Jacob Goldstein
Jacob Goldstein spent more than a decade as co-host of the Planet Money podcast. He's also the author of the book Money: The True Story of a Made-Up Thing, which the New…
Join Pushkin+
Gain access to ad-free versions of 20+ podcasts from the Pushkin library along with exclusive bonus episodes and other member benefits.
Jacob Goldstein and Robert Smith talk with Adrian Wooldridge, co-author of The Company: A Short History of a Revolutionary Idea.
Companies are some of the most powerful institutions in the modern world – right up there with the nation-state. Where did the modern corporation come from? And what do AI and Chinese state-owned firms mean for the future of the company?
Connect with us:
Robert Smith, consider, if you will, the company.
00:03
Speaker 2
The company, the corporation, the firm.
00:06
Speaker 3
Not any company, not a company, but the idea of the company.
00:11
Speaker 2
Which seems like this big concept that almost exists in nature, right? You have the state... The state is how human beings organize themselves politically, and then you have the company.
00:23
Speaker 1
The company is up there with the state, right?
00:26
Speaker 3
The company, in terms of powerful institutions in the modern world, those are clearly the big two. It's really interesting to look at the history of business, as one does, and realize that the company... especially the company as we know it, has not always been around. It is a human invention that was invented in a very specific time and place. That time and place is England in the mid-1800s. And then the company went on to conquer the world.
00:57
Speaker 1
I'm Jacob Goldstein.
00:58
Speaker 2
I'm Robert Smith. This is Business History, a show about the fundamental, basic history of business, which is the company.
01:07
Speaker 3
And Robert, you and I both read years ago, before we started the show, we read a book called The Company, a short history of a revolutionary idea.
01:15
Speaker 2
I picked it up a couple weeks ago and looked at it again and found that I had underlined probably half the book. Like, loved it. Great ideas in this book.
01:23
Speaker 1
Yeah, full of ideas and stories.
01:25
Speaker 3
And so for today's episode, we are interviewing one of the co-authors of the book, Adrian Wooldridge. He's an opinion writer at Bloomberg News now, has been covering business and economics for decades at this point.
01:39
Speaker 1
We talked to him about the history of the company. That's what today's episode is.
01:43
Speaker 2
And we're going to cover some of the big things that have happened since Adrian wrote the book. The rise of companies in China, for instance, artificial intelligence. That'll be at the end of the show. But mostly we talked about the older history because it really is fascinating.
01:56
Speaker 3
In particular, we started with this list that is in the book of the four things that came together, at least in Wildridge's argument, the four things that came together to create the modern company. The list is this. One, artificial personhood. Two, tradable shares. Three, limited liability. And four, open entry, meaning anybody who wants to can start a company. And so, of course, we started with number one on the list, artificial personhood.
02:28
Speaker 4
A corporate body is something that can live forever. It's more than the sum total of the individuals who constitute it. And it can live globally in all sorts of ways. It's not defined by the boundaries of either place or time. And the people who really develop a lot of the legal thinking behind the notion of a corporation, a corporate body, are the Romans. It's a very important fact of Roman law.
02:57
Speaker 1
The word, right?
02:58
Speaker 3
Like it's cognate with corpse. It means formed into a body. Yeah. So what is this sort of proto-corporation that we see in ancient Rome?
03:07
Speaker 4
Well, you could have a town could be a corporation or a guild could be a corporation. There are groups of people who form organizations to pursue collective ends. There are fishmongers, fishermen people who gather together to represent the interests of people who are involved in fishing and things like that. Yeah, I think the whole, it's the notion that when you form a collective, It has a collective existence, which is more than just the existence of its individual members. It's a body which has an immortality, has an ability to exist outside the rules of space and time.
03:47
Speaker 2
Did it need a contract? Did it need rules?
03:50
Speaker 4
I mean, in Rome, yeah, of course. Everything is defined by contracts and laws and rules. These are business-minded rules. But a legion is a corporation. An army would be a corporation. Things like that. It's certainly something that is a collective entity.
04:07
Speaker 3
And then you talk about this flourishing of corporations in medieval Europe when we first get the word company. Which comes from like eating bread together.
04:19
Speaker 4
Yeah, breaking and eating bread together. And the Middle Ages is the medieval times. There's an obsession with corporations. The Middle Ages is a world in which you have towns, you have guilds, you have bodies of people. who have collective existences, collective rights, and they are forming these in a way that's both enduring and also puts constraints on the power of the state. So the Middle Ages is almost a world that is honeycombed. with corporate bodies and, of course, the church.
04:54
Speaker 1
The Corporation of London is from that time.
04:57
Speaker 4
I'm sitting at this very, very moment in the City of London, the Corporation of London. This old City of London is absolutely full of these corporate bodies. And then you have things like, let's say, the guilds, the fishmonger halls and things like that. These are bodies that have been in existence for, Many, many, many centuries in which at one point in their lives regulated trade in all sorts of things. Now they basically regulate their own dinner times.
