🍋3000 years of the firm: corporations, clans & government
The firm across history, and its emergence from the interactions of culture with institutions & economic development
The firm is a fundamental concept in economics. We all have an intuitive idea of the form and function of a modern firm, and its role in the wider economy. The modern firm, however, has evolved from recognisable predecessors over roughly 3000 years. In this post I present a potted history of the firm over time and across the globe, and look at the interaction between the evolution of the firm and the evolution of political institutions. Look out for when and where the features we now associate with firms first appear, including indefinite lifetimes, ownership beyond family and clan groups, a separate legal identity, and separation of ownership and control.
Firms are hard to define, but important and ubiquitous
It is hard to define a ‘firm’ in a general way. Within neoclassical economic theory, the firm can be an abstraction that represents the production side of the economy. It models organisations that intervene between people in their role as the owners and suppliers of the factors of production, and people in their role as consumers and demanders of services and finished products. Firms usually buy and combine factors in the hope of being able to sell the resulting products for more than the cost of production.
Firms are a ubiquitous feature of the economic landscape within which much of economic activity is undertaken. Bowen (1955: 1) highlights the importance of firms to people’s wellbeing, noting that
“[t]he business enterprise is one of the most pervasive and influential institutions of our society, and one in which innumerable important decisions and responses are made. These decisions and responses, in small and large enterprises, are links in the chain of factors determining the range of products available to consumers, the level of national income, the degree of economic security, the rate and direction of economic progress, and the distribution of income. These decisions and responses also significantly influence the character of human relations in industry, the quality of the lives of those who work in industry, and even the power structure of our society”.
Firms are old
It is fair to say that firms, in some form or another, have existed for several thousand years.
Sreni in ancient India
Taking ancient India as an example, Khanna (2005) argues that the Sreni — a complex organisational entity that shared similarities with companies, guilds, and producers’ cooperatives — was being used as early as 800 BC. Sreni were in more or less continuous use from that time until 1000 A.D., at which time an Islamic invasion of India started.
Sreni were separate legal entities that could hold property separately from their owners, create their own regulations controlling the behaviour of their members, contract, sue, and be sued in their own name (Khanna 2005: 8-9). Sreni were associations of persons rather than capital or property (Harris 2009: 614). They were not used as profit-maximising businesses (Harris 2009: 615).
They were utilised in occupations involving workers such as carpenters, ivory workers, bamboo workers, money-lenders, barbers, jewellers, and weavers (Khanna 2005: 10), but were not involved in maritime trade (Harris 2009: 615).
Firms in ancient Greece were short lived
In ancient Greece there were some relatively large firms but they were few in number (Bresson 2014: 45). Most of the commercial operations that did exist were small and of limited duration. The (in theory) infinitely lived firm did not exist.
Partners would agree to cooperate for just a single business operation. There might be many investors or several active partners, but their cooperation lasted for only one voyage or one operation. The development of permanent firms for commerce was unnecessary since low transaction costs meant that market transactions were sufficient for business operations (Bresson 2014: 57-8).
Firms in ancient Greece were predominately in the rural sector. Farms were longer lived, hierarchical organisations, often family owned and operated with a slave workforce (Bresson 2014: 57-9).
In Rome, contracting-out was in
During the Roman Republic, contracting-out of economic activities to private firms was the norm (Sobel 1999: 21). Individuals and firms (known collectively as the publicani) took on the role of tax collector, supplying the army, providing for religious sacrifices and ceremonies, building construction and repair, mining, and so on.
Manor bound in the early Middle Ages
For Europe in the early Middle Ages, the manor was the centre of large-scale production. Looking at eleventh-century England we see that many of the goods consumed on a manor were being produced internally. Manors undertook a diverse set of activities and were largely self-sufficient in the necessities of life such as food, drink, and likely the clothing and housing of peasants and salves (McDonald & Snooks 1986: 21). The manor relied on a residential workforce, the peasants being bound to the lord and the manor. The manors disintegrated at the end of the medieval era, when it became difficult to extract labour services by force.
Persson (2014: 232-3; 242) makes clear that the manors reached their largest share of production when they could depend on forced or serf labour. Manors were the large-scale units of production in agriculture, they never dominated production.
