APPENDIX To
chapter 2
Early
Business Structures:
Excerpts
from The Wealth of Nations[1]
Adam Smith
Adam Smith’s
description of “joint stock companies” in the Inquiry into the Nature and Causes of the Wealth of
Nations provides the earliest known
eye-witness description of the risk-transferring, profit-maximizing entity we now call the corporation. The following text
quotes Smith at some length on the peculiar alchemy of this form of
enterprise.
The
protection of trade in general has always been considered as essential to the
defense of the commonwealth, and, upon that account, a necessary part of the
duty of the executive power…. But in this respect, as well as in many others,
nations have not always acted consistently; and in the greater part of the commercial
states of Europe, particular companies of merchants have had the address to
persuade the legislature to entrust to them the performance of this part of the
duty of the sovereign….
When those companies do not trade upon a
joint stock, but are obliged to admit any person, properly qualified, upon
paying a certain fine, and agreeing to submit to the regulations of the
company, each member trading upon his own stock, and at his own risk, they are
called regulated companies. When they
trade upon a joint stock, each member sharing in the common profit or loss in
proportion to his share in this stock, they are called joint stock companies. Such companies, whether regulated or joint
stock, sometimes have, and sometimes have not, exclusive privileges.
Regulated companies resemble, in every
respect, the corporations of trades [guilds] so common in the cities and towns
of all the different countries of Europe; and are a sort of enlarged monopolies
of the same kind…. The monopoly is more or less strict according as the terms
of admission are more or less difficult; and according as the directors of the
company have more or less authority, or have it more or less in their power to
manage in such a manner as to confine the greater part of the trade to
themselves and their particular friends. In the most ancient regulated
companies the privileges of apprenticeship were the same as in other
corporations [and] the usual corporation spirit, wherever the law does not
restrain it, prevails in all regulated companies…. When they have been allowed
to act according to their natural genius, they have always, in order to confine
the competition to as small a number of persons as possible, endeavored to
subject the trade to many burdensome regulations. When the law has restrained
them from doing this, they have become altogether useless and insignificant….
Joint stock companies, established either
by royal charter or by act of parliament, differ in several respects not only
from regulated companies, but from private copartneries.
First, in a private copartnery, no
partner, without the consent of the company, can transfer his share to another
person, or introduce a new member into the company. Each member, however, may
upon proper warning, withdraw from the copartnery, and demand payment from them
of his share of the common stock. In a joint stock company, on the contrary, no
member can demand payment of his share from the company; but each member can,
without their consent, transfer his share to another person, and thereby introduce
a new member. The value of a share in a joint stock is always the price which
it will bring in the market; and this may be either greater or less, in any
proportion, than the sum which its owner stands credited for in the stock of
the company.
Secondly, in a private copartnery, each
partner is bound for the debts contracted by the company to the whole extent of
his fortune. In a joint stock company, on the contrary, each partner is bound
only to the extent of his share.