How MIT's Football-Loving President Beat Back Socialism by Reinventing Entrepreneurship

And other tales from the fin de siècle struggle over the future of capitalism

Welcome to Making History, a newsletter about how historians make history. Also sometimes a newsletter, as in this series on the origins of “leadership,” that doesn’t so much go behind the scenes of history-making as it offers a preview of some of the latest arguments and findings in the field. For the beginning of the series, go here. And to subscribe, go here. It’s free!

If Woodrow Wilson and the Princeton alumni who backed him had one great target, as we saw in the last post in this series, it was the vision of socialism propounded by Eugene Debs, the socialist presidential candidate from 1900 to 1920 (and the great hero of Bernie Sanders, who first made a documentary about Debs in 1979). In this battle, Wilson and company consistently had the political system, the legal system, and the full force of state and paramilitary violence on their side — typified by the jailing of Debs during the second Wilson Administration in 1918. Why, then, worry so much about the struggle for legitimacy in the world of ideas and culture? The intellectual history of the late nineteenth and early twentieth century offers some answers. The period when Wilson came of age and rose to power, witnessed the ascent of two powerful intellectual developments that threatened to use claims of science and expertise to overthrow capitalist property relations. These were marginalist economics and systematic management (remembered but hardly reducible to Frederick Winslow Taylor “scientific management”).

In the 1870s, a group of young economists developed a theory that appeared to discredit both central elements of socialism, the labor theory of value, and of capitalism, the rewards of entrepreneurship. This was the “marginal revolution.” Traditional economics, whether in the spirit of Adam Smith or Karl Marx, focused on supply. The creation of value was found in labor, or the move by an entrepreneur to employ labor, and market demand determined the number of valuable widgets to be produced, not those widgets’ value. This was the “natural price” for goods. The marginalists, by contrast, focused on demand. They looked at how consumers’ desires at the margin of their ability to purchase different products determined those products’ value and thus how much labor and how many materials were brought to bear in production. Instead of the “natural price,” this was the “market price.”

These are rather abstract distinctions. But there were important consequences. In the marginalist world, the key to the creation of value lay in the hands of consumers. (For more on the marginalist theory of value, see this extraordinary essay by Corey Robin.) Production decisions became merely a technical matter of finding where the marginal cost of supply and the marginal value of demand come into accord, or “equilibrium.” Value creation dropped away from workers; value creation also dropped away from entrepreneurs. For the marginalists there was little room left for the entrepreneur except as a glorified middle-man, who like other laborers deserved to earn no more than the hours put in. Profit, in short, disappeared. “In a state of equilibrium in production,” Léon Walras, the most celebrated early marginalist, observed, “entrepreneurs make neither profit nor loss.”

Léon Walras, co-founder of the marginalist revolution, no date

It is no accident that the central intellectual metaphors in marginalism came from contemporary physics, or that two of the founders of marginalism, Walras and William Stanley Jevons, trained as engineers. The very ideas of marginalism emerged alongside and reinforced the views of the engineers who increasingly administered and analyzed the workings of the period’s rapidly growing companies.

While marginalism made the entrepreneur appear as a vestigial economic appendage, the systematic management tools developed from the 1870s onward made the entrepreneur appear as an organizational supernumerary. The champions of managerial systemization may have promised the owners of firms technocratic methods to control the workforce. But these engineers-turned-managers also threatened to eliminate the need for ownership entirely. This was what one of the spokesmen of scientific management, Henry Gantt, dubbed “the engineer’s way of eliminating the profit system.” Vladimir Lenin himself was something of a fan. Reflecting this danger, between 1870 and 1900 the proportion of engineers in top management in the largest manufacturing firms doubled from 9 percent to 17 percent.

In short, Wilson wasn’t wrong when he suggested, as discussed in the first post in this series, that the interests of ownership were under threat if the young men taking the reins acquired technical knowledge but no ideological armory. As the former engineer Frederick Winslow Taylor formalized and popularized the regime of systematic management in the 1900s and 1910s, and as engineers found themselves widely celebrated in popular culture and began to enter socialist municipal administrations, the engineer’s favorite virtue, efficiency, increasingly encroached upon the prerogatives of ownership.