05:30
Speaker 3
So you have this kind of corporate personhood in a general way going on for a long time. It seems like a big kind of step function, a big moment in the life of the company comes around 1600, right? When you get the chartered companies, the Dutch East India Company, the English East India Company.
05:53
Speaker 1
Which bring, you know, to go back to our list.
05:54
Speaker 3
So we've had corporate personhood, tradable shares kind of exist for a while before this, but tradable shares kind of, as we know them today, come to be a big deal with the chartered companies around 1600. So tell me about these companies and tradable shares.
06:10
Speaker 4
Well, well, Chartered companies essentially exist in order to.
06:16
Speaker 5
Do trade with chunks of the world. The East India Company does trade with East Indies. The Africa Company does trade with Africa. And they're basically given monopolies by.
06:28
Speaker 4
The state, have the right to issue shares, which give limited liability to people who invest in those companies. So you're bringing together some very, very important of the components of the company, as we've talked about so far.
06:44
Speaker 2
So when we have these companies, and we've heard about them in history class, the English East India Company, the Dutch East India Company, what exactly were they bringing in terms of products? If I were someone who lived in London, how would my life have changed through the import of what we were getting from the East India Company?
07:03
Speaker 4
Spices would be a very important thing. you know, Indian spices, all of the sort of things one associates with the Far East, or tea, or precious metals, or diamonds, or rubies, all of these sorts of things that are available in India, you go out and get them. So there's a sense of enormous adventure. It's like sending a rocket out to the moon and it comes back with a bunch of things that aren't really very common in your country. And suddenly people haven't seen these things before, haven't had them, and suddenly they're addicted to them. One is coffee. That's primarily bought in from Turkey. Another is tea, primarily bought in from China, but also from India. All of these things are coming on these boats, which are controlled by these limited liability trading companies. They're given these monopolies by the states in return for doing certain favors to the state. So they're They're sort of used by the state to control parts of the world. The British East India Company lends the state ships. And quite frequently, the British East India Company is bailed out by the state if it gets into trouble.
08:12
Speaker 1
They're called trading companies.
08:14
Speaker 3
We think of trade as like, well, we'll sail over there and sell them some stuff and buy some stuff from them.
08:19
Speaker 4
Yeah, it's not quite as nice as that.
08:21
Speaker 1
They were private imperial companies. forces, right?
08:27
Speaker 3
I mean, the English East India Company had an army and a navy and they invaded and took over India, essentially.
08:32
Speaker 4
Well, when it starts off, it's a bit more gentle than that in the sense that they've got ships, they've got guns, they shoot people who are their rivals, but they're basically engaged in trade with parts of the world that they reach. As the East India Company, as it develops, it evolves from being primarily a company that's engaged in trading with primarily a company that's engaged in ruling. Essentially, they take over the administration of India because they conquer India and they take over the taxation of the Indians. They use the taxation of India to employ soldiers. We've got a global trading empire administered through a sort of private company with its own army, its own navy, costing the taxpayer and the state nothing, but nevertheless extending Britain's sphere of influence in Asia.
09:32
Speaker 3
There were people at the time who didn't like the East India Company because it was doing bad things, because it was, you know, killing people in some instances. Interestingly, Adam Smith also didn't like the East India Company. And this is obviously well after it was founded, right? This is the second half of the 1700s. But he didn't like it for economic reasons, right? Why didn't Adam Smith, what was Adam Smith's problem with these people?
10:00
Speaker 4
Smith's essential problem with the East India Company is it's a monopoly. The East India Company has a monopoly of trade with India, China, other parts of the world, a whole range of different places. It has a monopoly. In return for that monopoly, it has limited liability.
10:18
Speaker 1
It gets to be a company, right? That's the deal it's making.
10:20
Speaker 4
So it's really much– he sees it really as an arm of the government, a pretend free trade organization. It's a monopoly. And a lot of East India employees will go on to sit in parliament. I think about a quarter of the MPs in Britain at one point are former East India employees. And– whenever the East India Company has bad periods, as it does do, whenever it goes bankrupt or close to bankruptcy, it's always being bailed out by the government. So it will pay a lot of money into the government.
10:57
Speaker 1
So he's making the libertarian case, the free market case.
10:59
Speaker 4
It's a free market case because this is not really a free market organization, partly because of monopoly, partly because of constant subsidies coming in. So the East India Company will pay out for a number of years and then it will get into trouble and it will require big subsidies, which the government always does it because it's got this bunch of East India men sitting in parliament voting in favor of it. So it's a very peculiar, very peculiar organization.
11:25
Speaker 1
So we've done corporate personhood. We've done tradable shares. Let's talk about about limited liability.
11:32
Speaker 3
And let's talk about it, you know, as time goes on, limited liability remains controversial into the 1800s. And it's interesting to me because limited liability we take for granted today.
11:48
Speaker 1
But it's not obvious that the world should be that way. And in fact, it's kind of weird, right?
