Introduction: Utopia Limited

On the evening of October 7, 1893, a new operetta opened to a packed house in London’s West End. William S. Gilbert and Arthur Sullivan were the titans of Victorian popular culture, with amateur musical societies putting on performances of The Pirates of Penzance and The Gondoliersfrom Brighton to Bombay. Richard D’Oyly Carte had built a special theater at the Savoy just for their works. Adding to the air of expectation, the two writers had quarreled a few years earlier, partly because Sullivan aimed higher than mere comic opera, and it had looked as if their long collaboration was coming to an end. Now they were back.

One of the themes of Utopia Limited, or The Flowers of Progress, was not an obvious rib-tickler: the limited-liability joint-stock company. That night’s operetta made fun of the idea that companies were sweeping all before them, enriching investors as they went. An English company promoter named Mr. Goldbury arrives in the exotic South Sea Island of Utopia and sets about turning the inhabitants into companies. Even babies issue company prospectuses. At one point in the final act, the King of Utopia demands, “And do I understand you that Great Britain/Upon this Joint Stock principle is governed?” And Mr. Goldbury replies, “We haven’t come to that, exactly—but/We’re tending rapidly in that direction/The date’s not distant.” Soon afterward, the Utopians join in one of the most improbable choruses ever set to music: “All hail, astonishing Fact!/All hail, Invention new/The Joint Stock Company’s Act/The Act of Sixty-Two!”

For all its barbs, Utopia Limited sounded a triumphant note. It was a celebration of yet another quirky Victorian invention that had changed the world. The new companies, set free by “the Act of 1862” and by its imitators in other countries, were speeding the first great age of globalization. They were luring millions of people off the land, changing the way that people ate, worked, and played. They were erecting the first towering offices in Manhattan and despoiling the Belgian Congo. They were battling with labor unions and challenging politicians. “This is a government of the people, by the people and for the people no longer,” warned President Rutherford B. Hayes: “It is a government of corporations, by corporations and for corporations.” The year before the curtain went up on Utopia Limited, the Ohio Supreme Court ruled that Standard Oil had created a monopoly. Even in Britain, which had nothing to match John D. Rockefeller’s oil empire, many of the bourgeois gentlemen chuckling knowingly in the boxes at the D’Oyly Carte theater owed their fortunes to the new device; and the stalls probably squeezed in at least one impoverished aristocrat who had blown his inheritance gambling on American railroad stocks.

Nowadays, the influence of this unsettling organization is even more pervasive. Hegel predicted that the basic unit of modern society would be the state, Marx that it would be the commune, Lenin and Hitler that it would be the political party. Before that, a succession of saints and sages claimed the same for the parish church, the feudal manor, and the monarchy. The big contention of this small book is that they have all been proved wrong. The most important organization in the world is the company: the basis of the prosperity of the West and the best hope for the future of the rest of the world. Indeed, for most of us, the company’s only real rival for our time and energy is the one that is taken for granted—the family. (Meanwhile, in a nice reversal of fortune, the world’s best-known family, the British monarchy, on whose whims and favors many of the earliest English joint-stock companies depended, now refers to itself as “the firm.”)

That does not mean that the role of the company has been appreciated, least of all by political historians. The great Companies Acts of the mid-nineteenth century get barely a sentence in most recent biographies of William Gladstone, one of their political champions; the intellectual godfather of the modern company, Robert Lowe, is more remembered for his work on education and his grumpy opposition to universal suffrage. The relevant volume of the New Oxford History of England that covers 1846 to 1886 does not find room to discuss the invention of the company in its 720 pages.1

