Sep 1, 1982
The Limited Liability Corporation
“The notion that the LLC was a ‘necessary’ product of capitalist development appears to be historical hindsight.”
“Thoughts of Some British Economists on Early Limited Liability and Corporate Legislation.” History of Political Economy 13 (Winter 1981): 774–793.
The origins and development of the limited liability corporation (LLC) have either been little studied or distorted by hostile ideological presuppositions. Contrary to popular anti-corporate mythology, the “beast of corporatism” was not spawned at the end of the 19th-century by “mature capitalism” without any previous economic analysis. The authors seek to give some background on the earlier intellectual, economic, and legal history of the LLC and raise research questions for the future. First, they trace the steady, if not always progressive, development of British common law from the 16th century down to the 1850s. Next, they examine the attitudes, pro and con, of the famous British classical economists (Smith, Senior, Tooke, J.S. Mill, and McCulloch) toward the corporate form of business organization in the years before its final legal establishment. Finally, they sketch the series of Parliamentary inquiries and reforms during the 1850s and 1860s as a background to subsequent reactions by late classical and early neoclassical economists (including the seminal assessment of corporatism by Alfred Marshall).
By way of broad generalization, even in England, the birthplace of industrialization and the traditional home of legal and social pragmatism, the modern LLC had a tortured and uncertain birth. While championed by a few prestigious economists, it was vilified by many (such as John Ramsey McCulloch). Even extreme economic and legal reformers were torn between what seemed an opportunity to benefit the poor or middle classes (by reducing their risk in investing their modest savings through legally limiting their liability) and condemnations of limited liability corporations as impractical and unjust. Even after Parliament had committed itself, in 1844 (the Registration Act) and again in 1856 (the Joint-Stock Companies Act), nearly half a century was required in order to reach a well-functioning body of statutory law. The notion that the LLC was a ‘necessary’ product of capitalist development appears to be historical hindsight.
Finally, it is surprising that the debate over the merits of the LLC has remained on such an elementary level. While Williamson, Alchian, and others have analyzed in some detail Smith’s and McCulloch’s contentions concerning the cost effectiveness of corporate organization (see Eirik Furubotn and Svetozar Pejovich, eds. The Economics of Property Rights, 1974), Marshall’s more complex and provocative suggestions have not been intelligently followed up. His correspondence indicates that he saw the conversion of many markets from partnerships to corporate domination as an evolutionary trend but he expressed fears of an industrial world dominated by a few large firms by reason of special legal privileges.