Frontiers

Statutes of Limitation

Sociology graduate student Alexander Jerneck examines the fiscal roots of corporate law.
April 2014

Forming a corporation represents the pinnacle of entrepreneurship. But in the late 19th century, American corporate law as we know it was only just beginning to take shape. 

“State legislators created corporations by passing a law, and that law would govern how long the corporation could exist, what business it could engage in, and what kind of property it could own,” says sociology graduate student Alexander Jerneck, whose dissertation, “Explaining the Emergence of Modern Incorporation Law,” examines the fiscal roots of corporate law.

In 1896, New Jersey changed all that, creating the first modern version of corporate law by allowing capitalists to consolidate many small competitors into huge, profitable corporations. This reshaped the American economy and provided many of the protections corporations are afforded today. Why the law changed is at the heart of Jerneck’s investigation.

The current scholarly hypothesis is that government control of corporations was only rescinded when failed infrastructure projects started causing money losses. But Jerneck says that would be simplifying a more complex evolution: “States’ tight control of corporations had always been criticized, both by those who saw it as fostering abuse and corruption and those that advocated less government involvement in the economy.” 

Many states did invest tax dollars in projects like canals, and subsequently lost taxpayer dollars. But this was not the case in New Jersey, which is especially important, Jerneck says, given it is the state where modern corporate law was first passed. There is no record that big infrastructure investments were made or that the state lost public money. It was something entirely more human, he says.

“Politicians’ ideas about taxation evolved when they realized that if they relinquished control of corporations, they could then tax them, so that services could be provided for their constituents,” says Jerneck. Despite the controversy surrounding corporate law, this arrangement made politicians reluctant to make it more restrictive, since they had already accomplished their goal of returning control to private owners. 

“New Jersey for many years got almost all of its revenues from taxes on the biggest railroad corporation, so that the state could pay for schools without leveling a property tax,” says Jerneck. “Once they found alternative revenue sources, the state made their corporate law more restrictive again, but by that time other states like Delaware had copied its modern, permissive laws.”

Next, Jerneck plans to survey the larger U.S. and test his hypothesis on other states’ history of legislation. “I’m most interested in the institutions that underlie our economy, the rules that determine who gets what,” says Jerneck. “Studying the evolution of corporate law provides clear and consequential outcomes. By comparing failed and successful attempts to change it, we can begin to understand why it changed.”