Does a society really need corporations?
What would the economy look like if busineses were limited to partnerships and sole proprieterships?
Would corporations be more careful with respect to various tort liability and other malfeasance if their investors were on the hook for any liabilities incurred?
Would juries be less likely to go haywire with judgments and punitives if they knew real people with homes and other assets might be hurt by those decisions?
Would this radically gum up capital markets, or would new instruments arise in their place?
It doesn’t seem to me that any part of American or liberal theory requires corporations, nor does any prong of conservative philosophy. I’ve not thought about this extensively, but I’d like some ideas. I know little about the history of corporations, how capital financing worked prior to their arrival, what the theoretical justification is for them, how corporations behave differently than non-corporations on account of their limited liability, etc. I did, however, take corporations in law school and found my professor to be a world class schmuck.
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This is really going to upset Markels.
Wendell Berry wrote about corporations:
“They are not interested in the good health-economic or natural or human-of any place on this earth. And if you should undertake to appeal or complain to one of these great corporations on behalf of your community, you would discover something most remarkable: you would find that these organizations are organized expressly for the evasion of responsibility. They are structures in which, as my brother says, “the buck never stops.” The buck is processed up the hierarchy until finally it is passed to “the shareholders,” who characteristically are too widely dispersed, too poorly informed, and too unconcerned to be responsible for anything. The ideal of the modern corporation is to be (in terms of its own advantage) anywhere and (in terms of local accountability) nowhere.”
It may upset markets – but a great project for a conservative would be to begin to describe the deleterious effects of corporations on not only local but national and international economies.
On another note: Corporate art is such that aesthetes of a conservative temper should have been suspicious long ago.
Wade needs something better to do with himself than constantly fawn over me. Really, dude.
I don’t think corporations necessarily belong to an ideology, as there are many ways of going about instituting them. The main purpose of a corporation is to harness economies of scale that smaller business forms are simply unable to handle. This results in more private innovation and production, but it also allows for more potential for rights violation.
I think a more interesting question is to ask why lawyers aren’t allowed to incorporate. The best we can get are LLCs.
My understanding of that is two fold. First, law firms are not allowed to share profits/ownership with non-lawyers because of our status as “officers of the court.” Second, I think, relates to conflicts. Lots of discrete individual owners would create more potential conflicts, just as law firms do naturally when they get too big.
I’m aware of both of those arguments, and I find them both lacking. For one, the ban on sharing profits with non-lawyers serves no purpose other than to perpetuate the guild-like mentality of the law, which isn’t necessarily helpful for anybody. It doesn’t improve ethics, efficiency, or quality of service. For conflicts, that only would come into play should the corporation go public and sales of shares became unrestricted. Otherwise, a corporation could protect against potential conflicts by ensuring that either ownership of stock is regulated from within or by only allowing non-voting stock to be free-flowing. Such stock could come with the notation that buying of the stock waives all potential conflicts ownership of the stock creates. So the owner couldn’t affect the company since they had no vote, and they couldn’t use the stock to create conflict.
Offhand, I don’t see how mere ownership of such non-voting stock would rise to the level of creating conflict. For a judge, that would be another thing.
James, I fawn over you because I’m turned on by the caricature drawing on your website. Can you blame me?
Corporations are really nothing more than a popular fiction used to simplify discussion of broad-based events in the marketplace. If asked to identify the entity known as “IBM” you couldn’t do it–IBM is nothing more than an interlocking network of contracts between individuals–employees, managers, owners, customers, suppliers, etc. This contractual arrangement is ideally suited to the efficient management of very-large scale resource allocation and decission making.
As such, the relevant discussion should really be about the virtues (or lack thereof) of decentralized ownership. Ultimately, you need some sort of structure which allows for very-large scale business operation–otherwise, you can never accomplish the scale or scope necessary for certain industries. You can make clothes without a corporation, but you cannot refine oil without one (at least not in a practical or efficient manner).
Otherwise, you’re just debating the merits of capitalism/free markets, as corporations are merely a manifestation of the desire to efficiently allocate capital and human resources.
I’m not sure I totally agree Beck, because corporations technically create an “artificial legal person” who is only liable to the extent of its market cap; those investors are not liable beyond their investment.
I tend to suspect that the needs of economies of scale to manufacture or refine certain products in an efficient manner would force the creation of corporate-like structures of some sort, many of which have grown up, anyhow, like the limited partnership or the limited liability company.
I agree. It seemst hat Beck’s theory is really a defense of the “firm” as a concept–as per Becker’s theory–but not necessarily the corporation as such.
Of course, the differences between the various limited partnership entities, limited liability companies, and corporate structures that exist today are largely artifacts of the tax code. If you postulate that the prime function of the corporation is to raise capital while limiting liability, I have no idea what would happen if investor liability were a legal impossibility. I suspect there would be a rapid clamoring for some sort of investor protection to enable companies that required a particular size to raise the necessary capital, whether the form be expanded limited partnerships or joint stock companies or what-not.
It’s sort of one of those “if they didn’t exist, we’d have to invent them situations”. Generally, I hate that argument, but it applies here, at least if you want an industrial economy which seeks to maximize innovation and investment.
The aggregation of sufficient capital to launch the tens of thousands of corporations in this country require highly distributed investment. Investors want to be able to invest small amounts in a wide range of ventures–this minimizes their risk while allowing them to participate in capital formation and higher-than-savings-and-loan returns on investment.
Lots of people like to complain about the fact that share holders in a corporation aren’t liable for anything negative their corporation does–creating an incentive for risk-taking behavior while decreasing incentives for effective oversight. These objections have a fair point, and go a long way towards justifying government involvement in publicly traded companies.
Nonetheless, it’s this very risk-seeking behavior which makes for successful industrialists, industries, and ultimately, national economies. For instance, the leniency of American bankruptcy laws are often cited as a reason for American economic prosperity. In Europe, bankruptcy court is basically just a tool to facilitate liquidation of assets and fair distribution of whatever’s left to creditors. American bankruptcy laws are intended to allow a restructuring period so the company can gain a second life.
All of these advantages would be difficult to attain if owners were required either to devote a significant amount of time to managerial oversight, or to expose themselves to liability beyond their initial investment. So while the corporate form–the “artificial legal entity”–might not be absolutely necessary (or remotely necessary to the conservative ethos), some similar system is necessary to truly leverage the full advantages of this wonderful thing we call capitalism.
I offer you a counter-question to your original question. You asked if corporations are necessarily conservative. Perhaps that’s the wrong question. Corporations are just an organizational form within the broader capitalist system. Perhaps you should be asking whether capitalism itself is necessary to the conservative philosophy?
One factor that should be considered is the effect of the coporation on our legal and political structure. The existence of these complex, artificial legal personalities may require, and certainly has historically resulted in, a bloated national bureaucracy to monitor and regulate them. Does big business beget — either in principle or by unintended but still natural consequence — big government?
And to answer Beck’s question, conservatism does not require capitalism, although an American conservative should be mindful of this country’s strong traditions of relative economic freedom.
I agree that the corporate form is necessary to leverage the full economic growth advantages of capitalism. The question is, what are the direct and indirect costs (social, moral, etc.) of full and true capitalism and its necessities? And are they worth it?