Towards a New Science of the Corporation
“Everything is energy”. So began the session on Maori governance at this years Corporate Law Teachers Association conference in Auckland.
We only knew this viscerally. C0rporate law has a blind spot for the concept of energy.
Apart from French Jurist, Maurice Hauriou, there has been little serious attempt to apply the science of energy to the study of corporate law.
I intend to seek analogies between social movement with physical movements, therefore, to compare the mechanics of social science with thermodynamics. I owe you some explanations on this design. There is need to establish a new science if analogies and relations that unite science are already established. In doing so, the human mind obeys the feeling that he has the web link and continuity of natural phenomena at the same time, if using the similarities found it is possible to determine more accurately the specific content of the new science and to classify the essential elements, then they serve it as it touchstone of human theories.
Hauriou, Maurice. (1899). Leçons sur le Mouvement Social (Lessons on social movement)
Hauriou considered that the purpose of corporate law was to enliven. Seeing in the laws of thermodynamics a model of corporate law that aligned the interests of the corporation with the interests of society.
But despite the modern corporation being a product of the same age as the steam engine, corporate law and lawyers chose to draw their inspiration from another science - economics. Creating a model of the corporation and corporate law that draws on principles and assumptions that played no part in the design and invention of the 1856 modern corporation.
Law had become the handmaiden of economics. Economic analysis and efficiency became the guiding principle in the practice of commercial law. This was the day corporate law died. And along with it, the promise of a thriving and enlivened planet.
Hauriou’s empowering vision for corporate law is more relevant today than at anytime in the last 100 years. Company law must be fundamentally re-animated if lawyers are to play a role in the challenges of social inequality, climate change and species collapse.
I too see in corporate law, energy laws.
But as Heraclitus reminds us “nature loves to hide”. Like all science, progress in the new science of the corporation is punctuated by years, decades and even centuries. The secrets hidden in plain sight.
Critical to this next sprint are developments in the concept of value and capital. Put simply, in the same way as heat and work are two different forms of the same thing - energy - the capitals are different forms of the same thing - value. This insight is the foundation of the new science.
In the late 19th century, the only capitals known to science were land, commodities, labor and money. In the 21st century we know from accountants and the IIRC that value is stored in many capitals. Indeed, the IIRC value creation model looks remarkably like a sankey diagram first created in 1898 to show the energy efficiency of a steam engine:
The French Jurist’s new science was forced to wait for more than one hundred years. For concepts and ideas to be discovered that would make it possible to begin to formulate a theory of what I call “capital dynamics”:
The study of energy in its social form – value. The field examines the relationship between value, work, the forms of capital in which value accumulates, the entropic and other qualities of each form of capital and the conversion of value between different forms.
Capital dynamics are critical to the practice of corporate law and governance. Without it the purpose of corporate law and the corporation will remain dictated to by the flawed assumptions of neo-classical economics:
corporations, having no existence, have no utility; and
having no utility, from the corporation’s perspective, value can only mean profit.
Lawyers continually deceived by the seductive simplicity of law and economics. Continuing their role as the primary enablers of the planet’s rapid and escalating decapitalisation.
Hauriou even preempted the doubters:
Mathematicians forgive me for having used a thermodynamic where mathematics are excluded. They will remember that the basic principles of this science, the Carnot-Clausius, like Mayer, are, above all, the truths of experience.
After decades of observing corporations, I do not doubt my experience and reason that corporations are real (albeit an animal of statute) whose existence is entirely dependent upon the movement of value in all its forms of capital.
From the perspective of corporate law, this is no mere formalism. I do not advise company directors that their corporation exist simply because the law says so. That is meaning less. Rather, in a thermodynamic sense, incorporation is disequilibrium. The legal concept of limited liability is another way of saying that corporation is a low entropy open system that is not in equilibrium with with its surroundings. And like other low entropy open systems, it avoid equilibrium (deregistration) by sourcing energy externally and storing it for future use in the forms of capital.
When the law says that a director must act in the best interest of the corporation, this means that the director must exercise their powers and discharge their duties to increase the socially useful energy available to grow and sustain the existence of their corporation. Perversely, there is a diminishing and then negative value return when corporations seek to maximize profits.
But before we can understand the profound implications of this new theory we must learn the language and basic concepts:
"It is impossible to speak of the objects of any study, or to think to think lucidly about them, unless they are named." (Blackwelder)
capital (noun)
Any repository or store of value. Where value accumulates.
social capital, intellectual capital, human capital, natural capital, manufactured capital, share capital, promissory capital, financial capital, etc.
Each form of capital has unique traits and characteristics that identifies it, and which is useful in analysing the quantity of value it can store, the work it can do and over what time or entropic properties.
[plural: capitals]
capital dynamics (noun)
The study of energy in its social form – value. The field examines the relationship between value, work, the forms of capital in which value accumulates, the entropic and other qualities of each form of capital and the conversion of value between different forms.
being or related to an entity considered isolated or separate from its surrounding in the study of capital dynamic processes.
capital dynamic process (noun)
An entity undergoes a capital dynamic process when there is some sort of value change within the entity.
The two major capital dynamic processes are:
conversion - a transfer of value from one form of capital to another that occurs within the boundaries of the entity ie. the transformation of natural capital into manufactured capital using human capital - the manufacture of a chair.
exchange - a transfer of value from one form of capital to another that occurs across the boundaries of the entity with its surroundings ie. the transformation of manufactured capital into financial capital - the sale of the chair.
capitalise (verb)
To convert high entropy/low value capital into low entropy/high value capital.
To engage in a capital dynamic process that results in a positive VROI for one or more entities.
decapitalise (verb)
To transform low entropy/high value capital into high entropy/low value capital.
A capital dynamic process that results in a negative VROI for one or more entities.
decapitalism (noun)
Sub economic and political system of capitalism based on the inefficient capital dynamic processes ie. transforming capitals with a greater value than money into money.
Characteristics of decapitalism include lessness, financialisation, value/money equivalence, corporate negation or nominalism and shareholder primacy and a negative VROI.
[antonym: capitalism]
decapitalist (noun)
A person or entity that practices decapitalism.
A person or entity that systematically decapitalises others.
[antonym: capitalist]
legal capital dynamics (Noun)
is the study of the capital dynamic processes, structures and functions that occur within an entity with separate legal existence that are required to maintain existence.
Shared Value (Noun)
a capital dynamic process that results in more than one entity experiencing a positive VROI.
Value (noun)
Energy in its socially useful form.
Value is a quantitative property of a capital that is transferred to perform work or bring about change through a capital dynamic process.
[synonyms: energy (science), interest (law), utility (economics)]
VROI (noun)
Abbreviation for value return of value invested.
Value return on value invested is the ratio of useful value created or destroyed within the boundaries of an entity as a consequence of a capital dynamic process expressed as a percentage.