In previous chapters, I surveyed the emergence of two models of business organization during the eighteenth century, the joint-stock business corporation and the unincorporated company. I demonstrated the entrepreneurs' preference for the corporation over the unincorporated company and showed the growing advantages of the corporation toward the end of the century, due to its personality, transferability, and liability features. In addition, I claimed that the unincorporated company could not, due to legal deficiencies, serve as a surrogate form of organization. But these three assertions taken together do not say much about the position of these forms of joint-stock organization in the economy as a whole. Was joint stock a marginal or a central phenomenon in eighteenth-century England? Did eighteenth-century joint-stock organizations have any significant impact on the contemporary economy, or is their study worthwhile only because they were precursors to the late nineteenth-century corporate economy? These questions were initially touched on in Chapter 4, which dealt with transportation and insurance, two significant sectors. The present chapter aims to broaden the perspective by dealing with the following questions: Was the development of the joint-stock undertaking during the eighteenth century confined to these two major sectors? Did other sectors pursue the paths of either transport or insurance, or did they follow other models of organization? What, if any, were the effects of the Bubble Act on the spread of the joint-stock form of association after 1720?

As children, most of us delighted in Rudyard Kipling's “just-so” stories. Kipling began with a simple fact, for example, elephants have long noses. Then he made up a fanciful story to explain it: perhaps a crocodile stretched an elephant's nose and the trait was passed down to other elephants. Just so!

In the previous chapter, I began with some simple facts, and then made up a causal mechanism to explain them. The three facts were: vetoes actually occur, veto chains are relatively common, and concessions often occur over the course of a chain. The first model failed to generate any of these patterns, but it supplied a useful framework for additional thought. The override model can generate the first and second patterns, but not the third. The sequential veto bargaining (SVB) model can generate all three.

Are the override and SVB models merely just-so stories? Or do they capture something real about the dynamics of interbranch bargaining? How can we tell? To answer this question I rely on the criteria outlined toward the end of Chapter 3. As indicated there, a sine qua non for a good model is an ability to explain empirical puzzles it was not designed to explain. Table 2.12, which I reproduce in separate tables throughout this chapter, is filled with empirical puzzles that go well beyond the three “stylized facts.” For example, why does the probability of a veto increase with legislative significance during divided government, but not during unified government? Why are veto chains short? Why don't any of the covariates predict the success of an override attempt, once the decision to attempt an override is made? Can the models explain these facts?

My focus throughout the present work is on four features of the business organization: the nature of the legal entity, raising joint-stock capital and transferring interest, the degree of limitation on personal liability, and the existence of entry barriers. The present chapter examines the application of these features to the business corporation. I discuss the needs of the English economy in terms of capital, and how these needs could be fulfilled by raising joint-stock capital in the financial markets of the time. I then analyze the demand for limited liability in eighteenth-century England and the degree to which this privilege was available to business corporations. Finally, I examine the existence of entry barriers, in terms of costs and other obstacles, which could prevent incorporation and make the privileges associated with it unattainable. This chapter shows that by the beginning of the nineteenth century, both the joint-stock feature and the limited liability feature became more valuable and widely available, and as a result became the major motivation for seeking incorporation. It further shows that it was not Parliament, as such, which prescribed high costs for incorporation, nor did it place high entry barriers on the formation of new business corporations. Such barriers that existed resulted from the opposition of vested interests to newcomers and not from parliamentary policy.

LEGAL PERSONALITY

By the sixteenth century, if not earlier, long before our story begins, a corporation was a personality in English law.

Veto threats pose a puzzle. The political struggles between the president and Congress are not the verbal sparring matches of college debating societies. They involve real stakes: redistributing wealth, creating rights, making war. But a veto threat is just words. How can the president's verbal posturing, mere words, make much difference in high-stakes bargaining? The problem is a general one in political science. “Actions speak louder than words” is a profound principle of politics, and one that is easy to understand. But why should words, the sheerest “cheap talk,” speak at all? Yet they seem to. Rhetoric often has a profound influence on the course of bargaining.