Firms were small in medieval Europe
In medieval Europe, firms were typically small with households being the normal production unit in agriculture. In cities, the evidence, such as it is, suggests that workshops were in the main small family-based operations with few employees, apprentices aside, supplying the local market. Such producers carried out a small number of tasks and bought intermediate goods on the market. Larger-scale production took advantage of the division of labour but the different stages of production were not integrated into a single workshop or firm. Economies of scale were exploited, not by creating large-scale vertically integrated firms, but by employing the ‘putting out’ (or Verlag) system of production (Persson 2014: 242-3).
Excepting the Florence supercompanies
Small scale may have been the norm at this time, but large firms did also exist. If we consider the 14th century, we see the development of ‘supercompanies’ in Florence. There were three companies – the Bardi, Peruzzi and Acciaiuoli – that were, for their time, particularly large and diversified. They engaged in general trading, commodity trading, banking, and manufacturing over a wide geographical area. They were vertically integrated, controlling commercial activity from acquiring inputs to selling the finished products.
Going the long distance with the commenda
During the medieval period, a business entity commonly used throughout Eurasia for long-distance trade was the commenda. The prototypical commenda was a bilateral contract involving a sedentary investor who provided capital — in the form of cash, in the Islamic world, or cash and goods, in the Latin world — used to purchase tradable goods and pay trade-related expenses, and a travelling agent (Harris 2020: 132-3). The traveller invested labour, expertise, information, contacts, and bodily risk, but did not normally provide capital. The traveller was granted control over the assets and travelled with them to the distant port or market. The contract also specified the division of any profits.
The commenda can be seen as creating a group of assets that was separate from either of the parties. Creditors of the commenda had a call on the assets of the commenda but not on the private assets of the investor. The commenda originated once or, at most, twice in Arabia or the Eastern Mediterranean or central Asia, and migrated throughout Eurasia (Harris 2020: 167).
The waqf separated ownership from control
The idea of a legal entity separate from human beings, as is the case for the corporation in the West, is not recognised in classical Islamic law. Within the Muslin world, the organisation most used for instead of the corporation was the waqf. The waqf appears to have been first used around a century after Muhammad (Kuran 2011: 110). A waqf was created by an individual who endowed land, or other immovable property, for a charitable or pious purpose. Any property so endowed was inalienable. Advancement of the waqf’s aims was achieved by the enjoyment of the property itself or by the income generated from the property. The wagf had a trustee or caretaker (mutawalli), appointed by the founder, who ran the waqf and oversaw its property. The trustee held the property in trust and neither they nor the beneficiaries owned it.
While the waqf was not a perfect substitute for the corporation, it did have two of the corporation’s most important features. It could hold a separate group of assets meaning it was possible for a perpetual holding of property to exist, and this property had a degree of shielding from the creditors of the beneficiaries. It also enabled a separation of ownership from control. What it did not have was the ability to remake its rules of operation at will, as a corporation can. That is, it was not self-governing. Also, a waqf’s range of activities was prescribed by its founder.
The clan Corporations of China
In China, there was a kinship organisation which resembled the corporation. The clan Corporation (see Ruskola 2000) had roots going back, at least, as far as the Song Dynasty (960–1279). The clan Corporation was an organisation based on lineage:
“Individuals [of] the same genealogical patrilineal line who maintained significant social relationships were considered members of the same lineage. The lineage was the highest social organization short of the state. Members of the same lineage usually lived near each other, in the same community, village, or set of villages. The core bond of a lineage, however, was religious. All members of the lineage, and only members of the lineage, worshipped the same ancestors, the common ancestral roots often going back many generations. Ancestral worship took place on lower levels as well, in the family, the branch, and the sub-lineage. However, the lineage level worship was the most important because it represented the widest circle connected to the same ancient ancestor. The worship ceremony involved gathering in ancestral halls, making sacrifices, and other rituals” (Harris 2009: 614).
While this was the situation in theory, Ruskola (2000: 1636-45) argues that in practice many of the clan organisations were in fact voluntary associations rather than natural kin groups. Von Glahn (2016: 301) notes that one strategy for the creation of corporate lineages was the adoption of more liberal principles of inclusion — that is, membership was not restricted to demonstrated common descent.
The lineage organisation held property (ancestral halls, graves, genealogical lists, and other resources needed for the worship of the ancestors) that was separate from that of the individuals and families who made up the clan. In contrast to the Western corporation, the clan Corporation — at least in theory — did not have a clear governance structure, nor was it involved in profit-maximising pursuits or even legal transactions with those outside the clan. However, Ruskola (2000: 1645-56) argues that in practice many clan Corporations did pursue profits, that they did possess elements of independent legal personhood, that they had centralised management, and that there is some, if not overwhelming, evidence that, at least in some cases, ownership rights were transferable and that the enterprises had limited liability. Over time the use of the clan Corporation expanded beyond its traditional uses as a social and religious organisation to include charitable, economic, educational, military, and political purposes.