11:53
Speaker 3
Like if you, whatever, give somebody $ 1, 000 to buy something from them, to buy flour from them, then the company goes bankrupt. And they're like, oh, we're not going to give you that flour you bought. And you can't have your $ 1, 000 back because we went bankrupt. And then you go to the house of the CEO or the guy who was running the company or owned the company.
12:14
Speaker 1
And he's still super rich. He's got a big house. He's got a ton of flour. And you're like, just give me that flour. I bought it. And he's like, no, no, the company went bankrupt. And I don't owe you anything.
12:23
Speaker 2
I'm fine. I'm fine.
12:24
Speaker 4
Absolutely.
12:25
Speaker 1
That's weird.
12:26
Speaker 4
I wonder who you're thinking about. Anyway.
12:28
Speaker 1
Yeah.
12:28
Speaker 4
I mean, I should emphasize the fact that we've been talking about a certain sort of company, which are limited liability companies. And they're big trading companies which enjoy these monopolies. But there are lots and lots and lots of other companies. The vast majority of companies are partnerships.
12:48
Speaker 1
Historically, you mean up until the 1800s? Historically.
12:51
Speaker 4
So when you've got the East India Company, big massive organization doing all of this stuff, you've got thousands upon thousands of partnerships. And they basically consist of, they have corporate personhood to some extent. They're people who come together and agree to do business with each other, but they don't have limited liability.
13:13
Speaker 1
Which is amazing, right?
13:15
Speaker 3
Like in that setting, if the company goes bust, the partners go bust.
13:20
Speaker 1
You can't be rich.
13:21
Speaker 4
And have your company.
13:22
Speaker 1
Down to their cufflinks. Lloyd's. We did the Lloyd's story.
13:25
Speaker 3
That's Lloyd's of London had unlimited liability until the What?
13:29
Speaker 1
End of the 20th century, basically. Anomalously.
13:32
Speaker 4
So what tends to happen because of the risk of unlimited liability is that these organizations remain small. They tend to be people who know each other very well, quite often who are related to each other. And they tend not to last for hundreds of years. They're born and they die. They dissolve quite quickly because they're networks and they can go spectacularly bankrupt. So this separation between these big trading companies with their limited liability on the one hand and these very small partnerships, mostly of people who know or are related to each other, which come and go very, very quickly. So there are two different sorts of worlds. If you go to the time of the Medicis, let's say, there are large numbers of companies, but those companies will be partnerships.
14:20
Speaker 1
And family. I mean, the Medici, famously, it's a family.
14:23
Speaker 4
And the Rothschilds. The Rothschilds. It's very common.
14:27
Speaker 3
The chartered companies, the trading companies are so big and so risky that the government's like, OK, we'll make an exception for you. You can have limited liability because nobody could handle unlimited liability.
14:38
Speaker 1
The risk is too big. But what is it that changes in the 1800s?
14:43
Speaker 3
Why does it flip from limited liability being the exception to limited liability being the norm as we know it today?
14:51
Speaker 4
The heart of this whole thing is the advent of the railroad. Because the railroad requires a lot of capital. And it requires big risks on the part of a lot of capital. And the government really, really wants railroads to be all over the place. So instead of having to go through the rigmarole of getting a bill through Parliament to grant this person or that person the right to build a railroad, the government comes along and it says, why don't we have this idea of making limited liability automatic? If people apply for limited liability, let them have it. All they need to do is fill out the right forms, have the right corporate structure. And so instead of being a privilege granted in order to achieve certain ends. It should be a right that you have so long as you do follow the rules.
15:42
Speaker 1
And when people say that, other people say, that's crazy.
15:45
Speaker 2
Especially with railroads, you've got a giant iron thing that can hurdle through space, kill people, like of all the things to give them liability for, limited liability.
15:55
Speaker 4
Absolutely. So there are a lot of people, and we shouldn't forget here the role of ideology, that in a world in which you have... the predominance of patronage. place, position, feudal values. It sort of makes sense that you have to ask for privileges from the government and the government will give you those privileges in return for doing things for the government. That's how the old world used to work. Everything was about patronage and deference and personal relations. Then come along a group of people who we might call neoliberals if you wanted to be a little bit anachronistic, but they're They.
16:36
Speaker 1
Call themselves liberals at the time.
16:38
Speaker 4
They're classic liberals who say, well, the world works better if it's a nexus of contracts and if we presume that people are going to do the right thing and if the market works. So we should have a market with establishing companies just like all sorts of things. So a group of liberal reformers of whom the most famous is William Gladstone come along and say, well, this should be an automatic thing. Granted, if you obey certain rules, tick certain boxes, rather than the privilege that you ought to be groveling to the government about. So it's essentially at the heart of the liberal reforming movements of the mid-19th century. There are two things that they're obsessed by, really, in my view. One is that you should have open competition for jobs or for academic positions or for places at universities.
17:27
Speaker 1
A free market in labor.
17:31
Speaker 4
And secondly, that you should have the same sort of principles with companies. But there is quite a significant group of free market thinkers who raise a big question mark at the time. And John Stuart Mill being the most prominent of these people. And they say, what do you mean by limited liability? So you're going to impose the cost of risk, which is consciously taken by certain people on the whole of society. Why should the whole of society passively have to accept the consequences of business practices going wrong?
