The Classical Corporation in American Legal Thought

Abstract

Classical political economy was dedicated to the principle that the state could best encourage economic development by leaving entrepreneurs alone, free of regulation and subsidy. The development of classical economic policy in the United States dramatically changed the concept of the business corporation. Within the preclassical, mercantilist model, the corporation was a unique entity created by the state for a special purpose and enjoyed a privileged relationship with the sovereign. The very act of incorporation presumed state involvement. State subsidy and the incorporators' public obligation were natural corollaries. Business firms that relied on the market alone to determine their prospects were simply not incorporated.

As classical theory replaced the mercantilist model, the business corporation gradually evolved into a device for assembling large amounts of capital in a manner that could be controlled efficiently by a small number of managers. The classical model of the corporation did not emerge mature in a single decision. It evolved gradually in the nineteenth century, reaching its apogee in the 1880s and 1890s.The developing model of the classical corporation included two fundamental premises: (1) the corporate form is not a special privilege but merely one of many ways of organizing a business firm; and (2) the peculiar advantage of the corporation which the law should encourage is its ability to raise and concentrate capital more efficiently than other forms of business organization.

These important developments formed the core of the classical corporate model: (1) the attack on the Marshall era contract clause; (2) the demise of the charter theory of business regulation; (3) the rise of the General Corporation Act and the decline of the special subsidy; (4) the application of the fourteenth amendment's protections to corporations; (5) the expansion of limited shareholder liability; (6) the narrowing scope of quo warranto and ultra vires; (7) the facilitation of multistate corporate business activities; and (8) the separation of ownership and control.

Keywords: corporation, classical, neoclassical, political economy, business, limited liability

JEL Classification: B12, B25, B52, K22, K40, L21, L53