When Canadian Prime Minister Mark Carney framed his new infrastructure and resource agenda as a “nation-building” project, he tapped into an old Canadian ambition: escape velocity from the gravitational pull of the U.S. market. The motivation for this sudden interest in trade diversification is Donald Trump’s stated intention to use tariffs as leverage to force Canada to become the fifty-first state. That threat has sharpened Ottawa’s incentive to diversify exports in a way that successive Canadian governments, dating back at least to the Ottawa Economic Conference of 1931, have aspired to but consistently failed to achieve.
Image source: 2016 presentation by Lawrence Schembri of the Bank of Canada to the AIMS think tank in Halifax.
This historic pattern has been remarkably stable. The history of Canada’s efforts to divert trade away from the United States is a boulevard of broken dreams. Whether Canada pursued Commonwealth preferences (the sentimental favourite of the political right in Canada), Pierre Trudeau’s “Third Option” in the 1970s (which envisioned closer trade ties with the social-democratic countries of the EEC), the Asia pivot of the 1990s (which involve Team Canada trade missions in which a plane load of politicians and businessmen flew on a glorified sales mission), the structural fact remained: the U.S. absorbed the overwhelming majority of Canadian exports. Geography, cultural similarity, scale, integrated supply chains, and risk-minimizing behaviour by firms kept the share stubbornly high. The Team Canada trade missions of the late 1990s appear to have had nearly zero impact on Canada’s international trade, as academic researchers have statistically demonstrated. The relative importance of Asian export markets to Canada did increase after 2000, that appears to have been driven entirely by economic growth in Asia rather than Canadian government policy.
The question right now is whether the latest tranche of so-called fast-tracked projects, which involve such commodities as so-called critical minerals, LNG, graphite, and electrons flowing down wires, can meaningfully reduce Canada’s degree of export dependence on the United States. The real question is not whether these projects are “nation-building” in an abstract national-identity sense, but whether they actually shift the geography of Canadian exports. On that metric, only one of these projects really matters, for reasons I will explain below.
I decided to invest a bit of time in trying to figure out which of the newly announced projects is likely to do the most to change the overall headline figure. So I looked at some of the documents related to four projects with clear export potential—Northcliff Resource’s (TSX:NCF) Sisson mine (tungsten/molybdenum), Crawford (nickel),Ksi Lisims (LNG), and NMG Phase 2 (graphite) and then tried to estimate how many dollars of exports each of them would likely generate in 2030 and 2035, if all of the plans come to fruition without delays. I know that’s a highly charitable assumption, given we are talking about Canada. For fun, I also tried to estimate how many full-time jobs each project would create since there is a lot of concern in Canada right now about the country’s high unemployment rate, the outflow of talent to the US, and falling fertility rates.
Project
Estimate of annual exports (US$)
Exports to US
Exports to RoW
Share of project sales that are exports
Share of exports going to US
Approx. FTE operations (2030 & 2035)
Sisson Mine (NB – tungsten/moly)
$0.31 bn
190m
120m
90%
60%
300 FTE
Crawford Nickel Ontario
$560m
$340m
$220m
70%
60%
1,000 FTE works in the greater Timmins area
Ksi Lisims LNG (BC)
$6.86 b
$0 bn
$6.86 b
100%
0%
700 FTE (operations)
NMG Phase-2 – Matawinie + Bécancour (QC)
180m
110m
70m
85%
60%
350 FTE (mine + battery plant)
Iqaluit hydro (NU)
$0 (no exports)
0
0
0%
–
20 FTE, likely seasonal
North Coast Transmission Line (BC)
$0 (no direct commodity exports)
0
0
0%
–
order of 100–150 FTE (grid ops & maintenance)
I could show you my rough work, but I estimate the total annual export value in 2035 or US$7.9billion or C$10.3billion. Of these exports, I estimate US$7.3 billion or C$9.5billion, will go to countries other than the US. As well, it seems that for most of these projects, with the obvious exception of the Iqaluit summertime hydroelectric project, virtually none of the commodities produced will be for the domestic Canadian market.
The arithmetic is unambiguous: roughly 87% of incremental export value from Thursday’s announcement is expected to come from just one of the new projects announced by Carney, that’s the LNG project. The LNG from this facility will overwhelmingly go to Asia, where energy is much more expensive than in North America and there is a desperate desire to stop using Russian energy. The export revenue and export diversification potential of the other projects is pocket change. The critical minerals and processed graphite are supposed to feed into the North American EV supply chain. (During the Biden era, Canada hoped that it would be part of emerging North American value chain. That’s why it put massive tariffs on Chinese EVs. The vision of the future that animated the Canadian government was of Canadians driving around in EV Chevrolets and Fords that were manufactured in the Great Lakes region of North America).
How Much Will Any of This Contribute to Diversification?
If it is built on time and on scale, the LNG project could have small but positive impact on the variable that the Carney government claims it wants to move downwards, the percentage of Canadian exports that go to the US. In 2023, Canada’s total exports of goods and services were about 600 billion USD. Ksi Lisims is designed for 12 mtpa of LNG, supplied by roughly 1.7–2.0 bcf/d of gas, with first shiploads leaving Canada in late 2029. In 2030, it will start earning foreign exchange for Canada. Now if we assume, for the sake of simplicity, that the price of a bcf of LNG will be the same in 2030 as it is today and that Canada’s overall exports will from between now and 2030 will increase at the historically expected pace, a fully operational Ksi Lisims LNG facility could account for roughly 0.7–0.8% of the value Canada’s total exports in the calendar year 2030. That’s not nothing.
When I look at the few concrete steps the Carney government has taken to diversify Canada’s trade away from the US, I’m convinced they are mostly symbolic. In that sense, they are strikingly similar to the Global Britain rhetoric we heard in the UK for a few years after Brexit. The UK spoke about striking ambitious trade deals with distant countries but was unwilling to do much in that area, in large part because of the domestic political costs of some of the trade deals proposed. I’m also concerned that policymakers are allocating an increasingly scarce resource, attention, to issue that have no export potential. The fact that a really important LNG project sits on the same list as some tiny projects suggests that the list-makers aren’t prioritizing.
I read everything Professor Joseph Heath writes, whether it’s a blog post from In Due Course or one of his books. He’s one of the most consistently clear-headed philosophers working today, especially when it comes to political economy. His recent Substack post, “Are cooperatives more virtuous than investor-owned firms?“, is another example of his signature style: lucid, skeptical, and refreshingly empirical. In it, Heath challenges the romanticism often attached to cooperative firms, arguing that they are neither inherently more virtuous (i.e. more socially beneficial) than investor-owned enterprises. (I suppose we should define organizational virtue here as an organization that seeks to increase the utility the human race/sentient beings as whole, not just the people who control the organization). I agree with Heath’s central claim, and it aligns with the argument made by Henry Hansmann in The Ownership of Enterprise, which shows that the choice of ownership form is best understood as a response to transaction costs and governance challenges.
Heath’s post also makes a comparative political claim that deserves closer scrutiny. Here’s where the empirical researcher in me gets pedantic. He writes: “In Canada, co-operatives have always played a much more important role in left-wing politics than they have in the UK.” This is a striking assertion, and one that I think isn’t quite right. While Canada certainly has a rich tradition of cooperative enterprise, especially in agriculture and finance and in Heath’s native Province of Saskatchewan, the UK’s Labour Party has had a formal electoral alliance with the Co-operative Party for about a century. This relationship is not merely symbolic. As of the 2024 general election, 41 sitting Labour MPs are also officially designated as Labour and Co-operative MPs. These MPs advocate for cooperative principles within the broader Labour agenda, and the alliance reflects a deep institutional connection between cooperative ownership and British left politics.
The historical relationship between the Co-operative movement and Britain’s Labour Party dates back nearly a century, back to the time when Canada’s CCF, and it predecessors, closely followed intellectual trends in the UK. The cooperative movement and the UK Labour Party formalized their alliance in the 1920s, jointly endorsing candidates who represent both Labour’s social democratic values and the Co-operative movement’s commitment to shared ownership and democratic control. Today, the partnership remains robust, with dozens of MPs carrying the joint designation, although I can’t think of any recent Labour policies in tax or anything else that favour the cooperative form over the investor-owned firms.
By contrast, the link between cooperative ownership and left politics in the United States seems to be far weaker, except perhaps in a few states settled by Scandinavians. While there are many successful cooperatives in the US, particularly in agriculture and rural finance, these organisations often have stakeholder bases that would almost certainly lean Republican. Some of the largest agricultural co-ops in the Midwest, for example, are deeply embedded in conservative communities. The cooperative form in the US has not been consistently championed by the Democratic Party, nor has it been institutionally integrated into, say, the DNC’s machinery, in the way it has in the UK or Scandinavia. In countries like Sweden and Norway, cooperative ownership is tightly woven into the fabric of social democracy, supported by both policy and party infrastructure.
