9.3 Rise of corporate capitalism and finance

Corporate capitalism transformed American business in the late 19th century. Large corporations replaced family-owned firms, driven by tech advances and industrialization. Limited liability, separation of ownership and management, and legal personhood were key features of this new model.

Investment banks and stock markets played crucial roles in corporate growth. They underwrote securities, facilitated mergers, and provided liquidity. This system concentrated wealth among industrial magnates, widening the gap between rich and poor and straining labor relations.

Corporate Capitalism and Finance in America

Features of corporate capitalism

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• Late 19th century corporate capitalism emerged shifted from small family-owned businesses to large corporations driven by technological advancements and industrialization
• Limited liability protected shareholders' personal assets from company debts encouraged investment and risk-taking
• Separation of ownership and management created shareholders as owners while professional managers ran day-to-day operations
• Legal personhood allowed corporations to own property enter contracts and sue or be sued
• Corporate structure enabled raising large amounts of capital achieved economies of scale in production and distribution ensured continuity beyond individual owners
• Examples: Standard Oil United States Steel Corporation

Investment banks and stock markets

• Investment banks underwrote and issued new securities facilitated mergers and acquisitions provided financial advice to corporations (J.P. Morgan & Co)
• Stock market operated through primary market for Initial Public Offerings (IPOs) and secondary market for trading existing shares provided liquidity for investors
• Corporate growth financed through equity financing via stock issuance debt financing via corporate bonds and retained earnings reinvestment
• Financial innovations developed new instruments (commercial paper) expanded credit availability increased market speculation

Wealth distribution in corporate capitalism

• Wealth concentrated among industrial magnates and "robber barons" widened gap between rich and poor (Andrew Carnegie John D. Rockefeller)
• Corporate influence in politics increased formation of trusts and monopolies shifted power dynamics
• Labor relations strained as corporations exploited workers in pursuit of profits led to rise of labor unions and worker movements (American Federation of Labor)
• Social and economic mobility created professional middle class challenged small businesses competing with large corporations
• Government responded with antitrust legislation (Sherman Antitrust Act) and Progressive Era reforms

Entrepreneurs vs professional managers

• Traditional entrepreneurs followed founder-owner model with direct involvement in business operations
• Corporate model shifted entrepreneurs to initial founders and major shareholders transitioning to professional management over time
• Professional managers emerged with specialized education in business administration focused on efficiency and scientific management principles (Frederick Taylor)
• Separation of ownership and control introduced principal-agent problem led to development of corporate governance structures
• Innovation in corporate settings fostered through research and development departments and intrapreneurship within large organizations
• Modern entrepreneurship focused on high-growth startups and venture capital produced serial entrepreneurs and portfolio management (Silicon Valley startups)