On the Illegitimacy of Corporations
Corporations are not free-market phenomena. They are not part of a system of consensual exchange among individuals. Corporations are government entities! They are the for profit side of our government. The dominant class in America consists of the people who move freely between non-profit and for-profit government institutions. Corporations are accepted as a normal and good aspect of American free enterprise, no one thinks to question their very existence. We blame and punish the persons in the corporation for their “abuse” of the system, yet it’s obvious that the problem is systemic. We know that corporate officers have every incentive to enrich themselves and few checks against them. We know that it’s criminal for any corporate official to earn more than our president, yet we are taught that corporations are “Free Market” phenomena and so the government/corporate class remains free to pay corporate officers any salary they can get away with. Enron is just one more scandal in this incestuous, illegitimate system. Like all scandals, it brings out the usual calls for more regulations to control these leviathans that we’ve created. Regulations do not change the essential corruption of the system itself. Let me explain.
Corporations illustrate again the Dilemma of Interventionism that I discussed in Consensualism over Coercion. When a government interferes with any aspect of the free, cooperative, and self-responsible functioning of individuals in society, it creates distortions that eventually will be seen as undesirable and will have to be controlled or curbed by new interventions. Having intervened in human interactions, the government enters a slippery slope leading to total regulation and control. Partial government intervention creates a situation of chaos, such as we now experience. The only way to eliminate the chaos is to have either complete government control of society, or complete non-governmental, consensual/cooperative control of society. There is no stable middle ground. In the case of corporations, we should either put them under complete government regulation like the Post Office, with fixed salaries and procedures (i.e. maximum salary for CEO—$250,000), or we must eliminate their legal structure completely, allowing only truly private businesses to exist.
Look at corporations. They are not private businesses; they are not the result of undistorted individual decisions to buy and sell. They are government-created machines. They are, in essence, arms of the government—but very poorly regulated arms. Adam Smith warned against the existence of government-granted corporations in no uncertain terms. He insisted that they exist only for unique national needs that could not be met in any other way, and that their existence be time-limited. Consider that the modern corporation is the creation of certain laws that annul the usual relationships in private businesses: (From the Encyclopedia Britannica)
Juridical personality – Corporation law makes the corporation a fictional person, with the rights of any person to sue and be sued, make contracts, and hold property. It is an artificial, state-created, business machine.
Limited liability – the capital suppliers (shareholders) are not liable beyond the amount of their investment. A private/consensual businessman is liable for all debts he incurs, without limit.
Transferability of shares – rights in the organization may be transferred readily from one investor to another without reconstituting the organization under law. Investors are not owners. The only real owner is the government that charters the corporation.
Indefinite duration – Long after the original incorporators are gone, the corporation can continue to exist as a business machine, with unending turnover of investors, officers, and employees.
Let us consider the general socio-economic results of this legal fiction:
The Separation of both Ownership and Management from Responsibility – No single persons, or group of persons is responsible for the corporation’s actions or debts. In private business, the single owner or partners are owners and managers, and are completely and personally responsible for their actions and debts. In the corporation, human ethics are replaced by corporate ethics (oxymoron).
Creation of Perverse Incentives – Managers have every incentive to increase their income at the expense of the shareholders and the corporation itself, and there is little to stop them. Why shouldn’t they get a bigger chunk of this multi-billion dollar behemoth? Aren’t they in control? Who will notice? The result, of course, is the excessive compensation of executives and worse, the abuse of their control to profit from any number of unethical practices such as stock price manipulation, insider trading, and other personal profits stemming from their role as officers. When scandalous behavior is revealed, the government adds a few regulations. In fact, as government creations, corporations should be completely regulated. Salaries of corporate officers should be set by the government, they should be civil service employees, not free-wheeling entrepreneurs taking advantage of government-granted powers!