18:04
Speaker 3
Yet there's a world you can make a free market story where like a state of nature is obviously unlimited liability, right? Like if some guy is running a company and owns a company and loses a bunch of money and owes me money and he has money, then he should give me money in a state of nature, you could argue.
18:23
Speaker 4
So the public, ultimately, somebody has to pay if things go wrong. And ultimately, it's the public that pays it. One of the things that happens from the middle of the 19th century onwards when you get this mass production, you get a lot of public limited liability companies. There's an enormous bubble in the sense that there's a lot of fraud. There are lots of companies that are badly run, lots of companies that go bankrupt. it becomes a feature of British or American capitalism. A lot of companies are a bit dodgy. And the word company has a pretty rakish name. One of the great books written in the 1870s, I think, is The Way We Live Now, which is by Anthony Trollope. And it's a book about companies, people who create companies, basically to build railroads in the middle of America, which they know nothing about. The people who are running the companies are are a bunch of idle aristocrats who think that they're going to get free money for putting their names on boards. And there's this character who's the heart of this book called August Melmut, who's basically a massive fraudster. And this book is, you know, not only extremely popular at the time, but it's telling the story of a lot of financial fraud that goes on.
19:38
Speaker 1
We're going to take an ad break. We'll be back in just a minute.
19:41
Speaker 3
By the way, if you want to listen to the show without ads, you can sign up for Pushkin Plus. at pushkin.fm slash plus. In that model, you give us money and you don't have to listen to ads.
19:53
Speaker 2
It's kind of like time travel because you'll jump forward many minutes.
19:58
Speaker 1
A few minutes.
20:01
Speaker 2
And we are back from the break. with our guest today, Adrian Wooldridge.
20:04
Speaker 1
So I want to just go back a moment.
20:07
Speaker 3
So there's this debate over limited liability, and there's sort of a free market case against it. You could also make a free market case for limited liability, which is whatever consenting adults want to do, the government should let them do. So if I want to start a limited liability company and somebody wants to do business with my limited liability company, as long as they know what they're getting into, they should be allowed to.
20:27
Speaker 2
And they will because it's in the name. You attach limited liability company to the name.
20:33
Speaker 1
It's LTD in the UK, right? It's Corp or Inc in the US. It's AG in Germany.
20:39
Speaker 4
Yeah, that's right. And so the pragmatic minded people such as Gladstone and his Chancellor of the Exchequer, who's an extraordinary figure called Robert Lowe.
20:50
Speaker 1
You call him the father of the company.
20:52
Speaker 4
I think in many ways he is the father of the company because he's the chancellor of the Exchequer. He's an extremely educated, articulate man. And he's actually an albino. He's almost blind. He's this white. wizened sort of looking figure he can't see but he's an extraordinary forward-looking thinker and he talks about companies his phrase for them is little republics these are little republics because they will run business they will create prosperity and they'll do it without the government really having much to do with them so instead of the government being involved in all of these decisions such as who trades with the with the indies or who builds bridges The government just lets the market get on with these things, lets people of their own free will form collective entities which produce this, that and the other, run railroads, do all of these things. They're little republics. They limit the power and the responsibility of the state.
21:49
Speaker 3
Yeah, Elo says up until now, forming a company has been a privilege. We hope to make it a right.
21:55
Speaker 4
That's right. Absolutely.
21:56
Speaker 1
And he does, right? There are these specific, a couple laws that get passed through Parliament in the mid-1800s.
22:01
Speaker 3
Yep. That bring all of these things together, corporate personhood, tradable shares, limited liability for.
22:08
Speaker 1
Anybody who wants it. That's right. And the company as we know it becomes a thing in the world.
22:13
Speaker 4
Yes. And it doesn't take much. I mean, it doesn't take much in terms of parliamentary legislation. You know, you put these, as you say, these four things are put together. These bills are passed. And very, very quickly, you get corporations becoming corrupt. mainstream. You get buying shares in private companies rather than these big public trading companies becomes mainstream. Gilbert and Sullivan writes an opera about companies. They're saying these companies have become a massive feature of British society, also American, German, French society, very, very quickly. They move from being oddities to being central organizations in society with great speed as a result of legislation, which is essentially very elegant, enabling legislation. None of your American style 10,000 page documents saying this, that and the other. They're enabling documents of a very modest type of legislation, I think.
23:15
Speaker 3
And yet, despite the relative elegance and simplicity of the British corporate law relative to the overwrought, overlong American corporate law, American corporations took off in the following century.
23:30
Speaker 4
No, no, I think your corporate law at that time was as elegant as our corporate law was. I was thinking about your current Sarbanes-Oxley and all of this sort of bloated sort of stuff.
23:38
Speaker 1
Fair enough, which is why the UK is kicking our ass now. Oh, wait, sorry.
23:42
Speaker 5
I do.