This variation raises an important question: why is the linkage between cooperative ownership and left politics stronger in some countries than others? We probably need scholars to develop a causal model that explains this divergence. Such a model would need to account for historical party structures, electoral systems, the role of civil society, regional economic patterns, and perhaps even cultural attitudes toward ownership and governance. Heath’s skepticism about cooperative moralism is well-founded, but his comparative politics could use a bit more empirical grounding. A few years ago a great book on the history of the UK’s Cooperative group was published by some of my friends. It could provide empirical detail to stimulate the thinking of philosophers.
Business-historians are very interdisciplinary and they are always looking to publish their historical findings in new journals. So here’s an opportunity that sits squarely at the intersection of business history and contemporary policy: the Sustainability (MDPI) special issue on “Energy Transitions and the Banning of Synthetic Products: Historical Developments and Present-Day Controversies.” The journal’s current Journal Impact Factor is 3.3, which puts it in the same general ballpark as some of the business-history-adjacent outlets that are important to business historians in business schools. I see that Industrial and Corporate Change’s 2024 JIF is 1.8; the Journal of Economic History is 2.9. The upshot: publishing in this Special Issue could gives business historians reach into policy conversations.
Practicalities first. The submission deadline is 30 June 2026; the special issue is under Sustainability’s “Energy Sustainability” section. Manuscripts go through the standard single-blind review, and accepted pieces appear online on a rolling basis. (APC details and instructions for authors are on the call page.)
The guest editor is Pierre Desrochers (Department of Geography, University of Toronto Mississauga). Many of you will know Pierre from BHC: he presented back in 2010 (“Industrial Symbiosis: Old Wine in Recycled Bottles?”), and he has long collaborated with scholars working at the business–environment interface. In short, he knows our literature and our norms.
What makes this SI especially attractive to business and economic historians is its framing of “energy transitions” through the lens of E. A. Wrigley’s organic-to-mineral economy narrative. Wrigley’s central claim was that industrial development required escaping the constraints of an “organic economy” dependent on surface-grown resource by shifting to a “mineral economy” (coal, later hydrocarbons, and synthetic materials) is not just an energy story. It’s a firm-level, supply-chain, and market-structure story: greater energy density changes relative prices, which reorganize production functions, logistics, and the boundaries of the firm.
The CFP talks about Wrigley and then asks us to interrogate today’s policy moves that nudge economies back toward organic inputs (biomass substitutes for plastics, mandated renewables) and away from synthetics and fossil fuels. That is precisely the sort of historically grounded counterfactual thinking that business historians are well placed to do.
Several research avenues suggest themselves:
Firm strategy and path dependence. How have incumbent producers of synthetics and polymers adapted to regulatory pushes toward “organic” alternatives? Do we see Schumpeterian entry or defensive consolidation? A comparative sectoral history—synthetic rubber, plastics, fertilizers—could illuminate.
Transaction costs and infrastructure compatibility. Wrigley’s story is ultimately about system-level complementarities (fuels, machines, transport, finance). Policies that discourage synthetics may impose hidden coordination costs across supply networks. Business historians are good at thinking about the law of unintended consequences and can also quantify such frictions with archival pricing series and procurement records.
Addition versus substitution. The SI explicitly notes that “transitions” often look like energy addition, not displacement. That invites studies of rebound, stacking, and multi-fuel equilibria inside firms and regions. Those are all topics business historians are good at.
Corporate political economy. The present-day controversies over plastics bans, grid stability, and renewables integration echo earlier episodes (municipal light & power debates, post-war petrochemical build-out). Tracing lobbying, standard-setting, and coalition formation across episodes can test whether today’s arguments are genuinely novel or just re-packaged.
It’s an exciting time to be talking about energy transitions, particularly in light of the recent conversations sparked by the “note” by Bill Gates. If your comparative advantage is archival depth, you can still target contemporary relevance: the editor explicitly welcomes historical or contemporary analyses, qualitative and quantitative work, and literature reviews.
Despite common ancestry in English rugby football, Canadian football has long stood apart from its American cousin. The Canadian Football League (CFL) plays on a field that is 110 yards long, with two 20-yard end zones, and 65 yards wide, compared to the NFL’s 100-yard field with 10-yard end zones and a width of 53⅓ yards. Bigger country, bigger football field, you might say. These differences at the pro level exist alongside three downs instead of four, and they cascade down into university and high school play as well.
English: The second Harvard-McGill football game, played under the rugby rules. The Harvard players are on the left (in white), and the McGill players on the right. They flank the game officials. Date Taken on 15 May 1874 Source From the book “Football – The American Intercollegiate Game”, written by Parke H. Davis in 1911 and no longer in copyright
Under Commissioner Stewart Johnston, a Queen’s University graduate who took office in April 2025, the CFL has proposed and begun to phase in a package of changes that will move aspects of the game toward NFL norms. In 2027, the league will move the goal posts to the end line, shorten the field from 110 to 100 yards, and reducing end zones from 20 to 15 yards. These details were announced by the league and summarized in national coverage.
Fan reaction has been mixed. One organized response is a petition by CFL fans calling for a two-week blackout to delay the implementation of the changes, on the grounds that they erode the distinctive character of Canadian football. The petition and the surrounding discussion make plain that identity and tradition matter in sport, and that any shift toward alignment with the American game will be scrutinized closely by the league’s core audience. Today, the Globe and Mail, Canada’s national paper of record, denounced the pronounced rule changes in nationalistic, quasi-religious terms as breaking a “covenant”. That piece in the Globe prompted me to write this blog post.
I strongly support the proposed convergence of rules. The CFL commissioner is doing the right think. Harmonization reduces transaction costs for broadcasters, equipment suppliers, analytics firms (think of Moneyball but in age of AI), and sponsors who operate across the Canada–United States market. Players benefit from fewer adjustment frictions when moving between leagues or training environments. On a broader level, harmonization deepens the interconnection between Canadian and United States football economies in such areas as media rights, merchandising, talent mobility, and joint ventures in youth development, and it thereby enhances bilateral returns from cross-border synergies. These are exactly the sorts of effects one expects when regulatory regimes become more compatible.
The economists’ gravity model of trade helps explain why this logic travels beyond sport. The model holds that trade between two economies rises with their economic size and falls with distance, where distance includes not only geography but also regulatory difference. Canada trades far more with the United States than with distant partners because the United States is both very large and very close in every relevant sense, including legal and regulatory familiarity. A contemporary illustration of why gravity models matter in thinking about regulation is the United Kingdom’s experience after Brexit. The Brexiteers wanted UK rules to diverge from European ones because divergence felt good, at least for them. However, they should have looked at a map before deciding whether regulatory divergence from Europe is the right policy– fact is, the UK is in Europe. Even small increases in regulatory distance from the European Union created non-tariff barriers, compliance costs, and uncertainty that weighed on trade, despite the minimal geographic distance. The lesson is straightforward. When regulatory distance grows, exchange tends to fall, even where countries sit side by side. The UK should, almost always, harmonize regulations with the EU, unless there is a really compelling reason for divergence. Similarly, Canada should, almost always, harmonize regulations with the US, unless there is a really compelling reason for divergence.
History offers a practical reminder of what happens when standards diverge from infrastructure. During the CFL’s United States expansion in the mid-1990s, several American venues struggled to accommodate a full Canadian field. In Memphis, for example, attempts to fit the larger geometry into the Liberty Bowl produced irregular, truncated end zones that were reported to be as shallow as seven to nine yards at certain points, an awkward solution that undercut the on-field spectacle. I distinctly recall that being discussed at the time, although until today I had forgotten about the problems involved in squeezing a CFL playing field into a US stadium. Lack of rule harmonization was not the main reason CFL expansion into the US failed, but it was a factor.
None of this is an argument for indiscriminate alignment in every last area of life. There remain moral, cultural, and constitutional domains where distinct Canadian standards are appropriate just as there is a case for the UK retaining Imperial units of measurement in a few spheres of life that aren’t that important to visting Europeans. Nobody wants Canada to start using the electric chair because the US does. I kinda like that my local fruit and veg trader here in England can now sell in pounds of weight as well as pounds of money, although I would trade that for the right to live in the south of France near the Med. Nor would I deny that there is some value in trade diversification efforts: Canada has periodically explored trade diversification strategies, from the Third Option in the 1970s to more recent efforts. However, the structural forces described by the gravity model will keep the United States as Canada’s principal economic partner for the foreseeable future. In that context, targeted harmonization of rules is less a surrender of sovereignty than a way to sustain it.
If you don’t want Canada to become the fifty-first state, you need to make Canada as rich as possible. The best route to preserving meaningful independence is a strong economy, and building such strength involves deeper trade with the United States and regulatory compatibility that enables it. To have a strong country, army, navy and so forth, you need a rich economy to act as its tax base. To get to that rich economy, you sometimes need to adopt rules and institutions from the hegemonic power. Paradoxically, building a richer and more sovereign Canada involves adopting US rules.
