How to Keep a Secret: The Decisive Advantage of Corporations

Coase Conference: Markets, Firms and Property Rights: A Celebration of the Research of Ronald Coase, University of Chicago Law School.  Robert Cooter, Herman F. Selvin Professor of Law and Director of the Program in Law and Economics at the UC Berkeley School of Law.

In the 1950s socialists around the world built gigantic steel plants like Nowa Huta in Poland. By the 1980s they were losing vast amounts of money and they seemed destined to die a slow death by rust. Lakshmi Mittal, who led the international operation of an Indian steel business built by his father, believed that these industrial dinosaurs could flourish in the age of mammals. He had novel ideas to reorganize them, and he thought that the Asian construction boom would lift world steel prices. He proved right on both counts. In the late 1980s he used family money to buy ailing steel companies in Indonesia, Mexico and Kazakhstan that nobody else wanted. He was the only one who could see how to turn them around. Acquiring Nowa Huta in 2003 was a large step to becoming the third richest person in the world as reckoned by Forbes in 2005. What do entrepreneurs like Mittal know that others don’t know? First, they know how to organize a business. Reorganizing gigantic steel mills to make them smaller and more profitable requires massive changes in offices, roles, and the people who fill them. Second, entrepreneurs like Mittal know better than others what prices the future will bring, so they know which lines of business to expand and which to contract. Knowledge of organization and future prices convey a decisive advantage over competitors. The last chapter concerned financing new ideas through credits, bonds, and stocks. The corporation is usually the best form of organization to protect entrepreneurs from losing their ideas and to protect investors from losing their money. Given effective law, the parties can structure the corporation so that investors make more money by keeping the firm’s secrets than by sharing them with others, and entrepreneurs make more by developing the business than by appropriating the investors’ money. Effective organization and law release creativity to make wealth, whereas ineffective organization and law channel energy into taking wealth from others.

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