7: Book Review
The perspective of a law professor adds just enough new material to give a fresh and compelling interpretation to issues and events familiar to anyone who has paid modest attention to economic policy fashions over the past half century. This book is a serendipitous complement to The Economics of Innocent Fraud.1 A review of the latter work appeared in the Financial Times on August 12, 2004 under the title of “deceptions for which no one can be held responsible.” After reading this exposition on the corporation a reader may be less than willing to agree that no responsibility can be assigned for the deceptions. Bakan brings a degree of precision without identifying individual malefactors. He manifests no disagreement with Galbraith’s observation that “the corporation…is an essential feature of modern economic life. We must have it.” His book is rather an expansion on the next sentence: “It must conform, however, to accepted standards and requisite public constraints.”
The critical, core concept here is the person status with which the corporation came to be endowed, especially in U.S. law, as the 19th turned into the 20th century. Bakan provides a tour through the legislative and judicial history of the corporation to show that much of the popular economic dogma impaled as innocent fraud by Galbraith is traceable to the success of corporate promoters in persuading politicians and judges to give them privileges that are effectually denied to real persons.
The corporation is not a person, of course. It is instead a socially created institution, quite recent in origin, utterly insensitive to the moral codes and principles out of which laws affecting interpersonal behaviour have evolved. The person parallel emerged from judicial decisions after agitation by corporate promoters had expanded the scope of its legislated privileges. A few decades of experience with the consequences prompted a more apt metaphor in a 1933 decision by Supreme Court Justice Louis Brandeis, who characterized the corporation as a Frankenstein monster. “Corporations, like the monster, threaten to over-power their creators.” Monsters need to be kept on a chain to keep them from causing harm. Since corporations are created by acts of sovereign governments, those governments must regulate them to protect the interests of the people (who are the supposed sovereign in democratic nations). The corollary of the corporation’s birth in a legislative act is that it can also be killed through the same process. That is not a notion that appears often in newspapers, but Bakan’s references demonstrate that legal scholars are thinking and writing about it as an important policy option.
Graphic accounts of corporate misbehaviour are abundant these days, even as we enjoy the apparent fruits of corporate “efficiency” in the production of a rising flood of abundantly affordable “stuff.” Al-though we wouldn’t want to give up the corporation in principle, the good work it does for us comes at a high social cost, for the corporation does all it can to reduce expenses by forcing others to pay them. The “others” include employees, customers, suppliers, innocent bystanders, even shareholders and corporate managers in their roles as citizens and inhabitants of the common biosphere. Abuses of these kinds have long been addressed in economics literature as “externalities.” The difficulty of evaluating their magnitudes to facilitate parallel comparison with internal money savings has made it too easy to dismiss them as “mere” – even if the word is not voiced. In this book, and especially in the film The Corporation,2 Bakan has provided impressive documentation of the high costs we all pay (and that future generations will pay) for the internal efficiencies of the corporation. As Milton Friedman is fond of saying, “there’s no free lunch.”
Bakan demonstrates by extensive presentation of judgments against corporate abuses that they seem virtually immune to condign punishment, even though the penalties imposed might be expected to deter real persons from repeat offenses. Fines and damage awards are accepted as a cost of doing business. The managers of corporations are required by law to make money for shareholders. The list of judgments illustrates the cold-blooded risk analyses that corporations make in determining how many customers and employees they can kill and maim and still come out ahead on a comparison of likely penalties to the known savings afforded by cheap design and lax administration of safety procedures. Executive spokesmen manifest no personal shame in these instances, for it is in fact a requirement of their job. Peter Drucker is quoted as saying that a manager with a social conscience must be fired immediately. It is only when managers defraud shareholders, as in Enron, that they get sent to jail.
In support of his sub-title, Bakan calls on a specialist in psychopathy to witness that the corporation’s institutional character manifests most of the traits of human psychopaths. Fundamentally, that means a focus on the self to the exclusion of all others. Identifying symptoms include irresponsibility – they put others at risk in order to reach their own goal. They are asocial in refusing to accept responsibility for their own actions and are unable to feel remorse. Like human psychopaths they are manipulative and grandiose (we’re the best), relating to others superficially, for “their whole goal is to present them-selves to the public in a way that is appealing…. Human psychopaths are notorious for their ability to use charm as a mask to hide their dangerously self-obsessed personalities.” Corporations present a façade of social responsibility, but it goes only as far as the consequences are good for the bottom line. This behaviour is an inevitable consequence of the corporation’s institutional structure, which impels managements to seek ever more powers by telling ever more lies about the corporation’s aspirations and performance. Even when they undertake “good works” for public relations, a cost-benefit calculus is required. There must be a reasonably foreseeable pecuniary reward.
