When analyzing the history of the American corporation, it is tempting to believe that the cause of the rapid rise of large, hierarchical corporation, in a highly concentrated industry is over determined. Historians have advanced theories that explain this corporate revolution as phenomenon created by a variety of different factors. In this paper, I take two of the most prominent theories, those of Alfred Chandler and William Roy, and integrate them into a theory that focuses on the preconditions necessary for the corporate revolution to occur. I argue that government investment in public and legal infrastructure laid the foundation and provided the impetus for firms to dramatically grow and increase their profitability by adopting the structure of the large hierarchical corporation; the rise of which caused many markets to become highly concentrated. I define infrastructure as, the resources required for an activity.
[...] Additionally, the corporate structure limited the liability of its owners to their invested capital, and indeed changed the definition of ownership; owners did not own the corporation as such, but rather the rights to control the corporation and to collect its profits. Thus, the corporation became more than the property of its owners; it became its own entity, perpetual, but divisible. This divisibility is described by William Roy as the “socialization of property,” which he characterizes thus, instead of each firm being owned by one or a few individuals, each firm became owned by many individuals, and individual owners in turn typically owned pieces of many firms” (Roy 10- 11). [...]
[...] In 1888, and again in 1889, the state of New Jersey liberalized its corporate laws, “essentially legalizing the holding-company form of organization.” This change had dramatic consequences for American Business, as by 1901, the majority of large, capital-rich firms were incorporated in New Jersey. The hallmark of this change was the ability for firms to own stock in other firms, but the legislation had other profound consequences (Roy 152). By allowing the free incorporation of any firm, the New Jersey government essentially did away with a corporation's necessity to serve a public purpose. [...]
[...] By altering its corporate laws, the state of New Jersey made an investment in the legal infrastructure necessary for the rise of the modern corporation. As firms incorporated, they became able to buy other firms, and were able to dramatically increase their capital through the socialization of property (Roy 253). In Scale and Scope, Alfred D. Chandler argues that, essential first step that led to the creation of the modern industrial enterprise was the investment in production facilities large enough to exploit the full potential of the economies of scale and scope inherent to new or improved technologies” (Scale and Scope 26). [...]
[...] In order fully take advantage of economies of scale and scope, firms needed to develop an hierarchy of executives and managers to administer this new larger corporation, thus replacing Adam Smith's “invisible hand” of the market with Chandler's “visible hand” of management (Scale and Scope 14-18) (Roy 7). I propose an alternative explanation based on the concept of infrastructure. Using Roy as a starting point, I place central importance on the corporate institutional structure, and take the preconditions of efficiency theory technological advances, economies of scale and scope, and hierarchical managerial bureaucracy as necessary to the development of the large hierarchical corporation, but not sufficient to imply causality. [...]
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