For years, I have been thinking about the likely impact of AI on labour markets. In fact, I taught a career strategy class for first-year university students that introduced them to the scholarly debates about the automation of different types of cognitive tasks and then got them thinking about how they should adapt their career strategies to AI. I explained that AI was going to eliminate a few jobs entirely and would replace human input in parts of jobs. (Many jobs involve bundles of different tasks). The students usually ended up writing that they needed to use their time at university to develop skills that are complementary to AI. My point is that I’ve spent a fair bit of time thinking about how AI will impact different labour markets.
One of the most consequential but still under-examined implications of artificial intelligence is its likely impact on the boundaries of firms. Until recently, I wasn’t thinking about how AI is going to change the case for vertical integration. In this blog post, I’m going to try to use business history to think about these issues.
As Ronald Coase observed in his 1937 paper on “The Theory of the Firm”, firms arise to internalize those activities that are too costly to handle through contracts and arm’s-length exchange. Coase was trying to answer a deceptively simple question: if markets are so great, why do firms exist at all in a market economy? If markets are so wonderful as efficient allocators of resources, what justifies the creation of hierarchical structures that internalize production? Each large firm is an island in command economy hierarchy in a sea of market forces. Coase’s answer lay in the concept of transaction costs, which the costs associated with using the market to coordinate activity. These include the costs of finding suppliers, negotiating and enforcing contracts, and, crucially, the costs of dealing with opportunistic behaviour. When these market-based costs exceed the costs of managing an activity internally, through direction, authority, and monitoring, that changes the Make or Buy decision of that company. This logic underpins the concept of vertical integration, where a firm extends its boundary to include upstream suppliers or downstream distributors to avoid the frictions of market transactions. The make-or-buy decision thus turns on a comparative assessment of transaction costs inside the firm versus those incurred in the open market.
A classic illustration of this logic comes from the case of General Motors and Auto Fisher Body, which has been extensively discussed in the literature on transaction cost economics and by my fellow business historians (see here, here, and here). Initially, GM sourced automobile bodies from Fisher Body via a long-term contract. However, as demand for comfy “closed-body” cars surged in the 1920s, GM became increasingly dependent on Fisher. Fisher got the upper hand and exploited its power. Fisher, in turn, had little incentive to invest in production facilities that were close to GM’s assembly lines, and there were allegations that they exploited GM’s dependence by pricing opportunistically. According to the prevailing interpretation of this episode, Fisher Auto Body’s managers were only adhering the letter not the spirit of their contract with GM. According to the transaction cost interpretation, this created a classic case of asset specificity: Fisher had made investments tailored to GM’s needs, and GM was exposed to hold-up risk. In response, GM chose to vertically integrate by acquiring Fisher Body, thereby eliminating the need for ongoing contract renegotiation and securing control over a critical input. While some of my fellow business historians have questioned the details of this narrative, the case remains a widely used teachable example of how transaction costs, particularly those arising from relationship-specific investments, can drive firms toward integration by undermining the rationale for using the market.
My strong impression is that AI, especially when coupled with automation, predictive analytics, and large-scale data infrastructures, is reshaping each of the three main categories of transaction costs: search and information costs, bargaining and contracting costs, and monitoring and enforcement costs. Each of these shifts the relative attractiveness of market-based coordination versus managerial hierarchy, and each of them is already playing out in real firms right now.
My thinking about all of these issues has been influenced by Thierry Warin, a Montreal-based economist whose recent California Management Review piece, From Coase to AI Agents (2025), got me thinking about this issue. Warin suggests that the rise of AI agents changes not just the microeconomics of transaction costs but the architecture of organizational coordination itself. He builds on Coase but extends their insights into a world populated by autonomous agents, predictive models, and generative tools. Warin’s suggest to me that while AI can certainly lower the costs of using managerial hierarchies (it makes it easier of managers to monitor their subordinates), it is almost certainly going to lower the transaction costs involved in using the market to the greater extent. As such, it likely to shift, in many industries, people from reliance on coordination using managerial hierarchies to using coordination by the market. So we will see fewer cases of companies acquiring their suppliers, as GM did with Fisher Auto Body long ago. In fact, AI may cause the vertical disintegration of firms, accelerating a trend we saw in the late 20th century, when then great vertically integrated firms constructed in the first part of the twentieth century were replaced by coordination by the market.
Here’s what I have taken from the new work on AI and the theory of the firm. AI significantly reduces search and information costs, even more than the was the case with Google searches. Intelligent agents, algorithmic procurement systems, and even natural language interfaces now make it cheaper to identify suppliers, assess their offerings, and match capabilities. Pre-AI and, especially, pre-World Wide Web, the difficulty of finding a reliable vendor with the right specialization created a very strong commercial rationale for integrating the function in-house. Now, many of those frictions are collapsing, along with the case for vertical integration.
AI can also assist in bargaining and contracting by writing very good, watertight totally “complete” contracts, evaluating risks, and even simulating negotiation outcomes. Smart, self-enforcing contracting frameworks, potentially supported by blockchain infrastructure, embed enforcement directly into digital exchanges, can reducing ex-post haggling and the costs of opportunism (think of Fisher Auto Body). Lastly, the cost of monitoring third-party performance, traditionally a major argument for internalization, is falling. Thanks to the internet of Things, you can monitor what a distant supplier is doing in real time and at lower cost than was the case thirty years ago. Thanks to AI, you can interpret all of that data without hiring lots of human compliance and monitoring people. Real-time analytics, machine vision (you don’t need a human to count how many units come of the assembly line), and anomaly detection (an AI agent can inspect the quality of the auto bodies that today’s Fisher Auto Body is sending to today’s Alfred P. Sloan) will let upstream firms oversee quality and compliance without being physically present or organizationally intertwined.
This shift in the transaction cost landscape might suggest a simple conclusion: AI favours vertical disintegration everywhere and always. I suppose the actual effects of AI are context-dependent, and the classic Coasian trade-offs don’t disappear. In some industries, new technological capabilities reduce some transaction costs but increase others. For example, AI systems are often cognitively opaque. (Do I really understand the AI system that allowed me to find a great deal on my hotel for the Academy of Management?). A company may outsource an analytics task to an external AI provider, but understanding how the system arrived at a decision and ensuring that it didn’t do something reputationally or ethically risky (here’s where the business ethics professor comes in) may be more difficult than managing a transparent internal process.
This gives rise to a more nuanced map of trade-offs. In some domains, especially those involving modular, standardized, and relatively routine tasks (making auto bodies for Alfred P. Sloan), AI will promote market-based governance and strengthen the case for vertical disintegration. In others, particularly where the decisions are ethically or legally fraught, AI may actually reinforce the case for vertical integration. The table below summarizes these contextual trade-offs.
In effect, AI reduces the traditional cost penalties of outsourcing, but it also introduces new strategic uncertainties. As a result, we should expect to see increasing divergence across industries and functions in how firms draw their boundaries. This is already visible in early-stage evidence. For example, some companies are disaggregating their analytics and marketing functions, relying on external AI vendors with scalable expertise. I hope those firms know what it going on within the AI products they are buying. Meanwhile, Tesla has reintegrated key parts of its supply chain, including battery production and chip design. I bet they are doing so to remain complaint with the law.
In some industries, like precision medicine, defence, or autonomous vehicles, require complex coordination between proprietary hardware, sensitive data, and domain-specific machine learning. In those cases, control over process and data becomes a source of value, which means that vertical integration offers benefits in the age of AI that weren’t there before.
Sector
Likely Impact of AI Firm Boundaries
Rationale
Digital marketing, logistics/trucking
Disintegration
High modularity, low IP sensitivity, strong market tools
To put this all in perspective, it helps to bring research from my home field of business history into play and discuss how firm boundaries have evolved in response to past technological changes that shifted the cost of moving information. These new technologies, the telegraph, the fax machine, etc all changed transactions in different periods, and thus the case for using vertical integration in the face of a difficult Make or Buy decision.
Let’s draw on the work of Alfred Chandler, a historian of business organization who, in the 1970s and 1980s, laid the groundwork for our understanding of vertical integration in the industrial age. To people outside of the business history fraternity, Chandler is best known for The Visible Hand (1977), where he argued that the rise of large, vertically integrated firms in decades around 1900 was driven by their ability to coordinate better than the invisible hand of the market. His argument, which was strongly influenced by Ronald Coase’s theory of the firm, was that as railroads, the telegraph, and the telephone lowered internal communication costs, it became more efficient to organize production hierarchically and within big firms. The visible hand of management replaced the invisible hand of the market because of technology. If the AI is likely to promote vertical disintegration in many industries today, the telegraph had the opposite effect in the age of John D. Rockefeller and Alfred P. Sloan.
