Introduction to Economics                 Lesson 5 of 2006                        



In Australia and throughout the world, much economic activity is performed by or through what are called or referred to as “companies”.  Why is this so?  What is a company and how has it come about?



There are various definitions as to what precisely, in an economic or business context, is a company.  [We are not concerned with the use of the word in a military sense, in the sense of companionship, a ship’s company, or whatever else.] 

To a certain extent at least the variations reflect merely the differences contained in the statutes and regulations of governments, which regulate the legal existence and activities of companies within the jurisdiction of each such particular government.   But apart from such statutory or regulatory distinctions, there is basic widespread agreement as to what constitutes a company.

A company is an organization, a structure, an institution, an entity or a vehicle comprising 2 or more people who have united to pursue a common business interest.  It is related to, and sometimes overlaps, the concept of a club, an association or a society, but is generally thought of as separate and distinct from these.  It can take the form of a partnership, a joint stock company or a limited liability corporation.  In modern times however the tendency has been to equate it with the limited liability corporation.



The history of the company is complex and confusing.  This is partly at least because the concept has developed from differing strands and sources and has meant different things at different periods.  In medieval Europe the viewpoint that the Catholic Church was more than just its members and was eternal led to the development in Canon Law of the concept of the Church as a corporation. 

At the same time the need for an ongoing existence of the position and affairs of various individual offices or groupings of people lead to the development of the concept of the corporation aggregate and the corporation sole.  Examples of the former include the Governor and Company of the Bank of England, the Corporation of the City of London and the Chancellor, Masters and Scholars of the University of Cambridge.  An example of the latter is the Archbishop of Canterbury.

Early commercial corporations such as the Dutch and the British East India Companies were set up by rulers and governments to undertake colonial ventures and to benefit from trade with and exploitation of newly discovered lands. The development of the modern company however, probably really began at about the time of the Industrial Revolution with the legislative chartering of various designated bodies to establish specific infrastructure such as waterworks, roads, bridges and railways.

Beginning about 1820 the emphasis changed.  Rather than legislation setting up designated individual  companies, tightly regulated for a specific undertaking, governments passed what were called Enabling Acts; legislation designed to attract business by encouraging people generally to incorporate within the particular jurisdiction in effect to perform whatever business they liked.  In what has been described as “a race to the bottom”, legislatures competed in making it easier for companies to incorporate and operate in their particular jurisdiction.  In the USA for example this has lead to the to the “Delaware Corporation” with perhaps 60% of the top companies in the USA being incorporated in that state.  Amongst other things, Delaware charges no taxes on profits earned outside the state.      



The large limited liability Corporation is perhaps the most significant factor in the creation of the modern world, at least in the parts generally seen or regarded as developed and which consequentially provide their populations generally with materially higher standards of living.  It has enabled or facilitated the aggregation of capital, thereby providing the pool of funds required to undertake ventures too large, too risky or too slow in returning a profit to be taken on by any one individual or family or even a group of individuals or families.

As the size of the pool of funds available and of the tasks undertaken increased a new profession came into being; the manager.  Previously businesses had been operated and managed by their owners and their families.  Development of the professional manager has lead to greater specialization and increased efficiency resulting generally in increased returns and faster development.   It has also enabled undertakings of ever-greater size and complexity to be initiated and conducted.



The modern limited liability corporation possesses a number of significant features.  They include

·         The ability to sue and be sued in its own name rather than the names of all the members.

·         Perpetual succession; it continues in existence even if its members die.

·         Members enjoy limited liability; they are not liable for the debts of the corporation other than the amount they have agreed to contribute by way of the purchase of shares.



The power and influence of modern corporations, in many instances greater than nation states, has resulted in many people criticising the concept of the corporation and calling for it to be abolished or more strictly controlled.  Such modern critics include Ralph Nader and Noam Chomsky who have called for greater government control of the activities of corporations and a refocus on public rather than private interest.



                                        David Sharp

                                          May 2006



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