In fact, the history of the company is an extraordinary tale. What often began as a state-sponsored charity has sprawled into all sorts of fields, reconfiguring geography, warfare, the arts, science, and, sadly, the language. Companies have proved enormously powerful not just because they improve productivity, but also because they possess most of the legal rights of a human being, without the attendant disadvantages of biology: they are not condemned to die of old age and they can create progeny pretty much at will. This privilege of immortality, not to mention the protection that the artificial corporate form has afforded various venal people down the ages, has often infuriated the rest of society—particularly governments. Hence, there has been a lengthy series of somewhat bad-tempered laws trying to tamper with the concession—from the Statute of Mortmain, which Edward I issued in 1279 to stem the flow of assets being transferred beyond his feudal writ to the “dead hand” of corporate bodies (particularly monasteries), to the 2002 Sarbanes-Oxley Act, through which Congress tried to make bosses more accountable for the sins of “their” companies.

There are two ways to define a company. The first is merely as an organization engaged in business: this definition, as we shall see, includes everything from informal Assyrian trading arrangements to modern leveraged buyouts. The second is more specific: the limited-liability joint-stock company is a distinct legal entity (so distinct, in fact, that its shareholders can sue it), endowed by government with certain collective rights and responsibilities. This was the institution that the Utopians’ “Astonishing Fact,” the Companies Act of 1862, unleashed, and which is still spreading around the world, conquering such obstinate refuseniks as the Chinese Communist Party and the partners of Goldman Sachs.

Though this is primarily a book about the joint-stock company, it unapologetically strays into broader territory. From the beginning of economic life, businesspeople have looked for ways to share the risks and rewards of their activities. One of the fundamental ideas of medieval law was that “bodies corporate”—towns, universities, guilds—had a life beyond that of their members. In the sixteenth and seventeenth centuries, European monarchs created chartered companies to pursue their dreams of imperial expansion. One of these, the East India Company, wound up ruling India with a private army of 260,000 native troops (twice the size of the British army). Another, the Virginia Company, helped to introduce the revolutionary concept of democracy to the American colonies, to the fury of James I, who called it “a seminary for a seditious parliament.”2 Yet another, John Law’s Mississippi Company, wrecked the economy of France, Europe’s richest country in the eighteenth century.

Yet William Gilbert was right to think that something fundamental changed in nineteenth-century Britain. The most powerful economic power of the day finally brought together the three big ideas behind the modern company: that it could be an “artificial person,” with the same ability to do business as a real person; that it could issue tradable shares to any number of investors; and that those investors could have limited liability (so they could lose only the money they had committed to the firm). Just as important, the Victorians changed the point of companies. It was no longer necessary to seek special sanction from parliament to set one up or to limit its business to a specific worthy aim (like building a railway between two cities); now it was possible to set up generalpurpose corporations at the drop of a hat. All that was necessary was for seven people (“If possible, all Peers and Baronets,” Goldbury mischievously advised the Utopians) to sign a memorandum of association for the company to be registered and for it to use the word “limited” to warn creditors that they would have no recourse to the company’s owners.

The Companies Acts, which were rapidly copied in other countries, unleashed entrepreneurs to raise money, safe in the knowledge that investors could lose only what they had put in. They also gave birth to an organization that soon seemed to acquire a life of its own, swiftly mutating from one shape to another, with government usually unable to restrain it. Nowadays, nobody finds it odd that, a century after its foundation, the Minnesota Mining and Manufacturing Company makes Post-it notes, or that the world’s biggest mobile-phone company, Nokia, used to be in the paper business.

The Victorians also gave us many of the most profound arguments that swirl around companies. Nowadays it is assumed that the causes of capitalism and companies are inseparable. Yet many of the earliest critics of the joint-stock company and the “subsidy” of limited liability were economic liberals, taking their cue from Adam Smith, who had derided them as antiquated and inefficient. One noted Victorian thinker, A. V. Dicey, fretted that the company would become the harbinger of a new age of collectivism: “one trade after another” would pass from the “management of private persons into the hands of corporate bodies created by the state.”3 (Karl Marx gave a grudging welcome to companies for much the same reason.)