Historians often note that Truman moved left in 1947–48. Somehow, they say, the joy of combat with the “do-nothing” 80th Congress liberated him to “become himself.” Historians also comment on the surprising way Eisenhower moved right in 1959–60. Contemporaries noted how Reagan lost his “flawless touch” for the deft legislative compromise after 1986, seemed to become more rigid, and lost more battles with Congress (New York Times, November 7, 1987:33; quoted in Nathan 1990). Finally, after the Republicans seized control of Congress in 1994, political commentators observed that President Bill Clinton emerged from a period of drift. But unlike Truman in 1947, Clinton seemed to move right rather than left. Are these incidents unrelated accidents of history? Or do they show the same causal mechanism at work?

Using a Model as an Interpretive Framework

Interpreting history is central to political science. In presidential studies, historical interpretation often takes the form of a narrative illustrating how presidents use power, manage the transition between administrations, handle crises, make appointments, and so on. When the narratives work as political science – and some work brilliantly – the selection of facts and their presentation flow almost inexorably from an underlying causal mechanism. An implicit model supplies the framework for interpreting history. It must be so, else the narrative remains only a chronology. But even though it is the model that scripts the drama, directs the actors, and moves the scenery, it rarely appears on stage. It remains behind the scenes, usually unexpressed and invariably informal. Concealing the model carries a cost.

Chapter 3 left the history of the Bubble Act shortly after its enactment in 1720. Chapter 6 described the difficulties that the unincorporated company faced during the eighteenth century in common law and in equity, with only a glimpse at the Bubble Act. It is now time to combine the two stories, as, in 1808, the unincorporated company and the act meet in court for the first time since 1721. I argue in this chapter that this first meeting, and the frequent litigation that followed, turned the courts into a major playing field between 1808 and 1844. Though the only form of organization disputed was the unincorporated company, results of the litigation eventually had a considerable affect on the fate of the business corporation as well. This judicial playing field also greatly affected a parallel field: Parliament. The two major pieces of legislation of this period, the repeal of the Bubble Act in 1825 and the General Incorporation Act of 1844 (which are discussed in Chapter 10) were a reaction to dramatic shifts in judge-made law. They cannot be understood without a full account of their judicial context. This context includes judge-made doctrine produced in a stream of formal court decisions. These decisions, in turn, cannot be understood without an awareness of the institutions in which they were given – the courts – and the personages that shaped them – the judges.

The passage of the Bubble Act can be viewed as part of either of the two narratives that ended the previous chapter: the rise of the share market or the story of the moneyed companies and the national debt. Most legal historians as well as historians of the business corporation recount the episode of the act as part of the ascent of joint-stock companies in general, and in particular of smaller, domestic, and unincorporated ones, the more speculative of which became known at the time as bubble companies. They view the Bubble Act as prohibitive and reactionary legislation aimed at impeding the rise of the joint-stock company as a legitimate form of business organization.

Though many financial, economic, and political historians viewed the South Sea Bubble (the financial episode) as a central chapter in the story of the rise of the moneyed companies, the national debt, and the financial revolution, only a few considered the Bubble Act itself (the legal episode) as a relevant event in this well-known story. If at all, they view the act as one of several measures aimed at contributing to the success of the financial scheme for the conversion and stabilization of the national debt.

From the narrower perspective of the first narrative, the Bubble Act is normally viewed as a watershed in the history of the unincorporated as well as the incorporated joint-stock company, from a status of recognition, popularity, and appreciation in the years 1689–1720 to one of mistrust and eclipse after 1720.

Many legal and economic historians consider the development of the unincorporated company to be one of the best examples of the flexibility and adjustment of the English legal system to the changing needs of the growing and industrializing English economy. These historians, often unknowingly, join their voices to the functional paradigm of the relationship between the law and economic growth. What they are saying, in fact, is that despite a prohibitive legal doctrine, the Bubble Act, and the law of corporations in general, there was a loophole within the English legal system which made the system more instrumental to the needs of business. These historians perceive the unincorporated company to be a distinct form of business organization, based on a coherent legal concept. According to this view, the unincorporated company, which acquired almost all the characteristics and privileges of the business corporation, served as an adequate substitute for it and made possible the development of large-scale concerns at a time when incorporation by Parliament or the Court was very rare, before the mid-nineteenth-century reform in company law.

