When I speak in this book of corporations, I’m speaking of a very
special institution: the publicly traded stock corporation. This is an institution
with a board of directors, a set of executive officers, and a fluctuating
set of shareholders to whom the directors and officers are legally accountable.
These corporations have an explicit mission: to maximize return to stock
owners.
When Adam Smith wrote The Wealth of Nations in 1776, there were barely a
handful of corporations in Britain or America. The dominant business form
was the partnership, in which small groups of people known to each other
ran businesses they co-owned. In the public’s mind — as in Smith’s — the
corporate form, in which managers sold stock to strangers, was inherently
prone to fraud. Numerous scandals supported this view. Yet as the scale of
enterprise grew, partnerships proved unable to aggregate enough capital.
The great advantage of corporations was that they could raise capital from
strangers. In this, they were aided by laws limiting stockholders’ liability
to the amounts they had invested.
In early America, state legislatures retained some control over corporations
by granting charters to them one at a time. Typically, the charter specified
a business — such as building a canal and then charging tolls — that
a corporation was authorized to conduct. The corporation could do nothing
else, and after a certain number of years, its charter expired.
These limitations didn’t last long. By the mid-nineteenth century,
corporations could live forever, engage in any legal activity, and merge
with or acquire other corporations. In 1886, the U.S. Supreme Court declared
that corporations were “persons” entitled under the Fourteenth
Amendment to the same protections as living citizens. In effect, a corporate
franchise became a perpetual grant of sovereignty, with the sovereign powers
consisting of immortality, self-government, and limited liability.
These changes not only gave corporations great economic power; they conferred
political power as well. Unlike average citizens, corporations have large
flows of money at their disposal. With this money they can hire lobbyists,
sway public opinion, and donate copiously to politicians. They can also sue,
or threaten to sue, whenever it serves their needs. The one thing they can’t
do is vote, but with all their extra powers, voting is hardly necessary.
By the end of the twentieth century, corporate power — both economic
and political — stretched worldwide. International agreements, promoted
by the United States, not only lowered tariffs but extended corporate property
rights and reduced the ability of sovereign nations to regulate corporations
differently. In short, what corporations have wanted and largely won is a
homogeneous global playing field around which they can freely move raw materials,
labor, capital, finished products, tax-paying obligations, and profits.
All of this might be well and good, were it not for two things.
* First, despite the Supreme Court’s holding, the modern corporation
isn’t a real person. Instead, it’s an automaton designed to maximize
profit for stockholders. It externalizes as many costs as it possibly can,
not because it wants to, but because it has to. It never sleeps or slows
down. And it never reaches a level of profitability at which it decides, “This
is enough. Let’s stop here.”
* The second difficulty is that these automatons keep getting bigger
and more powerful. In 1955, sales of the Fortune 500 accounted for
one-third of U.S.
gross domestic product; by 2004 they commanded two-thirds. These
few hundred corporations, in other words, enveloped not only the commons
but also millions
of smaller firms organized as partnerships or proprietorships (see
figure 2.1). ... read
the whole chapter
Property rights are useful human inventions. They’re legally enforceable
agreements through which society grants specific privileges to owners. Among
these are rights to use, exclude, sell, rent, lend, trade, or bequeath a
particular asset. These assorted privileges can be bundled or unbundled almost
any which way.
It’s largely through property rights that economies are shaped. Feudal
economies were based on estates passed from lords to their eldest sons, alongside
commons that sustained the commoners. Commoners were required, in one way
or another, to labor for the lords, while the lords lived off that labor
and the bounty of the land. The whole edifice was anchored by the so-called
divine right of kings.
Similarly, capitalism is shaped by the property rights we create and honor
today. Its greatest invention has been the web of property rights we call
the joint stock corporation. This fictitious entity enjoys perpetual
life, limited liability, and — like the feudal estate of yesteryear — almost
total sovereignty. Its beneficial ownership has been fractionalized into
tradeable shares, which themselves are a species of property.
There’s nothing about property rights, however, that requires them
to be concentrated in profit-maximizing hands. You could, for example, set
up a trust to own a forest, or certain forest rights, on behalf of future
generations. These property rights would talk as loudly as shares of Pacific
Lumber stock, but their purpose would be very different: to preserve the
forest rather than to exploit it. If the Lorax had owned some of these rights,
Dr. Seuss’s tale (and Pacific Lumber’s) would have ended more
happily.
... read
the whole chapter