Why the joint stock company was one of the world’s best inventions

A company pools capital for entrepreneurs, and distributes risk for investors.

The oldest forms were extensions of the state, typically time-bound efforts to reach some goal of an empire. Victorian England introduced “limited liability,” in which investors were not liable for anything beyond their investment, and tradable shares.

This invention of invention helped fuel the Industrial Revolution. That’s from the 2003 book The Company: A Short History of a Revolutionary Idea by journalists John Micklethwait and Adrian Wooldridge.

More than 20 years old, the short snappy book was written in the wake of the Enron and Worldcom scandals. Before even the Great Recession, these business journalists were already asking: “Is the company essentially a private association, subject to the laws of the state but with no greater obligation than making money, or a public one which is supposed to act in the public interest?”

That questions remains important today. Even as it’s become far easier to start a company, as the authors write: “The modern company still needs a franchise from society”

Below I share my notes for future reference

Below is a video of these same two coauthors speaking in the Books at Google series in 2014 about a followup book they coauthored.

My notes:

The Joint Stock Companies Act 1862 (often called the Companies Act) was a landmark piece of Victorian legislation that established the legal framework for the modern limited liability corporation. Passed by the British Parliament, it allowed groups of seven or more people to form a company and register it easily, granting shareholders protection from unlimited personal debts
Rutherford B Hayes: “This is a government of the people, by the people, and for the people no longer… It is a government of corporations, by corporations and for corporations”
The Statute of Mortmain of 1279 was enacted by King Edward I to prevent the unchecked accumulation of land by the Church (monastaries) and other perpetual corporate bodies (“dead hand”)
The history of the company is old (as I’ve written about here and here) is old but the Victorian model was new for globalization and industrial age: had “artificial personhood”, tradable shares and limited liability (investors could be at arms length)— no longer special purpose enacted with state sanction
At their founding, Karl Marx begrudgingly supported for the same reason they were criticized by some, assumed the company would become collectivist in risk
John Stuart Mill accepted them because the capital intensive businesses of his day needed either limited liability investors or state control
“The limited liability corporation is the greatest single discovery of modern times,” said Nicolas Murray Butler. “Even steam and electricity would be reduced to comparative impotency without it”
Why is the limited liability corporation so important? More easily and efficient allocate capital
In 1937, Ronald Coase famously introduced his “nature of the firm” to bring down transaction costs (later debate between nexus of contracts vs bundle of org capabilities)
The Phoenicians and Athenians had some entities with shared risk but it was the Romans with tax collecting “societates” that began the structure of separate company
China and India advanced In technology but not pooled risk as companies: Chinese state companies were as corrupt and incumbent as European ones but many small European states meant theirs still competed more than Chinese ones
Muslim Koran split up inheritance across many family members, keeping family firms small (unlike European), and the law was less predictable (oral testimony)
Famously at height of China’s 15th century ascension, Yung Lo’s son ended seafaring and limited Zheng He — which might have changed global colonialism
In 1793, Chinese emperor sent a letter to Britain’s king George III: “As your ambassador can see we possess all things… There is therefore no need to import the manufacturers of outside barbarians and exchange for our own produce”
Italian merchants and European state enterprises pick up where Romans left off (often tied to voyages)
Company = compaigne = cum panis = breaking bread together (because Italian firms started as joint liability, and bankruptcy was punishable by prison.
Denis Papin ambush
Make a chart of oldest companies, of longevity (East India lasted 274 years; Hudson Bay is still olersfing)
Initially the English East India Company treated voyages as separate ventures, the Dutch (VOC) made all voyages part of a 21 year venture (more like today’s companies)
In 1611, the 10th English East India Voyage returned 148% to investors
Post Cromwell, the VOC pushed English East Indies out of spice trace so focused on India, while questions of whether a private company should have. A monopoly and a standing army
In 1773, parliament gave the company monopoly over tea in America, sparking the Boston Tea Party
The Royal Navy and maritime insurance finally eroded the need of chartered monopolies
In 1790s Elizabeth Heyrick launched a consumer boycott that forced the company to abandon West Indies sugar produced by slaves and instead moved to Bengal
Mississippi (French, John law) and south sea (English) bubbles
Edward Thurlow: (1731-1806)“ corporations have neither bodies to be punished, nor souls to be condemned, they therefore do as they like”
In 1619, the Virginia company introduced representative democracy into the colonies (same year of slavery imported)
Northern European contracted imperialism more successful than southern European (Spain) form of state version
East India Company called their administrators “civil servants” before government
During the impeachment of William Hastings, Edmund Burke described the East India company as “a government of writing and a government of record”
John Stuart Mill and Thomas Love Peacock among those writers who worked at the company while advancing their personal work (peacock wrote a poem about work drudgery)
In 1733, Irish satirist Samuel Madden (1687-1765) wrote a memoirs of the twentieth century in which two giant companies dominate the world
“They are behind the times… They belong to an age that is passed ,“ said a Pennsylvania governor about joint stock companies as quoted in William Roy‘s book from 1997 called socializing capital
After the state charters, the company fell out of favor for a century before legislation changes in the 1820s in England and then emanating out
