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The “Corporation” Is Pro-Individualism and Pro-Capitalism

By Vinay Kolhatkar

July 16, 2019

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“Am I getting through to you, Mr. Beale? You get up on your little 21-inch screen and howl about America and democracy. There is no America. There is no democracy. There is only IBM, and ITT, and AT&T, and DuPont, Dow, Union Carbide, and Exxon. We no longer live in a world of nations and ideologies, Mr. Beale. The world is a college of corporations.” – ­­Arthur Jensen, Network (1976)

Big corporations are certainly sizeable, with top-ranked Microsoft exceeding a trillion dollars in market capitalization (value of each share times the number of shares outstanding) in June 2019. Facebook was fifth at over half a trillion dollars in value, and Amazon, Apple Inc., and Alphabet (Google’s parent company) were ranked second to fourth.

The sheer size of some multinational corporations scares many people, like the fictional Arthur Jensen, into conspiracy theories. Are large corporations more influential than nations? Do they control politicians or is it the other way around?

However, these days, even for-profit corporations aspire to be good “corporate citizens,” doing their bit for the environment, the community, and social justice. Is it only lip service? More importantly, do such businesses have a right, let alone an obligation, to behave like benevolent organizations?

To answer these questions, we must first understand the nature of the corporation.
 

The Theory of the “Corporation”

In 1970, Milton Friedman asserted, in the Times no less (how the times have changed), that:

There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception [or] fraud.

The corporation, said Friedman, has no social responsibility:

If this statement [that the corporate executive has social responsibility] is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire ‘hardcore’ unemployed instead of better-qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his ‘social responsibility’ reduce returns to stockholders, he is spending their money.

Friedman was interpreted as implying that executives are merely the servants of the shareholders.

Are they?

In 2005, John Mackey, CEO of Whole Foods, disagreed with Friedman:

I’m a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies.

I believe the entrepreneurs, not the current investors in a company’s stock, have the right and responsibility to define the purpose of the company. It is the entrepreneurs who create a company, who bring all the factors of production together and coordinate it into viable business. It is the entrepreneurs who set the company strategy and who negotiate the terms of trade with all of the voluntarily cooperating stakeholders–including the investors. At Whole Foods we “hired” our original investors. They didn’t hire us.

Friedman countered that view:

The social responsibility of business to increase its profits and Mackey’s statement that “the enlightened corporation should try to create value for all of its constituencies” are equivalent.

It may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government.

T.J. Rodgers, founder and CEO of Cypress Semiconductors, was more scathing of Mackey:

Mackey spouts nonsense about how his company hired his original investors, not vice versa. If Whole Foods ever falls on persistent hard times–perhaps when the Luddites are no longer able to hold back the genetic food revolution using junk science and fear–he will quickly find out who has hired whom, as his investors fire him.

However, Mackey does not lose sight of investors in his “profits are a means to a mission” defense of making a mission the primary purpose of a corporation.

In economic literature, Friedman’s tenet is referred to as shareholder primacy. In 2002, Professor Stephen Bainbridge offered an alternative “director primacy” view that put the Board in control. Mackey’s view could be termed as entrepreneur or management primacy. However, in each case, we have some class in ultimate control, suggestive of a master-servant relationship. But need there be any primacy at all?

The Corporation is a nexus of contracts.

To gauge who is right or wrong here, it’s illuminating to go back to the Seventies. In 1976, professors Michael Jensen and William Meckling wrote one of the most seminal phrases in all of finance theory by revisiting the concept of the firm as a system of relationships (which was extant in academe since the Thirties)—the Corporation, they said, is a “nexus of contracts.”

And, in a free society, such contracts would be entered into voluntarily by individuals, whether that be a contract between a cleaner and a cleaning company, or between an office-cleaning company and a large multinational, or between a CEO and a large corporation.

Mackey may have originally sought investors for an idea, but he is wrong to generalize the investor class as passive—private-equity investors often seek operating management severely constrained by tight contracts, while themselves setting corporate strategy. He is also wrong to assume he “hired” investors. He invited investors to contract with him, i.e., hire him as CEO to pursue a vision, including a return for investors, articulated by him, and some investors voluntarily agreed to do so. In the subsequent “contract,” the firm as a legal entity (the nexus) hired him as CEO, and that set forth the future relationship, even if Mackey initiated the invitation.

To illustrate, if I agree to buy your used car, it matters not who made the first approach once a contract is executed—the contract sets out our rights and obligations going forward.

The Value within Corporations

A firm typically seeks synergy in the contractual bundle that it acquires—the whole is more than the sum of its parts. As accountants and economists know, the going-concern value of a firm will most often exceed the value in bankruptcy from a fire-sale asset sell-off.

