CATO JOURNAL commercial transactions, or to protect property rights, across regions and beyond local circles. This is in sharp contrast with the Roman law tradition, from which Western laws are derived, and has restrained capital freedom in China A related barrier to China's adoption of the modern corporation was its traditional practice of unlimited liability. Chinese literature classics are often full of stories in which children were held responsi- ble for their parents' or even grandparents unpaid debt, stories of debt being passed down generation after generation. This culture of unlimited liability is even dominant in today, s Chinese society But limited liability is a fundamental character of the modern corpora tion, without which passive outside shareholders would not be will- ing to part with the control of their assets and without which the inside managers would not want to engage in the control because they would not be willing to risk the future of their children and chil- dren's children. That is why a sage of the Progressive Era, Nicholas Murray Butler, proclaimed that"the limited liability corporation is e greatest single discovery of modern times"(Micklethwait and Wooldridge 2003: xxi). Therefore, the modern corporation would imply a direct clash with one of the defining features of the Chinese tradition Developing the necessary legal and informational institutions would by no means be a short-term task, even if the elite at the time had known how to do it. Given the urgency of China's modemization movement, the state had to come in and sponsor the new enterprises In the absence of a corporate law and a bankruptcy law, the govern- ment's sponsorship had to include implicit guarantees, limiting the liabilities for outside shareholders and for the corporation. This also marked the beginning of the state's role in corporate management and direct corporate ownership in modern Chinese history Of course, other factors were important as well in the government's decision to become involved in the early experiment with joint-stock companies, including its traditional distrust in private merchants motives(so the government had to be in, lest the businessmen would exploit the public). Also, the reformer officials were personally inter- ested in ensuring the experiment's success by providing the new enterprises with privileged trade monopolies The first modern corporation--China Merchants' Steam Navigation Company(CMC)was founded in 1872 by Li Hongzhang in his official capacity as the governor-general of Zhili province and a592 Cato Journal commercial transactions, or to protect property rights, across regions and beyond local circles. This is in sharp contrast with the Roman law tradition, from which Western laws are derived, and has restrained capital freedom in China. A related barrier to China’s adoption of the modern corporation was its traditional practice of unlimited liability. Chinese literature classics are often full of stories in which children were held responsible for their parents’ or even grandparents’ unpaid debt, stories of debt being passed down generation after generation. This culture of unlimited liability is even dominant in today’s Chinese society. But limited liability is a fundamental character of the modern corporation, without which passive outside shareholders would not be willing to part with the control of their assets and without which the inside managers would not want to engage in the control because they would not be willing to risk the future of their children and children’s children. That is why a sage of the Progressive Era, Nicholas Murray Butler, proclaimed that “the limited liability corporation is the greatest single discovery of modern times” (Micklethwait and Wooldridge 2003: xxi). Therefore, the modern corporation would imply a direct clash with one of the defining features of the Chinese tradition. Developing the necessary legal and informational institutions would by no means be a short-term task, even if the elite at the time had known how to do it. Given the urgency of China’s modernization movement, the state had to come in and sponsor the new enterprises. In the absence of a corporate law and a bankruptcy law, the government’s sponsorship had to include implicit guarantees, limiting the liabilities for outside shareholders and for the corporation. This also marked the beginning of the state’s role in corporate management and direct corporate ownership in modern Chinese history. Of course, other factors were important as well in the government’s decision to become involved in the early experiment with joint-stock companies, including its traditional distrust in private merchants’ motives (so the government had to be in, lest the businessmen would exploit the public). Also, the reformer officials were personally interested in ensuring the experiment’s success by providing the new enterprises with privileged trade monopolies. The first modern corporation—China Merchants’ Steam Navigation Company (CMC)—was founded in 1872 by Li Hongzhang in his official capacity as the governor-general of Zhili province and a 44795_Ch19_Chen:19016_Cato 8/29/13 11:37 AM Page 592