Activist management: Henry S. Dennison's institutional economics.

Author:Bruce, Kyle

Henry S. Dennison (1877-1952) was a Boston paper-products manufacturer (1) who, in a career spanning some fifty years, was a devoted exponent of scientific management, a pioneer advocate of unemployment insurance, and a leading corporate liberal of the interwar period. He lectured at Harvard Business School and was active in Harvard academic life, maintaining firm contacts with his friends Edwin Gay (in the Business School), Felix Frankfurter (in the Law School), and John Kenneth Galbraith (in the Department of Economics). He was also an adviser to the Wilson, Harding, Hoover and Roosevelt administrations. In both his private and public life, Dennison demonstrated an activist concern with the rationale and character and with the control and management of business enterprise, as well as with the impact of the capitalist business cycle on broader society. He sought to deal with these issues in his role as a business leader and public figure, as a practitioner or "doer." But he also did so as a theoretician or "thinker," in the disciplines of both economics and management. His thought was published widely in economics, management and other social science journals, and in the five monographs he published, two of which were with John Kenneth Galbraith. It was the tension between Dennison's practice and his theoretical bent, viz. his praxis, which shaped his thought and led him to embrace institutionalism.

Though piecemeal efforts have been made to chronicle aspects of Dennison's thinking, (2) these snippets of insight have usually been part of a wider story dealing with more general and wide-ranging topics of interest to economic, business and labor historians rather than students of institutionalist economic thought. There has been no serious attempt to systematically explore the substantial opus of thought, both published and unpublished, that Dennison left in his wake. This paper seeks to amend this oversight and undertake an overview of Dennison's thought in order to pull him out of relative obscurity and discern how his thinking on the nexus between economics and the "science" of management evolved from 1900 through 1952 and led him to embrace institutionalism. As a product of turn-of-the-century developments in economic and management thought, Dennison was deeply influenced by, and made a significant but largely unheralded contribution to the institutionalist approach to economics.

Though much of his thought in these areas was more a reflection of the intuition and "hunch" of a businessman and business opinion in general than it was highly original or pure theory, his organizational economics notwithstanding, Dennison's contribution to institutionalist economic thought can also be gauged from his influence on recognized theorists of the time and on public policy in general. Lionel Robbins once suggested that contributions to scientific research programs should be assessed according to their originality and the extent to which they influence the thinking of others in the field. In this manner, Dennison satisfies both criteria: he was an original thinker and he influenced others with his thought. For instance, Bruce (2000) demonstrated that Dennison played a key role prodding the young Galbraith to defect from mainstream orthodoxy and embrace the ideas of Keynes' General Theory before their wider acceptance at Harvard; and that Galbraith's embrace of more heterodox ideas regarding the corporation and functioning of the industrial order were planted in his mind as a result of his relationship with Dennison. Further, Bruce and Nyland (2001) showed that in his role in the interwar business stabilization movement and through his work on business cycles, Dennison made a lasting impression on Wesley Mitchell, with whom Dennison corresponded in the first half-decade of the 1920s.

Here, I complement the existing work chronicling the important yet unheralded contribution to institutional economics made by Dennison and suggest that in his concern with removing absentee ownership from his family company and in his constant questioning of mainstream economists' conception of "economic man," Dennison's thought was very much akin to Thorstein Veblen's. I also demonstrate that Dennison was one of the first management or organizational economists concerned with both the rationale and inner logic of the business firm and that he laid much of the groundwork for more recent work in the evolutionary and competence theory of the firm. Finally, I demonstrate that John R. Commons, who visited Dennison's family company, applauded the latter's contribution to the better understanding of labor economics and industrial democracy and was so taken with Dennison and his company's practice, that he placed him at the end of an intellectual lineage stretching from Marx to Veblen, from Veblen to F.W. Taylor, and from Taylor to Dennison in terms of their treatment of Commons' notion of "managerial transactions" in the context of the labor process.

Management or Organizational Economics: the Affinity with Veblen

Dennison was part-and-parcel of intellectual developments in economics and management at the end of the nineteenth and into the twentieth century, that seriously challenged the mainstream or orthodox view of the economic world. Today in the twenty-first century, the evolution of Dennison's economic thought appears to have foreshadowed a similar challenge being staged at the end of the last century that encapsulates a growing interest in history, institutions, business organization, and a greater dialogue between economics and management scholars engendering a better understanding of business firms and the management of resources, both human and non-human. In this context, Dennison made original and influential contributions to the institutionalist field in areas of contemporary practical importance. These areas included his managerial and organizational economics; his contributions to the "profession" of business management; his insights into organizational psychology and human motivation; and his labor economics and human resource strategy.

Dennison's most important and enduring contribution to institutionalist economic thought was his management or organizational economics. He was deeply concerned with the dynamic intramural of the corporation and the power and psychological relationships between the economic actors at play in these organizations. In fact, his status as a manager and an economic analyst trying to pry open the "black box" of the business organization shows Dennison to be a close ancestor of recent organizational and institutionalist economists; particularly those in the evolutionary tradition, who have attempted to generate a greater "conversation" with the discipline of management as a means of better understanding of firm heterogeneity and management behavior. In this context, Dennison personified the interconnectedness of economics and management. Like the founding fathers of institutional economics, he recognized at the turn of the last century, what many economists are coming to grips with today: that is, that institutions, organization, planning and coordination, in short, management, is a crucial factor in value and wealth creation (Lazonick 1991).

Beginning with his implementation of company policy, Dennison's management economics centered initially on his concern with corporate structure: removing absentee ownership and financier control over company policy, and replacing them with an internally selected echelon of "technocrats." It is here that Dennison's thinking resembles that of Veblen and to some extent anticipates Galbraith. Dennison joined his family's firm in 1899, and following his promotion to Works Manager in 1906, he was made aware of the fact that financiers/investors were primarily interested in dividends, not in management, as long as returns were forthcoming. Workers and managers, on the other hand, whose continuing performance determined organizational effectiveness could be motivated to better performance by increasing rewards. As he argued:

The investor's service is performed in a single act but after it is once performed it cannot be stimulated to a greater or less efficiency by a fluctuating return. Services of the workers on the other hand, whether of managers or managed, is a continuing act necessarily varying in effectiveness from day to day in response to a great complex of influences, physical, physiological, and worse. Such services are, therefore, peculiarly apt to be spurred by a fluctuating reward. (Dennison 1920, 160) In addition, the managers of Dennison Co. feared that control of the company might fall into the hands of absentee stockholders. As a consequence, Dennison's organizational reform program included the twin objectives of removing absentee ownership control over company policy and incorporating "active managers" into a collective that would eventually assume rights and powers of full ownership.

This experimental Management Industrial Partnership program meant that the Dennison company's active managers exercised an increasingly independent, functional ownership of the company. The shares of absentee stockholders were reclassified as non-voting stock so they could no longer ratify or thwart management decisions. At the same time, all managers were given yearly bonuses based on salary levels, paid in the form of common stock. Consequently, they became part of an enfranchised stockholder elite group of "technocrats" exercising a strong voice in molding and implementing company policy. In this pursuit of industrial democracy, Dennison's ambition was to build an expert managerial "team" to collectively own and operate a self-financing business. (3) Interestingly, as McQuaid (1975, 84) observed,

[i]n an untheoretical style, Dennison had created a program which closely approximated Thorstein Veblen's "Soviet of Technicians." Like Veblen, Dennison equated...

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