Saturday, November 06, 2010

Currents and Counter-currents in the History of the Company

The Company: A Short History of a Revolutionary Idea by John Micklethwait and Adrian Wooldridge includes a brief chapter on the history of the corporation in the United States. In 1840 there were no corporation in the modern sense, but rather small, owner operated farms and businesses. In the following century large, limited liability stock companies, professionally managed, came to dominate the American economy.

The very brevity of the chapter is helpful in illuminating the currents of that institutional history in America. The development of the modern corporation started with the railroads which substituted "the visible hand" of management for management and control for "the invisible hand of the market". Wholesale and retail commercial firms developed to serve the larger markets made possible by the railroads. Then manufacturing firms grew large beginning with the need to serve the railroads and then taking advantage of economies of scale to serve larger and larger markets. The stock market grew in size and economic importance, and eventually sweeping mergers resulted in huge firms with economic importance rivaling that of the government itself. (The United States did not establish a modern central bank until just before World War I.)

The growth of the power of the corporation led to the development of institutions to counter that power. Unions grew large and powerful to provide workers with power to counter that of the corporations for which they worked. Government regulation of corporations (in areas such as anti-trust and financial regulation) grew to protect the public from "the robber barons".

While the book's chapter on early history of the American corporation does bring us up to date, I think we still see the play and counter-play of corporations, labor and government seeking to obtain and maintain power.

  • The U.S. health insurance system, which is dominated by employer-based health insurance and large insurance companies, grew up during and after World War II; it provided corporations with a powerful tool to recruit and keep employees. That system put great power in the hands of the insurance companies. The new health care legislation asserts more government control over the health insurance industry and is expected to lead to a diminution of corporate control over employees through the employee need to keep health insurance provided by the corporation (or government agency) for which they work.
  • The Congress limited the rights of corporations and corporation owners and executives to fund political campaigns, thereby limiting the political power of the corporation, but this year the Supreme Court overturned that legislation and corporate political power was resurgent in the most recent election.
Institutions are not only an important part of culture, but we tend to take institutions as given. A short history of institutional development and change helps to see that our modern culture is of recent birth. Big companies and big government seem so much a fact of life that it is surprising to face their recent development. It is perhaps more surprising to recognize that the institutions are still changing, and changing rapidly.

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