Chandler’s story is one of integration enabled by coordination. He documented how firms like DuPont, General Motors, and Standard Oil created internal hierarchies to manage flows of materials, information, and decision-making in ways that captured economies of scale and scope. The availability of the telegraph and the typewriter made real-time internal coordination feasible. Centralized administrative systems, bolstered by accounting innovations, allowed firms to replicate their managerial processes across divisions. The relative cost of internal governance dropped below the cost of external contracting and vertical integration became the rational response.
Chandler developed his ideas in the 1960s and 1970s. Almost immediately after he published his landmark book, new communications technologies began to reduce the costs of using markets, which then helped to produce a wave of vertical disintegration. A brilliant economist and historian of technology, Langlois advanced what he called the “vanishing hand” thesis, deliberately inverting Chandler’s title. In a series of papers published around 2000 and then a book that I recently and glowingly reviewed in the journal Business History, Langlois argued that Chandlerian integration was historically contingent. It was a response to immature market institutions and underdeveloped communication infrastructure. Once information technology advanced, market coordination became viable again, and firms began to shed internal functions in favour of modular, contract-based production. Langlois saw the return of the invisible hand.
Chandler saw the rise of vertically integrated firms and managerial hierarchies as a functional response to the challenges of industrial coordination in the early twentieth century. Big firms emerged, in his telling, because they could do what markets couldn’t: coordinate complex production and distribution systems more efficiently. Langlois, writing decades later, picks up the pen where Chandler put it down and then continues the story. His “vanishing hand” theory argues that by the late twentieth century, those same large, bureaucratic firms, which were oligopolistic, integration-heavy, and middle-manager-laden, had outlived their usefulness in most sectors. Once the economy moved through the transitional phase Chandler had chronicled, the visible hand of management became less necessary. Technological progress, especially in computing and communications, lowered the cost of outsourcing and made decentralized coordination viable again. As a result, market selection started penalizing firms that clung to the old integrated model.
Where Chandler saw integration as a triumph of managerial capacity over market chaos, Langlois saw it as a workaround: a temporary fix until markets and modularity caught up. Seen from a Langloisian perspective (I just made the adjective up), improvements in the market’s ability to handle complexity, which are driven by IT, digital standards, and now AI, restore the advantages of specialization and exchange.
Take-away lessons
My reading of history suggests to me that AI is going to have a big impact on firm boundaries (I’m very confident of that), and that it will, on net, encourage vertical disintegration in most industries (I have moderately high confidence in this history-informed prediction).
Right, so what are the implications of these two history-informed claims about the future for investors? By investors, I mean people who aren’t passive investors in index funds but who are in the foolishly/risky game of picking stocks. If AI is indeed going to analogous in its effects on levels of vertical integration to Morse’s electric telegraph, Malcoln MacLean’s container ship, and World Wide Web, then active investors should be thinking less about which firms can own the full value chain and more about which ones are best positioned to orchestrate, specialize, or intermediate. The big opportunity lies not in backing vertically integrated giants, but in identifying firms that sit at key nodal points in increasingly disaggregated value chains. This includes infrastructure providers with privileged access to training data or cheap computing power (e.g., foundation model specialists), platform firms that coordinate ecosystems rather than build everything themselves, and hyper-focused specialists that can carve out high-margin niches in the long tail of modularized functions. Investors should also be attentive to companies with architectural leverage: those that define the protocols, interfaces, and workflows that others plug into.
I never give investment advice on my blog. However, if I were to make a suggestion for short sellers based on my reading of history, it would be to would be target firms whose business models remain over-invested in vertical integration at a time when AI-enabled disintegration becomes the lower-cost, higher-flexibility equilibrium. These are companies that double down on doing everything in-house (manufacturing, analytics, logistics, customer service) even as AI makes it increasingly efficient (and strategically necessary) to specialize, outsource, or orchestrate ecosystems instead. Chandlerian-style firms that depend on tightly coupled hierarchies and rigid internal workflows may find themselves bloated, slow to adapt, and burdened by fixed costs in an economy that increasingly rewards nimbleness and interoperability. If they fail to unbundle or pivot, their margins erode and their strategic relevance declines. I’m thinking of Intel here.
The most promising short candidates would be firms that (a) operate in sectors where vertical disintegration is becoming increasingly feasible due to AI, such logistics, IT services, legal or back-office operations and then (b) persist with high internal headcount, capital-intensive infrastructure, or proprietary tech stacks that do not interface well with emerging AI ecosystems. I’m not saying that vertical integration would be maladaptive in all sectors. In domains where AI introduces new opacity, liability, or tightly coupled learning loops, such as like national defence (think of NATO’s new 5% target), biotech, or autonomous systems, vertical integration may remain rational.
Let turn now from the implications for investors to the societal implications. So what is this going to mean for the non-stakeholder shareholders of firms? For workers, local communities, governments, and the natural environment?
Gerald Davis’s The Vanishing American Corporation (2016) tells the story of how the large, vertically integrated corporation, which was the dominant organizational form in American economic life at the time Chandler wrote his book, has steadily eroded since about 1980. He attributes this shift to changes in technology, finance, and ideology that made it increasingly feasible and desirable for firms to disaggregate. His account is congruent to that of Langlois, except that Davis is more interested in the implications of this change for workers, for Joe Sixpack in places like Michigan. (Davis works at a university in Michigan!). In his account, as supply chains became global, digital technologies reduced coordination costs, and capital markets demanded flexibility and short-term performance, firms began to outsource everything from manufacturing to HR to R&D. The core transaction-cost logic here mirrors Richard Langlois’s “vanishing hand” thesis: improvements in market-supporting institutions and technologies enabled tasks that once had to be done internally to be done more efficiently through the market. Davis shows how the vertically integrated firm, which once offered stable lifetime employment to male breadwinners, predictable career ladders, and a broad social compact, gave way to leaner, more modular organizations and thus ultimately, to platform-based firms with minimal internal labour forces. The social implications, in Davis’s view, are stark: the decline of the traditional corporation has undermined job security, frayed the link between firms and communities, and contributed to rising inequality and precarity. If I were Davis, I would predict that AI will deliver even more of the same.
The latest spat between Elon Musk and Donald Trump has moved from petty to poisonous. After months of barely concealed tension, Musk finally went on the offensive. For an overview of the events of the last 48 hours, see here, here, and here.
The two men, once mutual admirers, now represent opposing poles in the Republican constellation. This latest clash offers more than just tabloid drama for us to gossip about it underscores a deeper institutional problem: why do entrepreneurs as talented as Musk get pulled into the dark gravity well of rent-seeking politics?
Musk’s career is a study in duality. On one hand, he is the archetype of the Schumpeterian entrepreneur: making life slightly better for millions of people through innovations in things like payment systems. On the other, he has repeatedly deployed his political acumen to extract subsidies from governments. Tesla’s early growth was underwritten by generous tax credits, SpaceX relies on NASA contracts, and his energy ventures have gorged on regressive green subsidies. Musk is certainly not unique in this regard—he merely illustrates with exceptional clarity the tragic misallocation of genius that occurs when institutions permit, or even incentivize, rent-seeking entrepreneurship. Imagine the gains to human welfare if all of Musk’s talents had been directed solely at solving engineering problems rather than navigating political patronage.
President Donald Trump meets with Conor McGregor and family in the Oval Office, March 17, 2025. (Official White House Photo by Molly Riley)
William Baumol was one of the most versatile and influential economists of the 20th century, whose career spanned over six decades and touched virtually every subfield of economics from labour markets to innovation theory to the economics of art. Baumol spent much of his academic life at Princeton and later at NYU. While he published extensively on the theory of the firm and macroeconomic policy, his most enduring contribution to entrepreneurship studies came in the form of a deceptively simple insight: that entrepreneurship is not inherently productive. In his seminal 1990 paper, Entrepreneurship: Productive, Unproductive, and Destructive, Baumol argued that while the supply of entrepreneurial talent may be more or less fixed across societies (only a certain proportion of people are born with the genes that make them good entrepreneurs), how this scarce resource is allocated is highly sensitive to the institutional environment. In societies with strong property rights, the rule of law, and competitive markets, entrepreneurs are more likely to engage in innovation and socially beneficial enterprise. In contrast, in institutional contexts that reward rent extraction, through bribery or lobbying at the royal court—the same entrepreneurial energy may be directed toward unproductive or even destructive ends. Baumol’s typology reframes the policy debate: the problem is not a shortage of entrepreneurship per se, but the set of incentives that determine where entrepreneurial effort is deployed. His work reminds us that the entrepreneur is not always the hero of capitalism; he or she is whatever the institutional context incentivises him or her to be.