23:43
Speaker 4
No, so corporations... take off very quickly, and they cover the world very, very quickly. And I think that Britain, in my mind, is one of the great innovators in this, although similar things are going on in other countries, and they're going on in the United States at the same time. This move from a privilege to a right, this move from corporations capable of issuing limited liability, being auditors to being the central institution of the time. But what happens in the United States in the second half of the 19th century with an extraordinary speed, I think, is a revolution of scale that you get in the United States, just gigantic organizations. Up until then, it's only really states and state armies that employ people on that scale. We're talking hundreds of thousands of people. being employed by private sector organizations.
24:39
Speaker 2
At the same time that you're talking about here, we're also seeing a lot of regular people move into owning stocks and trading stocks. And we've done shows before about the manipulation that started to happen, insider trading, pump and dumping stock was what we'd call it now, and Jay Gould and this whole thing. Was there a movement to have protection for shareholders or... Did people think if you have the money to invest in shares, you know, buyer beware?
25:09
Speaker 4
I think there's not much of a movement at first. I think that there's an asymmetry of knowledge and information of an extraordinary sort and a bilking of the public on the part of the companies, the organizations. People just don't know very much. And the railroads are some of the worst. But there isn't really a regulatory frame. We don't have a Federal Reserve even or an SEC.
25:30
Speaker 1
There's nobody to do the regulation. There's nobody to do the regulation.
25:33
Speaker 4
And there's no information available to people. So you're constantly, and again, thinking of novels, you know, Edith Warden's novels are full of people, respectable, prosperous people who are being bilked. by big companies and who are bankrupted by that. And the only person who really tries to bring some order, not the only person, but the person who's a bit prominent in terms of bringing some order in this sort of capitalism, I think is JP Morgan. And, you know, the banks are doing it more than any regulatory body.
26:07
Speaker 2
Is doing it.
26:08
Speaker 4
So a lot of people lose a lot of money on the railroads.
26:11
Speaker 3
I mean, that's how Carnegie made his first money was working for the railroad and essentially insider trading.
26:16
Speaker 4
People like Rockefeller and Carnegie, the companies that they create are not regular limited liability companies. They tend to have massive control over them. They tend to have shares which only give them the right of control. They're titans. They're sort of dictators of their own company. So, you know, capitalism is messy. It takes a long time. But I don't think.
26:41
Speaker 3
Unlike today when all the big companies are run by the shareholders?
26:44
Speaker 4
Just kidding. We might talk about that a bit later. But when, you know, when Carnegie, the shareholding company is only really tidied up... by J.P. Morgan, I think, who comes up and starts introducing some rules of these things.
27:02
Speaker 3
And much more so in the 30s, in the Depression, right? That's when we get the modern regulatory regime.
27:07
Speaker 2
Absolutely.
27:08
Speaker 1
So let's talk about the 20th century.
27:10
Speaker 4
If you look at the American capitalism after the Second World War, it's not today's American capitalism in the sense it's more, it has more notion of stakeholders. You have stable people big companies that often conduct themselves in a way that takes into account stakeholders. And sometimes people talk about stakeholders, sometimes they don't. But there's this notion that it's the job of the company to be a sort of stabilizing force. So I think America goes through a big revolution in the 1980s in terms of its version of capitalism. And you have this notion in America, I mean, John Kenneth Galbraith is a classic example of this, whereby you have this notion that we should have countervailing forces. You have the big company, you have big governments, and you have big trade unions, and they sort of balance each other out. But companies are not pursuing short-term profits, and they're not only pursuing short-term profits. You have three big companies, as it were, in every sort of area. It's a much more stable version of capitalism after the Second World War. And you could call it stakeholder. I don't think Galbraith uses the term stakeholder. But it's different from what happens after the 1980s. It's not greed is good capitalism. It's stability is good capitalism.
28:29
Speaker 1
So let's get to the present.
28:31
Speaker 5
Yeah.
28:31
Speaker 1
After thousands of years. Yeah.
28:33
Speaker 3
So you wrote this book more than 20 years ago now. Holds up very well. It's a great read still.
28:39
Speaker 1
What has been.
28:41
Speaker 3
Particularly surprising to you over the last 20 years when you think about this long history of the company versus what we've seen since you wrote the book.
28:49
Speaker 4
I think there's been an enormous evolution in companies since about the year 2000. It's been a very, very dynamic period that we had this notion in writing this book. And I think more generally, there was this sort of notion that there were these things called public companies, which issued shares, enjoyed limited liability. for issuing those shares. And that was the sort of template of modern capitalism. And since then, since we wrote that book, we've got a lot of different forms of companies, which, you know, they're almost as if they're private companies, which can also issue shares and have limited liability. We've had a retreat from the stock market. We've had all these things, LLCs.
29:32
Speaker 3
The idea that you would have a company worth a trillion dollars, as we do now, that is not a public company.
29:39
Speaker 1
Yeah. I mean, if there was no company.