For the company’s early critics, it was not just a question of allowing investors to repudiate responsibility for their debts; many Victorian liberals also worried whether professional managers could be trusted to act in the interests of the owner shareholders. They had a point: the potential conflict of interest between the “principals” who own companies and their “agents,” who run them, which was later dubbed the agency problem, has dogged the history of the company, from the mills of Lancashire to software start-ups in Palo Alto, with shareholders repeatedly trying to find ways to make managers’ interests the same as their own (most recently with share options) and managers usually wriggling out of them. John Stuart Mill settled his own doubts on this score only by wearily concluding that for new capital-hungry businesses, like railways, the only alternative to the joint-stock system was direct state control.

Even after the Companies Acts, Victorians were still prey to the traditional cultural prejudices against these soulless institutions. The Morning Post ran a xenophobic campaign against the railway companies on the grounds that they were exporting British jobs. At the same time, American populists denounced the very same companies on the grounds that the British were trying to recolonize the country by stealth. In Anthony Trollope’s The Way We Live Now (1875), a company, supposed to build a great railway linking Mexico and the United States, is hijacked by an unscrupulous continental financier, Augustus Melmotte, and his American partner, Hamilton K. Fisker. Its board, consisting of know-nothing aristocrats and unscrupulous politicians, meets for a perfunctory fifteen minutes. (“There was not one of them then present who had not after some fashion been given to understand that his fortune was to be made, not by the construction of the railway, but by the floating of the railway shares.”)4 And the whole enterprise predictably results in a speculative crash.

In America, where the influence of companies was greatest, the howls against “the malefactors of great wealth” reached a crescendo at the beginning of the twentieth century. Yet no sooner had society reined in the robber barons than it discovered that a still less accountable villain had seized control of the company: the faceless manager. The rise and fall of the juggernauts of corporate America forms a large part of our story. Of course, not everybody worked for them—but it sure felt that way. Until 1975, the big American corporation was the model against which all other sorts of company were measured. Yet, since then, Company Man, too, has been chased out. Companies have become flatter, less hierarchical organizations.

Throughout the twentieth century, the company jostled with the state that spawned it. European and Asian governments tried to run companies of their own—and failed spectacularly. Many on the Left would argue that companies tried to set up governments of their own—and succeeded equally spectacularly. Meanwhile, the ways that companies have subtly influenced our lives have multiplied. It was a company—Lever Brothers—that introduced us to the concept of “BO.” (“It was not enough to produce satisfactory soap,” Joseph Schumpeter once observed. “It was also necessary to induce people to wash.”)5 It is a company—McDonald’s—that is credited with teaching the Chinese how to queue.6

Three themes stand out in our story. First, the company’s past is often more dramatic than its present. Modern business books may have macho titles such as Barbarians at the Gate and Only the Paranoid Survive, but early businessmen took risks with their lives as well as their fortunes. Send a fleet to the Spice Islands at the beginning of the seventeenth century, and you might be lucky if a third of the men came back alive. This was a time when competitive advantage meant blowing your opponents out of the water, when marketing meant supplying an English rose for the sultan’s harem (a London merchant of “honorable parentage” selflessly offered his daughter), and when your suppliers might put your head on a stick.7

The second point is to some extent a correlation of the first. In general, companies have become more ethical: more honest, more humane, more socially responsible. The early history of companies was often one of imperialism and speculation, of appalling rip-offs and even massacres. People who now protest about the new evil of global commerce plainly have not read much about slavery or opium. People who talk in terrified tones about the unprecedented skulduggery at WorldCom seem to have forgotten about the South Sea Bubble. Those who fear the unparalleled might of Bill Gates could do with a little reading on J. P. Morgan. Today, the number of private-sector companies that a country boasts—the United States had 5½ million corporations in 2001, North Korea, as far as we can tell, none—is a better guide to its status than the number of battleships it can muster. It is also not a bad guide to its political freedom.

