Saturday, November 1, 2008

In Defense of the Corporation

One of my many frustrations in using this form of communication is that, after an hour of searching, I cannot find the post in which Pericles recommended Robert Hessen's In Defense of the Corporation. As a result, I cannot summon up the context of that recommendation; I am afraid it might have been in response to an intemperent remark of mine.

As Pericles by now knows, I have a great deal of trouble with various features of American capitalism, and large corporations in particular I find to be more or less poised on a knife-edge as to whether their benefits outweigh their societal costs. Certainly our country would be incomparably different if our particular form of capitalist system had not evolved.

Anyway, I took Pericles's advice and read (almost all of) Hessen's (rather thin) book. I am not persuaded; that is, I am not persuaded to change my mind. But that is not what Pericles intended, I suppose; rather, he hoped to spur my thought process. In this he was successful, and I thank him for that; it's always good to examine one's opinions.

Anyway, here is my report on Hessen's book. I would like to attach it, the way I would to an e-mail; but sorry, don't know how to do that. It's a bit long for this milieu --sorry; most probably won't want to read much of it anyway.

In Defense of the Corporation

There is a charming moment in Robert Hessen’s thin treatise, when he says, “The entity idea and its corollary—that a corporation cannot derive rights from its members—is false and should be discarded.” Hessen goes on to explain that any organization is only a collection of individuals, and therefore is only a useful construct. From this he derives one of his central tenets: “…when rights are imputed to a corporation, what we really are referring to are the individual rights of its members—the shareholders, directors, and officers.”

Charming, in an “if only it were true” sense. Skip the obvious rights of individuals that cannot, apparently, be transferred to a corporation: the right to vote, to bear arms, to be free of cruel and unusual punishment. There are also burdens on individuals that cannot be transferred to their corporate surrogates, most notably, of course, the inevitability of death within a (so far) inelastic period of time after the attainment of majority, say, 80 years. Following from that, of course, are all the evils to which men are subject: the need to eat, and breathe, and rest. Corporations experience none of these burdens, so it is perhaps more accurate to say that individuals, rather than transferring their own rights to corporations, seek to create privileges and indemnities, by creating corporations, that they do not themselves possess.

Hessen’s book was written at the end of the 1970s, when scholars at the Hoover Institution, its publisher, could perhaps be forgiven their worry concerning the onward march of Socialism (a Democrat was in the White House). The book’s intention is to defend the American corporation against the attacks of Ralph Nader, who in those days had mounted a spirited attack against corporate structure. It is instructive to read Hessen’s characterization of Nader’s arguments, if only to see how distant some of Nader’s prescriptions now appear. Nader’s notion (as described by Hessen) that the solution to the evil excesses of corporate America is federal chartering seems today not only questionable. It seems hopelessly na├»ve to believe that the federal government can be a force for restraint against rampant capitalism, in an age when taxation itself is viewed by a substantial portion of the electorate as unpatriotic, and the notion of graduated tax rates as “socialism.”

So Hessen’s book is, largely, a curiosity. He does have some interesting things to say, however irrelevant to our current problems they may be. His book breaks down roughly into two partially overlapping sections. He begins with an explication of the origins of corporations, with a grade-school sort of step-by-step (“Now imagine that the original group of general partners is growing old …”) description of how inevitable is the progress from sole proprietor to international corporate behemot.

In his first four chapters Hessen is at some pains to explain how medieval guilds and boroughs and the like are not the legal or logical precursors to the modern corporation. This presentation is interesting because of its reminder that, in Western society, all rights, no matter to whom belonging, were at one point considered to derive solely from the dispensation of an absolute monarch. But the right of individuals to contract with one another for private purposes, rather than any state-granted status, is the source of corporate existence.

