic power has moved away from people and property to organizations. Power is restricted to the so-called right or what he calls techno-structure. This power is held by managers who make decisions concerning the company, have all the information, and coordinate.
We can say that this is shared by technicians and is true in large companies, where shareholders are merely investors whose sole function is to get a return on their investment. In individual or family enterprises, small and medium enterprises, the primitive power of the capitalist or owner remains.