Firms versus corporations: a rebuttal of Simon Deakin, David Gindis, and Geoffrey M. Hodgson

Abstract

I share the view expressed by Simon Deakin, David Gindis, and Geoffrey Hodgson (‘DGH’) that social scientists need to consider the constitutive role of law in their disciplines. This is particularly the case for economists working on the theory of the firm and on institutions more generally. Their analyses are often built on assumptions about the legal system which do not correspond to reality. One major issue is the generalized confusion between the concepts of ‘corporation’ and ‘firm’. In day-to-day parlance, the two words are synonyms. But, when the constitutive role of law is considered, the word corporation corresponds to a specific legal device which should be clearly differentiated from a less-specific concept which can be called a ‘firm’ or an ‘enterprise’. The notion of firm usually corresponds to the economic organization of various resources via contracts to produce goods or services. The corporation is a legal institution with peculiar characteristics, including a potentially eternal legal personality, an asset partitioning effect, and several layers of separations of ownership and control. Corporations are often used to legally structure large firms because they are very efficient legal devices to concentrate capital. But, firms are practically and conceptually different from the corporation(s) used to structure them. DGH consider that the understanding of what a firm is should not go against general, day-to-day understanding. In their view, although not all firms are corporations, all corporations are firms. I disagree. Only by clearly explaining that corporations are not firms can lawyers help social scientists consider the constitutive role of the law of corporations in the structuring of our present-day economy.

A further reply to Jean-Philippe Robé on the firm

“…We turned to dictionary definitions and other sources to note the everyday meaning for the noun ‘firm’. We agree with Robé (2021: 7) that ‘there is great confusion in the use of the words “company”, “business”, “firm”, “corporation”, “enterprise”, and so on.' But our search of dictionaries and other relevant sources established – contra Robé – that standard usage considers a corporation as a type of firm (Deakin et al ., 2021: 863–865).…”

“…Robé disagrees with our definition of a firm as ‘individuals or organizations with the legally recognized capacity to produce goods or services for sale’ (Deakin et al ., 2021: 869). Robé (2021: 1–2) protested that ‘this definition gives the impression that firms are legal persons … Firms are not creatures of the law. … In all legal systems, having a ‘legally recognized capacity to produce goods or services for sale’ implies, at least, having legal personality.’ For Robé, the law does not perceive the firm as such and only sees individual legal persons or incorporated legal persons.…”

“…After pressure from us to distinguish taxonomic definitions from descriptions, Robé now seems to have abandoned the task of defining the firm. Hence Robé (2021: 5–7) changed his former definition of the firm (an ‘organised economic activity’) to ‘my description of what a firm is’. In short, Robé (2021) now refrains from definitions and has switched to descriptions.…”

“…Hence Robé (2021: 5–7) changed his former definition of the firm (an ‘organised economic activity’) to ‘my description of what a firm is’. In short, Robé (2021) now refrains from definitions and has switched to descriptions.…”

“…Some of these are generously acknowledged by Robé himself. But differences remain (Deakin et al ., 2017, 2021; Robé, 2020, 2021). We all agree that social scientists need to consider more broadly the constitutive role of law in modern socio-economic systems.…”