The Corporation Is Centuries Older than We Thought
The genesis of the joint-stock company is usually traced to the founding of the English East India Company and the Dutch East India Company around 1600. New research co-authored by Prof. William Goetzmann says this origin story may be off by centuries.
A 17th-century drawing of the Bazacle mills in Toulouse, France.
There are hundreds of millions of corporations in the world. They manage business in Earth’s orbit, at the bottom of the ocean, and everywhere between. It is perhaps impossible to find a corner of human life untouched by the institution.
“In the modern world, most of business takes place in the corporate form,” says William Goetzmann, the Edwin J. Beinecke Professor of Finance and Management Studies and faculty director of the International Center for Finance at Yale SOM. At its most basic, a corporation is a legal entity with delegated management that allows people to purchase and transfer shares while limiting the liability of these shareholders. Because of their prevalence, “the origin of corporations has been of great interest to academia for a century and a half.” How did such a powerful economic force come to be?
“We show evidence that there is a long-term tradition, particularly in southern Europe, that allowed for the creation of perpetually lived corporations like the modern joint-stock company.”
The generally accepted narrative pinpoints the emergence of the modern corporation to two firms: the English East India Company in 1600 and the Dutch East India Company in 1602. Amid a “Big Bang” of European long-distance trade, Goetzmann explains, the new institution emerged to protect merchants from risk. Slowly, the idea migrated across the continent, then the world.
“We propose a counterexample,” Goetzmann says, in the new study he co-authored with David Le Bris of the Université Toulouse Capitole and Sébastien Pouget from the Toulouse School of Economics. They focus on several cases from medieval France and Italy, well before 1600, in which organizations akin to the modern joint-stock company emerged simultaneously in different geographies. “We argue for and show evidence that there is this long-term tradition, particularly in southern Europe, that allowed for the creation of perpetually lived corporations like the modern joint-stock company.”
The researchers identify organizations, from the mills of Toulouse in the 1100s to the financial institution Casa San Giorgio in Genoa in the 1400s, that held a form and function like today’s modern company. Importantly, they emerged not from legal institutions designed to support the mercantile class—as with the English East India Company and Dutch East India Company—but from inheritance law that, since Roman times, had been negotiating the division of illiquid assets.
Consider a lord who willed his castle to his children. After he died they could sell their shares for cash; they could manage the castle as a timeshare (an arrangement, Goetzmann notes, that long predates the Florida vacation rental); they could rent it out and share the revenue; or each could occupy a separate wing. Each option relies on the same principle: treating the castle—or any asset—as a partnership divided into distinct shares.
“And then in about 1100 or 1200, this idea was adopted for business purposes,” Goetzmann says. “It’s not exactly clear how it made the leap, but there’s some evidence it went through mining companies in early medieval times.” This inheritance-type structure allowed for joint investment and ownership, a semi-egalitarian governance structure, and importantly, an institution that did not dissolve if a partner died. As Goetzmann puts it, “this is a very nice feature for attracting capital.”
By offering a competing historical narrative of the public corporation, the researchers invite reconsideration of not just when the modern corporate structure came to be, but also how it eventually spread.
Goetzmann and his colleagues draw on the biological theory of convergent evolution to explain their findings. This theory suggests that certain adaptations, like wings, have proven useful enough that they appear in different places and different species that are entirely unrelated, like birds and bats. Following the same logic, the researchers suggest that corporations emerged not from a single location in northwest Europe in the context of long-distance maritime trade, but from a panoply of distinct legal and economic backdrops.
And while it may appear like a historical quibble, the implications of this work feed into a much broader understanding of the relationship between corporations and economic growth. “You can imagine a very strong and compelling narrative, which is that as these feudal states matured into republics, particularly merchant republics, they invented a whole new set of financial and institutional tools that created the modern world, that created potential for economic growth that hadn’t existed before,” Goetzmann says. Kings and lords gave way to the Dutch East India Company, which laid groundwork for the Industrial Revolution.
“Our paper is a bit countercultural because there were rules from the feudal times and the Roman times that created organizations like corporations,” Goetzmann says. “Organizations, in fact, that look more like modern corporations than does the Dutch East India Company.”