Friday, 1 April 2016

Mills and institutions

Will Goetzmann and collaborators have a new paper in circulation that looks institutional innovation over the last millennium or so... Medieval mills were high-tech and expensive to build, and it turns out that many of the things that make modern corporations tick (or not tick so well) were already tried out in the joint stock companies that financed and operated these mills. Here is the abstract:

We exploit unique archives extending over six centuries to trace the development
of corporate governance mechanisms that emerged in response to problems inherent in
organizing, capitalizing and sustaining large-scale business enterprises. Two Toulouse
milling concerns with antecedents in the 11th century organized themselves via mergers
into widely-held joint-stock companies in the years 1372 and 1373. We document the
institutional innovations they developed over the ensuing centuries, and place these
in the context of institutional economic theory. The rms adapted or invented insti-
tutional features that are widely recognizable today, including fully tradable shares,
limited liability, shareholder meetings, governing boards, cash payout policies, account-
ing audits and mechanisms for re-capitalization.
The paper has some interesting implications. First, it shows that it wasn't Northern Europe that invented the corporate form. Second, it shows that the advantages of joint stock companies seem forever elusive -- they don't out-compete other corporate forms today, and they didn't back then. This casts doubts on theories of development that put a shortage of capital center-stage. Plenty of food for thought here...