William Baumol’s typology remains a commonly used lens through which to understand this phenomenon. In his formulation, entrepreneurship is neither inherently good nor bad—it is merely energy. Whether it is productive, unproductive, or destructive depends on the institutional context. In the Gilded Age, many American factory owners lobbied for tariff protection to protect their margins from foreign competition. Thomas Edison got rich by spending long hours in his laboratory producing innovative products that genuinely made life better for ordinary people. That’s socially productive entrepreneurship. Other entrepreneurs of that same era got rich by hanging around in smoke-filled rooms in Washington trying to get the details of the schedule of tariffs altered. Today, too many entrepreneurial energies are expended on capturing regulators, designing market-thwarting rules, and lobbying for subsidies. The returns to such behaviour can be immense, and perversely, in some socio-political systems, more reliable than those from genuine innovation. Hence the tragedy: the institutional architecture, not the intrinsic morality of entrepreneurs, determines whether entrepreneurial energies go toward inventing better mouse-traps or rent-seeking (e.g., hanging around the court so you can ask the monarch to give you a monopoly on the salt trade or something).
Institutional theory seeks to explain the ultimate causes of economic growth not in terms of resources or geography, but through the quality and structure of a society’s institutions, the formal and informal rules that govern human interaction. The foundational figure in this tradition is Douglass North, who won the Nobel Prize in 1993 for his work demonstrating that well-defined property rights, enforceable contracts, and predictable legal systems are essential preconditions for sustained economic development. North’s key insight was that institutions shape the incentives that individuals and organizations face: when the institutions reward productive entrepreneurship, economies flourish.
More recently, Daron Acemoglu and co-authors have built on and extended this framework, arguing that the deep determinants of prosperity lie in the presence of what he and his co-authors call “inclusive institutions”—those that create broad-based opportunities and constrain the arbitrary exercise of power. His work, especially Why Nations Fail, has powerfully influenced both academic and policy discourse, which is why he got the Nobel Prize. Acemoglu’s arguments, like North’s, are ultimately about incentives: inclusive institutions direct effort toward innovation and wealth creation, while extractive institutions channel energy into rent-seeking, repression, and elite entrenchment. Taken together, institutional theory provides a compelling answer to one of economics’ most profound questions: why some nations grow rich while others remain poor.
This brings us to the central insights of the paper I co-authored with Graham Brownlow, “Informal Institutions as Inhibitors of Rent-Seeking Entrepreneurship”. In this paper, which was published in a journal called Entrepreneurship Theory and Practice, We examined why the United States, despite having formal constitutional rules that ostensibly promote market competition, saw such variation over time in the degree to which entrepreneurs engaged in rent-seeking behaviour. One of our key findings was that the effectiveness of anti-rent-seeking provisions, such as the anti-aid clauses that were inserted into many state constitutions during the Jacksonian era, depended not merely on their formal wording, but on how judges interpreted them. Judicial scepticism towards governments using taxpayer funds to help specific firms had a chilling effect on collusion between politicians and entrepreneurs. State efforts to subsidize politically connected firms were routinely struck down. In that institutional climate, rent-seeking became a riskier and therefore less attractive strategy for an entrepreneur trying to get rich.
We argue that the shift in judicial philosophy after 1915 rendered many of these formal constraints inert. Courts began to defer to legislative decisions, even when these transparently served private interests rather than public welfare. The result was an institutional environment increasingly friendly to rent-seeking. Even though the constitutional text remained constant, its meaning had been transformed by a shift in thinking of the judges. This insight underscores the fragility of formal constraints.
The key policy implication of our research is that the ultimate effectiveness of institutions in curbing rent-seeking entrepreneurship hinges on the moral and intellectual commitments of judges. Constitutions can inhibit rent-seeking only if the judiciary interprets them in that spirit. Judicial philosophies, which are shaped by public opinion, legal culture, and broader intellectual currents, determine whether the constitutional order channels entrepreneurial energy into productive or parasitic endeavours. The tragedy is that when these interpretive norms erode, talented individuals like Musk are rationally induced to play the political game rather than innovate in the marketplace.
Still, we should not end on a pessimistic note. Recent judicial decisions suggest that at least some parts of the American judiciary are reawakening to the dangers of rent-seeking entrepreneurship. If this trend continues, it may yet be possible to restore a climate in which entrepreneurship is once again skewed toward the productive. The battle between Musk and Trump is a mere symptom. The deeper issue is institutional. If we want more Musks designing rockets and fewer Musks manoeuvring for subsidies, we need courts that stand firmly against rent-seeking.
One of the privileges of working in a business school is that you occasionally get to meet/have a meal with really remarkable and impressive business leaders. One of the advantages of being a business historian is that you get to learn about similarly remarkable business leaders who lived ago. Let me tell you about Robert Wood Johnson II, a business visionary, patriot, and, in my view, war hero. If you’re trying to understand how ideational commitments can persist inside firms for generations, Robert Wood Johnson II is a useful figure to consider. He didn’t found Johnson & Johnson, but he arguably left a deeper and more enduring imprint on the organization than its original founders. Thinking about Johnson’s impact is useful because management academics who use the theory of organizational imprinting focus on firm founders—the leaders who control companies during their infancies. The underlying idea is that for an individual to leave a lasting impact on a company, they have to be there at the earliest stage. (Check out this new paper in ASQ that applies and develops imprinting theory). I suppose that this management theory is analogous to the personality theory that says that high quality parenting matters the most when the child is under five—the child’s destiny is basically set up the lessons they absorb from their parents before they go to school. Well the case of Johnson is a bit of a problem for imprinting theory as it currently exists because he wasn’t a firm founder—he sort of inherited a rather unremarkable company and turned into something very distinctive whose distinctive features endure to this day. Johnson became president of J&J in 1932 and led it until the early 1960s. Over those three decades, he embedded a managerial philosophy that combined decentralised authority with superior organisational performance by the main metrics. What Johnson did was a sort of second founding—he wasn’t the George Washington of this company, he was its Abraham Lincoln.
Johnson (1883 to 1968) spent nearly his entire adult life inside Johnson & Johnson. He joined the company as a young man, having grown up in the orbit of its founders, and was steeped early in both its operational details and its moral rhetoric. By the time he became president, he was already well-versed in the business and carried the authority of both experience and lineage. He was also a reservist in the U.S. Army before joining the federal wartime administration, where he took on a prominent role overseeing small manufacturers who were contributing the war effort and protecting these SMEs from an unholy alliance of bureaucrats, Big Business, and Big Government. His career blended private enterprise with public service, and that dual exposure shaped many of his views on decentralisation, corporate legitimacy, and leadership.
Johnson took control during the Great Depression. He didn’t cut jobs. In fact, in 1933 he gave everyone a 5% raise and opened a new factory. While other firms were retrenching, he was arguing publicly for higher wages, shorter hours, and corporate social responsibility, voicing ideas similar to those articulated by Herbert Hoover. “It is in the interest of modern industry,” he wrote, “that service to customers comes first; service to its employees and management second, and service to its stockholders last.” He outlined these views in a short pamphlet he distributed to other industrialists, called Try Reality.
What made Johnson interesting was not just that he held these views about putting the stockholders last, which were pretty widespread among American executives in the era of total war, but that he institutionalised them. His most famous contribution was the writing of Our Credo in 1943. This document lays out J&J’s responsibilities in a strict moral order: customers first, then employees, then communities, then shareholders. He had the text literally carved in stone in the company headquarters. It remains there today. Unlike many corporate value statements, the Credo wasn’t a marketing exercise for the website. J&J leaders were expected to take it seriously. In 1982, for example, the Credo was explicitly invoked by CEO James Burke as the basis for recalling Tylenol nationwide in response to the poisoning crisis.
The middle years of the twentieth century were the peak of the high modernist belief in centralisation. Sadly, even the Western democracies were affected by this worldwide trend: in federal nations, central governments sucked power in from state/provincial governments and some analogous happened in many companies, notwithstanding the popularity in other companies of the M-Form discussed by Al Chandler. Johnson believed in decentralisation, not just as an efficiency measure but as a philosophy of life. He turned J&J into what he called a “family of companies”: a group of semi-autonomous business units, each with its own leadership, decision rights, and accountability. He thought mistakes were inevitable, and that decentralised firms made them smaller and less systemic. He believed in developing leaders by giving them room to run their own operations. He once said that in a centralised firm, “one big mistake can cripple the whole organization.”
The model wasn’t imposed arbitrarily. Johnson had seen decentralisation work in practice. His early experiments with overseas subsidiaries gave local managers a high degree of autonomy, and he was impressed with the results. During WWII, when he ran the Smaller War Plants Corporation, he also saw that distributed production by smaller firms could outperform centralised control. These experiences reinforced his conviction that responsiveness, not control, was the key to both efficiency and resilience.
