The Corporation

The Corporation, by Joel Bakan, is a left liberal rant with some interesting substance beneath it. It discusses the nature and history of corporations, the odd if not absurd rulings that made them, in America, "people" under the law, and therefore entitled to rights under the 14th Amendment, and provides a litany of corporate misdeeds (in my opinion, some real and some imagined) throughout the years. It discusses the very real problem of "regulatory capture", where regulatory agencies that are created to "protect people from industry" end up serving the established interests in that industry to the detriment of consumers, potential competitors, and everyone else, but falsely concludes that more regulation is the solution to this problem. This error is repeated throughout the book, with government recommended as the solution to each and every failure of government stated or implied in the text.

There is, however, some merit from a capitalist and libertarian point of view to some of the arguments made within this book. For example, there is the fact that one of the defining attributes of corporations is the limitation of liability they provide for shareholders. The owner of an ordinary proprietorship, for example, is personally liable for his acts and the acts of his company, just as he would be liable for the same acts were they carried out in his non-working hours. The same is true of a partnership. This is not true of corporations. The liability of investors in corporations is limited to to the value of their investment. This is not much of a problem for companies and people who do business with the corporation. They know about this limitation, and that their potential recovery in suing a corporation are limited to the value of that corporation. This is why corporations are required to put the ubiquitous "Inc" after their name on contracts, for example. But there are people effected by the acts of corporation who do not have any choice. A corporation's externalities, for example, are different from the externalities of a person or an ordinary business, in that even if you sue the corporation, your recovery is limited to the value of that corporation. And since externalities are, by definition, "effects of an act on non-consenting third parties", you cannot choose to have externalities imposed on you only by people and ordinary businesses. If corporations exist, and if they produce externalities, as everyone does, they can impose externalities on you, and there is no way to opt out. This can be considered an initiation of force.

Mr. Bakan goes to great length to point out that corporations, in their single minded pursuit of profit, are inhuman. This is, of course, true. Corporations, legal fictions aside, are not people. He fails to point out that your car, your house, and your dishwasher suffer from the same failing. Corporations are more like machines then like people. His assertion that they are psychopathic, however, does not hold water. Psychopaths are people, and it is reasonable to expect a conscience from people. If they fail to display such, they are defective people, and therefore may be termed psychopaths. However, hammers and bulldozers are rarely described as psychopaths, despite their notable lack of conscience. However, there is a grain of truth in this argument as well. Corporate directors frequently act as if their limited financial responsibility for the acts of their corporation is also a limited moral responsibility. This is false.

So what can we do about the real problems concerning corporations? How would they be handled in my perfect world? Here I differ with Mr. Bakan. In my perfect Libertarian world, there would be no limited liability for corporate shareholders. Instead, there would be insurance companies which served to protect shareholders from liability from the actions of the corporations in which they invested. This insurance could either be purchased by the shareholders themselves, or could be purchased by the corporation itself on their behalf. Thus, those exposed to externalities by corporations would be able to recover their losses from the owners of the corporation or it's insurance company, even if it exceeded the value of the corporation. And stockholders would bear the cost of liability for their corporations, just as they do for their homes and cars. The insurance companies would vary their rates, on a case by case basis, for the shareholders of the various corporations, based on the behavior of those corporations.

I would also return to some of the older rules regarding corporations. For example, I would not permit corporations to own stock in other companies. This is a human right, but it is just that: a human right. There is no reason that companies must own each other, except for the purpose of obfuscation. And obfuscation is the bane of any market economy. Rather than merging companies, there is no reason that a corporation cannot sell it's assets to another, pay off it's shareholders, and cease to exist, rather than selling itself to another company. The main difference would be that the name of the company would cease to exist along with the company, and contracts would not be transferable. It really annoyed me, for example, when Cingular Wireless bought AT&T wireless, and without my consent, I became a customer of Cingular. I did not choose to do business with Cingular, and did not like the way they treated me.

And I would strongly consider returning to the rule that corporations could be created only for a narrowly defined purpose and a limited time. This might entail some loss of economies of scale, but would allow much greater flexibility to investors in choosing which things in which he wanted to invest.

What would the results of these changes be? In my opinion, they would reduce the number and size of corporations by removing one of the primary reasons (if not the primary reason) for incorporating, and by limiting corporations to a single purpose. The only time when it would be to the advantage of investors to incorporate would be when they needed to in order to raise the requisite capital in order to pursue the limited objectives they pursued. Transparency would be increased, as I suspect that insurance companies would be reluctant to insure shareholders of companies which were not forthcoming about their business practices, and willing to submit to inspections by the representatives of the insurers.

The problem that would not be solved by these changes is the problem of externalities. This problem is not specific to corporations, but merely exacerbated by their limited liability. The only solution I can see here is a more complete definition of property rights, and for more things to be privately held. But I will return to that subject in a forthcoming article on externalities.