The last half, roughly, of Hessen’s book addresses the questions of corporate democracy, shareholder rights, and state statutes relating to corporate governance. It is here that he parries the Nader attack; and he does so rather easily, both by citing some apparent procedural errors in different versions of Nader’s Taming the Giant Corporation and by examining some of Nader’s substantive claims and proposed remedies. The former approach would seem to have been hardly necessary, except that it is testimony, read now in Nader’s dotage, to the respect he once enjoyed: showing that the great man was capable of slipshod work was deemed important to an academic such as Hessen in attacking Nader’s arguments.

And what arguments they are! According to Hessen, Nader advocates a series of complex devices aimed at ensuring, for example, that all shareholders vote on virtually all significant operating decisions of a corporation. This, of course, is a non-starter; were it to be somehow enacted it would simply end corporate activity as we experience it today; and Hessen’s presentation leads one to the suspicion that Nader, if he is being represented accurately, simply wanted to force the dissolution of these large organizations. Indeed, Hessen says as much.

In his chapter “Dismantling Big Business,” Hessen presents Nader’s arguments that size itself, in business, is evidence of malfeasance, or at least, ill intent. Size offends the competitive spirit; it leads to foreclosing consumer choice; it produces unused industrial capacity and resulting unemployment and suppression of wages; it allows companies to manipulate consumer demand. Hessen counters most of these assertions with common-sense defenses, but his most effective answer to Nader is this: assuming you are correct, why is your proposed solution an improvement?

It is a difficult question. The truth is, American corporations have indeed produced great societal benefits, as well as important ills. But the interest of this subject, not to say Hessen’s text, is provided by the environment in which we find ourselves. It used to be possible to say that there was a feeling of resentment, in some quarters, against the real or imagined depredations of large corporations against the average consumer. In 2008, it is possible to sense the rage of, perhaps, a majority of Americans against the greed of what has begun to be seen as a plutocracy. The government, moreover, is seen as the source of a solution only by a minority of people, and often, by them, only reluctantly. Hessen, in this book, has nothing to say about this; he is defending the picnic against the ants: “…we are told that the evil of capitalism is prosperity and that giant corporations must be destroyed because they depend on and are committed to economic growth…”

We face a different scene today. Dissatisfaction with American business, as well as government, has seldom been greater. Government and business are seen as having gone, hand-in-hand, into enterprises aimed at creating a privileged class. Business writes the rules by which it consents to be governed, and government, through collusion or bribery, consents; the will, and the interest, of the people is everywhere given lip service, and nowhere respected.

We are at war with ourselves, as in the cell-phone commercial where the corner-office executive mutters with satisfaction, “it’s my way of stickin’ it to The Man.” When the office boy reminds him that he is The Man, he muses, “…maybe.” No one really believes, however, that this man waits interminably on hold for customer service, or fills out infuriating forms and cuts off product-code labels to get his fifty-dollar mail-in rebate, or takes off his belt and shoes for the edification of a three-hundred pound mouth-breather with a government emblem on the pocket of his straining white shirt in the line at the airport. Government and business, by moving closer towards one another in the regulation of the citizen and the consumer, have managed to become conflated in the minds of many.

This has not worked to the advantage of business. Pharmaceutical and insurance giants are seen as the new malefactors of the economy, now joined by “Wall Street” and the financial services industry generally. The question that Hessen, were he writing now, would ask is, “What has gone wrong with the American corporation?” It cannot do what it was not designed to do, of course: improve the culture, create general prosperity, right our social or political wrongs. But is it making these problems worse, through its pursuit of profits, heedless of external costs it may be imposing? Is unfettered capitalism a reasonable way to organize one of the pillars of any society, its economy? And, in the end, what, if anything, should be the role of government in business?

Hessen’s ultimate argument is that, as the rights of corporations are simply the rights of individuals, any attempt to restrain corporations is an attack on individual liberty. It is tempting to say that he would be unlikely to have a helpful prescription for what ails us today. Certainly American business, which has always been characterized by pragmatism and practicality, does not today show itself eager for reform; adjustments are necessary, in the form of what critics call socializing losses while leaving profits strictly private. But there is no groundswell, among its defenders, of sentiment that American business has gone too far. Indeed, blame for the financial crisis is generally directed at a few imprudent egomaniacs in sensitive positions, and an army of irresponsible individuals who had the temerity to think that they should be deserving of the temptations that were being waved under their noses.

