Adam Smith on the Joint Stock Company

Abstract

Adam Smith’s Wealth of Nations is the most influential work in economics ever written. But it is neither complete nor perfect. Smith’s theory of the firm, or the lack thereof, is one of the masterpiece’s blind spots. Smith thought history had shown that joint stock companies cannot compete with smaller firms, attributed this fact to certain organizational deficits, and concluded that joint stock companies should be established only under rare circumstances. Yet, in the following decades, exactly the opposite came to pass, with joint stock companies thriving in almost all fields and markets today. What made Smith so pessimistic about the joint stock company? Why did his pessimism turn out to be wrong? This paper is the first to address and answer these questions. It helps better understand Smith, and also one of economics’ greatest mysteries: the firm.

Keywords: Adam Smith, theory of the firm, joint stock company, stock corporation, corporate governance, agency

JEL Classification: B12, B31, D23, G34, H41, K22, L22, N43, O33