The origins of capitalism: A privilege with a purpose
Using private capital for public good
Matt Crossman, stewardship director at Rathbones Investment management, explains how the idea of a responsible capitalism – where firms exist for a wider benefit – is a return to the true roots of capitalism.
The pace may have accelerated in recent years, but the world has been in a period of rapid change since the start of the industrial revolution some 200 years ago.
The transition to heavy fossil fuel use and electrification has created a scale of economic activity that would have been simply unimaginable then.
Is history repeating itself in UK equities?
But none of this would have been possible without the rise of something far more subtle: a legal structure - the corporation.
We take corporations for granted, but a vital ingredient of capitalism that makes corporations possible - that of a separate legal personality - is a concept with a long history. In the UK, it was originally religious orders that benefited from this separate legal identity, given directly from concession by the Crown.
So, from their origins, corporations held a privileged position, and one that was granted for a higher purpose.
The usefulness of the form saw such 'royal charters' extended to local authorities for public works, and then vitally to commercial organisations like merchant guilds.
By the start of the 19th century, the ability to form a company was at the gift of Parliament, and these corporate entities finally gained a foothold with the passing of the Joint Stock Companies Act of 1844, more than a century later. But importantly, the risks of these enterprises were still shared.
Members of the companies granted under the 1844 Act were still liable for all the company's debts. The logical extension of granting a company legal personality — for example, its own name, capacity to be sued and to make investments — is that everything it makes, profits and losses, should be in its own name also.
And so came this crucial development: limited liability.
Increasing freedoms
This was when the world really changed. Not with the discovery of penicillin, nor the invention of the microchip, nor the internet, but with the passing of the Limited Liability Act 1855. This was the moment capitalism really took off.
The granting of limited liability to a wider class of companies in 1855 saw the introduction of labels such as 'Ltd' in the UK — that which we take merely as an identifier was originally intended as a warning label, a caution that in dealing with the organisation, the members' liabilities were limited.
Once its assets are exhausted, those owed money cannot pursue the individual members.
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