29:42
Speaker 3
Worth a trillion dollars, even if you adjust for inflation. But if there were, the idea that one of the 20 biggest companies in the world would be an American company that hadn't issued shares would be unthinkable.
29:51
Speaker 1
Absolutely. Why did that happen?
29:53
Speaker 4
Partnerships going onto the market and things like that. I mean, it's essentially an American phenomenon because there's so much more capital available. in so many different forms. You also had this notion, well, the people who own companies are you and me. They're regular people who own them through shareholding and that's the way that they're dealing with their savings. Now you have these people who are buying and selling companies in very aggressive ways who You have pools of capital that belong to a very small number of people who are getting the benefits of limited liability.
30:28
Speaker 3
That is quite striking to me. The basic private equity model is... borrow a ton of money, buy a company and try and sell it for a lot more in a few years. And what the borrowing, the leverage means is if you sell it for a profit, you make a ton of money. And what the limited liability means is if you don't and you fail, then you stay rich and you.
30:51
Speaker 1
Form another limited liability company and try it again.
30:54
Speaker 2
Absolutely.
30:54
Speaker 3
Like that really seems to be taking advantage of the asymmetry in limited liability.
31:00
Speaker 1
Do you think it's bad? Absolutely.
31:02
Speaker 4
Do I think it's bad? I'm sort of sentimental about these things. Yes, I do think it's rather bad. I mean, I think that the sort of public company model was a good way of having popular capitalism. and of bringing together society's savings, society's risks, and the benefits of capitalism and distributing them widely. Now we do seem to have a system whereby some people have all the rewards and fear.
31:32
Speaker 2
Of the risks.
31:33
Speaker 1
I mean, I will say....
31:35
Speaker 3
I don't have the numbers in front of me, but lots and lots of people do own shares now.
31:40
Speaker 5
Absolutely.
31:41
Speaker 3
This might be different in six months, but certainly at this moment, if you have owned an S & P 500 index fund or just whatever boring thing in your retirement account for 10 years, you have done quite well. ordinary people, at least as of now, are doing okay.
31:55
Speaker 4
That's the thing which limits my worry about it. And because America, which has been the prime sort of innovator in terms of different sorts of ownership and private equity and things like that, also has been the country which has done the best in terms of, you know, if you invest in the stock market in America, you will have done really quite well, better than you would have done in Europe. So it is creating a great deal of wealth But I also think it is creating a great deal of risk, which does worry me.
32:21
Speaker 2
What is the risk of having so much of our economy in private companies?
32:26
Speaker 4
The risk I see at the moment is I think that the risk is that we have crashes and that the cost of those crashes, as happened in 2007, 2008, is borne by the public in general. And that creates an addiction to risk on the part of all sorts of people. And I think we had an addiction to risk in the financial sector, which has been dealt with to some extent. But now we have an addiction to risk with AI and things like that. So I think putting all of your risk in one basket, I think it is a risky thing. So systemic risk. is a problem.
33:04
Speaker 2
Are public companies too over-regulated?
33:07
Speaker 4
I think the problem with the over-regulation of public companies is a problem of size. I think that because of the burden of regulations that were imposed because of a number of very bad bits of behavior by some quite big companies such as Enron, it's quite difficult for smaller companies to get off the ground. The cost of the Sarbanes-Oxley and the rest of it is very big for small companies. And what we're seeing in capitalism.
33:37
Speaker 3
This is why companies stay private longer, in part, is because the costs of going public are higher.
33:43
Speaker 4
And I think one of the things that we're seeing at the moment is not only companies staying private for longer, but we have a version of capitalism in which we have a big amount of consolidation, big companies dominating more and more areas of the economy, in tech, obviously, but not just in tech. And companies are staying around for longer than they were, let's say, in 2000. They're bigger than they were, let's say, in 2000. They're employing more people. They have more levels of hierarchy. So we're getting a consolidation of capitalism. And that worries me for many reasons, partly because I don't think we get the vigor of entrepreneurial self-renewal, but also because if you've got a smaller number of companies, the likelihood of disaster if one of them comes crashing down is bigger.
34:29
Speaker 3
Yeah, you wrote in the book, you wrote, the East India Company lasted for 258 years. It would be remarkable if Microsoft reached a quarter of that lifespan.
34:39
Speaker 2
Yes.
34:40
Speaker 3
So when you wrote that, Microsoft was about 25. Now Microsoft is about 50 years old.
34:47
Speaker 1
So it'll pass the.
34:49
Speaker 3
Quarter mark in 2040, which I would definitely bet on, right?
34:53
Speaker 1
Like Microsoft.
34:54
Speaker 3
is this wild giant that, to its credit, has largely reinvented itself.
