 All these things can be coded as capital with the right legal coding. So a simple firm, if you just use that term, or you say a business organization, is just an economic undertaking. Two persons that can get together and just start a mom's and pop shop, trade something, create a new algorithm or use software to code a new platform and find some money maybe from a venture capitalist and bring this to the market. There are lots of economic ideas and power and ingenuity going into this, and yet I think we again have to unpack it and understand what is the legal form behind this to really see how the capitalist system works. The law, for example, already says if there are two people who get together and do a business for profit, we consider them to be a partnership. Why do they do this? Because there's a long tradition that people came to courts and said, you know, I did something with my friend X and somehow he then left and I was left with all the debt and what do I do now? And so they started configuring out of the agreements, formal or informal agreements that people have made a legal construct, which they call a partnership. So you might not even know this, but if you get together with somebody else and you do something for profit, you are a partnership. And that has certain consequences. One consequence is that you're in it together. And if people want to enforce against your little company, they can enforce not only against your company, but also against your private asset because unlike a corporation, a partnership doesn't give its owners limited liability. So you're in it together if you do something for profit. Worth recalling when you ever, if you ever do this because it might be helpful to go to a lawyer and set up a corporation if you want limited liability. The other implication is that you are actually managing the firm together. And the third thing about a partnership is if one of you pulls out, the thing collapses, no longer exists. You can get around this through contracts and designing sort of partnership agreements that allow for substitution, but for that you need probably a lawyer. But the really important innovation for the capitalist economy was the corporation. So where does the corporation come from? You can go back to Roman times and find something like a legal entity. An entity that's not like you and me, a natural person that can breathe and talk and watch and write contracts, but it's just an abstract notion, but it's treated as a legal person in the sense that that legal person can own assets. It can contract in its own name as a legal person and it can be, can sue and be sued in its own name. These are the fundamental characteristics of a corporation. Roman law had legal persons, but Roman law did not use legal persons for business. Roman law used legal persons mostly for public purposes. So you create a separate legal entity, you fund it separately, you separate it from other budgets and it delivers certain types of services. The origins of the modern business corporation really start with colonial companies. The two big companies, the English East India Company and the Dutch East India Company were the first modern business corporations, if you like. They were created and chartered by the state, by the Crown in England, by the general estates in the Netherlands. They were funded with merchant capital, so it was a public-private partnership we might say today between the government, the state and private parties. Why did they need the government? Well, first of all, you have to create a legal person. You and I can't just create a legal person. We can do this today if we register our company with the appropriate registry, but note the register is kept by a government agency. Without that registration, you don't have a corporation. You might have a partnership. It doesn't give you limited liability. It doesn't give you legal entity status. If you want to have a corporation, you have always the state involved because it's a creature of the law. Again, like intellectual property rights, it's a creature of the law. So the English East India Company was chartered in 1600 by Queen Elizabeth and its purpose was to secure the trade routes to East Asia and that of course means to monopolize trade routes. The Dutch East India Company was chartered shortly thereafter and it had the same purpose, trying to monopolize trade with East Asia and both companies also were told that if they encountered people along the way they had the right to rule over them and they also were given cannons and military equipment to fight if necessary and the merchants of course put the money in there because they were hoping for profits by trading in foreign countries or maybe bringing stuff back home while all the spices, of course from India that had become fashionable in Europe. So the colonial enterprises were really important. Of course there were other companies before but they worked very differently. So the original trading companies of the 16th century before we had these big corporations were joint ventures, joint stock companies they were called but they were not legal persons. A joint stock company is basically merchants getting together, pulling their assets, going on a journey, making a lot of money, coming back, dividing up the stuff that they made amongst them according to the shares that they put in and dissolving the entity. If they want to do another journey they would do another company, right? So it was basically a venture and then they created the organizational structure for a venture but they didn't have an entity that would exist potentially forever because you can create a corporation for many, many decades. The original colonial companies were created only for several decades at a time but over time corporations got indefinite lifespans. So they live much longer than the mortals that govern them, that own them or that work at them. The East Indian companies were pretty successful. They made another of important legal innovations but it took another two centuries or so for the corporation to become a standard part of the legal systems of European nation states. So corporate statutes were enacted in the French system, in the German system, in the English system and at different times in the 19th century they also decided that they would no longer require parties who wanted to create such a corporation to come to the government and ask for specific permission for this venture and explain what they wanted to do. But they said, well, you can actually not create corporations off the shelf. We're creating a statute that says if you fulfill certain kinds of conditions and you register afterwards, then you are a corporation and you have created a corporation. The original corporations still have some funny features. So if you think about the state of New York and acted the first free incorporation statute in 1811, so that's quite a while ago, and it had some features that we would recognize as rather strange today. For example, it said, you live only for 20 years and then we might recharter you or may not, but you have a lifespan only of 20 years. It also said that you can't accumulate more than $100,000 in capital. So maximum ceiling of capital, also strange. Many statutes today still have some minimum capital requirements for corporations but not a