Monday, June 21, 2010

The Private Corporation--The Fulfillment of Private Property Rights

These first half-dozen or so posts have been fairly long and weighty, and have consequently led to a fair amount of time between posts to allow me to gather my thoughts and do some pertinent research. I have endeavored to lay out some first principals as to my governing philosophy in the economic and political realm. If anybody has ever seen the movie, Patton, with George C. Scott in the title role, this is the part of my blog that is analogous to the conclusion of the first 5 minutes of the movie where the General concludes his remarks to his troops by saying, "Awright you sunsabitches! Now you know how I feel!"

Indeed, you may be forgiven for thinking that this blog should be named Cambrian Republican instead of Capitalist given the nature of the first few remarks. I did so to underline a point. Capitalism could not exist without the antecedents of the American ecosystem that I outlined in the prior 4 posts:
  1. An origin that declared that man's liberty supersedes the power of the state, and that every man's rights be secured through the rule of law regardless of ethnicity, religious affiliation or other parochial associations.
  2. The creation of a precedent that instructs humility in public servants and facilitates the peaceful transfer of power from one administration to the other.
  3. The written enumeration of the processes and powers invested in the government by which all citizens' liberty and property are secured.
  4. When the success that resulted from the first 3 principles becomes self-evident to the peoples of the world, continue to remain true to your first principles by creating institutions that communicate the virtues of individual liberty, the rule of law, and more specifically the enforceability of contracts between parties.
Capitalism could not flourish in the absence of any one of these attributes. We are constantly reminded by history and in contemporary times that whenever any of the four attributes is threatened or removed from a country's ecosystem, capitalism is notably impaired and is immediately observable in the most visible component of a capitalist ecosystem--the private corporation.

Corporations have existed for thousands of years--even in Roman antiquity as groups of people organized to run businesses, as well as certain functions for the benefit of the public. Indeed, most of the law that governs incorporated municipalities has been almost completely lifted from the Common Law of Rome. In Renaissance and Enlightenment western civilizations, corporations could only be established through an act of government. However, in the mid-19th century, British and American law begun to loosen the restrictions for the certification of private corporations.

In the landmark case of The Trustees of Dartmouth College vs. Woodward, the United States Supreme Court ruled that corporate charters were 'inviolable', or not subject to arbitrary abolition or amendment by state governments. The New Hampshire legislature tried to amend the charter of the school, originally granted by King George III 50 years earlier, by resting the appointment of trustees into their own hands, thus changing it from a private institution to a public institution. Daniel Webster defended Dartmouth before the Court and the eminent John Marshall ruled that the College's corporate charter qualified as a contract between private parties. Even though the U.S. was no longer a collection of royal colonies, Marshall's court ruled that the contract was still valid because the Constitution says that a state cannot pass laws to impair a contract. Marshall emphasized that the term 'contract' referred to transactions involving individual property rights, not to "the political relations between the government and its citizens". By invoking the Contract Clause of the U.S. Constitution, Marshall reaffirmed the sanctity of the contract as necessary to the functioning of a republic (in the absence of royal rule, contracts rule). The decision settled the nature of public versus private charters, and resulted in the rise of the American business corporation. In 1844, the British Parliament echoed the decision by passing the Joint Stock Companies Act, which allowed companies to incorporate without a royal charter. Ten years later, they strengthened the private corporation by granting the concept of limited liability, meaning the parties to a failing corporation were only liable in the amount they invested in it. Complainants to the corporation could not attache the personal, non-corporate assets of the investor.

It only took about a half-century of rulings and legislative enactments to bring in force the outlines of the modern corporation whose main characteristics are the following:
  1. Exclusive entity that may exist in perpetuity: An entity conferred with the rights of a person to enter into contracts, buy and sell assets, and execute other transactions in the orderly course of business.
  2. Limited Liability.
  3. Separation of management and ownership. Allowed owners to seek and retain professional management of the enterprise they owned. Management no longer necessarily had to own the company, and were monitored by the company's board of directors.
  4. Shared ownership of contributors' capital via the issuance of easily transferable shares.
The private corporation's activity was governed by its charter, which is in effect its constitution. The enfranchisement of a private property right into an entity with a specific purpose that could undergo its value-enhancing activities in perpetuity was a revolutionary thought that led to profound changes in the betterment of humanity by orders of magnitude.

Observe the life of President-elect Thomas Jefferson in 1800. His life was similar in quality and character of say an adult male in 1700, and not much better than a person's life experience in 1300. However, the manner of living of Vice President Theodore Roosevelt in 1900 would be unrecognizable to Thomas Jefferson. The establishment of the sanctity of the privately contracted transaction, allowed the expedited accumulation and concentration of risk-based capital toward the attainment of some common, focused end. The resulting fulfillment of private properties rights enriched individual liberties and allowed the scope of man's ambitions to infinitely widen.

Postscript: Going forward my posts will be shorter and much more topical. These longer posts were written to provide a philosophical grounding of my viewpoints toward much of the commentary that will proceed. All are invited to argue and comment on any points that I have written in these posts. My rules for this blog are that you provide deliberate commentary that is supported by evidence (or provide the location of supporting evidence); that you form your arguments based in logic and sound reasoning (not emotional appeals, sentimentality, or the presentation of anecdotal evidence), and that you offer arguments in the absence of any ad hominem remarks.

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