While the mid-century Johnson & Johnson is sometimes cited as an exemplar of the M-form structure, its approach between the 1930s and the 1960s diverged in important respects from the canonical model articulated by Alfred Chandler. Structurally, the firm did resemble the archetypical M-form: it was organised into semi-autonomous operating units, each focused on distinct product categories or geographic markets. In a classic M-form, the divisions have responsibility for their own manufacturing and marketing, but not strategic decisions, which are made at the headquarters. From a purely formal standpoint, this places J&J within the broad tent of M-form adopters.
However, at J&J strategic decisions were also downloaded to the divisions. Functionally—and philosophically—it operated according to a radically different logic than in the classic M-form. Whereas Chandler’s M-form emphasized strategic centralization at headquarters, J&J espoused what might be called a doctrine of principled decentralization. Influenced by the managerial philosophy of Robert Wood Johnson, the company saw local autonomy not just as an efficiency mechanism but as a moral imperative. Decision rights were not merely delegated—they were embedded in the very design of the enterprise. The corporate center was relatively passive, providing capital and articulating broad values, but largely refraining from strategic coordination or intervention.
In this sense, J&J’s model was less a hierarchical allocator and more a federated network of entrepreneurial units. Where General Motors centralized planning functions and optimized across business lines, J&J tolerated—indeed, cultivated—a more pluralistic and loosely coupled structure. It is perhaps more accurate to think of J&J in this era not as a typical M-form firm but as an early prototype of post-M-form decentralization: structurally divisional, but governed through norms, local accountability, and minimal central orchestration.
Johnson viewed corporate power as a form of stewardship. He believed businesses needed to earn their legitimacy by serving others. He was also, in some sense, a Cold War liberal: convinced that capitalism needed to reform itself in order to survive the ideological battles of the mid-20th century. Corporate paternalism, in his hands, was not just a managerial strategy; it was a political response to the threat of social unrest and citizens drifting into supporting the totalitarian ideologies at the two ends of the political spectrum.
What makes Johnson’s case instructive is not just what he did, but how successfully it endured. By the time he retired in the 1960s, J&J was a global company, operating with over 100 semi-autonomous subsidiaries. That structure remains intact today. The Credo is still cited in internal deliberations. And the basic logic of his stakeholder-first philosophy continues to shape the firm’s governance. It is difficult to find many examples where the imprint of a mid-century CEO has lasted this long, especially when it runs so visibly counter to the shareholder primacy model that dominated American business thought in the decades after his retirement.
Robert Wood Johnson II was not flawless. He could be paternalistic, and his approach to moral authority might grate in a different institutional context. But in an era dominated by central planners and consolidators, he was making a different bet: that legitimacy and longevity come not from tight control, but from principled decentralisation. And eight decades on, his wager still looks pretty sound.
In some respects, Johnson and his ideas were totally representative of his generation. He was influenced by the ideas of Adolf Berle and Gardiner Means, whose 1932 book The Modern Corporation and Private Property helped shift elite thinking away from the idea that corporations should be run primarily for the benefit of shareholders. Berle and Means argued that large corporations had come to dominate American economic life and should be seen as social institutions. Their work was widely read and debated among business and policy elites in the interwar years, and Johnson’s rejection of shareholder primacy placed him firmly within that intellectual milieu.
But in other ways, Johnson was quite unrepresentative of his time. In an era increasingly captivated by high modernist visions of centralised planning and control (whether in government agencies, conglomerates, or business schools) he was actively decentralising power inside his firm. While many of his contemporaries were building central headquarters stuffed with analysts and long-range planners intent on micromanaging distant managers, Johnson was pushing authority outwards. He did this not out of ideological contrarianism, but because he believed decentralisation made firms more responsive, more resilient, and more moral.
This commitment to decentralisation is especially striking given Johnson’s own background in the U.S. military. He served in a leadership role during World War II and was socialised in a system that, at that time, embraced centralised command and rigid hierarchy. The modern doctrine of mission command, which means delegating authority and empowering subordinates, was decades away from being adopted by the U.S. armed forces. In fact, during the Second World War the U.S. military practiced the polar opposite of mission command, as their German opponents noted.
The concept of mission command has its origins in 19th-century Prussia, where military thinkers developed the idea of Auftragstaktik. This doctrine was built around giving subordinates clear objectives but leaving the means of execution to their discretion. The idea was to encourage flexibility, speed, and initiative at the tactical level while still maintaining coherence at the strategic level. Although it had long been admired by a few dissenting voices within the U.S. military, the U.S. military did not embrace mission command until the soul searching in the post-Vietnam period. The failures of top-down military, Robert McNamara-style planning in Southeast Asia, combined with a changing operational environment and the professionalisation of the officer corps, pushed U.S. military doctrine toward greater decentralisation. By the late 20th century, mission command had become a core principle in U.S. Army leadership manuals—a sharp departure from the centralised command culture that had prevailed during Johnson’s own time in uniform.
That Johnson, a mid-20th century military man, ended up building one of the most decentralised corporate structures in postwar America is testament to how deeply he believed in pushing decision-making down to those closest to the action.
What happens when British charitable institutions designed to serve the public good are treated like market actors and then a policy regime imported from the United States gets imposed on them? In the case of UK universities, the consequences have become increasingly difficult to ignore. The financial instability now threatening dozens of higher education institutions (HEIs)—a category of entity that is still formally classed being in the charitable sector (albeit as “exempt charities”)–is forcing a critical reconsideration of whether applying commercial competition policy to universities has gone too far. If the principles underpinning anti-trust law (particularly those ultimately derived from the Sherman Act in the United States) are unsuitable for cultural institutions such as museums, churches, or libraries, one might reasonably ask: why are universities—whose remit is arguably broader and more clearly charitable—subjected to the same regulatory logic?
The Competition Act 1998, the key legislative instrument shaping the UK’s competition framework, prohibits anti-competitive agreements and abuse of dominant positions. In doing so, it seeks to protect consumers from monopolistic behaviour and ensure market fairness. However, its extension to universities has had unintended consequences. Universities are not merely providers of services in a neutral market; they are mission-driven institutions, historically embedded within local and national contexts. The framing of students as consumers and universities as competitors—solidified in policy from the 2010 Coalition onward—has encouraged duplication rather than cooperation, shared infrastructure, or regional mission cohesion. Of course, there isn’t a real market here: the prices (tuition fees) are set by the government and students are allocated to universities through a public sector body called UCAS.
This problem is no longer theoretical. Financial strain is now systemic across the sector. In early February, Wendy Larner, Cardiff University’s Vice Chancellor, publicly stated the strictures of competition law are actively inhibiting cost-saving collaboration between geographically proximate institutions. For the benefit of international readers, I should explain that in the UK, it is not unusual to find universities whose buildings sit cheek by jowl next to the buildings of other universities, an arrangement that appears to scream out for a merger to achieve economies of scale. Cardiff University, which is in serious financial difficulties and is talking about closing its nursing college (!!) is an example of a university that shares a city with other universities whose campuses are also scattered across town.
Mergers, similar to the one undertaken by the universities in Manchester in 2004, and collaborations short of a merger, such as the collective provision of janitorial services, seem to be inhibited because they might now be construed by the Competition and Markets Authority (CMA) as cartel-like behaviour under the Act. Universities that once shared specialist staff, jointly invested in laboratory facilities, or coordinated postgraduate research training now find themselves navigating a thicket of legal ambiguities. My impression is that the CMA is run by people who read Adam Smith’s famous book and are now inappropriately applying it to universities. In a great sentence, Smith wrote that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” That may well be true of car dealers hanging out at the country club– they might well agree to fix prices somewhere around the ninth hole of the golf course. But universities are different because they are charities. When people from different universities re-unite at conferences, they are producing a public good rather than trying to find a backdoor route to the creation of a cartel.
To its credit, the CMA responded by Wendy Larner’s comments by saying that it is willing to have conversation with universities and to be flexible about the rules (see here and here). While the Competition and Markets Authority (CMA) has issued some clarifications by suggesting that collaboration is not necessarily impermissible the climate of legal caution remains pervasive. The chilling effects are real, even if not always explicitly codified. I’m not speaking here based on anything I have personally observed but I am basing my comments on what I have read online.
From a historical perspective, this represents a profound shift. British universities have long been seen as charities. Originally, they were closely tied to the established Churches (Church of England in this country) and then in the nineteenth century we had non-denominational civic universities. In the twentieth century, their funding, legitimacy, and purpose entangled with state agendas (think of Cold War science policies). Their institutional success has often depended on collaboration rather than competition. The Robbins Report of 1963, for example, imagined an expanding and coordinated system of higher education, with universities working together to meet national needs. The author that report was certainly a supporter of competition in commercial markets—he was a classical liberal friend of F.A. Hayek. It was not until the market-oriented reforms—accelerated in the New Labour and post-2010 periods—that universities began to be reconceptualised as companies.
