John Hood is president of the John Locke Foundation, a nonprofit think tank based in Raleigh, North Carolina, and author of The Heroic Enterprise.
The Corporation, as we know it–and we know it from every aspect of our lives–was invented; it did not come to be of itself.” With those words from Oscar Handlin begins Michael Novak’s latest work, The Fire of Invention: Civil Society and the Future of the Corporation. The quotation sums up neatly the two main thrusts of Novak’s short and readable book: the moral and social importance of the corporation, and the role that invention and patent laws play in a free society.
The Fire of Invention is based on three lectures Novak gave at the American Enterprise Institute in Washington. The first deals with the history and future of the corporation. Novak points out that while the publicly held corporation has become a worldwide phenomenon, the people of the United States are primarily responsible for “inventing” it as a basic social institution.
They did so first by suggesting that they as citizens, not as merely the subjects of a sovereign, could form corporations. The citizens of Massachusetts, for example, made up a charter of incorporation for Harvard University in 1636, shocking the monarchy back in England. By 1800 the United States, populated by only about 5 million people, had more business corporations than all of Europe.
The difference between America and Europe went beyond the extent of incorporation to the nature of civil society itself. Instead of pleasing states and sovereigns, would-be American incorporators would have to please customers and stockholders. “[The corporation] brought to civil society not only independence from the state but also unparalleled social flexibility and a zest for risk and dare,” Novak argues.
The second lecture in the book details another of America’s unique social institutions: its patent system. Without a system for “intellectual property,” the Founders believed, America’s experiment with freedom would fail. That is why providing for patents and copyrights, Novak maintains, is among the few enumerated powers of the federal government in the U.S. Constitution. And he does students of economic history a great service by uncovering Abraham Lincoln’s long-forgotten celebration of the Founders’ wisdom about patents. Before patents, Lincoln wrote, inventors had no way of protecting their practical ideas and thus lacked the incentives to develop and use them. “The patent system changed this,” Lincoln continued. “[Patents] secured to the inventor, for a limited time, the exclusive use of his invention; and thereby added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.” The title of Novak’s book is a paraphrase of this classic passage.
Corporations and patents were necessary to the explosion of American know-how throughout the nineteenth century. Even innovations originating elsewhere, such as the railroad, were implemented far more quickly in the fertile soil of the United States. Many economists and historians have tossed around various explanations for this fact, but Novak is onto the truth when he spotlights the role that social institutions play in guiding human endeavor.
The last of Novak’s lectures is on corporate governance. This is an important issue, given the insistence by latter-day socialists that “stakeholders” (outside interests affected by corporate decisions) deserve representation in corporate governance equal to the stockholders. Some argue that stockholders don’t deserve priority treatment because they are mostly passive, with little or no interest in the management of the firm. The author shows the hazards of this thinking.
Excellent as the book is, I wish that Novak had covered more ground. One dangerous argument that critics make is that corporations have duties to society. But Novak says little about this. He observes that the growth of pension funds means both broader stock ownership throughout society and stronger pressure on behalf of shareholders to keep managers in line. It is not enough to argue, however, that the interests of society in general and those of stockholders are converging because of the growth of stock ownership. One must challenge the basic assumption that the limited-liability corporation is a government intervention in the free market.
Although Novak doesn’t weigh in on all the issues and arguments, his book remains one of the best introductions to the subject of the morality of the corporation that one can find. Its brevity is an asset, not a liability; it makes The Fire of Invention a perfect gift for that busy corporate executive you know who needs to understand more clearly why what he does is socially beneficial and morally just.