34:59
Speaker 4
Absolutely. When we were writing this book, it was a period in which it looked as though capitalism was going through a very entrepreneurial phase. And we were talking a great deal about virtual companies, about the life cycle of companies getting shorter. Silicon Valley seemed to be this place where companies were being born and dying. Now, capitalism seems to be much more going through a phase of consolidation. Even companies that start off from nothing, they race very rapidly to become big, as Facebook did. And then they consolidate very quickly. They build up their defenses and all of that sort of thing. And it does look as though the average life cycle of companies that reach the top of the tree is getting longer again. The size of companies is getting longer again. The number of levels of their hierarchies is getting bigger again. We're going through a period of consolidation. It's quite interesting that I think there's a sentence of Alfred Chandler, the great business historian, who said that the history of American companies is the history of very brief periods of entrepreneurial vigor, followed by very long periods of consolidation, that he was talking about what happens just after the Civil War, when you had a period of Entrepreneurial vigor, then consolidation, and many of the companies that established themselves in the 1880s, 1890s are still around today. And it does look as though Chandler was right about this.
36:21
Speaker 1
Punctuated equilibrium.
36:22
Speaker 4
Punctuated equilibrium. And you put very interestingly to the example of Microsoft, because Microsoft really is a fascinating story of a company that looked a bit sort of stolid and staid. And it's gone through a great process of reinvention.
36:35
Speaker 3
Because they had an operating system and like... A spreadsheet and a word processor, right?
36:41
Speaker 4
That's right.
36:42
Speaker 1
When you wrote the book. And now they are a cloud company.
36:45
Speaker 4
Absolutely. No, no. It's a great company. And it does look as though Google has the capacity for reinvention, Amazon, the rest of it. So I would rewrite that sentence.
36:56
Speaker 2
We'll have more of our interview with Adrian Wooldridge in just a moment. Those are the ads. This is the interview we're talking with Adrian Wooldridge.
37:07
Speaker 3
What do you think AI is going to mean for this story, if you want to take a stab?
37:11
Speaker 4
There is quite a possible similarity between AI and the railways of the 19th century. In the sense that with the railways of the 19th century, you've got a transformative general purpose technology. which absorbed a huge amount of investments. You have to sort of invest before use, as it were, because you've got to invest a lot of money to build the railroads, increase the value of the land.
37:37
Speaker 1
So you've got to build all the data centers to train the next model.
37:41
Speaker 4
It's very, very capital intensive. It goes through booms and busts. It involves a lot of organization. It creates very big societal benefits. Railroads created massive societal benefits. This will probably create massive societal benefits. It creates an enormous amount of wealth. The railroads produced all of these great tycoons. And it does a lot to bankrupt a large number of small people, which the 19th century investment in the railroads was a terrible investment for most ordinary investors. Partly because, you know, you had railroads competing on the same line, and one of them would go bankrupt. And so the game in the 19th century was, was that, you know, it's a sort of sense of winner-take-all or winner-take-most if you're building the railroad that takes you to the West Coast. And that's the same thing that's going on now. They think that the winner will be the standard setter and will take most. Somebody has to lose from that, and a lot of small businesses will lose from that. In America, in the 19th century, the railway busts following the railway booms almost brought the economy down on several occasions, 1873. 1893.
38:50
Speaker 1
1873, it did bring the economy down.
38:53
Speaker 4
Yeah, it did. We have the Federal Reserve and all sorts of things now, which they didn't have then. It's a very risky process. These are huge sums of money that are going in.
39:02
Speaker 3
You've been talking about the first order effects of the railroads. There's a second order effect, which is the railroads combined with the telegraph drove industrialization much more broadly, made possible these new giant companies, new kinds of companies. We could talk analogously about potential second order effects of AI, and I could see that going different ways, right? You could imagine AI making it easier for one person to start a billion-dollar company, something people talk about. You could also imagine the models just kind of doing everything. I could see two very different stories about entrepreneurship and new firm creation.
39:38
Speaker 1
Do you have a view?
39:39
Speaker 4
No, I have the same view as you do, which is that I think we will get lock-in that some of these very, very big companies, particularly if they're data center companies or whatever, will stay at the top of the system. So you will get the consolidation, a continuous consolidation of capitalists. But I know lots of people who are sort of one-person or two-person entrepreneurs who whose businesses are being completely transformed by the fact that they can get AI to do lots of things, which would have meant that they'd have to hire some people. It's reducing the cost of doing a lot of boring tasks, and quite often boring but quite sophisticated tasks, almost to zero. So it's been good. And if you look at the American data so far, the number of tiny companies, solo entrepreneur companies, after going through a long process of decline and depression, is starting to zoom up again in America.
40:36
Speaker 1
I could see a.
40:36
Speaker 4
World in which you've got giant companies plus a flourishing entrepreneurial economy.
40:43
Speaker 3
When I think about the long arc we've been talking about over the course of the conversation and the central themes in your book, and I think about your book being written in the early part of this century, to me, maybe the most interesting change since your book has been written, is China, the development of world-beating companies, in some cases, in China. And I'm curious, in particular, does the success of many Chinese corporations, has that caused you to update your views at all on the relationship between companies and the state, this central theme?
41:21
Speaker 1
Totally.