This leads to the third point. The company has been one of the West’s great competitive advantages. Of course, the West’s success owes much to technological prowess and liberal values. But Lowe and Gladstone ushered in an organization that has been uniquely effective in rendering human effort productive. The idea that the company itself was an enabling technology is something that liberal thinkers once understood instinctively. “The limited liability corporation is the greatest single discovery of modern times,” proclaimed Nicholas Murray Butler, one of the great sages of the Progressive Era; “even steam and electricity would be reduced to comparative impotence without it.”

Economists have elaborated on why such institutions are crucial to economic development.8 Companies increase the pool of capital available for productive investment. They allow investors to spread their risk by purchasing small and easily marketable shares in several enterprises. And they provide a way of imposing effective management structures on large organizations.9 Of course, companies can ossify, but the fact that investors can simply put their money elsewhere is a powerful rejuvenator.

A cluster of competing companies makes for a remarkably innovative economy. Nowadays, you only have to look at Silicon Valley to grasp this point. But in the mid-nineteenth century, the effect of Western governments delegating key decisions about which ideas to back to independent firms was revolutionary.10 Rather than being trapped in government monopolies, capital began to search for the most efficient and flexible companies; and rather than being limited by family partnerships, it came together in bigger and bigger conglomerations. By contrast, civilizations that once outstripped the West yet failed to develop private-sector companies—notably China and the Islamic world—fell farther and farther behind. It cannot be just coincidence that Asia’s most conspicuous economic success is also the country that most obviously embraced companies—Japan.

This book is an attempt to chart the rise of this remarkable institution. But we have also taken the liberty to spend a little time puzzling about its future. At first sight, that future should be assured. Nation-states are on the defensive. Churches are struggling to find recruits. Trade unions are a mere shadow of their former selves. But companies are going from strength to strength. Most people in the West now work for companies, which also produce the bulk of the world’s products.11 Any young Napoleon who yearns for the scent of global conquest would be better off joining a company than running for political office or joining the army.

Yet, the company is much less powerful than it seems. Although the influence of companies as a species has never been more widespread, the clout of individual big companies has arguably declined. The much-vaunted idea that companies are now bigger than mere governments is, as we shall see, statistically fraudulent. Big companies are giving way to small ones, so much so, in fact, that an old question is now more pressing: What is the point of companies?

That question was most succinctly answered back in 1937 by Ronald Coase, a young British economist. In an article called “The Nature of the Firm,” he argued that the main reason why a company exists (as opposed to individual buyers and sellers making ad hoc deals at every stage of production) is because it minimizes the transaction costs of coordinating a particular economic activity. Bring all the people in-house, and you reduce the costs of “negotiating and concluding a separate contract for each exchange transaction.”

But the gains from reducing transaction costs that companies deliver have to be balanced against “hierarchy costs”—the costs of central managers ignoring dispersed information. In the nineteenth century, the gains to be had from integrating mass production with mass distribution were enormous—as Alfred Chandler, the doyen of business historians, puts it, the “visible hand of managerial direction” replaced “the invisible hand of market mechanisms.” In the twenty-first century, technology and globalization are helping to reduce barriers to entry—and thus helping to unbundle the corporate package. At the touch of a button, a mere journalist can get access to more information than a corporate giant could amass a decade ago. The fashion nowadays is for virtual companies—for airlines that do not own their own planes, for banks that do not have branches, for the invisible hand to claw back ground from the visible one.

That should not imply that the company is beginning a slow, inevitable decline. Despite the seductive charm of frictionless capitalism, most people seem to like being in companies. (We should admit that through luck, absence of opportunity, laziness, and, especially, the charity of others, we have both remained at the same organization for most of our working lives.) The economic argument has also deepened since Coase, with some economists preferring to look at the firm as a network of contracts and others seeing it as a bundle of organizational capabilities. But the basic questions being asked by modern investors, managers, and workers—What does this company do? Why do I work here? Will it make money?—are worth remembering as we head back into the past.

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