The corporation, a slow-burner from the Middle Ages
In Europe, the corporation developed over a long period of time.
“Many European corporate organizations emerged in the Middle Ages. One of the earliest were monasteries and convents, already common in Merovingian times. The Church itself can be seen as a “mega corporation” in many ways. Universities emerged later, but were to become an unusually striking and viable example of corporations. With the urbanization that accompanied the slow but unmistakable recovery of its economy, Europe witnessed the emergence of self-governing cities and communes, as well as a number of independent city states. In those cities smaller corporations emerged, such as guilds, militias, and charitable organizations that managed orphanages and hospitals. These social organizations were created by people sharing a common objective, not an ancestor, and they were to a considerable extent self-governing” (Mokyr and Tabellini: 5).
These developments eventually resulted in the business corporation as we know it today.1
Families just keep on keeping on
Somewhat surprisingly family firms seem to have an advantage in the longevity stakes. What is argued to be the world’s oldest company is the Japanese construction company Kongō Gumi Co., Ltd which was founded in 578. Kongō Gumi was a family-owned construction company for over 1,400 years. It was taken over by the Takamatsu Construction Group in January 2006, but it still operates as a wholly owned subsidiary of the Group. The Japanese guest house Garyo Hoshi has been run by the same family for 46 generations over a span of more than 1,300 years. The French winemaker Chateau de Goulaine was founded in 1000, as was the Italian bell foundry Pontificia Fonderia Marinelli. Some families just keep on keeping on.
Firms, social organisation & political institutions
It is clear that different social/economic organisations can lead to different economic outcomes. But what of political outcomes? Joel Mokyr and Guido Tabellini argue in their new working paper Social Organizations and Political Institutions: Why China and Europe Diverged that the different social organisations in China and Europe led to different political institutions.
China had centralised state institutions from very early on, while Europe remained politically divided for much longer. Mokyr and Tabellini argue that these initial differences were amplified by the different social organisations (clans in China, and corporate structures in Europe) that spread in these two societies at the turn of the first millennium AD. State institutions interacted with these organisations, and were shaped and influenced by this interaction.
Corporations contributed to the emergence of representative institutions and gave prominence to the rule of law in the early stages of state formation in Europe, while specific features of lineage organisations contributed to the consolidation of the Imperial regime in China.
European organisations were territorially based and some of them exercised exclusive control over their territory. This was true of landed elites during feudalism, but also of self-governing cities and of ecclesiastic structures when feudal structures began to weaken. These organisations created strong countervailing powers with which European rulers had to bargain in the early stages of state formation.
Chinese society instead was organised around lineages, and these dynastic organisations were weaker than their European counterparts. For this reason, power relationships between rulers and other social groups were more asymmetric in China than in Europe.
In Europe, the manner in which cooperation was maintained created a demand for external legal enforcement and this in turn influenced the evolution of legal norms and institutions. The European state structures evolved along with their legal institutions, giving prominence to the principle of the rule of law. In China, lineage organisations were effective substitutes for the State in dispute resolution, and the Chinese legal system evolved accordingly.
Mokyr and Tabellini also note that corporations in Europe provided a framework of governance principles that influenced the methods of control of political entities. The procedures that first developed within corporations to control collective decision-making were adapted and transplanted originally to the Christian Church and then to the developing institutions of state. Such governance principles provided a framework of fairness and legitimacy which European monarchs ignored at their peril. China, on the other hand, followed principles that were more conducive to autocratic forms of government.
The Western Church and self-governing towns also acted to help shape European state institutions. Significantly, these two forms of corporations were unique to Western Europe and did not have equivalent counterparts in the rest of the world. The Church’s influence on European state institutions came via its specification of moral and religious principles, and its creation of a dual structure of powers: ecclesiastic and secular. This contributed to internal and external political fragmentation. In addition, the Church gave rise to a transnational class of legal experts. Canon law also acted as an example for secular authorities of how to govern a community. Free town charters contained, on a small scale, several foundational constitutional principles upon which modern democracies are based: protection of civil and political freedoms of individuals, elections and representative government, separation of judicial, legislative, and executive powers, and term limits for office.
