The Case Against Corporations

Libertarianism within a leviathan state functions not as a governing philosophy, but as a critique of excesses, i.e. the cases in which state power is used in an unusually pernicious manner. These efforts have had varying degrees of success, depending on how well libertarians can convince major party operatives and wealthy financiers of the wisdom of restraining the state on one issue or another. Unfortunately, mainstream libertarians seem to have a blind spot, if not an outright case of political autism, when it comes to corporate power. Free-market conservatives, reactionaries, and traditionalists also view corporations far too positively. Let us examine the history of corporations, construct a case against their existence and power, and offer solutions for reining them in.

History of Corporations

The word “corporation” comes from Latin corpus, meaning “body”. Originally, it was the gods of Uruk that fulfilled the function of imaginary entities that owned property and conducted commerce. Like modern corporations, Enki, Inanna, Lagash, Shurupak, and the other deities of ancient Mesopotamia outlived any human and were not troubled by inheritance disputes, but needed humans to conduct affairs on their behalf. The ancient Egyptians merged this concept with a physical embodiment to create the concept of Pharaoh.[1]

By the time of Justinian I (r. 527–565), Byzantine-Roman law recognized several types of corporate entities, such as collegium, corpus, and universitas. The state itself was considered a sovereign corporation, the Populus Romanus. Smaller municipalities were also categorized as such, along with occupational guilds, political groups, and religious cults. The privileges of these early corporations were granted by the emperor in their charters, such as owning property, making contracts, engaging in commerce, and pursuing legal action.[2] Local governments and religious institutions were also incorporated in medieval Europe for the same reasons. Other forms of organization such as partnerships were offered by common law, which arose whenever people acted together with an intent to profit.

The era of the modern corporation began in the 17th century with the chartered companies that led European colonial ventures in India, the Americas, and elsewhere. The Dutch East India Company (VOC, from Dutch Vereenigde Oostindische Compagnie) was chartered by the Dutch government in 1602 and sold shares to investors, who traded them on the Amsterdam Stock Exchange. The charter granted limited liability to investors and allowed the company to use military force pursuant to its purposes, which it did by defeating Portuguese forces in the Maluku Islands.[3] The English government chartered corporations with a territorial monopoly. For example, Queen Elizabeth I chartered the East India Company of London in 1600 to monopolize trade with all countries east of the Cape of Good Hope.[4] Like the Dutch company, the English company would use force on the government’s behalf, becoming integrated with English and later British foreign policy. The English East India Company would become a symbol of both corporate success and exploitation.[5] Shareholders made almost 150 percent returns in 1711. Its first stock offering in 1713–1716 raised £418,000, and its second in 1717–1722 raised £1.6 million.[6]

However, the apparent success of a similar entity, the South Sea Company, turned out to be illusory. Established in 1711, its monopoly rights to trade with Spanish South America were supposedly backed by the 1713 Treaty of Utrecht. In reality, the Spanish remained hostile, only allowing one trade ship per year. Investors made the South Sea Company immensely wealthy despite the fact that it did no real business. It took on the burden of British public debt in 1717, further accelerating the share price. War with Spain in 1718 cost the company its prospects of trade profits.[7] The Bubble Act 1720, which prohibited the establishment of companies without a Royal Charter, contributed to Britain’s first speculative bubble.[8] South Sea Company shares eventually collapsed from £1000 in August 1720 to under £150 in October, causing many bankruptcies.

Modern Developments

As the 18th century ended, mercantilism was displaced by capitalism and agrarian economies became industrialized. Corporate forms also evolved to be less dependent on state direction and permission. Many business ventures during this time were unincorporated associations with up to thousands of members. Litigation was thus very difficult to coordinate, keeping the courts from being clogged with corporate lawsuits. The Bubble Act was eventually repealed in 1825. In 1844, Parliament passed the Joint Stock Companies Act, which allowed companies to incorporate by registration for only £10 without obtaining a royal charter.[9] Until 1855, company members were still fully financially responsible for their collective actions, but the Limited Liability Act changed this by only holding investors responsible up to the amount of their investment[10], thus allowing the remainder to be externalized to the public.[11] Insurance companies were excluded from limited liability at first, but the Companies Act 1862 changed this.[12] The 1897 House of Lords decision in Salomon v. Salomon & Co. confirmed the separate legal personhood of corporations by affirming that creditors could not sue the shareholders of an insolvent company for outstanding corporate debt. In 1892, Germany introduced the Gesellschaft mit beschränkter Haftung (GmbH), the forerunner of the modern limited-liability company (LLC). These were considered separate legal personalities with limited liability like corporations, but could be owned by a single person.[13]

