Wednesday, February 21, 2007

18th Century Chartered Joint Stock Companies are Not the Same as Modern Corporations

Smith is good for quotes, and too good for accuracy, though. He wrote so much about the world, from distant pre-history of the past right up to the mid-to – late 18th century that out of its context, readers search apply what they find as if they are relevant to the 20th - 21st centuries.

Does it matter? Not really, but in looking at his quotes in context we learn something about what he was about, and how much or little things have changed in the intervening 217 years since he last edited Wealth of Nations and Moral Sentiments.

Steve Borsch, a serious blog author, writes a post: “Changing Nature of Work and Your Value Online” (which proffers free advice on an important subject that is entirely interesting and perhaps relevant to some of you). He posts on his Blog, “Connecting the Dots (guidance, insight & ideas in a time of accelerating change)”, and carries carries a quotation from Wikipedia:

Think about the modern corporate organization and its just over 100 years of existence. From this Wikipedia article on the corporation comes this quote from Adam Smith's the "Wealth of Nations" which criticized the corporate form because of the separation of ownership and management.

The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

The modern corporate entity is, as Smith points out, an abstract one by its very nature. Remarkably complex and with numerous layers of specialized functionality, making it work as a whole is an ongoing challenge. With little true ownership by those that work within the corporate structure and loyalty (by both sides) fleeting, its no wonder that people are searching for meaning and aligned jobs while corporations are seeking human resources that provide a competitive advantage. Now throw in the explosion in instant and cheap communications, idea generation, knowledge transfer and social connections that the Internet has enabled and the corporation itself is undergoing massive shifts.
Now throw in the disruption of outsourcing, specializations that perish and retraining that takes years -- coupled with the masses that are working in jobs that pay the rent but are misaligned with what each view their mission, values and purpose to be, and you have a climate ripe for disruption and change.”

It is common to find this passage, and other from the chapters round it, frequently quoted as if Smith was referring to the modern (post-19th century) joint-stock company, even identical to the modern corporation operating within ‘globalisation’. Criticism of these modern institutions should be directed at them on their own merits or demerits, without bringing Smith into it, at least not on the criteria he used.

The common form of private firm in Smith’s day was the ‘co-partnery’, which was subject to much like the ‘partnership’ law of today: each member was liable for the co-partnery’s debts up to the limit of his fortune, into bankruptcy and beyond. But the joint-stock company in law limited a member’s debt liabilities to the amount of his share value only. This allowed it to recruit subscriptions from a far-wider audience than a co-partnery; allowing it to raise vaster capital sums, because the risk, should its venture fail, to the rest of their capital and possessions was much diminished.

After that, similarities with joint-stock, modern corporations evaporated. I commented on a professor’s use of ‘international trading companies’ as if these were the same as Smith’s in a post I wrote last September from the Adam Smith conference I attended at Columbia University, New York (see archive). The same applies here, in my view.

Smith’s context was the Royal Charter trading companies, a status awarded by the King, which gave them a legal monopoly of trade with designated regions of the world to the exclusion of all others, British and foreign. The most infamous of these was the East India Company, a by-name for systematic plunder.

Chartered joint-stock companies had Courts of Governors, operating through local managers. The shareholder holders subscribed their money and received dividends; the managers managed, nominally under the supervision of the Governors, but certainly not under their day-to-day control. This problem was exacerbated by the geography of the 18th century – India was many months sailing time from London, there and back, and could take a year or more in Smith’s time. During this time, local managers made every effort to get rich quick, at the local population’s expense, and the interests of the shareholders, and collectively they used the vast sums flowing their way to bribe and corrupt wherever they found it necessary to escape close supervision (including the Directors Court, politicians, and Prime Ministers).

In these circumstances, Smith did not consider their governance to be honest. Much of his criticism against the chartered companies was directed at these aspects of their activities, unique as they were in these respects. They were not regulated as international corporations are today with legal interventions, government inquiries, a free press and media, and stronger governments around the world. Information flows in seconds from a territory that used to takes months; they are not protected by monopoly rights, they don’t have Royal Charters (an institution that still functions in the UK, in that every university is founded by a Royal Charter, but without the endemic corruption that Smith wrote of, and without the spirit of mercantile political economy, the real object of his hostility to the 18th Century joint-stock companies.

Steve Borsch is not comparing like with like. When the advantages of a join-stock company were understood in the mid-19th century, legislation was enacted that governed their behaviour, which were worlds away from Smith’s barbed statements on the ones he wrote about.

[Read Steve Borsch at:]


Blogger Unknown said...

Thank you very much for your insight. I have recently come across a quote from Thomas Jefferson concerning "corporations" and I believe this helps me greatly to understand the context of his writing.
Can you provide any good books concerning the subject of 18th joint-stock companies?

8:22 pm  
Blogger SHOMRU said...

The modern phase of capitalist or market economy is dominated by the role of finance and financial institutions. Adam Smith did not forsee this transformation of markets into those driven by large oligopolies that have wrold-wide branches and roots, and the power of finance to move capital from one countruy to another at ease.
The economy is much more complex than was envisioned by Smith. Keynes, and later Friedman was closer, but then they had the benefit of hindsight.

6:53 am  

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