In addition to their effects on political institutions, the different internal organisation of society in Europe and China also mattered for how education was structured, what type of knowledge was accumulated, and how innovation took place. This is part of a wider historical puzzle: why did the industrial revolution occur in Western Europe and not in China?
Mokyr and Tabellini close with a summary:
“At a more abstract level, the differences in social arrangements between China and Western Europe illustrate an important mechanism through which culture interacts with institutions and with economic development. Europe and China relied on different social arrangements to sustain cooperation because they had different value systems — another crucial legacy of the Church. In other words, the influence of culture on institutions and on economic development is not only or primarily a direct influence, through beliefs and ideas. It is largely indirect, through the social arrangements that spread through society because of their complementarity with specific cultural traits. This also points to the importance of social organizations in the study of economic and political development” (Mokyr & Tabellini 2023: 44).
By Paul Walker
References:
Bowen, Howard R. (1955). The Business Enterprise as a Subject for Research: Prepared for the Committee on Business Enterprise Research, Social Science Research Council, Pamphlet No. 11, New York: Social Science Research Council.
Bresson, Alain (2014). ‘Capitalism and the ancient Greek economy’. In Larry Neal and Jeffrey G. Williamson (eds.), The Cambridge History of Capitalism (vol. I The Rise of Capitalism: From Ancient Origins to 1848, pp. 43-74), Cambridge: Cambridge University Press.
Gelderblom, Oscar, Abe De Jong and Joost Jonker (2013). ‘The Formative Years of the Modern Corporation: The Dutch East India Company VOC, 1602-1623’, The Journal of Economic History, 73(4) December: 1050-76.
Harris, Ron (2000). Industrializing English Law: Entrepreneurship and business organization, 1720-1844, Cambridge: Cambridge University Press.
Harris, Ron (2009). ‘The Institutional Dynamics of Early Modern Eurasian Trade: The Commenda and the Corporation’, Journal of Economic Behavior and Organization, 71(3) September: 606-22.
Harris, Ron (2020). Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400-1700, Princeton: Princeton University Press.
Khanna, Vikramaditya S. (2005). ‘The Economic History of Organizational Entities in Ancient India’, University of Michigan Law School Program in Law & Economics Working Paper No. 14, updated version 2/2006.
Kuran, Timur (2011). The Long Divergence: How Islamic Law Held Back the Middle East, Princeton: Princeton University Press.
Micklethwait, John & Adrian Wooldridge (2003). The Company: A Short History of a Revolutionary Idea, New York: The Modern Library.
McDonald, John & G. D. Snooks (1986). Domesday Economy: A New Approach to Anglo-Norman History, Oxford: Oxford University Press.
Mokyr, Joel & Guido Tabellini (2023). ‘Social Organizations and Political Institutions: Why China and Europe Diverged’, CESifo Working Paper No. 10405, April.
Persson, Karl Gunnar (2014). ‘Markets and Coercion in Medieval Europe’. In Larry Neal and Jeffrey G. Williamson (eds.), The Cambridge History of Capitalism (vol. I: The Rise of Capitalism: From Ancient Origins to 1848, pp. 225-66), Cambridge: Cambridge University Press.
Ruskola, Teemu (2000). ‘Conceptualizing Corporations and Kinship: Comparative Law and Development Theory in a Chinese Perspective’, Stanford Law Review 52(6) July: 1599-172.
Sobel, Robert (1999). The Pursuit of Wealth: The Incredible Story of Money Throughout the Ages, New York: McGraw-Hill.
Truitt, W. B. (2006). The Corporation, Westport, Connecticut: Greenwood Press.
von Glahn, Richard (2016). The Economic History of China: From Antiquity to the Nineteenth Century, Cambridge, Cambridge University Press.
The first ‘modern’ business corporation, in the sense that it had tradeable shares and limited liability, was the English Muscovy Company which was founded in 1555 and lasted until around 1630 (Micklethwait & Wooldridge 2003: 18; Truitt 2006: 3). It was, however, the Dutch (Dutch: Vereenigde Oostindische Compagnie; VOC) and English East India Companies that raised the joint stock company to be a major and durable business form. The Dutch company was founded in 1602 and between then and 1623 developed the features which would later become the textbook characteristics of modern companies: a permanent capital, legal personhood, separation of ownership and management, limited liability for shareholders and for directors, and tradable shares (Gelderblom, De Jong and Jonker 2013). The English company introduced similar features during the 1650s (Harris 2000).