Mark Hodak Sumarises Our Differences as Differences of Emphasis

In comments to my previous post Mark Hodak posts his considered reply, which summarises neatly where we differ and why. I think this should be the last word as I do not think we can do other than disagree over what to emphasise, rather than contest issues of great principle.

I have enjoyed the debate (apologies to all if my robust stule caused any offence!).

I shall, therefore, post his reply in full here, and unless further comments are offered by any reader, please consider the debate suspended:

Mark Hodak replies:

"Gavin,

I’m billed as a professor of business history, but I rather see myself as a student of business history. Your extensive exposition about what Smith had to say about institutional forms is a fine lesson.

I understand what you say at the start of it: “I believe that the principal-agent problem, recognised by Smith, was incidental to his essential message; specifically that ubiquitous forms of monopoly in foreign trade were another case of the wasteful prevalence of mercantile political economy…” I would grant that, and everything that follows. But his insight about agency was not incidental to MY message—it was central, and a valid insight to use in a piece about evolution of the corporation. My message, quite simply, was that Adam Smith could not have foreseen the dominance of the corporate form we see today. This does not counter anything else he wrote about trade. It is certainly not an indictment of his intellect or his achievement. It does not presuppose that he was in the business of predicting the future, which I grant he was not. It’s simply an extrapolation of his views about joint-stock companies as they had evolved up to his time.

I understand that Smith wrote very little about joint-stock companies, at least in WoN. I doubt there are more than a couple of articles in his entire tome that specifically references them. Quotes like “They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one,” or “That a joint stock company should be able to carry on successfully any branch of foreign trade, when private adventurers can come into any sort of open and fair competition with them, seems contrary to all experience” or “Without a monopoly, however, a joint stock company, it would appear from experience, cannot long carry on any branch of foreign trade” may represent incidental sentiments regarding his main message. But they seem to convey a distinct skepticism about the likelihood of a global economy as free as we have today looking the way it does today vis-à-vis corporations.

I understand that Smith did not forsake the joint stock form for every kind of business. As you state, he saw a role for them in certain, defined circumstances. But this view seemed, to me, a rather restrictive one: “The only trades which it seems possible for a joint stock company to carry on successfully without an exclusive privilege are those of which all the operations are capable of being reduced to what is called a Routine, or to such a uniformity of method as admits of little or no variation.” This hardly seems to foretell of a globally competitive GE, or BAE Systems--what he would have certainly characterized as outside of his restrictive definition, and in fact likely have characterized as “foreign trading” companies, albeit without special privileges.

Granted that everything in your fine explanation is true to Smith’s views, nothing in that explanation contradicts my assertion that Smith viewed agency costs as an inherent problem in joint stock companies, whether or not they were monopolies. That assertion is tenable, even granting that he might have felt the same about the impact of agency costs on other business forms (which, I think is debatable; he simply didn’t seem to have the same level of skepticism about those forms in a globally competitive environment).

I won’t presume to debate Smith’s main concerns or central intent in his WoN. Frankly, it’s been a while since I read it. But I don’t think my reading of the quoted passages was incorrect, out of context, or “silly” or “nonsense.” At worst, we have a disagreement on emphasis regarding how Smith might have weighted the relative impact of agency on various institutions— something that would be difficult to guess, even with all the supporting material on his views about each. One might disagree about how Smith might have viewed the modern world, but that is an admittedly speculative exercise that would properly remain outside of any thematic discussion."