The present chapter examines this view, with an intention to refute it. I do not deny that unincorporated associations existed and played important roles in academic, professional, charitable, and other areas. However, when applied to profit-maximizing business enterprises, with freely transferable interests, liquid assets, intensive managerial tasks, and loose social and moral connections between members, the unincorporated form of business organization had many impediments.

In Chapter 1, I surveyed a variety of organizational forms of business. In Chapters 2 and 3, I outlined the emergence, not without interruptions, of the joint-stock business corporation, from the mid-sixteenth century to the early eighteenth century. In the present chapter, I address the question of why the variety of forms persisted during the eighteenth century, whereas the joint-stock corporation did not gain dominance. In other words, why was a convergence process not observed, in which entrepreneurs transformed their existing undertakings, or at least their new ones, into joint-stock business corporations – obviously the natural candidates for this dominant position (particularly as we know the end of the story)?

Three major explanations for the persistence of this diverging path are explored in this and the following chapters. The first explanation is that the joint-stock corporation is not superior, in terms of efficiency, as some modern theoretical jurists and economists believe. The second is that the preconditions for exploiting its efficiency, an industrial economy with large-scale production and an effective share market, did not exist in eighteenth century England. The third is that there were legal, political, and other constraints that prevented businessmen from organizing in joint-stock corporations.

In the present chapter, I focus on two sectors, transport and insurance, and describe their divergence during the eighteenth century into two distinct organizational patterns: the first toward the joint-stock corporation and the second toward the unincorporated joint-stock company. I argue that the reasons for their divergence are rooted in systemic constraints.

The business community was not monolithic in its attitude toward the joint-stock company and the concepts attached to it. Several studies have emphasized the division within the business-oriented middle class between the northern industrialists and the City merchants and financiers, and the dominant position of the City in politics and in the economy. This chapter argues that as far as the attitude toward the joint-stock company is concerned, an additional dimension should be added, the division within the City of London between various groups of businessmen. This chapter first deals with the social and economic identity of the promoters of joint-stock companies and their adversaries. The rival interests over the question of trade and corporate monopoly are then studied. The advance of the joint-stock company into new sectors during market booms and with the introduction of new technology is then surveyed. Finally, the change in negative attitudes toward the share market is explained in light of the advance of the market and the widening circle of investors.

THE PROMOTERS OF THE NEW COMPANIES AND THEIR FOES

A considerable number of joint-stock entrepreneurs appeared near the turn of the nineteenth century. They were concentrated in London and involved in the promotion of the dock and water supply companies of that period. In the boom year of 1807, some forty-two new companies were formed, most in London, and mainly in the fields of insurance, brewing, food production, and metal manufacturing.

Reviewing a conference called to evaluate the state of presidential studies, George Edwards, John Kessel, and Bert Rockman note with somewhat acerbic wit,

It is plainly true that there are many ways to do good social science. Those who assemble data, those who conduct case studies, those who analyze others’ data, those who produce creative insights, those who take stock of what we know, and those who build theoretical models all make valuable contributions. “Theoretical” and “rigorous” are hardly synonyms for “good social science.”

Nonetheless, one of the goals of this book is to produce useful and interesting theory about the presidency in an age of divided government. The approach I take is characteristic of the new analytical or rational choice institutionalism. I focus on a specific, repeated, important phenomenon: veto bargaining. Then, I use rational choice theory to build several interrelated models of different aspects of the phenomenon. This approach is sufficiently novel – and controversial – in presidential studies to warrant an extended apologia.

WHY MODELS?

Solving puzzles is central to science. We see phenomena like those explored in Chapter 2, and ask why. Solving a puzzle means explaining it. Explaining it means finding and elaborating a causal mechanism for it.