The Power of the Poor
 
The Corporation We often hear about the bad things corporations do — that they trash the environment or buy off legislation. It is true. There are some excesses. But on balance, the corporation has had a far more beneficial impact on humanity than most people realize or are willing to admit. In fact, the corporation has played a central role in our prosperity—including enabling the emergence of the middle class.

Hernando De Soto believes extending ownership of property from small elites to the masses was the first real step to prosperity, the first engine of growth in the West. The corporation, he thinks, was the second.

British economist Angus Maddison has developed statistics showing per capital income since Roman times. What is interesting is that mankind’s income level is flat for almost 2,000 years. So it is no coincidence that the historically sudden rise of income enjoyed by the West started with the Industrial Age, which includes the advent of the corporation.

The Key To The Industrial Revolution

If I had to say which came first, the chicken or the egg, the corporation came first and industry came later.

The industrial revolution would not have been possible without the corporation. What allowed businesses to grow, what allowed them to capture and develop technology, what allowed them to store capital, was the corporation.
While the corporate form has been around for hundreds of years, it is only since the mid 19th Century that it ceased being primarily a tool of royalty. In the 16th Century, it was possible to buy shares in ships, for example, and kings chartered companies in efforts to promote colonization. These included the East India Company, the South Sea Company, the Mississippi Company, the Hudson’s Bay Company (the world’s oldest surviving multinational), and others. They all represented the combined efforts of governments, royalty, and merchants to profit from the New World. All were the fortunate and well-connected recipients of royal charters that gave them exclusive rights to trade in specific parts of the world.1

Many of the cutting edge technologies of the 19th Century, such as the railroad and telegraph, required large infrastructures. Families, even rich and royal ones, were too small to be able to organize and fund such large-scale businesses. For these, you had to accumulate the value of many families put together.

The industrial revolution involved the specialization and organization of production on much larger scales. Property rights were required to capture information about the relationships between people, their possessions, and any additional value that could be created. The Church, guilds, and other existing societal structures just didn’t possess the tools needed to usher in the industrial revolution.

That’s where the corporation, with its novel structure, came onto the scene. The corporation didn’t emerge from the mists fully formed, however. Many decades had to pass from the time it was a tool for royalty to the point that any person could create a corporate organization. The corporate structure is functionally unique, an artifact of the law.

Before 1850, it was impossible to form a corporation without a writ from a king in Britain or an Act of Congress in the US. But a series of laws in the US and Europe gradually expanded the powers of the corporation and extended it to more and more citizens. Today, anyone can create a corporation. As famed management guru Peter Drucker explained, the corporation “was the first autonomous institution in hundreds of years, the first to create a power center that was within society yet independent of central government.”2

What Makes the Corporation Unique?

The corporation is a unique, powerful and utilitarian organizational form because it harnesses capital – human and otherwise – in ways history has never seen. De Soto says that, at its core:

In fact the corporation is nothing else than the bringing together of various contracts that allow a few people to do the many functions that would have taken thousands of families to do.

Corporations brought with them a series of tools that allowed people to work efficiently on large scales and to create career paths quite separate from those of the family.

More importantly, corporate structures allowed you to put value into shares, documenting them as part of a property rights system. It also limited the personal liability of shareholders. These features made it possible to raise almost unlimited funds.

Angus Maddison has spent decades documenting the historical economic statistics of the world’s nations all the way back to the year 1AD. His work gives new perspective and shows that the last couple of hundred years is markedly different from all of the past millennia of man’s life on earth.

This graph demonstrates that significant growth in per capita income is a strictly a modern phenomenon. It shows that, for centuries, mankind essentially subsisted at very low levels without any meaningful growth. People were, on a whole, as rich in 1800 as they were in Caesar’s time, which is to say, not very wealthy. It was a life of subsistence farming and backbreaking physical work.

Beginning in the early 19th century, however, an accelerating growth trend started that continues to this day. It was triggered by the industrial revolution, the ability to harness energy resources, the advent of modern business tools, and greater globalization.

We in the developed world are far, far wealthier and more powerful today than our ancestors could have ever dreamed, but too many of those in the developing world are still living as their ancestors did in ancient times.
Because of perpetual succession, you were now able to transmit value from one generation to the other and death would not affect its creation. The corporation was legally similar to a person in some respects, and — importantly — it could be sued. This was critical if you needed investors and contractors, because they in turn needed to feel more secure that their investments would be repaid.

In 1800, most businesses were structured as sole proprietorships or partnerships. One hundred years later, the dominant business form was the vertical corporation. The first large corporations were the railroads. Other businesses, modeled after railroad structure, such as Sears Roebuck and Montgomery Ward, soon followed, as did Ford, Westinghouse, General Electric, and DuPont. They revolutionized people’s lives. Massive projects, once only dreamed of, became reality: a transatlantic cable was laid and vast industrial complexes were erected. A salaried management worker class emerged.

In their book, The Company: A Short History of a Revolutionary Idea, authors John Michelthwait and Adrian Wooldridge write:

The company is one of the West’s great competitive advantages… Companies increase the pool of capital available for productive investment. They allow investors to spread their risks by purchasing small and easily marketable shares in several enterprises. And they provide a way of imposing effective management structures on large organizations.3

It wasn’t just rich industrial magnates who benefited, for they weren’t the only owners. Millions invested in the stock market. Suddenly the people could have a stake in the future of a company.

In the West, corporations include much more than large multinationals. Because of the corporate structure, the common man commands more powerful industrial and financial tools than ever before. Millions of middle class people and small business owners have their own corporations and LLCs, or limited liability companies. Condominiums and co-ops are also forms of corporation.

In less than one hundred years, because of property ownership, business law, and the corporation, society has moved from a system in which only a few could hold assets, to one in which everyone can develop an enterprise. The result has been enormous prosperity.
References:
1 Micklethwaite, John & Woolrodge, Adrian. The Company, A Short History of a Revolutionary Idea, Random House, New York, NY, 2003, p17.
2 As quoted in Sampson, Anthony. Company Man: The Rise and Fall of Corporate Life, Times Business, New York, NY, 1995, p26.
3 Micklethwaite, John & Woolrodge, Adrian. op.cit.