The engineer as cultural icon: Cecelia Tichi, Shifting Gears: Technology, Literature, Culture in Modernist America (Chapel Hill: University of North Carolina Press, 1987).

Thorstein Veblen, a political radical, may have surprised few by describing owners as “parasitic” on the work of engineers. But no less than Frederick Winslow Taylor, a vociferous opponent of the labor movement, laid the chief blame for business inefficiency at the foot of management.

Engineers' obsession with efficiency threatened the highest form of waste: ownership. Images from Cecelia Tichi, Shifting Gears: Technology, Literature, Culture in Modernist America (Chapel Hill: University of North Carolina Press, 1987).

One progressive business heir and former Harvard undergraduate economics student, Henry Dennison, actually implemented a plan at his family’s company in 1915 that came close to expropriating the stockholders, giving all profits above a minimal dividend to the firm’s technocratic managers. This was the “explosion of the atom of property” that New Dealers would later identify: the separation of ownership from control, and the destruction of “the very foundation on which the economic order of the past three centuries has rested.” The technocratic ambitions of the engineers and their allies would not peak until the 1920s and 1930s. But their expansive ambitions could already be seen in the 1890s and 1900s — along with a backlash among their opponents.

If engineers trumpeted reason, then managers and college administrators celebrated emotion and intuition. If social scientists called for “social engineering” along with the decline of “personality” and the “hereditary principle,” then managers and college administrators celebrated personality and family firms more than ever. The engineers and their colleagues in the economics department might focus on “utilitarian motives,” Harvard’s president argued, but true “efficiency” was the product not only of expertise but of “human passions.” As the claims of expertise rose in prominence, Woodrow Wilson revised his earlier call to combine “leadership” with “expert organization.” Instead, he now insisted, “there is no such thing as an expert in human relationships”; human life, “shot through with passion,” could only be perceived by intuitive “spirit” and emotional “sympathy.” Too great a belief in expertise was a danger to true leadership.

Such statements were more than mere talk. In business, executives in the early twentieth century pushed back against attempts by engineers to systematize or eliminate their positions. Management, these figures declared, was inherently non-standardizable, requiring rare personal initiative and masculine aggression. On the shop floor, sure, expert input on how to increase productivity might be helpful. But the higher one went up the management tree, the less relevant expertise became. Instead, these men advocated for an intuitive kind of “impressionistic management,” as one scholar characterizes this approach. Rather than “rationality,” the province of science, managers laid claim to intuitive “judgment.” And unlike the engineers who could be hired, fired, or ignored at will, owners and executives didn’t have to win the argument to win out.

Meanwhile, at the largest companies, families who retained controlling ownership chose to give up some of their own wealth by paying non-family executives far more than their marginal cost in salary. By providing executives with substantial ownership stakes, these families effectively turned executives into heirs. The atom of ownership and control would not explode, the idea went, if those in control, the new executives, joined the family of property.

In the press, entrepreneurs became anything but careful calculators of risk, marginalist coordinators of production who passively responded to the dynamics of the market by reducing production in one area and increasing it in the other. Instead, entrepreneurs and owner–executives became above all men of great “energy” and “initiative.” It was these virtues, not rationality, administrative expertise, or scientific knowledge, that allowed these men to do what no one else could: face down “uncertainty.” The latter, unlike the engineering problem of risk, was a realm precisely defined by the inability of science to take its measure. In the minds of managers, owners, and their friends in the academy, only a small fraction of society could ever master the terrible anxieties of a radically uncertain world. This was the black beast scientific socialism could never slay — a denial of human capacity later given the imprimatur of science by Mises and Hayek’s critiques of economic planning — and the danger that only men endowed with a very special quality, “leadership,” could face. The remainder of the cowering population would then live gratefully under the protection of their economic lords.¹

No one better illustrated how these tendencies came together than Francis Walker, the most internationally prominent US economist of the latter quarter of the nineteenth century, the first president of the American Economic Association, and the president of MIT from 1881 to 1897. The son of a New England textile manufacturer and a participant in early undergraduate athletics at Amherst in the 1850s, Walker popularized the term “captains of industry” in economic theory as a way to describe the entrepreneur. “Despots of industry,” he explained, came closer to his conception.

