The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems



    Search for more papers by this author
    • Harvard Business School. Presidential Address to the American Finance Association, January 1993, Anaheim, California. I appreciate the research assistance of Chris Allen, Brian Barry, Susan Brumfield, Karin Monsler, and particularly Donna Feinberg, the support of the Division of Research of the Harvard Business School, and the comments of and discussions with George Baker, Carliss Baldwin, Joe Bower, Alfred Chandler, Harry and Linda DeAngelo, Ben Esty, Takashi Hikino, Steve Kaplan, Nancy Koehn, Claudio Loderer, George Lodge, John Long, Kevin Murphy, Malcolm Salter, René Stulz, Richard Tedlow, and especially Richard Hackman, Richard Hall, and Karen Wruck on many of these ideas.


Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increasing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.