The Changing Landscape of Capital and Business Risk

The public often imagines corporations as self-contained actors that provide a set of goods and services to consumers. Underpinning this image have been ideas of ownership, rights to capital and intellectual property, and corporate responsibility to stakeholders including consumers, workers, and shareholders. But what if almost everything we are told about the essence of the firm is wrong? So writes Sir John Kay, a British economist, corporate director, and longstanding fellow of St John’s College (Oxford) in his new book, The Corporation in the 21st Century.

The book revolves around contrasts between historical conceptions of corporations, capitalism, and contemporary practices. Kay writes, “A central thesis of [this] book is that business has evolved, but the language that is widely used to describe business has not.” In the 19th and 20th centuries, firms could be defined in terms of their control over material forms of productive capital (factories, steel foundries, railways, etc.) Socioeconomic critiques of capitalism, most prominently from Karl Marx, often centered on firms’ control of the means of production. Kay contends that firms today access productive capital as a service. For example, Amazon does not own its warehouses but rents them from another firm. Kay writes that today’s corporations and capitalism “[have] very little to do with ‘capital’ and nothing whatsoever to do with any struggle between capitalists and workers to control the means of production.”

Kay joins Luigi and Bethany to discuss the implications of this evolution in firms’ relation to capital: Why is it important to capitalism that its biggest firms no longer own their means of production? Why does the language used to describe this matter? What do Apple's manufacturing facilities, Amazon's warehouses, and TikTok's algorithms tell us about our notions of business ownership? How have these changes to capitalism redefined the struggle between the owners of capital, managers, workers, and consumers? In the process, Kay, Luigi, and Bethany explore the failures of capitalism and imagine what could and should be the purpose of the 21st-century corporation.

Show Notes:

Read an excerpt from the book (published by Yale University Press) on ProMarket

In Bethany and Luigi’s closing discussion of Kay’s book, Luigi cites several articles he has published on the topic, which we have linked below for the listener’s reference. In this past scholarship, Luigi studies how a firm and its operations often intertwine with other firms to form an ecosystem, and it is only through this ecosystem that value is created. Apple and Foxconn provide one example. Legally, they are distinct firms, yet Luigi contends they can be understood as elements of an ecosystem that creates value. Hence, it is sometimes productive to think beyond legal boundaries to consider how multiple firms may compose such a value-creating ecosystem in practice. Within the Apple/Foxconn ecosystem, Apple has a significant influence in dictating terms for Foxconn. Further, if Apple has such dominating power over its suppliers, then Apple could be said to have market power that raises antitrust concerns, which are less obvious if we take the legal boundaries of firms as the correct method of conceptualizing them.

Zingales, L., 2000. In search of new foundations. The Journal of Finance, 55(4), pp.1623-1653.

Rajan, R.G. and Zingales, L., 1998. Power in a Theory of the Firm. The Quarterly Journal of Economics, 113(2), pp.387-432.

Rajan, R.G. and Zingales, L., 2001. The firm as a dedicated hierarchy: A theory of the origins and growth of firms. The Quarterly Journal of Economics, 116(3), pp.805-851.

Zingales, L. (1998) Corporate Governance. In: Newman, P., Ed., The New Palgrave Dictionary of Economics and the Law, Palgrave Macmillan, London.

Lancieri, F., Posner, E.A. and Zingales, L., 2023. The Political Economy of the Decline of Antitrust Enforcement in the United States. Antitrust Law Journal, 85(2), pp.441-519.