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of information. While it is a collection of Jensen’s journalwritings (often with co-authors), it has a remarkable cohesion.More interestingly, it demonstrates his interest in asking theright questions to further our understanding of organizations.

The opening chapter is a lucid explanation of the founda-tional assumptions of economic science. It is followed by adefense of the use of economic incentives to induce desirablebehavior. He defends his economic model against charges thatit excludes any role for altruism, and that economic man ispurely selfish. The defense is a simple and effective one: fewhuman beings are purely altruistic, and economic incentivescan motivate them to behave as if they were. In response tocharges that there is evidence that man is not always a rationalmaximizer, Jensen hints at his current scholarly interests—studies of the operation of the human brain. He theorizes thatnon-rational behaviors may be founded in the biological andchemical structure of the brain, which are well beyond therealm of economics. He is clear that economics only providesa general model of human behavior, but that it providesgreater predictive power about human behavior than anyother social or biological science can presently offer.

These general defences of economists’ methodology arefollowed by a specific discussion of how inquiry proceeds ineconomics. In Jensen’s words, it is about ‘the relation betweenpositive and normative theories, the importance to the re-search effort of the choice of tautologies and definitions, thenature of evidence, and the role of mathematics.’ Tautologiesare useful at early stages in research, in part because they canidentify important issues. From this, researchers can proceedto use data to develop propositions that can be tested, and thiscan lead to theories. Jensen proceeds to illustrate how theorieshave been developed from definitions and tautologies in devel-oping agency theory. He then proceeds to a discussion of theforms of evidence available in social science research, aspreviously noted.

Information, like any other good, is costly to acquire, andusers can be expected to economize in its acquisition andapplication. Because one frequently cannot assign a specific‘cost’ to the acquisition of information, or a monetary value toits possession, this area of economics does not lend itself toformal mathematical modeling in the same way as do moretraditional subjects of investigation by economists. Sometimessuch neat models seem to abstract so far away from thegrittiness of everyday existence as to become uninteresting tomost readers. The use of such techniques in microeconomicshas led to divisions within the profession over their properrole. On the one hand, such models can have great explana-tory power when applied to real-world problems. On the otherhand, if one believes that scientific knowledge is provisional,then hypotheses must be subjected to empirical testing. And incases where the data is ‘soft’, rather than quantitative, testingbecomes far more problematic. Jensen, along with othersinvolved in the new institutional economics, has recognizedthat there are real limits to the explanatory power of formalmodels. Instead, his project, as well as those of others in thisfield, has been inductive: to examine the data presented by thehuge variety of organizational forms used to pursue economicactivity, and to infer some principles from these observations.The grand principle inferred is that decision rights are mostefficiently allocated to those who can acquire specific informa-tion at the lowest cost. This is subject to the grand constraint:that decentralization of decision rights incurs costs imposed by

the inconsistent (and often selfish) objectives of the decision-makers—agency costs.

The remainder of the book is taken up with the subject ofagency costs and their role in explaining both compensationand capital structures of firms. The first of these chapters(with William H. Meckling) lays the theoretical foundation, bydefining agency costs. Two chapters (with Eugene Fama)describe the relationships between forms of ownership andagency costs and the location of information within firms.They address the age-old issue of separation of ownership andcontrol, and specify more fully where ownership and controlare likely to be united. Firm wealth is maximized where agencycosts are high by locating decision rights (control) and residualclaims (ownership) with those individuals who have a particu-lar knowledge that is essential to the firm’s success (e.g.partners in law, medical and accounting practices).

The three chapters on management compensation (withGeorge P. Baker and Kevin J. Murphy) contain the onlydiscussions of an issue with popular interest. The essentialmessage for popular critics of high levels of compensation isthat how much is paid is not nearly as important as how it ispaid. Evidence is presented that overall levels of executivecompensation may be too low rather than too high, as popularcritics suggest. Jensen et al. argue that it is essential formanagers to be compensated primarily for their contributionsto firm wealth. What these chapters establish is how unrelatedmost management compensation is to performance. Becausethis evidence conflicts with the agency theory of the book, itraises a serious challenge for the entire theory. The bookfrankly admits the failure of current theory to explain thisdivergence (chapter nine). One antidote for weak relationshipsbetween management compensation and performance is themanagement buyout (MBO), which grew in popularity duringthe 1980s and continues, with leveraged buyout firms, to servea role at firms with the most extreme management problems.MBOs require managers to invest most of their assets in theequity of highly leveraged firms, providing managers with theprospect of extreme variations in their wealth, depending onfirm performance.

