Across industrial sectors, markets are inherently imperfect, requiring “forces” to overcome frictional challenges between demand and supply. The forces are companies which through products and services solve the frictions. The formation of for-profit companies emerged well hundreds of years after the Tang Dynasty (A.D. 618-907) when the Chinese invented paper money, triggering unprecedented accumulation of wealth.
(If I have $1,000 which I do not need for a year, and open to lend it to somebody at 10% interest rate, I will need to find that person for that deal to go through. Also, the person that would receive that money from me needs to know someone who is open to lend $1,000 at 10% for a year. Unfortunately, there is a huge information asymmetry as I cannot easily find that person and the person cannot easily find me. What happens is that to ensure that money does not stay idle, I will take it to a bank which will pay me 10% interest rate. Also, the person that needs $1,000 will go to a bank to ask for a loan, and the bank will lend that my $1,000 to him for say 17%. That extra 7% is the cost of fixing the friction and by overcoming the friction, a new equilibrium point is set, bringing a largely imperfect market into a more perfect one. This is what happens in all market systems, across sectors and industries.)
So, for thousands of years, the demand/supply relationship existed across domains, outside the constructs of “companies”. Yes, as we currently have in Nigeria, there are informal economies which operate via largely direct human systems of demand and supply. Such markets are typically small with severe unmanaged perturbations. Yet, in extreme micro-elements of these economies, they operate largely “perfect” with minimal complexities requiring companies!
If you live in a very small village where a young man sells chewing stick (Walmart in U.S. calls it organic toothbrush) and people can buy direct from him, after he has harvested from the woods, there would not be a need for a “company”. But tell that man to scale the mission, then, all of a sudden, he needs company formation to effectively utilize factors of production due to varying ordinance in trade.
As you try to solve one problem, another problem comes up, and you need other firms to help you since you cannot do everything. That is the heart of economic activity. While the toothbrush to serve a very small village can be made without a “company formation”, to scale the business, the man needs to run a company as managing most perturbations in trade are best done via companies. The different ordinances in trade favor companies over human systems. An example: it is easier to import raw materials into a country as a company than as a “person”.
The fact is this: you can have “perfect” markets in some micro-areas where there are no complexities with all factors of production easily controlled and managed. But to scale anything out of that community, operating as a company becomes necessary due to perturbation forces from many ordinances which factors of production must interact with.
It is this understanding that puts companies ahead of humans in market systems. Companies accumulate costs just for being active, and those costs must be settled. And based on that, if you send an invoice with a corporate account number “a Company”, you have a better chance of being paid compared with when you send a personal invoice with your personal bank account number. The recipient sees the company as an entity that has bills to pay because the ordinance of trade upon which the factors of production operate make it that way. But if the invoice is in your name, he does not see any cost, and possibly could assume that you can forget the payment!
If your landlord does not want to pay for the work done for him, next time in 2020, send him your company invoice (with corporate bank account), NOT your personal bank account. Once he sees that, he will likely move faster to settle that bill.
Get a business name – and operate as a company! As a company, you are “bigger” than a carpenter, geek, plumber, etc. A Great New Year ahead.
Register for next edition of Tekedia Mini-MBA (June 22 - Oct 22, 2020) here. Four months, online, and costs $140 or N50,000 naira .