Review of Mickelthwait, John and Wooldridge, Adrian (2003) The Company: A Short
History of a Revolutionary Idea, Weidenfeld and Nicolson, London pp x +214
Published in Australian Financial Review, 31 December 2003
The company is such a central institution of modern capitalism that it's hard to imagine a market economy without it. In reality, however, like most institutions that we regard as stretching back into time immemorial, the company in its modern form dates back no further than the middle of the 19th century. Moreover, most of the early advocates of market capitalism viewed the company with suspicion, as an embodiment of unjustified monopoly privileges. Moreover, the spectacular collapse of the South Sea Company in the early 18th century led to the view that what would now be called moral hazard was an insuperable obstacle to the success of a joint stock company. By 1800, the company seemed to be a form of organisation that belonged to the past.
As late as 1854, the newly founded Economist was opposed to the adoption of an explicit limited liability rule, the cornerstone of the modern idea of the company. The Economist argued that individuals and companies were free to enter into contracts that limited liability in the event of default. Hence, a specific rule limiting liability was at best superfluous and at worst (if it proved impossible to contract around limited liability) harmful. Although the Economist soon changed its mind, it remained grudging in its support of this innovation for many years.
The company, then, is not a natural part of the landscape but an idea in need of a history and an explanation. Mickelthwait and Wooldridge are ideally suited to provide such a history. Their previous books, including The Witchdoctors and A Future Perfect, have established them as two of the most acute commentators on contemporary capitalism.
The Witchdoctors was a critical survey of the academic and popular literature on the theory of management. As the title implies, Mickelthwait and Wooldridge were far from complimentary about the state of management theory. Nevertheless, they took their subject seriously, by contrast with the generally dismissive view of academics in established social sciences ('airport economics' and 'pop psychology' are the kinds of phrases typically heard in these circles). If the company is a central institution of the modern economy, the analysis of its management is too important a subject to be left to the writers of such epics as Who Moved my Cheese?
A Future Perfect was probably the best defence of globalisation yet published. Avoiding both the naive technological determinism of the Thomas Friedman's (much better-selling) The Lexus and the Olive Tree, and the countervailing excessive scepticism of the 'globaloney' school, Mickelthwait and Wooldridge presented the globalisation of the late twentieth century as a real but historically contingent phenomenon, depending partly on technology but, even more, on political choices. In particular, they recognised the close link between the kind of globalisation they advocate, based on free movements of goods, capital and labour between countries and the free-market domestic policies variously referred to as Thatcherism, economic rationalism and neoliberalism (all of these descriptions are tendentious, as is the use of the much broader term 'liberalism' by Mickelthwait and Wooldridge to describe the same policies).
As Mickelthwait and Wooldridge recognised, a central premise of the case for globalisation was that markets, would do a better job of meeting the needs and desires of ordinary people than would elected governments. In the 19th century, this premise might have been defended adequately by arguments about the desirability of perfect competition. But, in view of the dominance of huge corporations in the modern economy (though, according to Mickelthwait and Wooldridge this dominance is often overstated) such a defence is not adequate in the 21st century. Any case for global capitalism must be, in large measure a case for organising economic activity through corporations. In The Company, Mickelthwait and Wooldridge accept this challenge.
They begin at the beginning with various forms of risk-sharing joint ventures adopted in the classical world. The most notable observation is that the crucial idea of a corporation as a distinct legal person may be attributed to Roman law. Attention is next turned to the Islamic world and to China, both of which were economically in advance of Europe at least until 1400, before falling behind. In contributing to the lengthy debate on the reasons for this relative decline, Mickelthwait and Wooldridge focus on the institutional obstacles to the development of durable private enterprises. In Islamic countries, they argue, inheritance laws divided estates and ensured that business ventures rarely outlived their founders. By contrast, in China, businesses were too long-lived, relying on government monopolies for protection against potential competitors.
The real action in the story begins with the great trading companies of Europe, first established as part of the wave of exploration and expansion that began with the voyages of Vasco da Gama. Unlike Portugal and Spain, where the state and the church led the way, the Northern Europeans relied heavily on private, but state-supported, activity. The English companies established under royal charters to exploit the opportunities provided by trade and conquest in the East and in the New World included the East India Company, the Hudson Bay Company (which survives to the present day) and the enigmatically-named Company of Distant Parts.
These companies, with their close alliance with the state, embodied the mercantilist philosophy of trade that dominated public policy in the two centuries leading up to Adam Smith's Wealth of Nations. Moreover, the central problem of the company, that of managers preferring their own interests to those of the shareholders, emerged early on with scandals such as the South Sea Bubble in England and the Mississippi company in France. Given this history, it is not surprising that Smith condemned joint-stock companies in unequivocal terms, saying that, where capital was managed by agents rather than owners 'negligence and profusion must always prevail'.This passage might seem surprising to those accustomed to seeing the corporation as the cornerstone of free-market capitalism. But as Mickelthwait and Wooldridge observe, suspicion of the corporation was widespread among economic liberals. Conversely, socialists from Karl Marx onwards have often welcomed the replacement of individual capitalists by large corporations, assuming that it would prove easier to dispossess anonymous rentiers than a self-conscious capitalist class.