41:22
Speaker 4
There are two categories of company, which I think are slightly shortchanged in this book. And this book is really preoccupied by the public interest But there are two sorts of companies that I've thought a lot more about since writing the book. And I think are much more important than I thought when I was writing that book or we thought when we were writing that book. One of which is family companies. Most companies in the world are family companies. A lot of very big companies are actually family companies, different family ownership. Tata, which is one of the world's biggest companies. was a family company. The Indian conglomerate. Tata and Sons. And family companies and the role of family capitalism, family companies, is bigger than... accounted for in this book. And there you get lots of different incentives. A lot of family companies are limited liability companies, but they also are bound together by blood relations and blood trust and things like that. But the second is state-owned companies. And the assumption in this book, when I was writing this book, I think, is that state-owned companies were things of the past, that these East India companies, which were quasi-state-owned companies, were things of the past, that the sort of corporate structures that's you had in nationalized companies were a feature of post-Second World War capitalism, which were bound to disappear. And what the Chinese primarily did, Singapore Chinese did, was they invented new types of state-owned companies, in which the state acts not through appointing the CEO and appointing the board and running them as if they're sort of public utilities, but through public ownership, through owning the majority of the voting shares. They control the company. So the companies act like private sector organizations in that they're global or can be global, in that they have the disciplines of the market, but they were owned by the state, which provides them with their initial capital and which owns the majority of the shares. And those sorts of state-owned companies, I would have thought when I was writing that book, I would have thought there were small players on the world stage. They've actually always been quite big players on the world stage. And they're getting much bigger because of China.
43:43
Speaker 3
One of the interesting things to me about the Chinese model is when I think of state-owned companies, I think of like a national champion. You know, you have your national airline or the big bank and the government sort of keeps it afloat and it's inefficient. But in China, in a lot of the industries, there are 100 companies that the government owns shares in, in the same industry. You know, everybody starts a car company and the local government backs it.
44:07
Speaker 1
And then they fail, which is good, right?
44:11
Speaker 3
So you don't have the kind of sclerotic company that shouldn't succeed but just keeps getting subsidized. You have a kind of startup capital and then the competitive pressure, like... It's surprising.
44:24
Speaker 1
I don't know.
44:25
Speaker 3
Is it surprising to you that that worked? Like one would not have predicted that 25 years ago.
44:29
Speaker 4
Absolutely. So what state-owned companies used to be is sort of national champions, CEOs appointed by the government, run like utilities almost, couldn't fail. And what China did was to say, let's just have the state as a share owner and let's have competition between all of these companies. So they would typically, I mean, almost always they have three, four, five companies. They say, fight it out in the cage. You know, have a cage fight. Let the best man win. Sometimes you have the national government running, you know, owning the shares. Sometimes state governments owning the shares. So the different people own the shares. Sometimes, you know, weird organizations will own the shares. But the principle is competition. And they say, you're not just operating nationally, you're operating globally. So you have a global mission. You probably have global talent. You certainly have global benchmarks. And this means, as you say, this means they can have a slightly longer-term focus in that they have access to cheaper capital, probably, certainly on the start-off level. But they have the disciplines of capitalism. And I think the number of state-owned companies in the world is almost certainly going up. that now that nations, developing nations, when they used to just look at Western companies as the model, very often now look at state-owned companies. So if you take a country like Brazil, if you go back to when I was writing this book, they would probably say, oh, well, our old days of state-owned companies are finished. We've got to get out of that. We've got to move towards the American model. They'd now say, no, no, state-owned companies are the thing of the future. You know, this is the way forward. And, you know, you have that and then you have these great state pools of capital in the form of sovereign wealth funds. So the state is back in a major way. So when we started off talking about the East India Company, which is a sort of protected by the state in certain ways, now we have these things back again. So whereas in this book, we sort of took the public company back, as the model from which anything else is a deviation. Now, I think we have a world in which we have private equity and all of that sort of stuff. We have a world in which we have big family companies, particularly in the emerging world, and big state-owned enterprises. So it's a much richer and more varied environment. And it's an environment in which no particular type of company is the standard against which everything else is measured.
47:02
Speaker 3
It's been great to talk to you. Thank you so much for your time. This was the second time I read the book, and I liked it both times. Thank you very much. It was a very enjoyable talk. I enjoyed this interview a lot. I would love to do some more interviews. Please write to us and tell us, A, if you like the interview format, and two, if you do, who else should we interview? You can email us at businesshistoryatpushkin.fm. You can also find us on Twitter at a.k.a. X. I'm at Jacob Goldstein. Robert is at Radio Smith. Radio is what.
47:39
Speaker 1
He used to do.
47:40
Speaker 2
Keeping the faith alive.
47:41
Speaker 3
Today's show was produced by Gabriel Hunter Chang, was engineered by Sarah Bruguere, and our showrunner and editor is Jake Harper.
47:50
Speaker 1
I'm Jacob Goldstein.
47:51
Speaker 2
I'm Robert Smith. Thanks for listening.
The Hosts
Robert Smith
Robert Smith, co-host of the Business History podcast, is a Professor of Journalism at Columbia University and contributing host of NPR's Planet Money where he tells stories about how the…