Government was not always so toothless against corporations as it appears today. The first corporations emerged in England in the late 16th century and by the early 18th had left a trail of scandals and corruption that climaxed in the South Sea Bubble. That event goaded Parliament into passing the Bubble Act of 1720, “which made it a criminal offense to create a company ‘presuming to be a corporate body,’ and to issue ‘transferable stocks without legal authority.’” That prohibition lasted for more than a century. But the industrial revolution was coming on, and the new opportunities for application of non-animate power for transportation and urban infra-structure called for greater pools of financial capital than had hitherto been contemplated (outside of war-fare). Railroad building was the activity that vaulted the corporation into the form and dominance it has manifested for the past 150 years. The critical step in that evolution was the granting of limited liability, which became entrenched in English corporate law in 1856 and in the various American states over the remainder of the nineteenth century. The process speeded up in the two decades at the turn of the 20th century as states began to compete for the corporate charter business by offering attractive privileges, such as no longer restricting the charter to a specific range of activities, and permitting mergers. Those “reforms” sparked a mush-rooming in the scope of corporate organizations and spawned a new industry in shares trading and acquisitions and the financing of these activities. Between 1898 and 1904, 1800 corporations were consolidated into 157, and “the US economy had been transformed from one in which individually owned enterprises competed freely among themselves into one dominated by a relatively few huge corporations, each owned by many shareholders. The era of corporate capitalism had begun.” (And Karl Marx had already been dead for 20 years!)
An important consequence was that shareholders had lost control of the corporations they owned. “Unable to influence managerial decisions as individuals because their power was too diluted, they were also too broadly dispersed to act collectively.” This created a problem for the law, for someone had to act and be held accountable if the corporation was to be able to buy, sell, own and engage in physical acts of creation and destruction. By various legal decisions over time, therefore, the corporation emerged as a legal “person.” “By the end of the nineteenth century, through a bizarre legal alchemy…the corporate person had taken the place, at least in law, of the real people who owned corporations…. Gone was the centuries-old ‘grant theory’ which had conceived of corporations as instruments of government policy and as dependent upon government bodies to create them and enable them to function.” Gone also the rationale for restrictions on corporate behaviour. “The logic was that, conceived as natural entities analogous to human beings, corporations should be created as free individuals…protected by…rights to ‘due process of law’ and ‘equal protection of the laws.’”
With that kind of legislative and judicial backing, the corporation was off and running. It was nonetheless nagged by the “robber baron” image of ruthless monopoly capitalism, and for a long time manifested an attitude of being persecuted by unfriendly governments. Corporations undertook campaigns of public relations to develop an image of themselves as friendly and even benevolent. Excesses nevertheless came in for a considerable share of blame for the Great Depression, and the New Deal initiated an era of reforms that included not only more strenuous regulation but also macroeconomic management by government. The latter innovation was motivated by the conviction of Keynesians that laissez-faire had been given sufficient rope to prove that “equilibrium is blither” (ER, November 2003).
In other words, “the market is a snare and a delusion,” and the “invisible hand” has no grip. In the period of post-war prosperity that ensued, labour unions forced better wages and working conditions, and then there was the sixties wave of “new social legislation” – environmentalism, human rights, worker and consumer safety (Nader!), culminating in the LBJ campaign promise of a Great Society. That was the low point in the govern-ment-business relationship so far as the corporations were concerned, and they mounted a counter-offensive in 1972, setting up the Business Round-table to co-ordinate a lobbying campaign.
Since then there has been a profound change in business-government relations. All major companies now have offices in DC. They won the right to finance elections under freedom of expression provisions of the US Constitution – an extension of the “person” metaphor. Corporations have subsequently effected a near-complete takeover of the electoral process (102-3). This is the end-point of a long struggle to gain freedom from democratic control. They have managed to cut funding to regulatory agencies, gutting enforcement mechanisms, and have succeeded in effecting repeal of several (especially environ-mental) regulations. “Corporate welfare bums” are frequently seen to threaten governments openly – “give us what we want or we’ll take the relocation bonus you already gave us and leave, taking our jobs with us.”
Consequently, it is no surprise to read that “the attitude that business is a victim is basically disappearing,” and that “today corporations essentially feel that they’re partners with government…not adversaries of government…(107). This is a dangerous notion,” says Bakan, “for partnership implies equality. If corporations and governments are indeed partners we should be worried about the state of our democracy, for it means that government has effectively abdicated its sovereignty over the corporation” (108). Deregulation takes away the democratic right of “the people” to control corporate behaviour. The PR campaign against government seems to have persuaded citizens these days that they are unlikely to get effective help from that source, so prominent social activists (he cites Naomi Klein) aim their efforts directly at corporations (150). This is a flawed strategy because it concedes to corporations “all the coercive power and resources of the state, while citizens are left with non-governmental organizations and the market’s invisible hand – socialism for the rich and capitalism for the poor….” (151). Quoting Noam Chomsky: “Whatever one thinks of governments, they’re to some extent publicly accountable….Corporations are to a zero extent. …One of the reasons why propaganda tries to get you to hate government is because it’s the one existing institution in which people can participate to some extent and constrain tyrannical unaccountable power” (152). The bottom line: “Without the state, the corporation is nothing. Literally nothing” (154).
Citizen action to reassert democratic sovereignty is inhibited by the success of a cultural campaign over many decades in the past century to demean and denigrate the utility of government action. The issue is summed up in a statement by Friedman to the author: “The big difference is whether you are really willing to accept the idea that civil servants are pursuing the interest of the community at large, rather than their own self-interest. That’s the big divide. That’s the divide between Galbraith and myself” (117).
Bakan’s assertions are generally documented meticulously. The performance is flawed in one of the very few cases (I noticed no others) where he let his guard down and threw in, anachronistically, the apocryphal anecdote about Charles E. Wilson saying that what is good for General Motors is good for the country.
1. This statement from John Kenneth Galbraith’s Innocent Fraud was quoted in my review of the book (ER, August, 2004).
2. Reviewed by Gordon Coggins in ER this past spring.
– from Economic Reform, September 2004