The Bureaucratization of Business – Corporations are not free associations of free and responsible persons, they are bureaucracies created by the government. They imbue our working lives with the authoritarianism of the state. The managers are indeed “officers”, with state-granted powers over the organization and its employees. Bureaucracy is not the result of management style, it is the natural and necessary consequence of all organizations created by the state.
The Stock Market – Without the corporation there would be no market for the freely-exchangeable corporate shares. The stock market, then is not a free market or consensual entity, it is the creation of the government by the force of law. It naturally has only a tenuous relationship to actual corporate value. Investors, corporate officers, and government officials have every incentive to make stock prices rise as high as possible. The result is a simple pyramid or Ponzi scheme. Get in early and make profits while others climb in. Get in late and lose as everyone else cashes in. This is not a natural or normal business phenomenon. It’s a gambling casino created by the state. The amount of lying , disinformation, and cheerleading resorted to by stock analysts, the media, government officials, and corporate officers is embarrassing. Just look at what these entities have been saying and doing during the creation and collapse of the recent stock market bubble.
Now let us consider some of the historical effects of this government institution:
Destruction of morality – The incentives of the management of a corporation are clear – they seek to increase their income and prestige. Now one of the ways they can do this, but not necessary, is to increase the stock price of the corporation. Now one of the ways to do this, but not necessary, is to increase the profits of the corporation. Now the ways of doing this are many and not necessarily ethical. One can increase profits by hiding costs, playing shell games, maximizing short-term return at the expense of long-term return, polluting the environment, pushing costs off onto other persons, lobbying for government contracts, lobbying for favorable government regulations, moving factories to where labor is cheapest, etc. etc. etc. What’s wrong with any of this you might ask? The problem is that the corporation is not a private individual or group of individuals who are morally responsible for their actions—it is a profit-maximizing machine. Its ethic is simple—maximize share price and profits. Individuals in a private business in a consensual society would have to be moral because they are both owners and managers; and members of a consensual society that holds them responsible for their actions.
Exorbitant salaries for management – The amount of money taken home by the average CEO is in the millions of dollars; far more than any private business man would withdraw from his company for his own luxury. But what’s to stop officers from paying themselves and their buddies as much as they can? The population is convinced that their salaries are a normal and good aspect of free market capitalism!
Scandals – Let us establish a rule: whenever there’s a scandal we should look for the government interventions that gave these individuals the ability to enrich themselves without the immediate knowledge and protestation of the victims. In this case, it’s not that certain individuals are corrupt and spoil everything, the problem is that the corporation itself is corrupt. It is an abrogation of normal consensual interactions among free and responsible individuals. Give a person power over other people and their money, and they will abuse it everytime. Don’t be surprised.
Exaggeration of the Business Cycle – This is intimately related to the Stock Market as mentioned above. Inflation of share prices yields vast increases in paper wealth, causing increased spending, causing increased business production. When the bubble bursts, as all bubbles must, the outrageous expectations crash to Earth and a recession occurs that wipes out the over-capacity and over-consumption. We have recently witnessed the biggest bubble of all time, and it is being followed as I write by a worsening recession that promises to be much longer and deeper than the stock market cheerleaders would have us believe.
Destruction of private businesses – How can Mom and Pop compete with WalMart? How can any private business compete with a government-chartered machine for concentrating capital and reducing investor/manager risk? Walmart is just one example of the destruction of normal community business and social structure. Corporations are gradually gobbling up every aspect of American life, beginning with industry and now spreading to agriculture and services. Private business can exist only by filling the small niches left over. The corporatization of all goods and services means the bureaucratization of our lives. From school to work, we are always the servants of government-created authorities. Personal freedom and responsibility are increasing absent from our lives. We are forced to live and act like machines.
Corporate control of the media – Just fifty years ago, there were hundreds of privately owned newspapers, each freely dispensing it’s views to the paying public. A few corporations own almost all newspapers today. The content of the papers naturally follows the needs of the corporations. Real dissent and criticism of our corporativist, authoritarian society and its leadership are practically absent.
