Organizations and Markets

Corporations Are People Too

25 January 2010 at 2:39 pm cpirrong 2 comments

| Craig Pirrong |

Legally, in some respects, anyways. That was a key issue in the recent Supreme Court decision re McCain-Feingold (see Dick’s post). I don’t have a lot to say about the specifics of the decision, as campaign finance law is way too arcane for me. Suffice it to say that I am inherently skeptical about any regulation regarding elections designed by incumbent politicians. People yammer about conflicts of interest all the time, but there’s a colossal one for you.

I just wanted to make a quick point about a debate between Stevens and Scalia carried out in the opinion and the dissent. Stevens noted that the Founders were deeply skeptical of corporations. Indeed so. Scalia noted that there are so many corporations today. Also true. The interesting question is how we got from A (Stevens) to B (Scalia).

The story is told in the North, Wallis and Weingast natural-state book Violence and Social Orders I’ve blogged about several times over at Streetwise Professor, mostly in the context of Russia. The relevant chapter is primarily based on John Wallis’s work. The basic story is that hostility to corporations — reflected very well in Adam Smith’s Wealth of Nations — was due to the fact that historically, English corporations were created by the crown, and were essentially very profitable favors provided to the politically connected. They were, in NWW terms, part of the “closed order” of the natural state, in which access to certain contracting forms was limited to a select powerful few. This animus towards corporations was inherited in the United States, but in the early years of the 19th century, state legislatures confronting issues associated with the financing of new infrastructure turned the corporate form into a prop of an open-order system in which this contracting form was made available to all. Rather than limit the right of incorporation to an elite, they made it available to everybody. The system changed from one in which legislatures had to grant every incorporation, to one in which pretty much anybody could incorporate if they met a set of general, universally applicable requirements. Hence, the proliferation of corporations.

Thus, Stevens was historically right, but his inference was wrong. The kind of corporation that Adam Smith and the Founders detested was a quite different from the modern corporation that developed in the 19th century. The name was the same, but the entire conceptual and legal basis for corporations old and new were completely different. Indeed, almost inversions of one another. The transformation of the corporation from a creation of the closed order to an essential element of the emerging open order explains the empirical phenomenon that Scalia cited.

This illustrates one of the dangers of assuming that the meanings and connotations of words in the 18th century (or any other time) remains unchanged to this day is quite dangerous.

Entry filed under: Business/Economic History, Corporate Governance, Former Guest Bloggers, Institutions, New Institutional Economics, Public Policy / Political Economy.