maximum ceiling. So these features in the law tell you that the legislatures were a little bit unsure whether they did the right thing but saying let's have free incorporation. You can just, if you fulfill certain conditions, you can set up a corporation and that corporation has a life on its own. And of course, as we know today, they actually did have a life on its own because many of these funny provisions, many of the constraints that were put in place to ensure that the corporations would not develop into these Frankenstein monsters were overturned very quickly. And what we have today is arguably something like a Frankenstein monster world of major corporations that govern our data or all resources that are reluctant to change to the demands of climate change that of course also have produced a lot of wealth along the way. Let's just ask a simple question, namely who owns the corporation? So today, many people would argue the shareholders are the ultimate owners of the corporation. But what actually do shareholders get when they buy a share in a publicly traded corporation? A shareholder gets the right to vote for the board of directors once a year. A shareholder has the right to participate in the profits of the corporation if there are any and if the board of director decides to pay out dividends if they don't, they don't. And the shareholder in a publicly traded corporation, not necessarily in a closely held corporation has the right to freely sell his or her share. So certainly they have a property right however defined in that share, they can sell the share but do they really own the corporation? Let me just tell you what a shareholder cannot do. A shareholder cannot manage the company itself unless you are the only shareholder or you're just a couple of shareholders who decide to do this. In a publicly traded corporation, shareholders do not manage the company. Even a controlling shareholder in principle shall not dictate to management what to do because the management or the directors, everybody is in it together. They're all sitting in the same boat in that corporation. So if one just the heavy weight controlling shareholder says, I can call the shots the others might suffer. So the whole idea is that it's not a collective of shareholders that maybe jointly have something like an ownership interest but not a single shareholder does and not even a controlling shareholder. Neither can shareholders just go and grab the assets of the firm. If they own the firm they should be able to do this but they don't because the firm owns its own assets. That's what a corporation does. That's what a legal entity does. It separates the corporation itself from the shareholders and the assets of the corporation belong to the corporation. If the shareholder went in and took them it would commit theft. Of course you can liquidate the corporation. You can liquidate the corporation but then it no longer exists and you can liquidate it with a super majority billed by the shareholders or because it goes into bankruptcy then the assets out for grabs and then the assets will be distributed to either the shareholders or to the creditors. So as I said earlier in the 19th century different countries one after the other in Europe and then in other parts of the world as well allowed corporations to freely register and become corporations just by following the letter of the law without a special government permit. This was quite important and actually started the movement if you want of the rise of the corporate form to the most dominant organizational form in the economy. Prior to that there were many different types of organizations. There were cooperatives, there were some hybrids between partnerships and corporations, there were limited partnerships. A whole plethora of different organizations but once the corporate form became available off the shelf it became one of the most attractive organizations out there. In the 20th century we also saw a lot of reconfiguration of corporate law and surprisingly enough one of the most important jurisdictions is the little state of Delaware. So Delaware has most of the largest corporations that are traded on public markets in this country registered as Delaware corporations. Now they can do business all over the United States and potentially also elsewhere in the world because most other legal systems will recognize them as corporations but remember that they're legal creatures. They exist under the laws of Delaware and it takes an extra act of recognition that can be standardized but it's still an act of recognition that other jurisdictions will recognize these companies. How come did Delaware become such an important state for incorporating companies? It didn't have a big industrial base. That was actually in the 19th century was an agricultural state but it realized that chartering corporations or becoming the major hub for incorporation would be a great boon for its budget because it could charge companies for incorporating in Delaware and given that there was not so much other revenue coming in that made up an important chunk. How do you attract companies to come to Delaware while you write a corporate law that is of interest to those who make the incorporation decision? And that's typically a mix of shareholders and management, particularly management. These are the people who make the decision to reincorporate a small little company that they might have started out in a different state and say let's just go to Delaware and then we make it public and then we live with it elsewhere. The fact that Delaware was not an industrial state also meant that there were no labor unions or other constituencies that would try to counter the interest of shareholders or managers in the design of the corporate form. So New Jersey and New York were, of course, the first states that had most corporations and that enacted corporate statutes and then Delaware came along and said actually we can offer even more and it was able to capture the market for incorporation. In the 21st century we see a couple of additional developments and I just want to bring them out here because we very often think that a corporation is just the same as the business entity but that's not necessarily the case. The business entity, the undertaking, the firm, if you want, the enterprise is the business organization but we can organize in law the business organization in many different ways. We can create a single entity, one corporation and then we have subdivisions that have nothing to do with the law but we just organize them economically or we can start carving out different legal entities from this one unit and make sure that then there's a parent company like a holding company and then we have lots of subsidiaries how we can use the legal system to turn the corporate form into just a form for business organization also into a form for minting capital for creating additional wealth. Let me show you how this works in practice and here I'm offering a little institutional autopsy of Lehman Brothers Lehman Brothers was one of the big investment banks that participated in securitized mortgages and was big not only in originating mortgages but also trading the kind of financial instruments that the trusts, the special purpose vehicles had issued in trading other securities making a lot of