I’m not even going to get into the issue here of whether anti-trust law is a good thing or whether the world would have become a better place had the Sherman Anti-Trust Act, which has now been emulated in every country influenced by American soft power, had never been created. (I’m sympathetic to that counterfactual but will leave that to another blog post). I’ll simply point out that many scholars, particular in my home field of business history, have long been sceptical of both the early, path-setting anti-trust laws and the motives of their creators (see this paper). My main argument here is that we shouldn’t apply competition laws to universities because they are charities, not companies!
Theoretically speaking, the case for viewing universities as companies rests on shaky ground. While classical economic theory correctly champions competition as a driver of innovation and efficiency, the university sector defies many of the assumptions necessary for those outcomes to materialise. Information asymmetry is profound—students cannot fully evaluate the “product” they are purchasing until years after the fact—and the “goods” on offer (teaching, research, cultural engagement) are not easily interchangeable. Moreover, duplicating niche programmes or competing for the same shrinking pool of students (think of how the post-2008 fertility crisis is about to hit universities) does not lead to efficiency; it results in waste. This problem is particularly acute in regions with multiple institutions serving overlapping communities. In such cases, the inability to merge departments, co-deliver teaching, or rationalise real estate due to fear of breaching competition law borders is unhelpful.
The analogy with the Sherman Anti-Trust Act, as applied in the United States, is instructive. That legislation was justified on the grounds it was necessary to prevent industrial monopolies from exploiting consumers. But when applied to universities—which do not exist to maximise shareholder value—it risks misdiagnosing the problem entirely. Indeed, the collapse of several for-profit universities in the US should serve as a cautionary tale: market logic, when applied too uncritically, can hollow out the very institutions it purports to reform.
If we do have to think of universities as companies, a more appropriate model might be drawn from the regulated public utility sector (think of electricity and natural gas pipeline companies), where certain forms of collaboration are not only permitted but required to ensure service continuity and universal access. Alternatively, one might revisit the statutory exemptions available to public broadcasters or national cultural bodies, which recognise that competition law should not be enforced uniformly across all sectors of national life. If universities are to survive and thrive they must be permitted to act like charities.
Perhaps a wholesale exemption from competition policy may not be necessary but clearer “safe-harbours” for collaboration and pre-authorisation for all mergers could make a substantial difference. But continuing to treat universities as if they are indistinguishable from mobile phone providers or supermarket chains is intellectually indefensible and practically damaging. Don’t get me wrong– I love that the UK has so many competiting mobile phone providers. It’s just the universities are different. It has taken centuries to build a higher education system with global reputation and local relevance. Let us not dismantle it through policy frameworks designed for a fundamentally different domain of human effort.
Is it time, then, to reconsider not just the letter of the law, but the philosophy behind it? The financial crisis in UK universities is not solely a consequence of external shocks or demographic decline—it is also the product of a misalignment between institutional purpose and regulation. If collaboration is what the moment demands, then regulation must follow suit. Perhaps the UK needs to declare independence from the Sherman Anti-Trust Act and the philosophy behind it.
I’m feeling a little bit guilty, albeit only a little bit. Canada is in a really difficult situation right now thanks to Trump’s plan to impose 25% tariffs on its exports to the US. I think that if I had been more proactive back in 2015-2017, Canada might be in slightly stronger bargaining position today. That sounds very arrogant and conceited but please hear me out.
Here’s the background as to why I feel a bit guilty. I’m a dual citizen of Canada and the UK and I feel a strong sense of loyalty to both countries. I feel a greater sense of debt to Canada because that’s where I grew up. My formative experiences there included a tremendous sense of material abundance that just wouldn’t be paralleled here in the UK. I doubt that I would have had the luxury of becoming an academic had I grown up in Britian. Canada invested in me (I’m thinking of various scholarships funded by private donors and taxpayers, research fellowships, nice juicy research contracts, etc) so I feel a sense that I should pay it back.
In 2015, I had the opportunity to do precisely that. I was the star expert witness in a Canadian constitutional court case that had the potential to reverse a historical miscarriage of justice in a way that would resulted in the dismantling of internal trade barriers and a boost to Canada’s economic output. Had my side in the court case prevailed, I think that Canada would today have interprovincial free trade, a higher standard of living, and greater bargaining power in the face of Donald Trump’s threats. Many observers, including the OECD and the IMF have said that Canada’s internal trade barriers are dragging down productivity and living standards. Getting rid of them could boost GDP per capita by up to 4%.
Here is a summary of the court case and my role in it. R v Comeau was a fascinating case about beer, borders, and the Canadian Constitution. It started when when Gerard Comeau, a New Brunswick resident, was stopped by police immediately after crossing an interprovincial border. He was charged with buying cheap beer and liquor in Quebec and bringing it home, thus violating a New Brunswick statute that severely limits on how much alcohol residents can import from other Canadian provinces. Comeau’s lawyers, who were supported by a non-profit foundation, argued that this violated section 121 of the Constitution Act, 1867, which says that goods should be “admitted free” across provincial lines. I testified about the historical context and motivations for section 121 in the summer of 2015. (You can read my expert witness report here). The case was widely covered in the Canadian media and, because it coincided with a federal general election, was commented on by all but one of the party leaders. (see media coverage here, here, and here). In 2016, a trial judge delivered his verdict and agreed with our side, ruling that provincial trade barriers were unconstitutional. However, the Supreme Court of Canada overturned this decision in April 2018, ruling that provinces have the right to regulate goods crossing their borders, as long as the primary purpose isn’t to block trade.
At the heart of the case were competing views of section 121. Comeau’s legal team, and I, argued for a broad interpretation—that the section bans any provincial law that impedes free trade between provinces. That’s the interpretation of the section that is most consistent with the values of the free trading Victorian lawyers and politicians who created it. (See analysis of my arguments here, here, and here). On the other hand, the New Brunswick government and Canada’s top court leaned on a narrower reading, arguing that section 121 only prohibits outright tariffs on interprovincial trade, not non-tariff trade restrictions, such as sending the police out to arrest people who import beer from the next province.
My involvement in the court case was primarily at the initial trial stage, when it was being litigated in New Brunswick. I flew to New Brunswick from Paris where I was then living with my family (LONG STORY), testified for several days, came back to Europe, and was then gratified to read the news that judge had found my interpretation of the Canadian constitution to be persuasive. Having discharged my contractual obligations, I then basically stopped doing any work related to the case, aside from penning a short opinion piece in the Globe and Mail newspaper. Perhaps I should have invested more time in the trying to create awareness in Canada in the constitutional issues at stake, for instance by writing more about it or speaking about in the Canadian media. However, I had other fish to fry. My employer, a UK university, wouldn’t have been that pleased had a spent a significant amount of time on doing media work that wasn’t connected to a REF Impact Case. (For various bureaucratic reasons, my expert witness work couldn’t be classified as Impact work for the purposes of the REF. The REF is the system by which research performance, including societal impact, is measured and incentivized in UK universities). So, I didn’t do much with respect to the Comeau case after the week I spend in New Brunswick. In invested my research time in other projects, including the production of articles to be published in journals in the famous FT50 journal list. Basically I did the rational thing and focused my research time on the activities that are rewarded the most in the UK academic labour market. I said above that I feel only a little bit guilty, not really guilty. That’s because it was necessary for me to focus on my own career. I’m now working on other REF Impact Case projects that are unrelated to Canada and which focus on disseminating knowledge to non-academic research stakeholders here in the UK.
I suspect that if I had done more to educate the Canadian public about the original intent for section 121 of the Canadian constitution, the Canadian Supreme Court might have ruled differently. Judges are socially situated and they can’t ignore the prevailing climate of thought in their society as they interpret the evidence presented in court. Its ruling, which was delivered unanimously and was apparently written by the Chief Justice, quoted extensively from my expert witness report but ultimately sided against my interpretation. Had the Supreme Court sided with me, the interprovincial trade barriers would have been declared unconstitutional—after further litigation and transition costs as inefficient producers went out of business, GDP in per capita would almost certainly have been higher. And Canada would have been in a stronger position to deal with Trump.
The US, Canada’s adversary in the current struggle over tariffs, does not hobble itself with internal trade barriers: over the last two centuries, state politicians have tried to create internally protectionist barriers (it’s a perennial temptation) but because their Supreme Court has consistently upheld the original intent behind the Commerce Clause, the unity of the American internal market has been largely maintained. In the U.S., free trade between states is guaranteed by the Commerce Clause or Article I, Section 8 of the Constitution. It gives Congress the power “to regulate commerce… among the several States,” which has been interpreted to prevent individual states from restricting trade or discriminating against out-of-state goods and businesses. Over the years, the Supreme Court has reinforced this principle through the “Dormant Commerce Clause” doctrine, which basically means that even when Congress isn’t actively legislating on interstate trade, states still can’t pass laws that unfairly burden commerce between them. This clause has had a huge economic and social impact—it helped create a truly national market, allowing businesses to grow beyond state borders and preventing economic fragmentation like we see in Canada with cases like R v Comeau. So, while provinces in Canada still fight over interprovincial trade barriers, the U.S. system—thanks to the Commerce Clause—has largely prevented that kind of economic balkanization.