Further, as theorists Ayotte and Hansmann note in “A nexus of contracts theory of legal entities”:

A legal entity permits an owner to create a firm as a bundle of contracts that can be transferred to someone else, but only if they are transferred together. This bundled assignability allows for a balancing of several potentially conflicting interests.

The firm’s value is unchanged by changes in passive ownership occurring almost incessantly via trading on a stock exchange. But stakeholders will often contract via the firm as a nexus to retain key executives with incentives and penalties. Lenders seek to prevent the unbundling and the selling off of valuable subsidiary rights in the nexus via warranties in the contract for debt.

Thus, one way to characterize what I would call a POPL (a privately-owned, publicly-listed) corporation, is as a synergistic bundle of contracts, alienable from its current owners whose liability is limited to sunk cost or investment contracted for, and assignable as a bundle.

The limited-liability corporation device is a visionary invention of the modern economic era. Its essence is pro-individualism and pro-laissez-faire Capitalism.

The limited-liability corporation device is a visionary invention of the modern economic era. It has significantly advanced private enterprise by merging economies of scale with labor specialization and voluntary contracting among individuals. Its essence is pro-individualism and pro-laissez-faire Capitalism. There is nothing intrinsic to its nature that requires it to be a crony of the State.

But we do not live in free societies. In Crony Capitalism in America, author Hunter Lewis asserts that “cronyism is as old as recorded human history”—which he states is “precisely why the human race has made so little progress in overcoming poverty.” Lewis contends that only in the 18th and 19th centuries were there positive reforms, and only the U.S., Europe, and Japan benefited from such reforms that set cronyism back. How does cronyism set in?

 

Intrusive Lawmaking Co-opts the Corporation to Serve the State

In 1978, professors Jensen and Meckling returned to the theme of voluntary contracting, celebrating the phenomenal economic progress of the previous 200 years, while bemoaning the erosion of property rights. They articulated the root cause of that erosion—Cronyism:

Bureaucrats and politicians can and do use their positions in government to bestow benefits on others, in exchange for votes, for campaign funds, for favors, for job offers, all of which yield benefits to themselves. Revocation and abrogation of rights is the currency in which politicians and bureaucrats deal. Like all of us, they are constantly searching for ways to expand the market for their services. To do so, they must effectively break down the system of private rights because it limits their market. Stability in private rights is, by its very nature, a constraint on what government (i.e., bureaucrats and politicians) can do.

Jensen and Meckling cite the case of Penn Central Railroad, a corporation that in their opinion was forced into bankruptcy by price-fixing and wage-control regulation that violated the prior voluntary contracting. Subsequently, bondholders’ contractual rights to seize assets were abrogated. “Like successful businessmen and successful academics, successful politicians are entrepreneurs, constantly at work marketing their product,” say Jensen and Meckling, illustrating that if a private utility is bankrupted by regulation, politicians declare a “crisis” and come to the rescue with public ownership, new public investment, or heavier regulation. This manufacturing of crises—energy, environmental, unemployment, immigration etc. provides opportunities to expand the role of the State in economic affairs, undermining property rights, investor trust, and creating economic inefficiency by subverting the price system.

Section 10 of Article 1 of the U.S. Constitution says: “No state shall make any law impairing the obligation of contracts.”

And the courts, Jensen and Meckling warn us, have not upheld contractual rights—even though Section 10 of Article 1 of the U.S. Constitution says: “No state shall make any law impairing the obligation of contracts,” and the Fifth Amendment provides that “No person shall be deprived of life, liberty or property without due process of law, nor shall private property be taken for public use, without just compensation.”

Where to, from Here?

Are we now helplessly flung into a chaotic slide of the West into Communism?

Probably not, because, rather than making it infrequent, intermittent, and unpredictable, an absolute violation of voluntary contracting is a road to the destruction of the price system and property rights—and that road leads to the economy of Venezuela. What the really smart politicians want is not a slaying of Atlas, but an incestuous relationship—hence we can predict that the political “Godfathers” will take no more than their “protection” money.

Behind the mask of the sovereign State lie individuals, seeking aggrandizement of their power, wealth, rank, and honor.

Behind the mask of the sovereign State lie individuals, seeking aggrandizement of their power, wealth, rank, and honor. Incapable of running the corporations profitably themselves, the bureaucrats let the producers have a little freedom to compete and produce, as long as they also do the bidding required of them, of being good “corporate citizens.”

It’s beautiful for the aggrandizers, isn’t it? Let them run … but keep them on a long, invisible leash. Not only will they produce goods and services, but they are the perfect “Fall Guys” for the blame game when things go wrong, and they even donate to your campaigns. Indeed, banks, by undertaking widespread “social-justice” home lending, sparked the global financial crisis, and they even meekly took the blame after the State-managed central banks ignited that spark into a raging inferno.