Other examples exist, however. European capitalism, which has had all the sharp corners knocked off by 140 years of state welfare policies, has nevertheless been able to produce some of the stars of modern corporate achievement. European society, many observers agree, has produced a better way of life for the average citizen than has American society. Infant mortality in America, to cite one statistic, is behind that of most of Europe, including Greece and Portugal, as well as Cuba and some Asian countries. Clearly, if huge corporate enterprise is necessary for societal well-being, it is certainly not sufficient. Could the missing element be government-imposed restraint?

To go back to Hessen’s argument, he spends most of his time showing that, because interactions between corporations and third parties are invariably voluntary, no one should be harmed by the corporation’s existence, at least, not repeatedly (George Bush: “Fool me twice … you can’t be fooled again”), because consumers, like shareholders, have choices. And it is certainly true that if you don’t like Cellular One, you can try Verizon.

But in a sense, the attack against Nader is against a straw man. To say that nationalizing all significant corporate activity won’t solve any problems is not to say that there aren’t problems. And it would seem that modern American business has succeeded reasonably well (with government nudges) in preserving competition, in encouraging innovation, and in producing a steadily increasing Gross Domestic Product, not to mention its first purpose, which is to make profits for its owners. The issues are elsewhere. Here are a couple of them.

First, there is the issue of Hobbesian or Darwinian struggle. If life, like Donald Rumsfeld, is nasty, brutish, and short, should there be, in an advanced society, no mitigation of the worst life has to offer in a state of nature? There is a tension between allowing failure, it would seem, and protecting individuals against the worst consequences of failure. The most unreconstructed laissez faire capitalist would presumably rather not see people starving in the streets of American business districts. In this century, I mean.

No one, presumably, would argue that the secretaries at WorldCom or Lehman Brothers got what they deserved. Hessen’s assertion that a corporation is just a collection of individuals notwithstanding, it seems a signal characteristic of American business that, while the profits go disproportionately to the executives (much more than to the owners, by the way), when ruin comes it is the employees least able to recover who suffer the most. This is particularly true during a wholesale collapse like the one we seem to be witnessing now.

Corporations, like all of us, enjoy enormous benefits provided by government and the society at large, some of which they help pay for: streets and sewers; a more or less peaceful society governed by a generally accepted social contract; reliable enforcement of commercial contracts; predictability, within a wide margin, when it comes to economic, social, political, and legal norms. It was, for most of the 20th century, more or less accepted that some minimum of social welfare system is a reasonable price to pay for those benefits; that some minimum redistributive efforts are appropriate to promote social stability in an environment that encourages rapid and drastic economic adjustments. The question always in play is, what minimum, at what price?

Second, it is also true that consumers have choices, sort of. But, just as the nature of competition is to encourage innovation in order to satisfy perceived needs of consumers, competition allows, sometimes, for the degradation of standards or, at least, their suppression. To put it another way: if my competitor is not doing something, then doing it may help me at the margin; but not doing it will also, at the margin, not hurt me. If no one has live human beings answering the phone, no one is at a competitive disadvantage who follows suit. If no provider of cell phone service, or manufacturer of personal digital assistants, standardizes the charger interface, then no one else must do it to remain competitive, with the result that every upgrade or model change requires a new plug-in device that costs an extra $20. Those of us who remember the introduction of cable television can recall the promise that, because we would be paying for the programs, there would be no commercials, as, once upon a time, there were none in movie theatres.