The South Sea Bubble Act was partially repealed in 1825 by the Bubble Companies, etc. Act. Also known as the Act of 1825, this legislation removed the strict ban on joint-stock companies that had required special parliamentary approval, allowing the Crown to more easily grant corporate charters.The original Bubble Act was enacted by the British Parliament in June 1720 at the height of a massive speculative stock market bubble. It was heavily lobbied for by the South Sea Company in order to crush smaller rival companies and monopolize investor capital. The Act made it a criminal offense for unincorporated joint-stock companies to operate or issue shares without a formal Royal Charter or an Act of Parliament
Bolton and Watt grew manufacturing but remained a two-man partnership who handed down to sons — did well but ignored 1780s drawing from William Murdock of a wheel carriage (train) that Watt dismissed
South Sea company abuses shaped English views of joint stock companies (with distant oversight), but the American system was formed by them
Harvard oldest chartered American corporation, the first business was probably New London society in Connecticut in 1732; north Catholics in 1795 passed an
In 1785, the Potomac company intending to make the Potomac navigable had Washington and Jefferson as directors and still failed
New York curbside markets replaced Philadelphia
Dickens 1848 novel Dombey and Son focused on the death of a son hurting a family firm that was a partnership (as opposed to a limited liability)
Three pivotal early 19th-century developments catalyzed the rise of the American corporation: the Dartmouth College case (1819) securing private charters from state interference, railroads driving massive capital pooling, and state competition that replaced exclusive monopoly grants with accessible, general incorporation law
In 1819, Supreme Court found Dartmouth case that corporations had private rights so states couldn’t rewrite charters so willingly
In 1839 Massachusetts state legislature said companies didn’t need to be doing public works to be awarded limited liability— in 1837, connected e went further and allowed most to have limited liability (early economic development race to the bottom)
“The Pennsylvania Coke and Iron Company, chartered in 1831, was compelled to produce five hundred tons of iron within three years using only bituminous coal or anthracite in the process. A bank charter in New Jersey required the company to help local fisheries. New York limited corporations to $2 million in capital until 1881 and to $5 million until 1890. In 1848, Pennsylvania’s General Manufacturing Act set a twenty-year limit on manufacturing corporations. As late as 1903, almost half the states limited the duration of corporate charters to between twenty and fifty years. Throughout the nineteenth century, legislatures revoked charters when the corporation wasn’t deemed to be fulfilling its responsibilities.”
But England really led this 19th century wave: East India opened in 1834, Corn Laws repealed in 1846 and 1825 repealed bubble act —- railroads from George Stephenson in 1830 through 1840s, 2k miles of track laid by joint stock companies
Adam Smith among the many skeptical of limited liability (fear of collectivist distance)
John Stuart Mill thought limited liability could help the poor grow firms (by accessing new capital)
The Joint Stock Companies Bill was introduced to Parliament by the Vice President of the Board of Trade, Robert Lowe. In doing so, he proclaimed the right of every citizen to have freedom of contract and, with it, to obtain limited liability for operating a business. This makes him a father of companies
Afterward, France and Germany and even Sweden added more liability protections
“Is the company essentially a private association, subject to the laws of the state, but with no greater obligation than making money, or a public one which is supposed to act in the public interest?”
Robert Lowe called companies “these little republics”
Sears an example of businesses built on railroads — Woolworths and other department stores too
Veblen: conspicuous consumption
In 1851, the United States couldn’t fill Queen Victoria ‘s Grand Exposition but by 1913 produced 36% of the worlds industrial output — Germany did 16% and Britain 14%
Railroads invented the administrator, inspired by British colonial military
Between 1890-1904, massive consolidation left American industrial base in the hands of just 50 corporations
Trusts dated back to the crusades; became a tool of industrialists to form loose confederation of companies with similar voting
In 1892, the Ohio Supreme Court ordered the dissolution of the original Standard Oil Trust. To evade the ruling and continue centralizing control, John D. Rockefeller took advantage of New Jersey’s liberal incorporation laws—specifically its allowance for holding companies to own stock in other corporations. Virginia, New York tried but Delaware won the incorporation race to the bottom.
Herbert Spencer social Darwinism of survival of the fittest defended the trusts
Carnegie labor union standoff In Homestead PA (1894 Pullman strike)
In 1867, EL Godkin argued why the United States lacked the class consciousness of Europe “the social line between the laborer and the capitalist here is very faintly drawn. Most successful employers of labor have begun by being laborers themselves; most laborers… Hope to become employers.”
“The City of Brotherly Love was one of the most snobbish in the country. Yet, the city’s old families were not foolish enough to turn their backs on the new wealth that was being created by the Pennsylvania Railroad and the nearby coal-fields3 Instead, an informal deal was struck with the corporate parvenus: they could enter “society” so long as they were willing to shoulder their social obligations. This transformation of red-blooded capitalists into proper Philadelphians involved buying a house in Rittenhouse Square, playing golf at the Merion Cricket Club, perhaps even fox-hunting at the White-marsh Valley Hunt Club, and certainly handing their daughters (and their dowries) to the sons of the more gentrified families. Above all, it involved civic involvement—organizing charities, serving on the boards of the symphony, the art mu-seum, and the University of Pennsylvania. Charles Curtis Harrison, one of the city’s great businessmen, became presi dent of the University of Pennsylvania 32 Wharton Business School was set up by Joseph Wharton, founder of the Bethlehem Iron Company. This concentration of power was hardly democratic. Philadelphia’s elite thought nothing of deciding the fate of the city in their oak-paneled clubs. Yet, by co-opting big business into the city’s future, the old elite plainly brought much good to their city. And it was repeated across the entire country. The wealth that the new companies of the 1880s and 1890s generated was not just wasted competing to get invited to Mrs. Astor’s parties or forcing robber barons into the Social Register (first issued in 1888), though both these things certainly happened. It also helped to establish social services where none existed. It built museums and art galleries in a country that was prone to philistinism. And it bound the classes together in a society where the income gap was widening.”
