Commentary: Crackpots of the World, Unite!
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The author reminds the reader that neither markets nor corporations are synonymous with “capitalism,” and one ignores the lessons of economic history at one’s own peril.
In one of his more charitable moods, Dr. Johnson noticed, “A wise Tory and a wise Whig, I believe, would agree. Their principles are the same, though their modes of thinking are different.”1 I can half-seriously propose that the inverse is also true; namely that ignoramuses, utopians and, finally, fanatics, have remarkably similar modes of thinking though their principles and convictions are vastly different.
My friends visited Monticello, where they were shown the iron plough with the comment that it was invented by Thomas Jefferson. It obviously never donned on the Virginian curators that human history began somewhat earlier than 1776 and that metallic agricultural implements supported agrarian empires for millennia, especially in the timber-scarce Middle East and tree-conscious Chinese Empire. Another literary wit suggested, according to my memory, in Newsweek that the paved road was invented by some American. Poor Romans, they must’ve waited too long for this masterpiece of American ingenuity.
How akin is this thinking to the remembrances of one of my professors, who during his 1940 exams had to listen to the references to “Comrade Stalin’s theses on agriculture.” These theses ringed as “the crop must be reaped in time. Be late and you lose the crop” (with understandable consequences). Hittites, Babylonians, and Egyptians were obviously unaware of that. Linguistically challenged Uncle Joe was sparse on such formulas, but Chairman Mao turned these pronouncements in the style of Hallmark cards into a veritable art form.
No, friends. The plough was not invented by Thomas Jefferson, genius though he was. Equally true is that the markets preceded capitalism by thousands of years. We do not know when they originated, but the Code of Hammurabi, a written code of law composed a thousand years before the Laws of Moses, already contained attempts at market regulation.2 Hence, the markets were already functioning. Mosaic Laws, in particular, regulated land and slave ownership—obviously, the most pressing economic issues of the day.
The corporation was probably a later invention, yet it has also existed for millennia. Even if we exclude the temple landholdings in the Ancient Near East, the corporate organization has existed at least since the Roman times. One of the most important Roman corporations and, simultaneously, the first known example of the joint-stock companies were the tax farms.3 Outside of the government sector, corporations existed in antiquity, for instance, in the form of “funeral societies,”whose official purpose was to insure members against funeral expenses. Several seditious sects such as Christians proliferated in the Roman Empire under the guise of these societies. To the ones who think lightly of that, I remind that in the 19th century the Church of the Mormon was established under the corporate laws of the State of New York.
The innovation brought upon by capitalism was the triumph of a joint-stock limited liability company as the preferred form of corporate organization. While the Roman tax farms already had tradable shares, the extent of this form was pretty limited until the Late Middle Ages. Why this was so? I don’t know. My best guess would be that both Roman and Christian medieval societies regarded the concept of “limited liability” as farcical and even ungodly.4 Hence, the most popular corporate form was a partnership in which owners were locked in a mutual covenant.
The capitalist firm seemed so new even at the time of Industrial Revolution that Adam Smith cautioned: “The directors of such [joint-stock] companies… being the managers of other people’s money rather than of their own, it cannot be expected that they should watch over it with the same anxious vigilance with which they would watch over their own. Like the stewards of a rich man, they apt to consider attention to small matters as not for their master’s honor, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company.”5 The semantic abyss between the traditional view of corporations as intrinsically suspicious and prone to misuse and glorification of the firm, even endowment of it with some unalienable rights in the modern business discourse is truly staggering.
–Peter B. Lerner, MBA, PhD is a semiretired financial researcher residing in Ithaca, NY.
1. S. Johnson quoted in J. Boswell, The Life of Samuel Johnson, Vol. 4 (1791).
2. The Code of Hammurabi is a disjointed compendium of laws, ordinances and “best practice” reviews. Remarkable prominence is given to the physicians’ fees and prosecution for malpractice. Obviously this problem was as poignant then as it is now. We can excuse his lack of economic literacy in imposing direct price controls, but Hammurabi could have selectively enforced his code by targeted flaying and impaling the trespassers. The due process consisted of a brief prayer to the god of the sun, Shamash.
3. The distinguished scholar of contract design and executive compensation Ulrike Malmendier (UC-Berkeley) recently came up with a fascinating study of the Roman tax farms.
4. In the Harry Potter series, J. K. Rowling imagined the corporation of goblins who treated things as intrinsically belonging to their producers/creators. What the outsiders considered as a permanent sale, they viewed as a temporary rent. The ownership of swords, armor, horses, and wives by the Viking chieftains retained some flavor of this archaic understanding.
5. A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Part 3, Chapter 1.
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