These trivial examples point to one way in which the drive for profits overrides considerations of efficiency and the avoidance of waste, and results in consumer dissatisfaction. To say that the consumer has a choice, in other words, is the type of truth that can obscure a larger, countervailing truth. We can all still get a hamburger the way we like it; but does anyone believe this would be true if McDonald’s and Burger King ("having it my way" notwithstanding) could create barriers to entry on the scale of those enjoyed by Toyota and Ford?

The point is, while some products naturally require commercial enterprises of large scope to produce, that very fact encourages some (and only some) behaviors that are not in the interest of the society at large. The anticompetitive practices of the commercial dairy industry in attempting to suppress certain organic milk producers is another example of the corporate use of economic power to deny consumer choice. In other words, the invisible hand does not everywhere function optimally.

Corporations are both the heroes and the villains of the piece. The challenge is to take advantage of their strengths while hampering their ability to do harm by the over-enthusiastic exploitation of those strengths. Recognizing that corporations (and limited partnerships, etc.) possess advantages that individuals do not serves only to highlight the need for serious consideration of public policy initiatives.

This is not an argument for a command economy; but it does point out that “free-market capitalism,” in the phrase of the immortal Larry “I’m for keeping America strong!” Kudlow, is not without its shortcomings. Hessen’s Defense is successful in countering Nader’s arguments; but as those arguments were never a threat to American capitalism, his effort might have been better spent in identifying and addressing the societal dislocations that corporations and their milieu help exacerbate. It is only prudent, when evaluating any construct, to assess both its strengths and its weaknesses. Hessen, at most, gets us halfway there.

Friday, October 31, 2008

Another Great Economist Quote

From this week's lead article, endorsing Obama.

Somehow Ronald Reagan’s party of western individualism and limited government has ended up not just increasing the size of the state but turning it into a tool of southern-fried moralism.

That's what's known as hitting the nail on the head.

Thursday, October 30, 2008

In case you need another reason to vote

In Brooklyn, Manhattan and Seattle only, unfortunately. Sorry, Chicago dwellers.

See here.

Wednesday, October 29, 2008

In Defense of the "S" word

I'll take swords for four hundred!

"So... Maybe Americans are getting... less stupid. Because for one thing, they're not buying the "Barack is a Socialist" garbage. And for another, they seem to recognise Socialism when they see it (See: $700 billion bailout for the financial system and using taxpayer money to do it)... and they seem, by all known polling systems, to think it would be a REALLY good idea to start doing some MORE of it -- where it counts: say, healthcare, education, green infrastructure..."


That's right - in a closely contested election, the Los Angeles Times is concealing a video showing Barack Obama at a going-away party for former PLO spokesman Rashid Khalidi, attended by radical Palestinian activists and domestic terrorists Bill Ayers and Bernardine Dohrn. 

Someone please explain away this one!  And, as you try, ask yourself this:  "Would the LA times bucket the video if it were McCain, Palin, or even Hillary?"  

I look forward to the sophistry. 

Tuesday, October 28, 2008

Monday, October 27, 2008

Introducing Jane Pauley on the Campaign Trail

Great stories are on the way, I have not had a single second. 18.5 hour days 5 days straight so far! I will post some of the better phone conversations and other delights when I have a few minutes. 7 days until E-Day!

Obama's internship

Obama Undertakes Presidential Internship To Ease Concerns About His Lack Of Experience

Palin's got no time for silly drosophila research

Pride in ignorance

"This is what the Republican Party has done to us this year: It has placed within reach of the Oval Office a woman who is a religious fanatic and a proud, boastful ignoramus. Those who despise science and learning are not anti-elitist. They are morally and intellectually slothful people who are secretly envious of the educated and the cultured. And those who prate of spiritual warfare and demons are not just "people of faith" but theocratic bullies. On Nov. 4, anyone who cares for the Constitution has a clear duty to repudiate this wickedness and stupidity."

"Positive" Rights

Classic HLS and Kennedy School continentalism.  The history of this reasoning is not distinguished for its success.  

Sunday, October 26, 2008

wait, what?

I had to see it to believe it...