Why corporations sustained progressive era: they wised up to politics and PR (Ivy Lee); they introduced CSR (employee welfare and Philantropy (Carnegie) and they really made everybody richer
Werner Sombart in “Why is there no socialism in the United States?” he writes “on the reefs of roast beef and apple pie socialist utopias of every sort are sent to their doom.”
Early shareholder vs stakeholder capitalism (authors terms); UK and U.S. vs Germany (smaller, guild influence more apprenticeships and vocational trainung) and Japan (middle stand and zaibatsu and Keritsu
Despite creating the firm the UK kept more family firms rather than American professionalism
American firms were the end (tend and grow them); the UK firms were a means to an end (to be harvested by civilized gentry)
Commerce and even applied science was looked down upon by UK elite
Friedrich List argued that the nation is the fundamental unit of economic activity, rather than Adam Smith’s focus on the individual. He posited that the ultimate goal of political economy is to cultivate a nation’s productive powers and industrial capacity, rather than merely maximizing the short-term, cosmopolitan accumulation of exchangeable values
Gilded Age robber barons ceded to the 20th century professional manager, separating ownership from control, and driving skyscrapers for their offices
Alfred Sloan said of William Durant: “a great man with a great weakness – he could create, but not administer”
Thomas McGraw: “What Ford did for physical machines, Sloan did for human beings”
Ford resisted trends in multidivisions and professional managers; DuPont followed Sloan and built centralized R&D while divisions focused on ptofitsbiiity
Coca Cola and Proctor and Gamble professionalize market research and advertising
Wharton (1881) was widely followed by Harvard business school (1908)
Frederick Taylor (((Remember his Philadelphia research)); James McKinsey
Sinclair Lewis’s 1922 novel Babbitt and George Orwell’s 1939 novel Coming Up for Air are foundational texts that satirize the trap of the modern “company man.” Both novels explore the stifling reality of middle-class conformity, material obsession, and the quiet despair of the modern bureaucratic worker
Berle and Means’ 1932 classic, The Modern Corporation and Private Property, highlighted the separation of corporate ownership and control, exposing widespread shareholder passivity. This reality shaped the Securities Act of 1933 and subsequent federal laws, forcing self-interested managers to publicly disclose vital financial data to protect the fragmented owners.This paradigm stands in stark contrast to the historical legal framework highlighted by the Michigan Supreme Court’s 1919 ruling in Dodge v. Ford Motor Co. (often associated with 1916 events). The court famously established that a business corporation is organized and carried on primarily for the profit of the stockholders, directing boards to prioritize shareholder payouts over broader public or employee benefits.While the Dodge v. Ford ruling dictates that operational strategy must ultimately aim to benefit shareholders, the Berle-Means framework proves that actual day-to-day corporate control frequently defaults to management. This dynamic remains a central tension in modern U.S. corporate law and governance.
Peter Drucker’s groundbreaking 1942 book, The Future of Industrial Man, argued that the corporation had replaced the church and local community as society’s most powerful institution. He later expanded this in his landmark 1946 study on Alfred Sloan’s General Motors (Concept of the Corporation), where he argued that employees must be valued for their brains and problem-solving abilities, rather than being treated as interchangeable machine parts
Drucker in 1959: knowledge workers
In his 1967 landmark book, The New Industrial State, John Kenneth Galbraith argued that the U.S. economy had transitioned from free-enterprise capitalism. It was now controlled by a “technostructure” of managers and planners in giant oligopolies—like the Big Three automakers and Big Five steel companies—which planned production, prices, and consumer demand to ensure stability.
In the 1956 Organization Man, William Whyte argued that the “Social Ethic”—a rising corporate culture that prioritized conformity, group consensus, and belongingness over personal initiative—was stifling entrepreneurship
Thatcher privatization and Yeltsin post Cold War and China —Carter deregulated airlines
in 1974, America’s 100 biggest industrial companies accounted for 35.8% of the countries growth domestic product; by 1998 that figure had fallen into 17.3%.
Three groups of people played a leading role and unbundling the mega corporation of the 20th century: the Japanese, Wall Street and Silicon Valley
President Reagan’s 1983 tariffs on heavy motorcycles bought Harley-Davidson crucial time to modernize and retool. Coupled with a 1981 management buyout, this protection enabled Harley to introduce the innovative Evolution engine and lean manufacturing practices. By 1987, Harley had rebounded enough to request the tariffs be dropped early.In contrast, the UK motorbike industry—once a global powerhouse with brands like Triumph and BSA—collapsed. Its failure is largely attributed to a cycle of underinvestment, poor labor relations, and an inability to match the engineering reliability and mass-production efficiency of Japanese competitors like Honda and Yamaha
“Money goes where it wants and stays where it is well treated” aphorism
On March 28, 1980 Richard Anderson compared HP and Japan’s best chips, showing Silicon Valley was behind — software diversification followed
In 1956, the same year “Organization Man” was published, William Shockley Nobel prize celebration photo has most men without ties (Northern California was always more informal, more small firm and distributed)

