Choosing the Partnership: English Business Organization Law During the Industrial Revolution

For most of the period associated with the Industrial Revolution in Britain, English law restricted access to incorporation and the Bubble Act explicitly outlawed the formation of unincorporated joint stock companies with transferable shares. Furthermore, firms in the manufacturing industries most closely associated with the Industrial Revolution were overwhelmingly partnerships. These two facts have led some scholars to posit that the antiquated business organization law was a constraint on the structural transformation and growth that characterized the British economy during the period. Importantly, however, the vast majority of manufacturing firms in the modern sector were partnerships. An easy explanation for the predominance of partnerships is that the legal restrictions on access to the joint stock form gave entrepreneurs no other choice of legal vehicle for their collective enterprises. It is not a large leap to then argue that these restrictions inhibited the development of the English economy. Those who make this argument implicitly envision a counterfactual in which legal restrictions on the joint stock form were absent, firms in the modern sector used the joint stock form to access external sources of funds to finance investment, and consequently capital accumulation and output accelerated more rapidly in the modern sector. The goal of this Essay is to challenge this view and to point towards other possible explanations for industrial entrepreneurs’ use of the partnership form. In short, the restrictions on access to the joint stock form lacked bite. While firms did not have general access to incorporation until 1844, creative businessmen and lawyers crafted an alternative legal form—the unincorporated joint stock company—that served as a functional replacement for the business corporation. Restrictions on unincorporated joint stock companies were unenforced and largely ignored. Thus, the use of the partnership by entrepreneurs in the modern sector must be understood as a choice; the law did not dictate their firms’ legal form. This Article proposes a resolution of this puzzle based on the pecking order theory of corporate finance. For the vast majority of firms in the modern sector it was optimal to use only debt, not equity, for any external financing. Industrial entrepreneurs chose the partnership form because it minimized the costs of debt financing. The unlimited liability of partners gave firm creditors additional collateral and provided better incentives against opportunism by partners, thereby lowering the cost of credit to the firm. Furthermore, the tighter nexus between control and residual financial claims in the partnership form resulted in better incentives for the owner-managers to exert effort and make efficient decisions in running the firm. Part II begins with a short overview of the early history of the joint stock form in England and then turns to the legal framework for business organization during the Industrial Revolution and explain that the supposed restrictions on organizing as a joint stock company were not binding. Part IV develops an explanation based on the pecking order theory of corporate finance for why industrial entrepreneurs nonetheless organized their businesses as partnerships

TMI? Why the Optimal Architecture of Disclosure Remains TBD

We are inundated with disclosures in our daily lives. In one of the more evocative passages in their stimulating new book, More Than You Wanted to Know, Omri Ben-Shahar and Carl E. Schneider imagine a day in the life of someone who actually reads all those disclosures (pp. 95–100). During a commercial on the morning news, the protagonist hits pause on the TiVo to catch the fine print that would otherwise fly by. Breakfast is a slog, requiring close reading of the toaster’s ominous label and the disheartening nutrition facts on the butter and jam. More of the same awaits at the office, where the pop-up announcing a critical software update is accompanied by a lengthy and perplexing end-user license agreement. And so on. The parable vividly illustrates the fanciful nature of the hope that many disclosures will be digested and used in the way their designers intend. Truly reading and trying to comprehend even a modicum of the disclosures we face “would mean a life-time educational project like the worst of high school—boring subjects and nasty tests going on your permanent record” (p. 70). Ben-Shahar and Schneider provide both a compelling account of how we arrived at the current state of ubiquitous ineffective disclosure and a sweeping critique of disclosure as a regulatory technique. Disclosure is seductive to lawmakers because it seems so plausible that more information is always better and essentially costless to furnish. But the authors survey the evidence and find that disclosure has failed time and again. Its failure is due at root to a misunderstanding of psychology. Disclosure rests on the false assumption that people actually want to make all of the significant decisions in their lives (not to mention the insignificant ones) and to make them with care. In fact most of us are decision averse. And when we do struggle through complex decisions, disclosures typically offer little useful simplification. These problems with disclosure are compounded by its rampant use. Each additional disclosure reduces the attention paid to those that have gone before, leading to overgrazing on the disclosure commons. As a regulatory technique, mandatory “disclosure is a fundamental failure that cannot be fundamentally fixed,” and “what fails should be abandoned” (p. 12). More Than You Wanted to Know is timely, arriving amid a surge in enthusiasm for light-touch regulatory tools like disclosure that attempt to move choices in the right direction. One influential approach—popularized by the best seller Nudge—dons the mantle of libertarianism, eschewing regulations that would limit freedom of choice in favor of simply redesigning the “choice architecture” through interventions like disclosure to achieve regulatory goals at little cost. The ascendancy of this approach has served to delegitimate choice-limiting policies. If we can achieve so much for so little through harmless tweaks to choice architecture like disclosure, then why ever resort to tools like product regulation that might prohibit someone’s preferred option? What sort of Neanderthal would continue with such outmoded forms of regulation? Ben-Shahar and Schneider provide a refreshing counterpoint to the shift toward “nudging.” Mandating disclosure to improve choice architecture in fact has a long history and a poor track record; the authors explain why. But while the book provides an important critique of the traditional approach to mandatory disclosure, it does not fully engage with the burgeoning behavioral literature on disclosure that advocates alternative approaches. To explain the limits of the book’s critique, I begin by reframing the core thesis of the book as an application of dual-process theory from cognitive psychology. Ben-Shahar and Schneider analyze a particular—and undoubtedly prevalent—rationale for disclosure regulation: providing information to improve deliberate decisionmaking. They convincingly show that this model of disclosure often gets the psychology wrong. Our effortful deliberate processes are not so easily improved and are often not even engaged as our more intuitive processes predominate. This is not, however, disclosure’s only modus operandi. I examine an alternative mode that aims simply to influence rather than instruct. This mode of disclosure harnesses our more intuitive processes to move beliefs or behavior in a specific direction. To this approach Ben-Shahar and Schneider’s main critique does not apply. But other critiques do, and I offer several. Finally, I turn to their normative bottom line. While debunking excessive faith in mandatory disclosure—what they term disclosurism—Ben- Shahar and Schneider develop an ism of their own—what we might call antidisclosurism—by arguing for total abandonment of, or at least a presumptive bar against, mandatory disclosure. But their approach risks making a mistake symmetric to that of the nudge advocates who adopt strong presumptions against any limitation of choice. We are better off avoiding all of these isms in our regulatory thinking. The right response to the important critiques of mandatory disclosure that Ben-Shahar and Schneider raise is not a presumption against disclosure but rather rigorous empirical assessment of which disclosures work and which do not, with an eye toward the pitfalls the authors document. About disclosure, there is still a great deal more to know