In recent weeks, the threat of US tariffs has caused Canadians to discuss the subject of internal free trade with renewed vigour. There has been a lot of talk about eliminating these trade barriers through the expansion of existing interprovincial compacts (see here, here, here, and here), such as the New West Partnership. In my view, these initiatives are nice but their potential benefits are small relative to those that would come from a clear reversal of the position the SCC adopted in interpreting s. 121 in the Gold Seal case.
Don’t get me wrong. There are many other things that Canada had done to put itself in a weak bargaining position. For instance, it failed to follow up the splendid Canada-EU trade agreement it negotiated by building the east-west infrastructure (what I called Laurentian infrastructure in a nod to the Laurentian thesis associated with the late Donald Creighton) that would have allowed it to really take advantage of this paper agreement. I’m thinking in particular of the unbuilt pipelines to bring natural gas to Canada’s Atlantic ports, where it could have been liquified and sent to Europe. However, failure to bring about internal free trade has made a bad situation worse.
Perhaps a future Canadian government will have a policy of only appointing Supreme Court justices who agree with the view that Section 121 should be interpreted broadly rather than narrowly.
In late 2024, President-elect Donald Trump reignited diplomatic tensions with Canada by making provocative remarks about the country’s sovereignty. Trump referred to Canadian Prime Minister Justin Trudeau as the “Governor of the State of Canada,” adding with a smirk that Canada might as well join the United States if it wished to avoid the heavy tariffs on its exports. Trump took to his preferred platform, Truth Social, to repeat these sentiments. Over the following days, Trump’s posts escalated in tone, suggesting that Canada’s economy relied heavily on U.S. trade and that tariffs were inevitable unless it reconsidered its status. By mid-December, Trump’s comments had sparked widespread media attention, with some analysts unsure whether his statements were intended as serious policy proposals or simply political theatre or were simply a joke.
Here is some media coverage from India of the issue.
My educated guess is that they may be serious. There are certainly people around Trump who are concerned about the “browning of America” and who have, in the past, mused that incorporating Canadian provinces as states of the union would raise the Caucasian share of the US population (sorry I can’t find the link but they did say that). The same people seem to be fiercely opposed to Puerto Rican statehood). I don’t think that Trump is a racist ideologue, but I do think that he is interested in building a legacy and there would be no greater legacy than permanently expanding the United States. Changing the map of your country is a way to get your face on Mount Rushmore. That’s even better than being happy about Trump Tower becoming the tallest building in New York. When I first heard the slogan “Make America Great Again” I noted that it didn’t specify when exactly American greatness had peaked. Like many, I had assumed that the imagined Good Old Days in this slogan were either some nostalgic version of the 1950s or the 1980s, a period when Trump was in his prime. But it could be the vaguely defined period of greatness underpinning the slogan is the nineteenth century, the period of manifest destiny.
Perhaps I am personally biased in thinking that Trump is serious about offering statehood to some or part of Canada because my PhD thesis looked at the 1860s, a period when that option was very much on the table. Maybe my background is skewing my analysis of what is going on right now.
In any event, Canadian popular reaction to Trump’s remarks was swift and defiant. Prominent politicians across the Canadian political spectrum rejected any notion of annexation, although I did notice the Premier of Ontario took the precaution of placing a US flag next to a Canadian and provincial one during a press conference. Polling data showed that Canadians overwhelmingly opposed closer political integration with the United States, with support for national sovereignty apparently at record highs. Only 1 in 8 Canadians are open to the idea of Canada, or their Canadian province, joining the United States. Even in the more politically conservative Prairie provinces, that number isn’t much higher than 20%.
Trump’s 2024 comments about Canada echoed his earlier proposal in 2019 that the United States should acquire Greenland, then an autonomous territory of Denmark. In August 2019, news broke that Trump had floated the idea during meetings with aides, reportedly framing the acquisition as a strategic move to gain access to Greenland’s natural resources and enhance the U.S. military presence in the Arctic. Trump later confirmed the proposal on Twitter, which is now called X. The proposal drew immediate backlash from Denmark, with Prime Minister Mette Frederiksen describing it as “absurd” and anachronistic. Her view was that while Tsarist Russia might once have been able to sell Alaska to the US, this isn’t 1867 anymore and we don’t do things that way. Trump retaliated by cancelling a state visit to Denmark, claiming Frederiksen’s response was disrespectful.
The idea of the United States annexing Canada has deep roots. During the early 1800s, tensions between the United States and British North America culminated in the War of 1812, during which some American leaders saw the conflict as an opportunity to annex Canadian territories and to liberate their inhabitants, many of whom were Anglo-Saxons culturally indistinguishable from people in neighbouring states, from British misrule. While the war failed to achieve this goal, the idea persisted among American expansionists. The Annexation Movement gained momentum in the 1840s, spurred by Manifest Destiny and economic pressures. In 1849, a group of Montreal merchants published the “Annexation Manifesto,” calling for Canada to join the United States to escape economic stagnation and benefit from free trade.
William Henry Seward, U.S. Secretary of State during the 1860s, was a vocal proponent of territorial expansion and believed that Canada would eventually be absorbed by the United States. In the 1850s Seward, who was an ardent abolitionist from New York State, said it was more logical for Canada to be part of the United States than it was for the slave states. Seward was confident that economic integration and demographic trends would lead to Canadian annexation without military force. However, these ambitions, along with garden variety interest group politics in the US congress, resulted in the cancellation of the Reciprocity Agreement in 1866, which had established free trade between the U.S. and British North America since 1854. This Free Trade agreement’s termination was partly driven by American resentment toward British support for the Confederacy during the Civil War, as well as lingering annexationist sentiment. The cancellation intensified Canadian fears of U.S. expansionism and reinforced support for Confederation as a means of unifying and protecting Canada against American ambitions.
A paper I wrote long ago, “Confederation as a Hemispheric Anomaly: Why Canada Chose a Unique Model of Sovereignty in the 1860s,” sheds light on why Canada ultimately resisted annexationist pressures. I wrote this paper because in part because I was sympathetic to the 1860s Canadians who favoured Annexationism, some of whom had arguments that were based on economic logic. (Annexationism was very strong in communities in which the border was an annoyance that complicated everyday life.) Once the US passed a constitutional amendment ending slavery, many Canadians, particularly farmers in the area west of Toronto, concluded that they could now safely join the Union. The paper argues that, unlike the United States and many Latin American nations, Canada adopted a model of sovereignty that preserved close ties to the British Empire while granting autonomy through Confederation. I argued that Canadian Confederation as a deliberate rejection of U.S.-style republicanism, emphasizing the desire to strengthen ties with the British Empire. Another reason the Annexation movement of the 1860s failed was the fact that Anglo-Saxon Americans were aware that Canada was home to a very large number of non-Protestants). Whether those ties were ultimately good for subsequent Canadian living standards is something we can discuss—as I argued in the final chapter of book published in 2008, post-Confederation Canada’s economy really fell behind the US. I speculated that the Canadian constitution designed in London in 1866-1867, which provided for an excessively centralized and not very democratic political system, had something to do with it. In the generation after 1867, vast numbers of Canadians voted with their feet in favour of the US and moved there, settling in places such as Ontario California.
My own personal view is that while I don’t like Trump, I think there is a strong logic in favour of continent-sized economic units, particularly those that resist the tendency to become protectionist blocks. I was totally opposed to Brexit and think that Britain would have been better off had it remained in the EU. (I’m agnostic about whether the UK should have adopted the Euro as its currency, as was once proposed by Tony Blair). By the same token, I think that Canadians and Americans would be better off if they combined their two countries at least in the form of an EU-style customs union with a common currency. The devil is obviously in the details. However, I think that we need to be able to separate the issue of which constitutional arrangement is economically superior from the political personalities of the day. When Clinton and Obama were presidents, support for greater integration in Canada was higher than it currently is. Whenever some particularly objectionable Republican gets in the White House, be it Richard Nixon or the like, we tend to see a nationalist reaction in Canada. I bet that if the annexation of Canada were proposed by the likes of a Clinton or an Obama, the Canadian reaction would be different. I also bet that if the prospect of Canada’s ten provinces getting votes in the electoral college became a realistic one, many Republicans would become strongly opposed to the concept because at least nine of those provinces would be staunchly blue states.
While Trump’s recent statements may have been made in jest, they reflect a pattern of American leaders revisiting old territorial dreams to achieve economic or political goals. Canada’s current response is consistent with a historical commitment to maintain sovereignty in the face of external pressures.
The Past Speaks 