The standard economic response to a private enterprise using the coercive power of the state in its dealings with consumers and suppliers, or to exclude competition is that it should either be stripped of its privileged position and exposed to market competition, or if this is not feasible, nationalised and subjected to political accountability. Many of the great trading companies suffered the first of these fates, but a surprising number were nationalised in one form or another. The most prominent example was the East India Company, which was effectively nationalised following the 'Indian Mutiny' of 1857 (now commonly described, from the Indian perspective, as the First War of Independence). Even more strikingly, a number of the corporations set up to colonise North America transformed themselves into representative governments, and became precursors of the United States.
The early history of the joint-stock company, then, was anything but promising. As late as 1850, the history of the company as an institution seemed to bear out the judgement of Adam Smith. But the rise of large scale industry, and particularly of the railroad, required the mobilisation of quantities of capital too large for individuals or partnership to manage.
The starring role in the story of the company, as told by Mickelthwait and Wooldridge, is taken by Robert Lowe and his Companies Act of 1862, which allowed limited liability joint stock companies to be formed simply by registration, eliminating what remained of the requirements for specific Parliamentary approval introduced in the wake of the South Sea Bubble. Companies grew steadily through the 19th and early 20th century, displacing entrepreneurial businesses and partnerships in increasingly large sectors of the economy. As in other aspects of economic performance, leadership passed from Britain to the United States around 1900 and it was American companies that would dominate the 20th century.
Although the corporate form allowed businesses to raise large amounts of equity capital the structure of management was slower to change. Early companies were still, in most cases, run by their founders, assisted by small groups of personal staff, and frequently with family members playing a prominent role. Although they were no longer outright owners of their businesses, Napoleonic entrepreneurs like Henry Ford continued to act as if they were, maintaining centralised control over all aspects of their businesses.
The early 20th century saw the rise of the first truly modern corporation, General Motors. Under the leadership of Alfred Sloan, its president from 1923 to 1946, GM abandoned the unitary model of the early corporation for a multidivisional form in which divisional managers were assigned targets for outputs and costs, and allowed substantial autonomy in meeting those targets. Unlike the unitary form, which was constrained by the capacity of the head office to manage many different enterprise, the multidivisional form was effectively unlimited in its capacity for growth.
Sloan was also the first great representative of the class of professional managers who took over control of the great corporations as they outgrew the organisational capacity of the entrepreneurs who had founded them, or, more commonly, the heirs of those entrepreneurs. The professional managers were soon recognised as a new ruling class, most notably by James Burnham who observed that corporate managers had more in common with socialist planners than with the capitalist owners they nominally served.
The triumphant era of managerial capitalism ran from World War I to the early 1970s. Their share of business output and business assets rose steadily with the 200 top corporations accounting for more than 60 per cent of all corporate assets by 1968. Meanwhile governments, organised on very similar lines were also increasing their share of economic activity.
The crucial figure in the triumph of the modern corporation was the Organisation Man, the lifelong employee who climbed the corporate ladder and whose loyal service was rewarded with the protection of the corporation up to retirement age and beyond. In America and Japan in particular, this bargain extended beyond the white-collar managers and professionals to permit blue-collar workers to attain the kind of middle-class lifestyle and economic security that had been inconceivable in the past and that is rapidly receding into memory today.
The economic chaos of the early 1970s brought this era of stability to an end. Although all the structures of the postwar settlement were shaken, the corporations adapted faster than others and rapidly shook off the constraints that had been imposed upon them by governments and unions. The wave of privatisation that swept the world from the 1980s that signalled (or appeared to) a general acceptance that the companies, and not governments, represented the wave of the future.
Meanwhile companies repudiated the implicit bargain they had made with their employees, whose jobs were subjected to a continuous process of outsourcing, downsizing, and re-engineering. Initially, this process was justified by the slogan of shareholder value. It gradually became apparent, however, that this slogan concealed the enrichment of senior managers, and particularly chief executives, at the expense of shareholders and employees alike.
Until the end of the 20th century, it seemed that this process was unstoppable. Instead of being bound down by governments unions and by the messy practicalities of physical production, companies were breaking free of national boundaries and were increasingly valued on the basis of their intangible essence, which in turn was dependent on the leadership of charismatic Chief Executive Officers. The only serious danger seemed to be the possibility, represented by the aspirations of Enron to 'weightlessness' that this process of abstraction would be taken to the point where the corporation became entirely virtual.
In 2003, the name Enron has entirely different connotations, and symbolises the resurgence of a class of problems companies had apparently left in the past - muckraking journalists, crusading (or maybe jihadist) district attorneys and interfering politicians. Even the unions, resolutely excluded from Enron when it was in business, returned to the scene to demand (successfully as it turned out) protection of the entitlements of employees.
Thus, the story, which begins on a note of triumph ends in uncertainty. It remains unclear where the company is heading. Perhaps the trend towards the weightless corporation will continue and Enron will be seen as a pioneer brought down by excessive ambition. Perhaps the traditions of the managerialist corporation will reassert themselves. It is even possible that the trends of the last twenty-five years will be reversed and that the scattered renationalisations of recent years (Railtrack in the UK, Air New Zealand, US airport security) will prove to be the harbingers of a resurgent state.
Even if the last of these possibilities, were to be realised, their book would
still be of immense value. The lessons that have been learned from the history
of the company over the past 150 years have affected, both for better and for
worse, all forms of economic and social organisation, from government departments
to private households. The company is truly, as Mickelthwait and Wooldridge
say, a revolutionary idea.