TMI? Why the Optimal Architecture of Disclosure Remains TBD

We are inundated with disclosures in our daily lives. In one of the more evocative passages in their stimulating new book, More Than You Wanted to Know, Omri Ben-Shahar and Carl E. Schneider imagine a day in the life of someone who actually reads all those disclosures (pp. 95–100). During a commercial on the morning news, the protagonist hits pause on the TiVo to catch the fine print that would otherwise fly by. Breakfast is a slog, requiring close reading of the toaster’s ominous label and the disheartening nutrition facts on the butter and jam. More of the same awaits at the office, where the pop-up announcing a critical software update is accompanied by a lengthy and perplexing end-user license agreement. And so on. The parable vividly illustrates the fanciful nature of the hope that many disclosures will be digested and used in the way their designers intend. Truly reading and trying to comprehend even a modicum of the disclosures we face “would mean a life-time educational project like the worst of high school—boring subjects and nasty tests going on your permanent record” (p. 70). Ben-Shahar and Schneider provide both a compelling account of how we arrived at the current state of ubiquitous ineffective disclosure and a sweeping critique of disclosure as a regulatory technique. Disclosure is seductive to lawmakers because it seems so plausible that more information is always better and essentially costless to furnish. But the authors survey the evidence and find that disclosure has failed time and again. Its failure is due at root to a misunderstanding of psychology. Disclosure rests on the false assumption that people actually want to make all of the significant decisions in their lives (not to mention the insignificant ones) and to make them with care. In fact most of us are decision averse. And when we do struggle through complex decisions, disclosures typically offer little useful simplification. These problems with disclosure are compounded by its rampant use. Each additional disclosure reduces the attention paid to those that have gone before, leading to overgrazing on the disclosure commons. As a regulatory technique, mandatory “disclosure is a fundamental failure that cannot be fundamentally fixed,” and “what fails should be abandoned” (p. 12). More Than You Wanted to Know is timely, arriving amid a surge in enthusiasm for light-touch regulatory tools like disclosure that attempt to move choices in the right direction. One influential approach—popularized by the best seller Nudge—dons the mantle of libertarianism, eschewing regulations that would limit freedom of choice in favor of simply redesigning the “choice architecture” through interventions like disclosure to achieve regulatory goals at little cost. The ascendancy of this approach has served to delegitimate choice-limiting policies. If we can achieve so much for so little through harmless tweaks to choice architecture like disclosure, then why ever resort to tools like product regulation that might prohibit someone’s preferred option? What sort of Neanderthal would continue with such outmoded forms of regulation? Ben-Shahar and Schneider provide a refreshing counterpoint to the shift toward “nudging.” Mandating disclosure to improve choice architecture in fact has a long history and a poor track record; the authors explain why. But while the book provides an important critique of the traditional approach to mandatory disclosure, it does not fully engage with the burgeoning behavioral literature on disclosure that advocates alternative approaches. To explain the limits of the book’s critique, I begin by reframing the core thesis of the book as an application of dual-process theory from cognitive psychology. Ben-Shahar and Schneider analyze a particular—and undoubtedly prevalent—rationale for disclosure regulation: providing information to improve deliberate decisionmaking. They convincingly show that this model of disclosure often gets the psychology wrong. Our effortful deliberate processes are not so easily improved and are often not even engaged as our more intuitive processes predominate. This is not, however, disclosure’s only modus operandi. I examine an alternative mode that aims simply to influence rather than instruct. This mode of disclosure harnesses our more intuitive processes to move beliefs or behavior in a specific direction. To this approach Ben-Shahar and Schneider’s main critique does not apply. But other critiques do, and I offer several. Finally, I turn to their normative bottom line. While debunking excessive faith in mandatory disclosure—what they term disclosurism—Ben- Shahar and Schneider develop an ism of their own—what we might call antidisclosurism—by arguing for total abandonment of, or at least a presumptive bar against, mandatory disclosure. But their approach risks making a mistake symmetric to that of the nudge advocates who adopt strong presumptions against any limitation of choice. We are better off avoiding all of these isms in our regulatory thinking. The right response to the important critiques of mandatory disclosure that Ben-Shahar and Schneider raise is not a presumption against disclosure but rather rigorous empirical assessment of which disclosures work and which do not, with an eye toward the pitfalls the authors document. About disclosure, there is still a great deal more to know