The Political Nature of the Firm: When Businesses Produce Institutional Order

Over the past year, I worked through archives and site visits across diverse manufacturing regions of the United States to better understand how regional economic capacity originates. What I found in the archives of Stanford, on the factory floor of New England’s American Woolen Company, and while interviewing the political and business stakeholders of Pittsburgh carries theoretical insights and some direction on how law and economics can also be pursued from the field. The phenomenon I document, I call corporate statecraft: the purposive construction of institutional order by firms beyond their own boundaries. The concept emerges from what the archives and the interviews revealed, and points toward a theoretical framework rooted in law but drawing on institutional economics, political economy, and economic sociology.

When the Palo Alto City Council adopted a zoning ordinance for the Stanford Industrial Park—front setbacks of one hundred feet, thirty percent open green space, a 250-foot greenbelt—the provisions were not new. They had governed the Park for nearly a decade, set by Stanford under the leadership of Frederick Terman, the university's dean of engineering, as restrictive covenants in the leases. The municipality did not design these rules. It adopted them—though not without contest. Opposition led to a referendum, which passed. What residents ratified, in effect, was the translation of private covenants into public law.

In Columbus, Indiana, the Cummins Engine Foundation paid the architectural fees for every public building—on condition that the community select from a list of world-class architects approved by J Irwin Miller, the company’s chairman. Later, Cummins employees led the creation of a Community Education Coalition that coordinated workforce development across institutional boundaries. Formally philanthropy and civic initiative, functionally private regulation sustained for half a century. 

In Pittsburgh, the Allegheny Conference on Community Development—a coalition of the region’s leading corporations—performed the functions of a regional planning authority for decades. 

In Stafford Springs, Connecticut, Jacob Long is rebuilding, from a shuttered woolen mill, the workforce institutions that previous owners left to decay. ‘There isn’t any pipeline’, Long told me when I visited the mill. ‘We are the pipeline’. Because he has invested everything, he cannot leave—and because he cannot leave, he builds.

In each case, the institutional order governing a region was built by firms—not by lobbying for rules or capturing existing ones, but by producing the rules themselves.

The conceptual starting point is Coase’s 1937 insight that firms produce governance—extended by Williamson, North, and Calabresi and Melamed. Gilson and Sabel showed that collaborative arrangements for innovation dissolve the boundary between contract and organization at the core of firm theory. If that binary dissolves for inter-firm production, it can dissolve for institutional production too—and a question becomes available: what happens when firms produce the institutional environment that everyone else must navigate? At the national level, no single firm authored the German vocational training system. But at the regional level—in the presence of functioning constitutional order but the absence of the connective institutional tissue that makes economic life possible—the institutional environment may simply not exist. Someone has to build it.

Three implications follow from these cases.

First, for the theory of the firm. The Coasean firm produces internal hierarchy. The Williamsonian firm selects among governance structures. The firm engaged in corporate statecraft extends Coase’s insight—in line with the findings of Gilson and Sabel—to institutional production that sustains long-term regional economic capacity. Economic capacity does not arise and then acquire legal form. It arises through legal form.

Second, for legal analysis. In every case I examine, authority flows from private to public—the reverse of what foundational frameworks in law and economics typically assume. Terman's covenants became Palo Alto's zoning. Miller's grants became Columbus's de facto design code. The Conference's priorities became Pittsburgh's development plan. The instruments progress from property to contract to association to informal governance—and as they do, they become harder for existing legal categories to recognize. The gap between what these instruments govern and the accountability attached to them is widest where the instruments look least like regulation. A court knows how to evaluate a covenant. It has no established framework for evaluating an associational compact that shapes the development of an entire region. Calabresi and Melamed’s Cathedral presupposed a state that assigns entitlements. Corporate statecraft poses a logically prior question: who produces the entitlement structure when the state has not? State action doctrine asks whether a private actor is the government in disguise. Corporate statecraft is not government in disguise—it is private actors producing governance where government has not provided it. The question does not fit the doctrine, not because the doctrine is wrong, but because the phenomenon is new to it.

Third, for normative purposes. Corporate statecraft varies in orientation, and the variation matters for outcomes. Terman built institutions that benefited competitors, because competitors thickened the labor market on which Stanford depended. The result was an institutional order that continues to foster entrepreneurship—Silicon Valley has regenerated for seven decades. The Allegheny Conference was by nature more selective—the region's leading corporations responding to genuine crisis. It produced real steeples: world-class universities, a leading healthcare system. But these are steeples that anchor a region, not steeples that seed an ecosystem. Pittsburgh created the infrastructure that serves a community but stopped short of creating the one that regenerates it economically: new firms. And the steeples it did build were tax-exempt. By 2021, the five largest nonprofits held $4.3 billion in exempt property within city limits. The city that successfully transformed now struggles to fund the public services on which its anchor institutions depend. The problem is not in the Conference's intentions, which were civic, but in the absence of broader economic leadership that could sustain regional development beyond philanthropy—and of mechanisms through which affected communities could shape the order being built around them. That is a structural tendency of more selective governance.

Where does this leave the field? It points toward a repositioning of institutional law and economics—extending the Coasean tradition by considering how non-state actors organically build legal architectures that generate economic capacity, before the state determines if and how to regulate economic behavior. Much of what these firms produced—a dean's decision to build an industrial park, a family's six decades of patient capital, a coalition's priorities—does not appear in the datasets law and economics conventionally analyzes.

Calabresi has argued that the encounter between law and economics must be a two-way street. Corporate statecraft is what comes back from the other direction: firms produce governance beyond their boundaries, and the communities shaped by it deserve accountability frameworks not yet built. The deeper questions are about how authority migrates from private to public, how governance acquires legitimacy without the procedural foundations that public law provides, and where the boundaries of accountability should fall when the producer of institutional order is not the state. Pursuing them may require law and economics to develop empirical methods that can reach the institutional realities its models presuppose.

The author's article can be found here.

Marco Mari is a Research Affiliate, MIT Industrial Performance Center, and Executive Director, Italia Innovation.