The Fairy Tale of Capitalism: Corporations, the Free Market and the Invisible Hand

“The first function of a mythology is to waken and maintain in the individual a sense of wonder and participation in the mystery of this finally inscrutable universe.” 
-- Joseph Campbell, quoted by Michael Toms in “An Open Life” (1988)

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James Lancaster VI, commander
of the first voyage of the
East India Company (1601) 
Long before the Old Ones, an ingenious new production organizing technology appeared. Elizabeth I of England chartered the first limited liability Corporation, a “company of merchants of London trading into the East Indies”, known as the East India Company. 125 shareholders contributed the initial 72,000 pounds of capital. The year was 1600.

The shareholders (a.k.a. stockholders) control a limited liability Corporation. The Corporation begins when the Corporation’s CFO Chief Financial Officer receives something of value, usually cash or an existing business, from the initial investors. The CFO gives them ownership shares, each share having same value. Each investor owns part of the corporation in proportion to the number of shares she owns. Almost simultaneously, the investors choose the CFO, the CEO Chief Executive Officer, who makes day-to-day decisions for the owners and manages employees, and a committee called the Board of Directors, which hires and fires the CxOs and decides questions for the owners.

The Corporation resembles a person, because it can autonomously conclude contracts, trade, incur debt, declare bankruptcy, and contribute to political campaigns.

"Limited liability company" means if the Corporation gets in trouble, then it’s the Corporation’s fault, not the shareholders’ fault. The shareholders bought their shares from the Corporation or on the Exchange. Their liability is limited to what they paid for their shares. Having already paid, they have no further liability.

East India Company Chop

If customers sue the Corporation for making a dangerous product, and the judge orders the Corporation to pay, then the shareholders pay nothing. If the Corporation borrows excessively and can't pay the debt, the Corporation pays what it can, and shareholders have no obligation.

That means shareholders aren’t responsible for the Corporation they own. That means the Corporation is a "moral hazard". That doesn't mean the Corporation is a bad thing. The big knives in your kitchen are physical hazards. They aren't bad things. You must be careful with knives and Corporations. But that’s another story.

Even before Elizabeth I, a Corporation was a more or less formal group of people, organized for some purpose, and empowered by law to act as an entity or person. The Old One Adam Smith described the economic role of trade guild corporations.  Since the Great Wars, "Corporation" has referred usually to business Corporations, organized by investors to dodge taxes and increase their personal wealth. In our modern Society, we use Corporations for the purpose of supplying many, perhaps most, of the goods we use.

The Corporation’s CEO outranks other Managers. If the Corporation’s profit usually increases somewhat from year to year, then the Staffs advise their Aristocrats to allow the CEO a free hand. And if the Corporation’s profit isn’t so good, then the Staffs usually sell their Aristocrats' shares, to avoid the excessive paperwork of dismissing the CEO. The remaining  apathetic and hopeful shareholders usually allow the CEO a free hand. Corporations owning Corporations and other ingenious legal elaborations of the art add further distance to the shareholders from the CEO. The authority of the CEO with a free hand grows perhaps so much that she chooses members of the Board. But that’s another story.

Certificate for Six shares of stock in a Corporation (1887)

In the Free Market, many buyers and many sellers compete. Any seller (or buyer), dissatisfied with a price (or product and price) offered by a buyer (or seller), can readily find another seller (or buyer) with whom to trade.

Adam Smith observed that, when we as buyers approach a seller in the Free Market,

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love ..."

The buyer gets the product, in exchange for the money she gives up.
The seller gets the money, in exchange for the product she gives up.
In the Free Market, each person gets what she wants more, in exchange for what she wants less. This is a public service distributing to all what they need.

Each buyer and seller, says Smith,

"... intends only his own gain; and he is in this, as in many other cases, led by an Invisible Hand to promote an end which was no part of his intention."

Smith also wrote that the Invisible Hand guides an employer to distribute the necessaries of life in roughly equal quantities to the employees by the natural cascade of the Downward Trickle, so each person gets an approximately even portion. But that is another story.

The Economists George Akerlof, Michael Spence and Joseph Stiglitz wrote of snakes in the garden of the Free Market: information asymmetries. The holder of a product knows better than others the quality of the product. The seller of the used car knows if the car is a low-quality "lemon" or a high-quality "peach". The prospective buyer, knowing less, discounts her offered price, to mitigate the inferior quality of a "lemon". But if the seller knows the car is a "peach" then she hesitates to reduce her price. The seller’s price exceeds the buyer’s price. So no trade occurs. Neither party benefits. Each trader benefits in a fair trade.

