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Under pressure

– the vital difference between a “firm” and a “corporation”

from Peter Radford

I am learning that it takes a while to come to terms with the trauma of an attempted coup.

Various people are reacting differently depending on their state of mind prior to the attempt.  What catches my eye, given my own perspective on the role of business in society, is the pressure emerging on our large corporations.  Having spent the past few years busily ignoring the moral corruption and ineptitude of the Trump regime business leaders are suddenly trying to appear pious.  Many of them are suspending their support for political groups and individuals.  Others are suspending social media platforms that were used to organize insurrection and ferment violence.

This is all too little too late.

The equivocation that allowed major corporations to support Trump whilst overlooking his manifest moral failings simply so that they could benefit from tax cuts and reduced regulation stains those corporations forever.  It is an example of the transactional thinking produced by a rigid application of the flawed notion of shareholder value permeating the business world.

Let’s set the record straight: corporations are wards of the state.  They exist because the state says they can exist.  That’s what obtaining a corporate charter implies.  Actually it is an explicit, not implicit, relationship.  In return for being given a charter a firm, which then becomes a corporation, commits to providing socially beneficial services.  It is a classic example of a state/private sector partnership.  The charter brings with it a variety of benefits available only to corporations.  So as firms accept those privileges they surrender their market purity: they become hybrids, they become agents of the state.

It is the inability of most economists to understand the vital difference between a “firm” and a “corporation” that has bedeviled the development of our understanding of institutions and their role in mediating transactions in the face of radical uncertainty.  Firms and corporations may look similar when viewed through the narrow lens of economics, but they are very different structures with very different consequences for economic development.

This is not the place to opine further on that difference, except to point out to anyone interested, that, as wards of the state, modern corporations are obligated to act socially responsibly.  That includes not funding politicians who advocate violence or who seek to undermine democratic elections.  So acting responsibly is not some amazing attribute of a “woke” corporation.  It is an expected attribute.  It is something we ought to demand.  Indeed: acting otherwise ought to bring with it the potential loss of the charter that is so central to the corporations survival.

This is a moment when getting rid of our muddled thinking about what appear to be arcane definitions of what a “firm” is becomes vital.  We need to shift this discussion out of academia where it is doomed to wallow in endless hair splitting, and get it into a more open domain where we can build pressure on our corporations to be sensitive to the socio-economic consequences of their actions.

Finally: let’s also be clear.  We have for far too long outsourced swathes of socio-economic policy making to the business sector where a transactional attitude born of a false theory has produced a level of inequality, insecurity, and inequity that has undermined the nation and torn its social fabric wide open.

We need to take back into the democratic domain that policy making so that we can all invest in the outcomes.

So it is good that business is under pressure.  It has run free too long.

  1. Herb Wiseman
    January 13, 2021 at 4:22 pm

    Thanks for this summary. But did this arise when Friedman argued in 1971 or so that corporations do NOT have a social responsibility?

    • January 14, 2021 at 4:27 am

      Dear Herb,

      Peter Radford just argued Friedman’s paper on December 9, 2020 for its 50th anniversary:
      https://rwer.wordpress.com/2020/12/09/the-firm-yet-again/

      This question contains a deep theoretical problem for economics. Please see my comment on December 9 on Peter Radford’s article :
      https://rwer.wordpress.com/2020/12/09/the-firm-yet-again/#comment-175940

      • Herb Wiseman
        January 14, 2021 at 1:26 pm

        Thanks Yoshinori. I saw the original article when it was posted here. I have been opposed to Friedman’s paradigm of capitalist economics since April 3rd, 1976 when I participated in a protest March in Toronto called Stop The Cutbacks. It was around that time that Salvador Allende’s widow was interviewed on the CBC show Take Five with host Adrienne Clarkson who went on to be Canada’s Governor-General. One of my friends was the translator for the show. Forty-five years later after countless demonstrations against the negative effects of Neoliberalism we are still enjoined in that battle but now it is existential.

  2. January 13, 2021 at 11:28 pm

    Thanks Peter. Perhaps also the fictitious ‘personhood’ of corporations could be debunked and over-ruled. According to my reading the US Supreme Court never actually decided on that, in 1886(?), it was a fiction inserted by a clerk of the Court.

    Perhaps because of that the original requirement for social benefit was forgotten or buried.

  3. Blissex
    January 14, 2021 at 5:48 pm

    «as wards of the state, modern corporations are obligated to act socially responsibly»

    This statement seems part of the series “When I become Supreme Commissar Of the People that’s how things will be”. In the meantime in reality many corporations as well as many individuals do whatever they can get away with.

    That is what corporations do is the product not of wishful exhortations about being grateful for the gift of their corporate corporate, but by relationships of actual political power.

    As in JK Galbraith’s notion of “countervailing power” and then there are two cases:

    * Employees and customers have enough countervailing power to push corporations, firms, businesses to “be sensitive to the socio-economic consequences of their actions”, and then whether they must only maximize shareholder value is does not matter.

    * Employees and customers do not have enough countervailing power, and then whether or not some piece of paper says that should not just maximize shareholder value does not matter either.

    That means that distributional issues as to which vested interests have the “right” to which share of the output of businesses, just as those to which vested interest have the “right” to blacklist their opponents, are brutally political questions, not of technical legalisms as to the nature of corporations and firms.

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