Francis Walker as president of MIT, 1897.

Walker’s entrepreneur possessed abilities so unusual that he could never be compensated like other workers. These men were guided by “subtle instinct,” not rationality, boasting a “power of insight” akin to “foresight.” The entrepreneur’s work was defined not by calculation but “the courage to venture” and to face a “great degree of uncertainty”; his leadership qualities and personality were such that his subordinates “acquire vigor from the contact” in the same way that “great captains inspire their armies.” Because such capacities were so distinct, entrepreneurs amounted to an entire separate “class” in modern society.

This was Walker’s central claim: just as labor and capital each had their own claim on the economic surplus, so, too, he argued, the entrepreneur deserved his own incontestable share. The profits of Walker’s entrepreneur could never be limited by “the normal supply price of the ability and energy required for managing the business,” as one leading marginalist later argued. In Walker’s view, the entrepreneur not only deserved an outsized share of any profits; his entrepreneurial capacity, the extraordinary ability to exercise leadership amid uncertainty, also gave him the right to rule over all who required a sense of predictable security to survive. Walker’s entrepreneur, like the feudal lord, was simply “masterly” — akin to the “seigniors under the Old Regime” — and he should be paid in rents, rather than wages, accordingly.

In addition to his work on entrepreneurship, Walker was something of a nineteenth century dynamo: a major force in the creation of the Native American reservation as a kind of Jim Crow system to separate and purify the races; a significant exponent of Anglo-Saxonism and immigration restriction; and a champion of eugenics for the “wholesome surgery and cautery” of the body politic. Over the course of his career, Walker also moved from early faith in laissez-faire to support for anti-trust, though less for the sake of workers or consumers than to protect the lively instincts of new entrepreneurs from the “dead hand” of the shareholder corporation.

Walker’s beliefs about undergraduate education were of a piece with both his ideas about entrepreneurship and his larger worldview. Unlike the leaders of the antebellum college, and like the other leaders of the new research universities, Walker insisted that ethics had no place in scholarship and that the creation and transmission of expert knowledge was the institution’s mission. Yet this did not mean that higher education lacked moral significance. Walker believed that the fundamental premise undergirding education at MIT was “the essential manliness of young men.” It was their masculinity that enabled students to use the study of science to develop “intellect and character” and become “resolute, exact, and strong.” The study of the humanities, meanwhile, endowed students with the personal stature to complement their scientific expertise. “A great engineer must be a great man,” Walker explained.

Along with the humanities, Walker, an avid fan of football, cricket, and rowing, emphasized athletics. He began his presidency at MIT by renovating the gym and celebrating what he declared to be a shift among the students from a “morbid” view of the body to a new “muscular” era. One MIT football team even won a league championship. Competitive sports, Walker argued, bred “steadiness of nerve” and “quickness of apprehension”; football, he believed, constituted the perfect training for those destined for command. College athletics provided just those qualities of intuition, initiative, personality, and fortitude amid uncertainty, in a word, leadership, that comprised his ideal captain of industry, the entrepreneur.

1. Although Frank Knight’s work is the source for the canonical distinction between “risk” and “uncertainty,” with the former quantifiable through statistics and the latter fundamentally beyond quantification, the idea that the profits of entrepreneurship are due to a distinctive capacity for facing an unpredictable future is much older. In addition to Walker’s work, see Frederick B. Hawley, “The Risk Theory of Profit,” The Quarterly Journal of Economics 7, no. 4 (1893): 459–79; Herbert Davenport, The Economics of Enterprise (New York: The Macmillan Company, 1913). Long before these writers, the centrality of uncertainty to entrepreneurship and its kinship to feudal mastery were recognized in the eighteenth century by Richard Cantillon. These ideas, however, largely dropped out of political economy until the late nineteenth century. The marginalists, for instance, occasionally noted the importance of uncertainty but left the concept undeveloped. Donald A. Walker, “Walras’s Theory of the Entrepreneur,” De Economist 134, no. 1 (March 1, 1986): 1–24; Robert F. Hébert and Albert N. Link, A History of Entrepreneurship (New York: Routledge, 2009), 43.