The Greatest Invention of the Modern World — the Corporation

The Greatest Invention of the Modern World — the Corporation

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PATENTK Canadian Inventors Association

Nicholas Butler, President of Columbia University, once said, “The greatest invention of the modern age is the limited liability company! Even the invention of the steam engine and electricity were inferior.”

If you invent the company today, you can patent the company system. You don’t have to be a machine, a material structure, or a software algorithm to get a patent. Let’s look at why companies are the most novel, great and useful inventions.

The historical significance of the corporation system

Does the emergence of the company really have such a great effect on human society? How can a company, as an economic organization, be called an invention when we were taught that only new science and technology were inventions? And the greatest invention of all?

As long as it is innovative and has not obvious, useful and realizable methods and technologies, etc., can be inventions and patents. History has proved that the invention of the company system greatly promoted the economic development of human society. A lot of money is needed to build railways and canals. The question is how to raise the money? The emergence of the corporation has become the most effective way to raise funds. Marx famously said: “If it were necessary to wait for accumulation so that some individual capital could grow to the point where it could be used to build railways, there would be no railways in the world today. But it was done in a flash through the corporation.”

We should realize that all innovations that surpass our predecessors and are beneficial to human society are inventions. Whether it is the invention of science and technology or the innovation of social system. And often the invention of science and technology affects a field, while the innovation of the social system will affect the whole society, and even affect history. Such as the “rural contract responsibility system”, “special economic zone”, “one country, two systems” and so on proposed in the reform and opening up.

It seems that our previous understanding of invention was too narrow. “The company is the greatest invention of the modern age” is not surprising if we take a closer look at how human society developed before and after the birth of the corporate system, and the role that companies played in it.

According to the research of American economist Delong, “97% of the wealth of mankind has been created in the past 250 years”. Was 250 years ago, the British industrial revolution period, before this, humanity has experienced a long history of several thousand years, in the long history, human beings have many great inventions, such as China’s four great inventions (gunpowder, the compass, printing, paper), the four great inventions to Britain’s industrial revolution period since the invention to Europe more than one thousand years history in the past, in this one thousand year of history, many science and technology inventions into realistic productivity, far less than two hundred years of progress and change. What is the reason for this? Why are the same scientific and technological inventions transformed into real productive forces in different historical periods so different?

The birth of the company coincided almost with the Industrial Revolution in Britain. As long as we understand the birth, role, and development process of the company, we can know that the company played the most important role in it.

Before the advent of corporations, many scientific and technological inventions and their conversion into commodities depended mainly on the personal power of the inventors, or on the power handed down from generation to generation, or on the support of enlightened officials. It is difficult to get support from groups and social forces. History has proved that the invention, improvement, and transformation of science and technology into real productivity, in addition to the individual efforts of the inventor, also needs the support of many resources and elements. Continuous financial support is needed, for example; Talents with various skills are required to work together; A large number of engineering problems need to be solved; It requires a considerable amount of manpower to work together for production and the accumulation and inheritance of knowledge. Need to create market demand, meet market demand, and provide follow-up services for goods; Need to deal with other producers; You need someone to organize and manage, and so on.

None of these needs can be addressed by the inventor himself, or by the government. How to do?

Evolution of the company

Under the condition of the market economy, it is necessary to have an economic organization that can transform scientific and technological inventions into various resources and elements needed in the process of actual productive forces, and organizes them to achieve this goal.

But the organization needs to solve two problems: first, it needs someone willing to invest. After the investor invests, the biggest worry is whether the investment has a problem to bear all the consequences? Is it an unlimited liability? If we can’t solve this problem, there won’t be a large number of people willing to keep investing. Second, invest with confidence. Because there are many investors, but not every investor is directly involved in the operation. If it is not possible to clearly distinguish the property of investors and the property of the economic organizations they invest in, investors who are not directly involved in the operation will worry that the assets they invest in will be easily taken away by investors who are directly involved in the operation due to information asymmetry. As a result, a large number of investors who do not directly participate in the operation will not feel safe to invest.

The design of the company system gives an answer to these two questions.

The solution to the first problem is to keep investors’ risk under control, namely limited liability. All investors of the company shall bear limited liability within the limit of their capital contribution. This system allows investors a limited risk, unlimited returns can make people who want to take risks want to invest bold investment.

The solution to the second problem is to clearly divide the property boundary between the individual property of the investor and the economic organization invested in so that the economic organization becomes an organization with independent property and personality, namely, an independent legal entity, independent legal person property.

To put it simply, after the investor becomes a shareholder, in addition to enjoying dividends when the company is making profits, any act of seeking the interests of the company without the consent of all shareholders is illegal. Even shareholders. Its meaning is legal person property wants to be protected like individual property, inviolable. In this way, investors who do not directly participate in the operation can be reassured to invest, making cooperation between strangers possible.