“Philadelphia, which had done so well out of the robber barons, got clobbered. Scott Paper had been a pillar of civic life in Philadelphia for decades. But in 1993 it posted a loss, and in 1994 it brought in Al Dunlap to boost its flagging per-formance. “Chainsaw Al” moved the headquarters to Florida, laid off thousands of workers, reneged on a promise to pay the final $50,000 of a $250,000 pledge to the Philadelphia Museum of Art, and finally sold the business to Kimberly-Clark?+ Another staple of local civic life, Drexel and Com-pany, wound up as part of Drexel Burnham Lambert, and was forced out of business by federal prosecutors. SmithKline merged with a British company, Beecham.? Meanwhile, many of Philadelphia’s new companies preferred the anonymity of Route 202 to the expensive amenities of downtown.”
Enron and Worldcom controversies were in the recent past as this book comes out
European tariffs from late 19th century to even UK giving up on free trade to battle Americans — who eventually formed subsidiaries within those countries further adapting to local tastes
Japanese firms were in United States: Kikkoman made soy sauce in Texas before 1890s
By 1960, of $66b FDI, half was U.S. and just 16% was UK
Rather than establish local roots like Shell and Unilever British executives of 19th, the Americans used the post-World War passenger jet to travel around
Jean-Jacques Servan-Schreiber’s landmark 1967 book, The American Challenge (Le Défi Américain), argued that U.S. corporations were dominating Europe. He warned that if European nations did not modernize their decentralized management, education, and innovation, they would become mere economic colonies of the United States
Between 1980-2000, 50 largest firms grew more slowly than the works economy
“Companies spraying from the loins of the state”
“ I believe in corporations “said Teddy Roosevelt. “They are indispensable in instruments of our modern civilization; but I believe that they should be so supervised and so regulated that they shall act for the interests of the community as a whole.”
“The trend at the moment is for the corporation to become ever less “corporate”: for bigger organizations to break themselves down into smaller entrepreneurial units. The erosion of Coasean transaction costs will make it ever easier for small companies—or just collections of entrepreneurs—to challenge the dominance of big companies; and ever more tempting for entrepreneurs to enter into loose relationships with other entrepreneurs rather than to form long-lasting corporations.”
“The modern company still needs a franchise from society”
“Will society find a successful way of exploiting, an organization that has become collectively indispensable, yet individually unpredictable?” (East India lasted 258 years, Microsoft would be remarkable to reach a quarter of that)