What’s the big deal about corporations?

I had the pleasure yesterday of attending a lecture by Timur Kuran that discussed how the adoption of laws allowing corporations fostered the economic success of Europe. The only form of commercial organization allowed in the Ottoman Empire until the 1850’s was a partnership. This led to two difficulties. First, in a partnership it only takes one member to veto a proposed move. Second, since a partnership is legally an organization made up of a certain set of people, it automatically dissolves when any one of them dies.

That issue of corporate personhood has come up during the Republican primary campaign with Mitt Romney’s comment, and as one of the litany of issues mentioned by the Occupy ___ groups. Mike Munger asked Dr. Kuran about this at the end of his talk. What would happen if we did away with corporate personhood? My recollection of the response, along with some elaboration, is below.

1. Doing away with corporate personhood would be an obstacle to pooling resources. Right now–even despite the economic downturn–it is extremely easy (historically speaking) in modern, developed economies to match capital up with labor. We can even match up enough capital to produce things like iPads, ATM’s, and airplanes. This kind of resource pooling did not happen in the Ottoman Empire because of the constraints mentioned above. Because of the minority veto, you wanted to know and trust the people that you were forming a partnership with. (Dr. Kuran showed evidence that in the 17th century about 80 percent of partnerships had only two members, while fewer than 5 percent had more than 5.) I personally don’t care who’s running the companies I invest in as long as they’re doing their job.

2. Doing away with corporate personhood would prevent perpetual ventures. When all you have is a partnership and one of the members dies, game over. Right now, the health of key individuals like Steve Jobs does play some role in speculation about the company’s future prospects. But it would be absolutely ludicrous for me to have to know the health of 500 CEO’s and other board members simply to have confidence in my investment in an S&P index fund. Ottoman law further complicated this because of their inheritance laws and the fact that more prosperous business owners were likely to have multiple wives and many children. When they died, their business assets were split up in many small pieces. Now, if any of the other stockholders in a corporation dies, the other stockholders are unaffected and the shares pass intact to the deceased’s estate.

3. Doing away with corporate personhood would hurt laborers. To me this was the most illuminating part of the answer that Dr. Kuran provided. As a laborer–whether you serve food at McDonald’s, make cars at GM, or develop software at IBM–you benefit from the fact that a corporation is purchasing your service. You benefit from the two factors mentioned above, in that you can put capital from strangers to productive use and don’t have to worry about the corporation dissolving without warning. But these two seem somewhat weak nowadays–we have Kickstarter and corporations do sometimes fall apart overnight. The most important benefit to the worker is that you have the corporation as a form of protection should anything go wrong. It limits your personal liability, meaning that the McDonald’s worker who sold the woman coffee that was too hot was not personally responsible for the $600,000 lawsuit.

It can be funny to talk about whether or not corporations are people, but a world without corporations is no joke. Just ask the citizens of the Middle East, who are still suffering from nearly a millennium of slow economic growth.