Limited liability and the demarcation of property are two related issues. If the demarcation of shareholder and company property is not clear, the shareholder must assume unlimited liability to the company. The solution to these two problems resulted in a very elaborate economic organization, the corporation, the limited liability corporation. This is a genius design that achieves the best combination of self-interest and collaboration.

After the emergence of the joint-stock company, the problem of exiting the company through equity transfer was further solved. The company solved the difficult problem of can continue to raise money, then you can borrow, can buy technology, can hire, you can purchase resources, the company became the market elements configuration platform, combination of various resources platform, a platform of the interests of the investors, a specialized division of labor cooperation platform, knowledge accumulation and knowledge platform.

Companies put these resources together, and miracles keep happening. The power of the company continues to manifest itself. A company is really just a set of rules and regulations.

Companies and markets

Companies have another important role: they are substitutes for the market.

In the Nature of the Firm, Nobel Prize-winning economist Ronald Coase argues that “within the firm, market transactions are eliminated and the complex market structures that accompany them are replaced by entrepreneurs, who direct production. I think it can be assumed that the salient feature of the firm is as an alternative to the price mechanism “.

The emergence of the market economy is much earlier than the emergence of companies. Exchanges between different subjects in the market will generate a lot of transaction costs in the process of transaction and exchange, which will increase the cost of enterprises. For example, the enterprise needs to find buyers, suppliers, negotiations, contracts, lawsuits, and so on in the process of operation.

Therefore, people are wondering if these relationships are relatively fixed, whether they can be grouped together in a form of enterprise organization to fix their relationships, so as to reduce transaction costs, improve management efficiency, increase corporate profits, and promote the development of productivity.

The organization is the company, and the company can do that. Therefore, within a certain scope of the market economy, the birth of companies replaced some market transaction relations, thus improving the efficiency of resource allocation in the whole market and promoting economies of scale, and eventually, it developed into enterprise groups and multinational companies to replace a larger market. Coase put forward the “transaction cost” theory in 1937, believing that the existence of companies is to save market transaction costs. He believes that a company is created when the cost of market transactions is higher than the cost of management within the company.

Of course, the size of the company cannot be unlimited, cannot be big enough to completely replace the market, if that is a planned economy, a country is a company. Even the Soviet Bloc of Eastern Europe was like a big company, with planned economies between countries that ended up in the opposite direction. To have a reasonable limit on the size of the company, it is essential that competition is not impeded.

Companies need to be regulated

The development of the company promotes the legalization of the whole society. The emergence and development of companies need legal norms, and the various market behaviors of companies also need legal constraints. Companies have the same law of development as many human things. They can play a great role in promoting the development of human beings. At the same time, due to their profit-seeking nature, they also do a lot of bad things and do a lot of things that are not conducive to the development of human society under the circumstances that are difficult to control. The company needs not only the Company Law but also the Securities Law, Contract Law, Consumer Rights, and Interests Protection Law, Anti-Unfair Competition Law, anti-monopoly Law, and other laws to restrict and regulate its behaviors. The development of the company, to some extent, gives rise to these laws and promotes their continuous improvement.

Since the company is a legal person, it will be like a natural person, was born, initial (infant) and growth (adolescent), maturation (adulthood), decline period (old age), life has died, the process was not only determined by its own law of development, is also the result of the competition in the market at the same time, the most typical case is the financial crisis such as Lehman brothers bankruptcy of enterprises.

In the process of its birth and development, the company will constantly encounter various internal contradictions and conflicts, as well as contradictions and conflicts from various aspects of the market and society. For example, internal management issues, the establishment, and improvement of the management system; The problem of labor relations, how to make labor relations maintain balance; How to safeguard the interests of creditors; How to conduct the assessment; How to motivate and supervise; How to sign contractual agreements with other trading parties; How to control various risks in the operation of the company; The most important question is how to govern the company. Effective corporate governance models are still being explored.

As the company (manager) will also do many bad things and harm the interests of shareholders and other parties, the company’s development process urgently needs the supervision of the government and society.

Government supervision can be carried out by promulgating government laws and by various government agencies. The supervision of the society includes shareholder supervision, intermediary supervision, and media supervision. Every time a crisis breaks, new regulatory issues are raised.

Companies are everywhere, all the time. Companies are the closest to us, and each of us can start a company, or work for a company, or enjoy its services, or litigate with the company, or buy stock in the company, or vote with our hands, or vote with our feet.

The company is the furthest away from us. We often watch all kinds of companies, all kinds of behavior, all kinds of performance, all kinds of companies you sing.

If you have a new idea for a company like this, don’t hesitate to get in touch with PATENTK. You could be one of the greatest inventors of our time.

Part of the passage is from October 11, 2010, 15:36

Zhou Fangsheng, a researcher at the Institute of Fiscal Science of the Ministry of Finance, Shanghai