Previously, I posted about Margaret Blair’s paper on concession theory, where she argued that the state played an integral role in the development of the corporate form, disputing those who argue that corporations could be somewhat replicated via private contracting. 

The latest entry in this genre is a new paper by Taisu Zhang and John Morley, The Modern State and the Rise of the Business Corporation.  They adopt a somewhat narrower definition of corporation to mean something like a large, publicly traded, limited liability entity, and argue that its rise is necessarily linked to the development of a state apparatus capable of recognizing and enforcing the rights of disparate investors, including the development of a uniform, professionalized court system.  They make their argument through a series of cross-cultural case studies, the most fascinating (and convincing) of which is 19^th and early 20^th century China.  According to the paper, at this time, China’s economy had grown to the point where it needed something like the corporate form, and corporations were in fact statutorily authorized, but China’s weak central state meant that there were few takers.  It wasn’t until the middle of the 20^th century that China had sufficiently rebuilt its national government to make the corporate form more attractive.

Anyway, if this kind of historical analysis is your thing, Zhang & Morley’s paper offers a unique new analysis.  Here is the abstract:

This article argues that the rise of the modern state was a necessary condition for the rise of the business corporation. A typical business corporation pools together a large number of strangers to share ownership of residual claims in a single enterprise with guarantees of asset partitioning. We show that this arrangement requires the support of a powerful state with the geographical reach, coercive force, administrative power, and legal capacity necessary to enforce the law uniformly among the corporation’s various owners. Other historical forms of rule enforcement—customary law or commercial networks like the Law Merchant—are theoretically able to support many forms of property rights and contractual relations, but not the business corporation. Strangers cannot cooperate on the scale and legal complexity of a typical corporation without a functionally modern state and legal apparatus to enforce the terms of their bargain. In contrast, social acquaintances operating within a closely-knit community could, in theory, enforce corporate charters without state assistance, but will generally not want to do so due to the institutional costs of asset partitioning in such communities.

We show that this hypothesis is consistent with the experiences of six historical societies: late Imperial China, the 19th century Ottoman Empire, the early United States, early modern England, the late medieval Italian city states, and ancient Rome. We focus especially on the experience of late Imperial China, which adopted a modern corporation statute in response to societal demand, but failed to see much growth in the use of the corporate form until the state developed the capacity and institutions necessary to uniformly enforce the new law. Our thesis complicates existing historical accounts of the rise of the corporation, which tend to emphasize the importance of economic factors over political and legal factors and view the state as a source of expropriation and threat rather than support. Our thesis has extensive implications for the way we understand corporations, private law, states, and the nature of modernity.