The Artificiality of Corporations
By Staff News & Analysis - August 23, 2010

The End of Management … Business guru Peter Drucker called management "the most important innovation of the 20th century." It was well-justified praise. Techniques for running large corporations, pioneered by men like Alfred Sloan of General Motors and refined at a bevy of elite business schools, helped fuel a century of unprecedented global prosperity. But can this great 20th century innovation survive and thrive in the 21st? … "Modern" management is nearing its existential moment. Corporations, whose leaders portray themselves as champions of the free market, were in fact created to circumvent that market. They were an answer to the challenge of organizing thousands of people in different places and with different skills to perform large and complex tasks, like building automobiles or providing nationwide telephone service. – Wall Street Journal

Dominant Social Theme: The modern age poses special challenges to corporations.

Free-Market Analysis: There is fairly clear evidence that the rise of the corporation, a basically Anglo-American concept has run into rougher waters in this era of the Internet – as the Wall Street Journal points out. But the Journal for all its skepticism takes the rise of Western corporatism for granted, no matter how many "debunking" articles it presents. Authors may be dubious about whether corporations survive in their current form or not, but ultimately the bigness and intricate nature of such large people-pooling is not really in question and is in fact likely seen as an inevitable evolution of the market.

We are not so sure. It seems to us that a fundamental building block of regulatory democracy is the corporation, and that within this reference the corporation is a kind of artificial construct. We are not necessarily going to get support from formal Austrian economics on this point either. Classical (modern) Austrian perspective seems pro-corporation. Murray Rothbard, in particular, argues that corporations are "free associations of individuals pooling their capital." Thus Dr. Rothbard sees corporations as a free-market solution to various industrial conundrums.

It is certainly an interesting argument, and one fraught with questions in our view. Elsewhere, for instance, Dr. Rothbard and others argue that fractional reserve central banking is a crime. It seems to us something of a tautology that one can issue a proclamation absolving oneself of liabilities in one case, but cannot in another. Here is a larger Rothbard quote on corporations:

It should be clear…that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such men would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk. Thus, the government does not grant corporations a privilege of limited liability; anything announced and freely contracted for in advance is a right of a free individual, not a special privilege. It is not necessary that governments grant charters to corporations. – Murray Rothbard, in Man, Economy & State

Is private fractional reserve banking really a crime? What about letting the market decide things? We would gladly apply Dr. Rothbard's dictum to corporations – let the counterparty decide. But there is a catch. When we look at the history of corporations we see little if no evidence that people dealing in such capital pools voluntarily agree to such terms. From what we can see historically, corporations (with limited liability) have always been the product of some regulatory enabling. Certainly this is the case in America where corporations only really became popular after the Civil War when power generally began to be centralized by the state. Corporations, in this view, can be seen as an instrument of the state, and certainly the penumbra of regulations and laws that support and guide their activities are vast.

A book on the subject, available for free download on the Internet, is called, Gangs of America, The Rise of Corporate Power and the Disabling of Democracy, and is written by Ted Nace. This book traces the rise of corporations and shows how state power has always supported them. It is an unusual book to our mind and fairly well documented with footnotes and a bibliography. It is not just a pile of assertions. Where it falls down, unfortunately, is at the end when inevitably it recommends more government as a cure for what government has wrought. As free-market types, we'd rather go the other way – practicing a judicial disenfranchisement of the corporation and then letting the business model stand (in all its artificial ruthlessness) without state support, if it can.

Certainly, the book documents intensive state involvement in the creation of the corporate model throughout history. Here is how the author describes it: "When we pan in closer with our historical lens, tracing how the institution known as the corporation was constructed piece by piece, the looming shape comes into focus as a specific legal contraption, a thing made of nuts, bolts, wheels, belts, and wiring." While the book goes back thousands of years to trace corporate evolution, we found the chapters on the emergence of the American model most compelling. As with the central bank, it seems that prior to the Civil War the instinct was to rein-in bigness. Here is a description of pre-Civil War American corporate development:

After the (US) Constitutional Convention, the system that emerged for chartering corporations flipped the English system upside down. Instead of the monarch using corporate charters to grant special monopoly privileges to men of wealth, the American system placed the chartering function in the hands of the various state legislatures and placed an emphasis on restrictions and accountability measures, rather than on privileges. State constitutions and statutes reinforced the restrictive stance toward corporations. Under this system, charters tended to be granted sparingly, in keeping with the widespread belief that the potential for corporations to accumulate power rendered them inherently dangerous to democracy.