As firms return to public markets from the private owner-ship of MBOs, Jensen’s work implicitly predicts that manage-ment compensation will be more directly related to share-holder welfare. Financial firms have, in fact, been devisingmeasurement and compensation systems for the post-MBOworld of the kind Jensen’s work predicts.

WILLIAM J. CARNEY

Emory Uni6ersity,School of Law, Atlanta,

GA 30322-2770,USA

MORGAN: AMERICAN FINANCIER, by Strouse, J., NewYork: Random House, 1999, xv+796 pp., $34.95 (cloth)

Jean Strouse’s Morgan inevitably invites comparison withChernow’s (1990) National Book Award-winning House ofMorgan. Strouse does not fall short of the mark. Morgan is anextraordinarily accomplished contribution to the somewhatrevisionist modern literature on the era of the ‘robber barons’,especially so for someone whose only previous work, a

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biography of Alice James that won the Bancroft Prize, waslight years distant from the arcane world of investment bank-ing. Whereas Chernow told the story of the institution, fromits nineteenth century London origins under George Peabodyto the middle of the twentieth century’s ‘decade of greed’,Strouse gives us an intimate portrait of J. Pierpont Morgan,the man who in many ways personified the Gilded Age.

Morgan actually has more in common with Chernow’s(1998) recent biography of John D. Rockefeller, Sr. (Shughart,1998) than with his monumental history of J.P. Morgan & Co.No one can read these two engrossing narratives withoutconcluding that much of what passes for conventional wisdomabout the men who built the great industrial trusts in thedecades following the Civil War is indeed ‘myth’ (Folsom,1991). Morgan, Rockefeller, and their fellow capitalists consol-idated productive assets, exploited economies of scale, and cutcosts relentlessly. Andrew Carnegie, for example,

‘built big, efficient, technologically up-to-date [steel]mills and ran them at full capacity, which kept hisproduction volume high and his costs low . . . With thelowest costs in the industry, he could ‘‘scoop’’ the mar-ket by underselling his rivals anytime he wanted. Al-though government tariffs protected the new industry,Carnegie told [Pierpont’s father] Junius proudly that‘‘even if the tariff were off entirely, you couldn’t sendsteel rails west of us’’ ’ (p. 139).

During a time of secular deflation and remarkable productiv-ity gains, the output produced by great trusts expanded morerapidly than that of the economy as a whole and their pricesfell faster than did the general price level (DiLorenzo, 1985).Consumers clearly benefitted from these developments. Theonly ones to be hurt by the emergence of Carnegie Steel,Standard Oil, and other ‘huge, low-cost, high-volume enter-prises’ (p. 154) were the owners of the smaller, less efficientfirms who were either unable or unwilling to take advantage ofthe new production methods and to exploit the new marketsbrought within economic reach by an unprecedented boom inrailroad construction—‘75,000 miles of new track were laid inthe 1880s, more than in any previous decade anywhere in theworld’ (p. 195).

Because the railroads were the greatest demanders of capitalof the day—‘the Pennsylvania Railroad was the largest privatecompany in the world by 1865, with thirty thousand em-ployees, 3,500 miles of main track, and a capital investment of$61 million’ (p. 131)—Morgan devoted much of his attentionto financing that revolutionary all-weather transportationmode. Because equity markets were thin, the railroads’ capitalrequirements were met by the issue of bonds whose value, at atime when annual company reports and independent audits offinancial statements were unheard of, depended heavily on thereputation of the sponsoring bank. Morgan’s success, there-fore, rested on his single-minded attention to the interests ofinvestors who ‘regarded the Morgan name on issues of stocksand bonds as a warranty’. Ultimately, ‘his power came notfrom his own wealth but from a record that led other bankersand industrialists to trust him’ (p. 5).

Railroad finance presented Morgan with daunting chal-lenges. With huge capital requirements for laying track, pur-chasing rolling stock, and acquiring rights of way, solvencywas critically dependent on maintaining high rates of capacityutilization. With government subsidies in the form of land

grants and mail contracts providing incentives to expandoperations into new territories before there was adequatetraffic to support it, excess capacity was a chronic problem forthe roads. Heavy debt loads and high ratios of fixed tovariable costs triggered periodic rate wars and threats ofbankruptcy.

