Knowledge Problem

The Founders Were Deeply Skeptical of Corporations

Michael Giberson

Many keystrokes this week have been devoted to praising or damning the Supreme Court decision in Citizens United v. Federal Election Commission.  I’m inclined to agree with the praisers, but others are more competent to address the legal and political issues addressed by the court.  I just want to pass along a useful bit of historical observation from Streetwise Professor:

Stevens noted that the Founders were deeply skeptical of corporations.  Indeed so. Scalia noted that there are so many corporations them today.  Also true.  The interesting question is how we got from A (Stevens) to B (Scalia).The story is told in the North, Wallis and Weingast natural state book Violence and Social Orders I’ve blogged about several times, mostly in the context of Russia.  The relevant chapter is primarily based on John Wallis’s work.  The basic story is that hostility to corporations–reflected very well in Adam Smith’s Wealth of Nations–was due to the fact that historically, English corporations were created by the crown, and were essentially very profitable favors provided to the politically connected.  They were, in NWW terms, part of the “closed order” of the natural state, in which access to certain contracting forms was limited to a select powerful few.  This animus towards corporations was inherited in the United States, but in the early years of the 19th century, state legislatures confronting issues associated with the financing of new infrastructure turned the corporate form into a prop of an open order system in which this contracting form was made available to all.  Rather than limit the right of incorporation to an elite, they made it available to everybody.  The system changed from one in which legislatures had to grant every incorporation, to one in which pretty much anybody could incorporate if they met a set of general, universally applicable requirements.  Hence, the proliferation of corporations.

Thus, Stevens was historically right, but his inference was wrong.  The kind of corporation that Adam Smith and the Founders detested was a quite different from the modern corporation that developed in the 19th century.  The name was the same, but the entire conceptual and legal basis for corporations old and new were completely different.  Indeed, almost inversions of one another. Indeed, the transformation of the corporation from a creation of the closed order to an essential element of the emerging open order explains the empirical phenomenon that Scalia cited.

I’ve been meaning to read the North, Wallis, and Weingast book since it was published, but haven’t yet secured a copy. Guess I ought to get to it.