Not only were pre-Civil War populations suspicious of corporations, we found much evidence in the book of assertions that the Bell has made in the past regarding business practices. It has always been our assertion that without state involvement businesses would be much smaller – and that even industrial development of great magnitude would take place within a flexible arrangement shared among many smaller entities. Here is what Nace tells us: "It is important first to note that the corporate form, characterized by a charter and joint-stock ownership, was not the typical way businesses were organized in the colonies. Most businesses were owned by families or partnerships. They had no corporate charters, nor did they need them. …"

And Nace adds, "In Wealth of Nations (1776), Adam Smith saw the corporation as a decrepit and ill-conceived institution, a remnant of medieval privilege that was too prone to mismanagement to be useful for any but a handful of contingencies. In The Communist Manifesto (1848), Karl Marx ignored corporations altogether. Smith was thinking mainly about the situation in Britain, where virtually all the giant trading companies had collapsed by the mid-1700s. For the most part, the Industrial Revolution in England flourished under quite simple institutional forms, mainly family-owned enterprises, partnerships, and unincorporated joint-stock companies."

We won't rehearse the whole book, but there's quite a lot of information in it. Nace shows that the Revolutionary war's causes, for instance, involved the looming specter of the arrival of the East India Company in the United States. The "Tea Party" was not a symbolic act but a fiercely determined effort to get rid of the tea that the East India Company intended to use as a kind of corporate wedge issue. "In Philadelphia, New York, and Boston, pamphleteers laid out the scenario in precise detail, warning that if the British were to succeed in bringing the tea distribution system under the sole control of the East India Company, they would inevitably repeat the same scheme for other imported commodities."

Thomas Jefferson apparently had no higher admiration for corporations than central banks. "I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength, and bid defiance to the laws of our country," Thomas Jefferson wrote in 1816. It was not to be, of course. Post Civil War, the US Federal government's reach and power began to redefine America's psyche and business operations. Nace summarizes as follows:

For a time, it seemed that America had found a working balance where the corporation was allowed to perform certain functions for which it was well suited, but where corporate political power was kept firmly under the thumb of democracy. Yet as attractive as this finely balanced combination might be, it was not to last. Beginning in the 1850s, and particularly after the Civil War, legislators sympathetic to the wishes of the rapidly growing railroad corporations effectively dismantled the restrictive features of the charter system, replacing it with a non-restrictive system of automatic chartering known as "general incorporation." By the 1880s the old system was in near collapse, and by 1900 it had effectively vanished. A revolution had occurred, a dismantling of a key institutional framework. In its place, a new system was created, a revolutionary reinventing of the corporation. Even today, the impact of this quiet revolution is little appreciated, and the specifics of how it took place are even less understood.

We have nothing against corporations freely conceived and offered. But we would argue that in the current statist environment corporations themselves are, in a sense, another element of state power, just a little further removed than say, central banking itself. These two elements, mercantilist central banking and the judicially-initiated corporation, are important elements of the West's modern sociopolitical and economic structure and increasingly oppressive regulatory democracy.

Inevitably, the power elite can express considerable control through such large organizations and does. Corporations also are primary beneficiaries of central bank money flows and thus benefit inordinately from the current fiat-money environment. There is, as well, a dominant social theme to all of this – that the current system of Western regulatory democracy has evolved as the best of all possible worlds, and this includes the corporation.

There is, in fact, a great deal of secret history when it comes the West's larger financial and political structures. The Internet, fortunately, has allowed us to peel back the mask and gather some facts. When we do so, we almost inevitably find that the flow of history, corporate and otherwise, seems manipulated to benefit the few at the expense of the many. Perhaps we should not be surprised by this evolution, but we are always taken aback by the determination and forcefulness with which it occurs.

After Thoughts

The Wall Street Journal can treat corporations as a given and attempt to offer forward-thinking solutions to the dilemma of corporate bigness. One solution would be simply to remove the intricate web of legal support that surrounds them – in order that they may stand or fall on their own merits. Rather than reinventing corporations as the Journal writes, we would suggest a bit of deconstruction.

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