money simply by being in the financial market creating new assets and trading those of others but how did they do this? So they had a big holding structure a parent company in corporate in Delaware interestingly enough it also had 60 further units incorporated in Delaware and had about 34 units incorporated in the United Kingdom another 30 or so units incorporated in the Cayman Islands and then a couple of additional ones sprinted around the world more than 200 registered subsidiaries but many other special purpose vehicles trust in other types of entities why did they do this? So you see basically an economically integrated entity that uses the corporate form to create hundreds not just dozens hundreds of separate entities one possible explanation could be that Lehman Brothers was international so maybe you have to create a corporation in different jurisdictions and in fact some countries require you if you're in the financial service business in particular to set up an entity in your country if you want to operate it so that they can regulate that entity but that wasn't the main driver for Lehman because as I mentioned before it had 60 additional entities in Delaware no reason to do that really for questions of international business so why did they set this up? So what they actually did is for each new instrument or for each new financial strategy they set up a separate entity that's of course first of all a risk diversification strategy once you set up a separate entity that entity is legally separate from everybody else which means that if it goes under nobody else has to go under in principle because it's a separate entity the shareholders in this case the holding company that owns the entity or maybe there's a sub-level in between so the owners of this entity are protected by limited liability so we have a shielding effect here as well that makes a lot of sense from risk diversification alone but that's not all what they did to the contrary they even violated the risk shielding a little bit what Lehman did is basically setting up a subsidiary for almost every new business undertaking financial assets, new financial strategies then they needed money to fund these operations that money typically came from borrowing on the markets why would the creditors give these little entities money? Well they would say actually we have a capital base which is the equity that our parent company put into it and by the way our parent company is also willing to guarantee that we will be able to pay back our debt which basically means that the parent company which in principle is protected by a limited liability doesn't have to stand in for the debt of its subsidiary says in this case we will stand in for the debt of our subsidiary that lowers the cost of credit finance or debt finance for that subsidiary and they can get the money from the market the creditors don't think further because they think well Lehman holding companies won't go under will it? it's just such a viable entity has been with us since the early 19th century when three brothers from Bavaria set foot in Montgomery, Alabama and created a little cotton trading entity that went to New York and became a big investment bank so Lehman won't go under and so they would give a lot of money to these entities and Lehman holding would say we will back it but when you unpack Lehman really before it collapsed what we had was a situation where the parent company had assets but these assets were mostly the shares it owned in all the subsidiaries that it had created and the sub subsidiaries at the same time it had assumed obligations for all the debt these subsidiaries had incurred and when some of these subsidiaries could no longer service their debt and the creditors were knocking on the doors of Lehman Brothers at some point Lehman Brothers had said sorry we have nothing left because our assets are the subsidiaries the subsidiaries can't pay their debt they're almost going under the value of our assets are going under we don't have the liquidity to pay you and actually we might be on the verge of insolvency if the value of the assets further declines and we can't get a liquidity boost from somewhere else that's a situation in September just before Lehman Brothers went bankrupt but what happened in between with all the money that was made along the way well that money went to the shareholders of the Lehman holding company so whenever any of these entities were making money with these new and financial assets that created the new intermediaries that might have set up or typically assets created or assets that have traded all the returns went right up to the top and were paid out to shareholders either through dividends or through share repurchase programs which many companies had started doing regularly first and excessively by basically allowing shareholders to recoup their investments all the time then maybe buy additional shares in the hope that they could recoup relatively quickly so we're in a situation where these financial intermediaries large major investment banks such as Lehman Brothers become a center for creating new types of wealth by harnessing the power of the corporate form to divvy up different assets pools get lever up getting outside funding in the form of credit using any profits to pay back the shareholders to keep the shareholders happy and then if need be closed down this or that subsidiary the problem of course is when markets are down in general the asset value declines and you can no longer manage the amount of debt that you have incurred in the meantime that was the end of Lehman Brothers there are still debates about whether Lehman Brothers was just illiquid just didn't have enough cash on time to service all the creditors or truly insolvent I would say it's almost a mute question because when you look at the structure of Lehman Brothers you can actually see that it was a bit of a house of carts that's where the subsidiaries the subsidiars were overlevered the company had committed to step in and back up the subsidiaries and of course when you just pulled out a couple of carts at the bottom the whole thing had to collapse what is more surprising is that not more companies face the same fate they did almost as you might recall from 2008 the central banks in the United States the Federal Reserve System and the central banks in England put in and offered liquidity to companies and also allowed other investment banks such as Goldman Sachs etc. to reorganize them very quickly into bank holding companies so that they would have access to the liquidity support that the central bank gives that's again a government entity so I've been talking a lot about how the law creates entities you have a corporate form that's a creature of the state you can mimic some of these features in contract of course but having off the shelf this particular package of legal privileges legal features that create these legal persons that are separate from everybody else that's what the law does another phenomenal source social resource that helps create wealth is of course our public money system that's where the central banks come in and by combining the two having sort of access to central banks and using the legal system to create wealth in ways in which wealth is created today but it's a social resource not just a private resource