Market, Padua, Italy (1891)

When the CEO goes to the Free Market to hire Managers and Workers, information asymmetry accompanies each hire. The current employer knows the individual employee's ability well. The prospective employer discounts the wage offered the prospective employee, as Stiglitz says, "knowing that they will succeed in luring him away from his current employer only if they bid too much. If they bid less than his productivity, his current employer will match. Labor mobility is impeded."

And negative externalities inhabited the Free Market. When people of the same industry meet, even at parties and entertainments, wrote Adam Smith, “the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

The Professors sang to their students: "The only purpose of a Corporation is to serve the interests of the stockholders!"

In our next episode of FTC, we will consider the curious relation among Capital, the Chairman, and the 50 Percent.

Several friends read and critiqued the pre-publication draft, for which I am most grateful.

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“Chicago, Burlington & Quincy Railroad Stock Certificate” (1887, Public Domain, https://commons.wikimedia.org/wiki/File:Chicago,_Burlington_%26_Quincy_Railroad_Stock_Certificate_1887.jpg)

The East India Company, “Chop” (17th Century, Fair Use, https://www.theeastindiacompany.com/wp-content/uploads/2016/08/EIC-Chop.jpg)

“James Lancaster VI” (1596, National Maritime Museum, Greenwich, England, Public Domain, https://pt.wikipedia.org/wiki/Ficheiro:Jameslancaster.jpg)

Paolo Salviati (1818-1894), “Palazzo della Ragione, Padua, Italy” (1891, Hallwyl Museum, Public Domain, https://commons.wikimedia.org/wiki/File:Fotografi_fr%C3%A5n_Padua,_Sala_della_Ragione_-_Hallwylska_museet_-_102990.tif)


George A. Akerlof & Robert J. Shiller, “Animal Spirits” (2009, Princeton University Press, http://amzn.to/2iar4Mz)

George A. Akerlof, “The Market for ‘Lemons’” (Aug 1970, The Quarterly Journal of Economics, http://www.unc.edu/~shanda/courses/plcy289/Akerlof_Market_for_Lemons.pdf)

Daniel Brockman, “The Eric Tetralogy: 2: The Tea Party” (Aug 29, 2017, https://daniel-brockman.blogspot.com/2017/08/FTC-eric-tetra-2-tea-party.html)

Daniel Brockman, “The Eric Tetralogy: 4: Ideas as Monops” (Aug 29, 2017,


Daniel Brockman, "The Fairy Tale of Capitalism: CEOs, Growth and Prosperity of Society" (Mar 31, 2017, https://daniel-brockman.blogspot.com/2017/03/ftc-ceos-growth-prosperity-society.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Managers, Professors and Engels” (Jun 12, 2017, https://daniel-brockman.blogspot.com/2017/06/ftc-managers-professors-engels.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Rand, Marx and the Downward Trickle” (Nov 13, 2017,


Daniel Brockman, “The Fairy Tale of Capitalism: Supercompensation, Income and The Exchange” (Apr 6, 2017, https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Workers, GDP and Economists” (Mar 17, 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html)

The East India Company, “The East India Company’s Timeline” (http://www.theeastindiacompany.com/home/timeline/ retrieved Nov 18, 2017)

Adam Fresco, “With one eye firmly on the past, new chapter begins for East India Company" (Feb 8, 2010, The Times, London, https://www.thetimes.co.uk/article/with-one-eye-firmly-on-the-past-new-chapter-begins-for-east-india-company-6dmjkrdmwmr)

George E. Hoffer & Michael D. Pratt, “Used Vehicles, Lemons Markets, and Used Car Rules: Some Empirical Evidence” (1987, Journal of Consumer Policy, https://link.springer.com/article/10.1007%2FBF00411482)

Adam Smith, “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776, Public Domain, http://amzn.to/2jjusby)

Adam Smith, “Theory of Moral Sentiments” (1759, http://amzn.to/2Aq8wQL)

A. Michael Spence, “Signaling in Retrospect and the Informational Structure of Markets” (Prize Lecture, Dec 8, 2001, https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2001/spence-lecture.pdf)

Joseph E. Stiglitz, “Information and the Change in the Paradigm in Economics” (Prize Lecture, Dec 8, 2001, https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2001/stiglitz-lecture.pdf)

Michael Toms, "An Open Life" (1990, Harper Perennial, http://amzn.to/2Bz3Cnw)

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