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). ...
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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.
...
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