OK, part 3—we’ve now set the scene; this is the part where the Orcs invade the Shire (I hope I have my Tolkien references correct).

I hope I’ve established so far that the economy of Georgian England was based on an amazingly complex network of personal relationships which facilitated the exchange of goods and services via sophisticated informal credit arrangements, and that one’s personal character, established by family connections, religious affiliation, or references, was a vital part of maintaining one’s connection to this network.  Given the personal nature of business, most business undertakings, as you can imagine, tended to be small, consisting of family, trusted friends, and professional relations (e.g. apprentices, connections from related businesses).  But the government recognised that some kinds of business endeavour required more capital than could easily be raised by even the richest families, and as early as Tudor times the Crown, and later Parliament, granted groups of ‘adventurers’ the privilege of limited liability and trade monopoly in exchange for financing voyages, outposts, and military and commercial personnel to establish trade with other regions.  (I hope you are all watching Taboo because it was JUST LIKE THAT.)  The efflorescence of regional trade companies in England between the seventeenth and nineteenth centuries was part of what people refer to as ‘mercantilism’, which is making profits via arbitrage—buying stuff where it’s cheap, selling it where it’s expensive, and profiting off the difference in price minus the cost of transport. 

The regional trading companies functioned pretty much as intended, bringing in lots of good stuff and making some people very rich (though of course there’s copious scholarship describing how they actually worked in practice, how their monopolies were never complete, etc.)—so well, in fact, that people recreated their business model closer to home, initially primarily in banking and insurance but also in the large-scale manufacture and trade of various products; by 1720 it’s said the capital invested in joint-stock companies was about 13% of Britain’s total wealth.  (I will note that Wikipedia, which I’ve been using to prompt my memory, suggests that this had something to do with the Industrial Revolution, but this is clearly incorrect—neither the timing nor the business sectors involved in ‘corporatisation’ would lead anyone to this conclusion.)  This phase of corporate experimentation culminated in the collapse of the South Sea Company in 1720, an event known as the South Sea Bubble, in which no less a mastermind than Sir Isaac Newton, Master of the Mint (and very good with money) lost a good part of his fortune (he never admitted how much, but people have suggested about £20,000, or £3 million in today’s money) along with lots of other suckers. 

Between the passage of the Bubble Act in 1720 and its repeal in 1825 joint-stock companies could only be formed by special act of Parliament, and Parliament was pretty stingy about these—as I mentioned before, Adam Smith opined in The Wealth of Nations that joint-stock companies, inefficient and clumsy by nature and dangerously prone to disaster, were not a good idea for anything except banking, insurance, municipal water supply and transport infrastructure, and Parliament kept pretty close to this list. Nevertheless, businesspeople either legally or extralegally continued to form corporations, with some or all of the appropriate trappings—limited liability, transferable shares, corporate action, monopoly or eminent domain—as far as I can determine, until a series of acts between 1844 and the 1860s rationalised joint-stock legislation you could pretty much get away with whatever you weren’t sued for, and courts handed down contradictory decisions about who was allowed to do what in what context.

And so, for better or worse, joint-stock companies became part of the economic landscape.  Most people thought ‘for worse’, for a few very good reasons.  In the Wealth of Nations Smith describes what came to be known as the ‘agency problem’—the fact that a joint-stock company's multiple unrelated owners were separated from its day to day management:

it cannot well be expected that [the directors] should watch over [the workings of a joint-stock company] 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...in the management of the affairs of such a company.

Since joint-stock companies were managed by paid staff on behalf of owners who were both anonymous and impermanent, it was pretty soon recognised that this form of organisation ‘undermined the importance of character in business’. The absence of the social control exercised on business owners desiring to preserve their reputations in order to participate in economic life, combined with the vast resources joint-stock companies controlled and their unclear legal accountability, could lead such companies to act unethically, simply to manipulate the stock market rather than for sound business reasons. 

Examples of unethical corporate behaviour were certainly not difficult to find.  I mentioned in a previous comment that I’m currently writing about the Attwood case, which I think was one of the many wakeup calls to the business community of the time.  In 1825 the British Iron Company purchased an ironworks from John Attwood.  The following year iron prices dropped and, in an attempt to renege on the contract, three directors of the firm took Attwood to court, alleging that he had fraudulently misled them about the value of the property.  In an act of breathtaking chutzpah they declared their own agent one of the defendants, to keep him from testifying that the deal was honestly made.  The company lost their first case against Attwood in 1828 but won a second judgment against him in 1832.  Attwood petitioned the House of Lords to have his case reheard in the Court of Exchequer, and in 1838 he finally won a substantial settlement from the company, which went bankrupt shortly thereafter.  So, happy-ish ending, but what’s clear from this cautionary tale is that Attwood’s character and reputation as an honest businessman made no difference whatsoever to his treatment by the company and by the legal system.  In one of the cases I’m writing about now, reading the transcripts of people saying ‘my reputation is solid, I’ve been doing business here for years, ask anyone in Oxford’ or ‘I vouch for so-and-so as an honest man’ is downright sad, because that system of social control had already become anachronistic in the new world of anonymous contractual bureaucratic corporate management.  

I’m also writing about a series of letters between the owner of a business and three managers of a joint-stock company, in which the business owner is attempting to develop an agreement with the company after having won a series of legal cases against them establishing his right to do so.  In literally dozens of letters between him and these three guys he keeps trying, in standard socially-connected-businessman style, to work out a deal that would suit them all—he offers proposal after proposal and concession after concession, and the three company dudes literally ignore it, as they have no interest whatsoever in making a deal with him.  They obfuscate in boilerplate bureaucratic babble, and play him off against each other (‘good cop’, ‘bad cop’, and ‘unintelligible cop’).  He eventually had to take them back to court—he won, again, but was never able to achieve a mutually-beneficial deal with them; he eventually buckled under and became an agent for the company.

Parliament and the courts generally agreed that ‘public’ (i.e. created by the state) joint-stock companies should not be permitted to participate in the ‘private enterprise’ of the general domestic economy; Parliament generally declined to authorise companies that might 'carry on any ordinary trade or calling carried on in this country' or compete with existing family businesses.  So what happened?  How did the joint-stock company get so out of control, even though people were well aware of its problems, no one wanted them anywhere they didn’t belong, and Parliament did its best to keep close control of them?  Well, it was probably inevitable given the vast amounts of capital and resources these entities possessed, but I personally think it was one specific thing.  

I mentioned in an earlier post that we now take for granted something that is actually extremely weird; most of the time when we buy things from people we’re not exchanging our money for their stuff or services—we’re giving our money to a fictional legal entity, which somehow employs people to make and sell things we buy.  I realised that the first time in history that this ever happened to any great extent was with the railway companies—when someone went to the station to buy a ticket to visit their aunt in Scarborough that was the first time most individual people had ever had a direct economic interaction with a corporation.  Parliament had originally authorised the first railway companies as joint-stock companies within Smith’s categorisation of transport infrastructure…but, to everyone’s surprise, including the companies themselves, these companies ended up not just building and maintaining infrastructure but operating a huge and diversified passenger and goods transport business within the existing domestic economy.  In my opinion it was the railway companies’ ‘scope creep’ into the sphere of ‘private enterprise’, combined with their command of enormous resources, personal connections within government, and utter disregard for business norms, that broke the dam and allowed corporations to rule the world.

THE END 

For further reading on this whole sad story I recommend James Taylor’s Creating Capitalism—valuable insight into people’s attitudes and arguments at the time, and his take on what happened and why.  As I said before, I don’t think our explanations are incompatible, and I’m drawing on his ideas.