Corporate control of government – The government creates the corporations, the corporations dominate business and therefore society at large, the corporations therefore dominate the political process, and you have a self-perpetuation loop of government control over individuals’ interests. Corporations want, of course, government regulations that make it harder for private businesses to compete. The government obliges by producing so many regulations and requirements that only large corporations with vast resources can feign compliance. Government regulators always have an eye on a fat corporate job in the industry the regulate, therefore their complete ineffectiveness in protecting the general public.
Corporate class society – There are two classes in America: Those who benefit from government institutions and interventions, and those who do not. In the upper class are corporate officers and their beneficiaries, incorporated monopolies like medicine and law, beneficiaries of patent and copyright laws, and government employees. The rest of the population has to scramble to make money without the benefit of government privilege.
Monopoly concentration of wealth and power – Corporations, given their incredible government-created access to investor cash and their access to government favors, can freely buy up other businesses and even competitors. Competition is thus greatly diminished and business increasingly controlled and operated by persons far away with little knowledge of local conditions. Private business owners would not expand into products and services with which they are not familiar. Private owners take pride in their work and would not sell out to the highest bidder—nor would corporations be that highest bidder in a non-corporate society. Private businesses would stay more confined to their geographical area where they could easily see every aspect of their business.
You will no doubt argue that without corporations we wouldn’t have the kind and variety of goods and services that we have now. You are right. If business here in America and everywhere on Earth were private only, our lives would be immeasurably different. Sure, we might not have some of the gadgets we have, and some things would be more expensive, but look at the benefits! We would not suffer the ethico-socio-economic ailments outlined above. Society would become naturally cooperative—an interaction of equals with no persons exploiting government-granted powers over others. Businesses would become more local in character. They would be smaller in scope and would concentrate on what they do best. They would be far more responsive to individual customers. Small businesses would thrive as one could create a business without fear of corporate competition and without having to meet the regulations designed for corporations. Businesses would not be viewed as institutions but as private concerns owned and run by people like ourselves. There would be no scandals because there would be no government granted privileges and powers to abuse! There would be no multi-million dollar executive salaries, no insider trading, no stock market, and no exaggerated business cycles. All business, and therefore all life would become human in scope. Individuals would become self-responsible. People would work as part of an organic organization, not as cogs in a machine. Employment would be a mutually beneficial relationship between individuals, not a selling of one’s services to an impersonal machine. Corporate interests would not contaminate our media. Corporate interests would not contaminate our government.
How can we become a non-corporative consensual society? It’s certainly not so simple as just eliminating corporate laws. We cannot replace the immense government/corporate structure that runs our society without knowing exactly what we’re doing and where we’re heading. We must have a complete vision and understanding consensual human society. See my other articles on this matter. We have to eliminate authoritarianism and government intervention in every aspect of our lives—business, banking, education, charity, safety, etc. We have to reduce government, if one wants to continue to call it that, to the role of policeman and arbiter. Government should prevent the use of force by persons against other persons, and try to set it right when such occurs. Irresolvable disputes among persons must not be resolved by force but must be taken to elected arbiters. Pollution of the environment should be treated like any other taking of values from a person. If the person does not agree with or is not compensated for the dirtying of his air, water, or soil, he should be able to count on the help of the state to stop the pollution or have the polluter make a reasonable settlement with the affected population.
In the case of corporations, privatization would not be so difficult as in other areas, and certainly much easier than privatizing government departments as was so poorly done in the Soviet Union. In the US, stockholders would become partners. Since most stockholders would not want the responsibility or liability of actually owning and running a company, even as a small partner, they could sell their shares to investors who did. The value of shares would no doubt drop when this privatization is announced, as they would lose their Ponzi-scheme premium and society would no longer be organized around propping up share prices.
I want to help create this revolution so my children and the rest of humanity can enjoy life in a sane, humane society of free and responsible persons.