With Morgan’s blessing, the railroads first attempted tosolve the problem of ruinous competition through ‘gentlemen’sagreements’, calling upon the parties to share traffic, to refrainfrom engaging in cut-throat pricing, and to transfer freight toconnecting roads—the last of which was made necessary bythe lack of standardized track gauges. As the economic theoryof oligopoly predicts, however, these agreements always unrav-eled quickly (Stigler, 1964). Indeed, even if the parties kepttheir promises, cooperative agreements were vulnerable todestabilization by the ‘blackmail line’: ‘Extortion artists wouldlay down parallel tracks just to be bought out by an estab-lished road’ (Chernow, 1990, pp. 53–54). With periodic ratewars plaguing the industry, hopes turned to government. Somerailroad managers, such as Union Pacific’s Charles FrancisAdams, Jr, fantasized that the new Interstate Commerce Com-mission (ICC), created by the Interstate Commerce Act of1887, ‘would succeed at preventing rate wars where the roadsthemselves had failed’ (p. 257). As a matter of fact, Adamsorchestrated an organization of 22 railroad presidents underthe rubric of the ‘Interstate Commerce Railway Association’.This was headed by the ICC commissioner Aldace Walkerwho resigned his regulatory post to lead the organization,which ‘promised to maintain stable rates, allocate traffic, andrefer all violations to the ICC’ (p. 260). But this too failed toresolve the industry’s problems: ‘more roads defaulted duringthe 1890s than at any other time in American history’ (p. 320).

‘Morganization’ was the next solution. Competing roadswere consolidated under common ownership, ‘fixed railwaycosts were slimmed, . . . creditors were forced to swap theirbonds for ones with lower interest rates’ or for preferred stock,and, with Morgan partners placed on the consolidated compa-ny’s board of directors, road management was placed underclose supervision. Eventually, ‘some thirty-three thousandmiles of railroad—one-sixth of the country’s trackage—weremorganized’ (Chernow, 1990, p. 67). However, while ‘tightsupervisory control’ proved ‘far more effective at promotingthe ‘‘wise development’’ of railroad properties than any othermeans the Morgans had tried’ (p. 253), morganization was avictim of its own success. ‘Steadily decreasing transport costscombined with intense competition for traffic and an overalldecline in prices to bring passenger rates down 50 percentbetween 1850 and 1900. Freight charges fell even further:railroad freight revenue went from 1.88¢ per ton mile in 1870to 0.73¢ by 1900. These declining revenues heightened thecompetition Morgan was trying to control . . . ’ (pp. 256–257).

A similar substitution of cooperation for competition wasthe hallmark of the methods Morgan later applied to Interna-tional Harvester, US Steel, General Electric and the othergreat enterprises he helped to finance. Morgan, like John D.Rockefeller, Sr, ‘advocated a kind of managed competition, inwhich the managing was done not by government bureaucratsbut by experienced professionals who understood the complex-ities of high finance—in other words, by him’ (p. 6). Speakingof Morgan’s methods as they applied to the steel industry,George Perkins, president of New York Life and later aMorgan partner, asked ‘What is the difference between the US

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347BOOK REVIEWS

Steel Corporation, as it was organized by Mr Morgan, and aDepartment of Steel as it might be organized by the Govern-ment?’ (Chernow, 1990, p. 110). The answer, of course, is thatMorgan’s industrial consolidations were voluntary, whereasgovernment-managed cartels are inherently coercive. Morganmight have been able to supervise the business affairs of thecompanies under his financial control, but he could not con-trol competition. US Steel was Morgan’s masterstroke: ‘itwould control nearly half of America’s steelmaking capacity,and produce more than half of its total output—7 million tonsa year’ (p. 404) and it would create ‘real value for investors,earning $60 million in net profit between March and Decem-ber 1901, and $90 million in 1902’. However, US Steel’s stockwas outperformed by that of its major competitor, Bethlehem,over the next quarter of a century (p. 408). Morgan was alsocapable of making huge blunders. His attempt to cartelizeAtlantic shipping by organizing the International MercantileMarine around the White Star Lines was nearly stillborn whenthe British government paid White Star’s chief rival for pas-senger service, Cunard, not to join by heavily subsidizing theconstruction of the Lusitania and Mauritania (p. 476), andsank forever when White Star’s Titanic went down.

