The Convention covered not just patents but also trademark laws (which enabled Switzerland and Netherlands to sign up to it despite not having a patent law). In 1886 the Berne Convention on copyrights was signed. The Paris Convention was subsequently revised a number of times (notably 1911, 1925, 1934, 1958 and 1967) moving towards a strengthening of patentee rights; together with the Berne Convention, it formed the basis of the international IPR regime until the TRIPS agreement.[61] However, as we saw in Chapter 2 (section 2.3.3), despite the emergence of an international IPR regime, even the most developed NDCs were still routinely violating the IPR of other countries’ citizens well into the twentieth century.
The above should show how deficient the IPR regimes of the NDCs were (when they were themselves developing countries) by the standards that are demanded of today’s developing countries. There were widespread and serious violations by even the most advanced NDCs until the late nineteenth century and beyond, especially when it came to protecting the IPR of foreigners.
3.2.4. Corporate governance
These days, we tend to take the principle of limited liability for granted. However, for a few centuries after its invention in the sixteenth century for highly risky large-scale commercial projects (the British East India Company being the best-known early example), it tended to be regarded with great suspicion.
Many people believed that it led to excessive risk-taking (or what today we call ‘moral hazard’) on the part of both owners and managers. They regarded it as an institution that undermined what was then regarded – along with greed – as one of the key disciplinary mechanisms of capitalism, namely, fear of failure and destitution, especially given the harshness of bankruptcy laws at the time (see section 3.2.4.C).
Adam Smith argued that limited liability would lead to shirking by managers. The influential early nineteenth-century economist John McCulloch argued that it would make the owners lax in monitoring hired managers.[62] It was also believed, with some justification, to be an important cause of financial speculation. Britain banned the formation of new limited liability companies on these grounds with the Bubble Act in 1720, although with the repeal of the act in 1825 it was again allowed.[63]
However, as has been proven repeatedly over the last few centuries, limited liability provides one of the most powerful mechanisms to ‘socialize risk’, which has made possible investments of unprecedented scale. That is why, despite its potential to create ‘moral hazard’, all societies have come to accept limited liability as a cornerstone of modern corporate governance.[64]
In many European countries, limited liability companies – or joint stock companies as they were known in those days – had existed under ad hoc royal charters since the sixteenth century.[65] However, it was not until the mid-nineteenth century that it began to be granted as a matter of course, rather than as a privilege.
Generalized limited liability was first introduced in Sweden in 1844. England followed this closely with the 1856 Joint Stock Company Act, although limited liabilities for banks and insurance companies were introduced somewhat later (1857 and 1862 respectively), reflecting the then widespread concern that they could pose serious ‘moral hazard’. Rosenberg and Birdzell document how, even a few decades after the introduction of generalized limited liability (the late nineteenth century), small businessmen ‘who, being actively in charge of a business as well as its owner, sought to limit responsibility for its debts by the device of incorporation’ were frowned upon.[66]
In Belgium, the first limited liability company was founded in 1822, and the 1830s saw the formation of a large number of such companies. However, it was not until 1873 that limited liability was generalized. During the 1850s in various German states, it was introduced in a restricted form, whereby the principal owners had unlimited liability but shares giving limited liability could be marketed. It was not until the 1860s that various German states scrapped or weakened traditional guild laws, thereby opening the door to the full institutionalization of limited liability (Saxony in 1861, Wurttemberg in 1862 and Prussia in 1868-9). In France, limited liability only became generalized in 1867, but in Spain, while joint-stock companies (Sociedades An~onimas) began to emerge from as early as 1848, it was not fully established until 1951. It is interesting to note that in Portugal limited liability was generalized as early as in 1863, despite the country’s economic backwardness at the time.[67]
In the USA, the first general limited liability law was introduced in the state of New York in 1811. However, this fell into disuse around 1816, due to general apathy towards limited liability companies, and other states did not permit limited liability companies until 1837. Even after that, as in the European countries of the time, prejudice against limited liability companies prevailed until at least the 1850s. As late as the 1860s, most manufacturing was carried out by unincorporated companies, and there was still no federal law granting generalized limited liability.[68]
Bankruptcy laws have attracted an increasing amount of attention over the last two decades or so. The large-scale corporate failures that followed various economic crises during this period have made people more aware of the need for effective mechanisms to reconcile competing claims, transfers of assets and the preservation of employment. The industrial crises in the OECD countries during the 1970s and 1980s, the collapse of communism, the miserable failure of ‘transition’ since the late 1980s and the 1997 Asian crisis were particularly important in this regard.
While the debate is still unresolved as to what makes the best bankruptcy law – the USA’s debtor-friendly law, the UK’s creditor-friendly one, or the employee-protecting French one – there is little disagreement that an effective bankruptcy law is desirable.[69]
In pre-industrial Europe, bankruptcy law was mainly regarded as a means of establishing the procedures for creditors both to seize the assets of and to punish dishonest and profligate bankrupt businessmen. In the UK, the first bankruptcy law, applicable to traders with a certain amount of debt, was introduced in 1542, although it only became consolidated with the 1571 legislation. However, the law was very harsh on the bankrupt businessmen, as it deemed that all their future property was liable for former debts.[70]
With industrial development came an increasing acceptance that business can fail due to circumstances beyond individual control, not just as a result of dishonesty or profligacy. As a result, bankruptcy law also began to be seen as a way of providing a clean slate for bankrupts. This transformation of bankruptcy law was, together with generalized limited liability, one of the key elements in the development of mechanisms for ‘socializing risk’ that allowed the greater risk-taking necessary for modern large-scale industries. In 1705-6, for example, measures were introduced in the UK to allow cooperative bankrupts to keep five per cent of their assets and even discharged some from all future debts if the creditors consented.[71]
63
However, Kindleberger argues that the Bubble Act was ‘a device to save the South Sea Company by halting the diversion of cash subscriptions to rival promotions, not an attack on it’ (1984, p. 70), as I suggest here. Whatever the motive was behind the Act, the fact that it survived for a century implies that the view that limited liability promotes speculation, whether true or false, was widely accepted.
67
Dechesne 1932, pp. 381-401 (for Belgium); Tilly 1994; Millward and Saul 1979, 416 (for Germany); Bury 1964, p. 57 (for France); Volts 1979, pp. 32-5, 46 (for Spain); Mata and Valerio 1994, p. 149 (for Portugal).
69
See Carruthers and Halliday 1998, and Carruthers 2000, on the current state of the debate, especially in relation to the USA, the UK and East Asia.