The end-game is not the U.S.S.R., but the new Russia of the billionaire oligarchs feasting on the private sector, granting and receiving favors, setting up an interdependency that the private sector cannot disentangle itself from.

 

Co-opting YouTube and Facebook into Censorship

Neo-Marxist philosophy has been advocated by much of the professoriate since the Sixties. Its new social strand is derived from the old Marxist notion of inevitable class wars, except that it sees these battles everywhere—race wars, gender exploitation, ethnic and national domination, and conflicts over sexuality. The U.N., the EU, and the media are all predominantly neo-Marxist as are most governments. And they need a tactic to bully corporates to be their agents of change without overtly making it appear so.

Is the concept of corporate social responsibility (CSR) a veil for such neo-Marxist intrusions?

In 2015, in his paper titled, “The politics of corporate social responsibility,” (subtitle: “Why Milton Friedman has been right all along”) Professor Marc Orlitzky’s findings were that “the literature review provides empirical support for Milton Friedman’s (1970) claim that the values underpinning CSR are driven by a socialist-collectivist agenda, which is inherently opposed to capitalist/libertarian values of free enterprise and individualism.”

In the 21st Century, the postmodern neo-Marxists also invaded the funds management industry.

In the 21st Century, the postmodern neo-Marxists also invaded the funds management industry. Words like “humane,” “ethical,” or “responsible” camouflage their real motive. Today, money managers are scrutinized for “responsible investment,” by entities that are not their clients, to pressure them into investments that seek “climate-change risk mitigation” and avoid “modern slavery.” ESG (environmental, social, and governance) investing is not a fad, it has $20 trillion allocated to it.

Corporations co-opted into semi-fascism shed their souls. Many also become as two-faced as their sovereign sugar daddies—they proclaim to take pride, not in profits, but in lip service to the green lobby, not in a meritocracy, but in multi-gender representation on their boards and management, not in free speech, but in engendering a narrative controlled by their political masters. But soon, just as Friedman predicted, their own rhetoric traps them.

“Hate speech” legislation has now been passed in several countries.

“Hate speech” legislation has now been passed in several countries, and its effect is to stifle expressions opposed to the U.N./EU’s postmodern neo-Marxist worldview by casting them as fake, racist, or xenophobic. Gatestone Institute informed its readers that “In 2017, Facebook’s Vice President of Public Policy, Joel Kaplan, reportedly agreed to requests from Pakistan’s Interior Minister Nisar Ali Khan, to ‘remove fake accounts and explicit, hateful and provocative material that incites violence and terrorism’ because “the entire Muslim Ummah was greatly disturbed ….”

German censorship laws now require social media platforms to delete any “alleged criminal offenses such as libel, slander, defamation or incitement, within 24 hours of receipt of a user complaint.” French regulators recently spent six months inside Facebook, assessing its hate-speech policies. President Macron now wants more oversight of social media. “Hate-speech” laws can even criminalize people who post information about the atrocities committed by terrorists. Among sovereigns, only the U.S. Supreme Court has thwarted hate-speech legislation’s intrusion into the American legal system.

So the platform providers maintain a right to unilaterally amend the conditions on which the platform is provided to retail clients—precisely to cater for such uncontrollable regulatory risk. In 2019, the EU even thanked Facebook, Google, and Twitter—for “cooperating” to remove “hate speech” from their platforms.

Now put yourself in the shoes of Mark Zuckerberg—it’s co-opt or die.

Now put yourself in the shoes of Mark Zuckerberg, or of the board members of Amazon, or Alphabet (which owns Google, which, in turn owns YouTube)—it’s co-opt or die. Indeed, as Hunter Lewis demonstrates, co-opting often put many corporations ahead of the regulatory curve—the incestuous step-children initiated competition-stifling regulation, and it was marketed by their sugar daddies as “protecting the consumers.” If today’s “John Mackey” wants his corporation to fulfill its corporate mission, not just profit, but getting into bed with sovereigns, is also a means—the Mafia-State’s offer of protection within its “sovereign boundaries” has become economically attractive—symbiotic even.

The Corporation is a device that bolsters the workings of the market, when it’s free. But the corporate device cannot be built to withstand an attack on the freedom of the market itself. Multinationals operate in several jurisdictions, and are subject to intrusive lawmaking that cannot be prevented in unfettered democracies, or in republics with inadequate constitutional protections, or when enshrined constitutional protections are not enforced by the courts.

Only the courts upholding a strong Constitution or an alert, active, and knowledgeable electorate can thwart the State from further encroachment. In the absence of that bulwark, the value and validity of contracts in the nexus of contracts are threatened, and before long, the nexus is subtly, almost unnoticeably, co-opted into a system of semi-Fascism.

The fictional character, Arthur Jensen, was wrong. There are nations and ideologies, and they require corporations, big and small, to heed them.
 

 

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