On the Legal Origins of Corporations and The Quest For the Theory of the Firm (I)
Parallel to (and beyond) the debate over the theory of the firm and the market there is an important feature of the definition of the firm as an institution based, among other aspects, on legal elements, what has been called the legal basis of the firm.
Paraphrasing Oliver Williamson, before there were markets and firms, there were organizations, institutions and groups. Law, broadly construed, was a component of the emergence of organizations (either for religious, commercial or social purposes), markets and firms, namely capitalist firms, from the High Middle Ages to the end of Modern Times, preceding the Industrial Revolution. Without going too far back to the Antiquity and Early Middle Ages, I sketch a limited number of hypothesis and apply these elements to the Portuguese case and compare it to that some features of other nations, such as France, the Netherlands, the United Kingdom and Spain.
The literature review is made in two steps: first the theoretical aspect of the firm and its relation to the legal basis. The second part of the review has to do with the historical aspects, mainly historiography and history of the legal and institutional dimensions.
In the first section I settle the issue with a review of the literature, namely over the economic theory of the firm, the legal theory of corporation and other institutions, from the late 19th century to the recent years. There is even a recent upsurge of research, partly disconnected, over the nature and history of corporations. A discussion of the definition of corporation and firm will be made briefly based on the economic and legal scholarship. A critical stance is adopted because of the salient features of the historical and legal aspects of the object of study.
The second part of the literature review is condensed and some key points are highlighted: the controversy over the Roman and Canonical laws origin of corporation is discussed and related to the historiography of the emergence of limited liability endeavors, shareholder and joint stock companies.
The third part has to do with a second and controversial question over the legal origin of modern firms and corporations: the rise of the capitalist firm based on divided stock shares and common ownership and other features like limited liability, management structure and other neglected aspects that are important for the understanding of the entanglement of legal, institutional and organizational aspects of corporations and firms. The first and most obvious conclusion of the study is the central place of the state and merchants, political elites and financial traders. Other aspects are also discussed briefly. The legal aspects are emphasized, especially because of the availability of archives.
In the fourth part, the case of Portugal and several European countries – all related to the colonial expansion and “race” to the Indian El Dorado – are Spain, the Netherlands, the United Kingdom and France (some comments will be made to cases such as Sweden, Denmark and Germany for comparative purposes). Part of the interest is the comparison of the role of the state in the institutional and legal framing of corporations
I conclude with the importance of the legal dimension in the definition of the firm, both for economic theory, management and business history. This conclusion highlights the importance of the state and other institutions that shaped the different legal frameworks between countries and the structure of corporations. Indeed, management structure and conflicts with stockholders and the shareholder influence within the corporation is emphasized.
In the conclusion I make a brief consideration over the literature on the “Varieties of Capitalism” and relate my conclusions to some of the propositions of this literature with some critical notes. I also point out to some avenues for further research.
(to be continued)