In Chapter 7, we have looked at the fundamental features of business corporations.

I will now analyse how business corporations developed in the industrializing world in a legal environment which was initially hostile to them. Competing firms have led competing States to amend corporate laws which were initially restrictive. Incorporation was transformed and turned from a privilege into a right. Freedom of incorporation is now widely accepted. The development of corporate law has now led to the advent of financial capitalism, i.e. a form of capitalism in which two forms of capital exist in connection with any given bundle of assets and contracts concentrated into any given large firm. There is first the capital and contracts required by the productive activity; and there is then the financial capital represented by the financial instruments issued by the corporation used to legally structure the firm. To understand the role played by financial markets, I will present the evolving relationship between firms and States in a globalized economy. To do this, I will use the simple model of a firm adapting its corporate structure to the opportunities offered by the evolving legal rules in an international economy. This will lead us to a reassessment of the necessity to differentiate firms from corporations and to insist on the importance of the rules of corporate governance and of accounting in a globalized world.

Although the legal features of business corporations are hardly considered in classical economics, the use of business corporations to legally structure real-life large firms is universal. By taking the view that corporations are merely ‘legal fictions’, that ‘the firm and the ordinary market [are] competing types of markets’, and that ‘the “behavior” of the firm is like the behavior of a market’, the dominant analysis is condemning itself to irrelevance for the analysis of the real-life global economy. The use of business corporations is universal, and the architects of large firms go through the pain of using them for solid reasons. Some of them have been reviewed in the prior chapter. Now we must analyse how business corporations came to play their role in the operation of the World Power System.