Strouse interweaves fascinating accounts of Morgan’s busi-ness ventures with the story of his personal life. Unlike manyof the ‘ ‘‘new’’ men from more modest backgrounds who werebuilding America’s corporate commonwealth and makinglarge fortunes’ (p. 142), Morgan enjoyed a privileged child-hood. His father Junius’s successful partnership with GeorgePeabody supplied the wherewithal for European educationand travel, creating an appetite that stayed with Morganthroughout his adult life. Pierpont’s foreign excursions—Egypt was a favorite destination—were annual events, oftenkeeping him away from 23 Wall Street for months at a time.But privilege had its price. His mother was ‘depressed anddemanding’ (p. 78) and he learned from his father ‘an astrin-gent perfectionism’ (p. 84) that produced a quick temper anda lifetime of hypochondria. Pierpont’s character was furthershaped by the early loss of his first wife, Amelia (‘Memie’)Sturges, to tuberculosis, and by his subsequent marriage toFrances (‘Fanny’) Tracy, who, much like the woman espousedby John D. Rockefeller, Sr, soon became a professionalinvalid.

Morgan escaped from his loveless marriage in a successionof affairs—some platonic, some not—that were apparentlyunimpeded by the rhinophyma that grossly disfigured his nose.Although ‘he could have made more money than he did’ (p.xii), Pierpont lived well, building a series of ever more sumptu-ous yachts named Corsair (‘if you have to ask you can’t affordit’) and amassing a fabulous collection of art worth $50million at his death (Chernow, 1990, p. 158)—the total valueof his estate was put at $80 million (p. 684).

The third part of Strouse’s story is of Morgan’s central rolein maintaining the stability of the American banking system.Among other things, he helped defuse financial panics, bailout New York City, and ease the post-Civil War return to thegold standard. Ironically, it was the behind-the-scenes ma-noeuvring necessary to restore confidence in Wall Street thatsupplied populists with their most effective ammunitionagainst the so-called Money Trust. Pierpont’s attempt to de-fend himself in testimony before the Pujo committee probablyprecipitated his final nervous collapse in April 1913. Why is it,one wonders, that populist demagogues heap abuse on menwho have worked hard to accumulate wealth but are

awestruck by the scions of families who have done nothingother than inherit it?

In my view, teachers of courses in management, leadership,entrepreneurship, and business ethics should junk their text-books and insist that students read about the men who builtthe modern industrial world. Not only would some history belearned and some myths be dispelled, but students would gaina fuller appreciation for the foundations of business success—a reputation for fair and honest dealings (‘the first thing ischaracter . . . [A] man I do not trust could not get money fromme on all the bonds in Christendom’) and the dogged pursuitof efficient resource use—than could possibly be gained other-wise. Morgan should rank high on any such reading list. It isthe definitive biography of a man and his time.

REFERENCES

Chernow R. 1990. The House of Morgan: An American Bank-ing Dynasty and the Rise of Modern Finance. Simon &Schuster: New York.

Chernow R. 1998. Titan: The Life of John D. Rockefeller, Sr.Random House: New York.

DiLorenzo TJ. 1985. The origins of antitrust: an interest-group perspective. International Re6iew of Law and Econom-ics 5: 73–90.

Folsom BW Jr. 1991. The Myth of the Robber Barons. YoungAmerica’s Foundation: Herndon, VA.

Shughart WF II. 1998. Review of Titan. Managerial andDecision Economics 19: 197–199.

Stigler GJ. 1964. A theory of oligopoly. Journal of PoliticalEconomy 62: 44–61.

WILLIAM F. SHUGHART IISchool of Business Administration,

Uni6ersity of Mississippi,Uni6ersity, MS 38677,

USA

MARKETING STRATEGY AND UNCERTAINTY, byJagpal, S., New York: Oxford University Press, 1999, xvii+334 pp., $55.95 (cloth).

A book of this type is still an exception—if not a completenovelty—in the field of marketing. In it, Jagpal develops athorough and rigorous application of microeconomic analysisto selected issues of marketing strategy. Special attention isgiven to the interface with corporate finance, drawing uponportfolio theory and the capital asset pricing model (CAPM)as frameworks to explain the marketing behavior of firms withparticular financial structures.

Chapters 1 and 2 are devoted to issues of strategic pricepolicy. Uncertain expectations about demand and cost, hetero-geneous preferences, capital market risk, effects of competi-tion, information asymmetry, and multiperiod considerationsare some of the assumptions that make the treatment ofstrategies such as price bundling and price skimming morerealistic than in many other textbooks. Chapters 3 and 4 dealwith consumer behavior. Lancaster’s ‘characteristics’ model ofconsumer preference is extended to incorporate reference pric-ing theory, which itself was developed from Kahneman and

Copyright © 1999 John Wiley & Sons, Ltd. Manage. Decis. Econ. 20: 343–351 (1999)