In the first half of the nineteenth century, a populist movement led by President Andrew Jackson opposed widespread political corruption involved in purchasing charters from state legislatures in the United States. Jacksonians adopted, at the state level, “general incorporation” statutes, which required that a new corporation merely register with the state government rather than obtain “special incorporation” by means of a bill passed by a state legislature or Congress.
At the same time, corporations in general were granted the right of limited liability—traditionally a privilege reserved to governments. In the business context, limited liability means that creditors can be compensated only out of the assets of the corporation, not out of the personal assets of shareholders or managers. Without limited liability, companies would have tended to remain closely held, cautious partnerships among small groups of people who trusted each other. The enormous agglomerations of capital, often from anonymous, far-flung investors and bold, risk-taking by entrepreneurs—the very actors who made the US economy into the capitalist system we know today—would not have taken place.
The benefits of general incorporation and limited liability have been most evident in manufacturing, characterized by increasing returns to scale (in which output outpaces increases in input), and telecommunications and infrastructure, from railroads to electric and water utilities, characterized by network effects (in which a service grows in value as more people use it). Because larger enterprises or networks are more efficient in industries such as these, there is a natural tendency toward monopoly or oligopoly, even in the absence of conspiracies against commercial rivals.
The growth of monster industrial corporations and infrastructure corporations has helped consumers, who have benefited from falling prices as a result of mass production, as well as governments in wartime, when national manufacturing can be converted to military use. But the prevalence of natural monopolies or oligopolies in some of the richest sectors was, for many years, a problem for workers, who as individuals had little or no bargaining power when it came to setting the terms of their employment with giant firms. In the mid-twentieth century, the solution in the United States was what economist John Kenneth Galbraith called “countervailing power”: a system in which different groups checked one another’s power. Helped by the need for labor peace during World War II and the early Cold War, and exploiting the vulnerability of centralized manufacturing and infrastructure corporations to strikes, labor unions compelled employers to engage in collective bargaining over wages and benefits. As a result, many corporations were compelled to share more of their profits with their employees for a generation after 1945.