In the United States, corporations were usually formed by acts of Congress until the late 19th century. The captains of industry therefore made more use of the trust model than the corporate model, under which Rockefeller’s Standard Oil and Carnegie Steel Company became enormously successful.[14,15] State governments had more permissive corporate laws than the federal government in the 19th century, but most were designed to prevent corporations from gaining much wealth or power.[16] In the 1890s, New Jersey and Delaware adopted enabling corporate statutes.[17,18] Around this time, mergers and holding companies led to larger corporations, and governments responded with anti-trust and anti-monopoly legislation. Forming corporations was also made easier in most jurisdictions, though some places had many state-owned corporations that effectively nationalized certain industries. In recent decades, many countries have moved toward privatizing state-owned corporations, though ownership was transferred to politically connected oligarchs in many cases.[19,20,21]

Inherent Problems

The history of the corporate form makes clear the intractable problems of such entities. Fittingly, their roots are in the realm of religion, where fictions that operate on the intersubjective level of human experience have traditionally resided. Formalism demands that official reality should reflect actual reality, which is the first argument against corporations. Physical existence requires a concrete particular form; corporations are defined as lacking this, instead being legal persons without individual humanity. Furthermore, an association of individuals who agree upon a group identity and common purpose may be formed and continued without being accorded special privileges by a state, and power should not do what it need not.

A new set of problems arises when the state takes on a corporate form. For a sovereign to incorporate is redundant, as it already has all of the privileges of a corporation by virtue of monopolizing the legitimate use of force within the territory it controls. For good or ill, it can use its power to declare itself immune from suit and limit its liabilities by debasing currency or declaring a sovereign default. Only a loss of sovereignty from losing a war or sufficiently damaging measures taken against its trade by other sovereigns could force a sovereign to pay its creditors. More generally, a sovereign entity can have no law at all enforced against it except by the previously mentioned means. This is because the very concept of international law is a contradiction of terms; a sovereign cannot be subject to a higher law by definition.

Additionally, for a ruler to invite others to share power in a joint venture is to create offices which will eventually be used for evil ends, regardless of any well-intentioned efforts to create checks and balances. Eventually, these powers will be used to usurp the rights of the ruler and redistribute them. The road from there to democracy and all of its ills is heavily worn and in no need of additional traffic. Once that occurs, politicians can demagogue against the very corporations that the state has empowered to convince voters to support regulations that will increase state power and control over the economy. It is better to nip this recipe for rebellion and totalitarianism in the bud.

There is also danger in any sovereign entity, from private property monarch to nation-state government, granting such privileges to business interests. Corporations become the most powerful and profitable business entities wherever they can be formed without the tight constraints of pre-modern times (and even under those constraints in many cases) because of their ability to capitalize gains and socialize losses. That is, their state-granted privileges allow them to protect their interests by means unavailable to purely private businesses and push the tab for their mistakes onto the rest of society. This has long been a problem with regard to environmental pollution. Recent examples of this that still cause lingering resentment are the various corporate bailouts following the 2008 financial crisis. These privileges and safety nets, combined with their abilities to bribe state officials to regulate smaller competitors out of existence with compliance costs and spend vast amounts of money on political campaigns[22], creates a feedback loop by which economic and political power is centralized into a quasi-fascist oligarchy.

This oligarchic power is weaponizable just like any other power. Once an industry is dominated by only a few large corporations because the state has altered the market to keep any other upstarts from having a chance to compete, it becomes possible to deny essential services to people who are considered undesirable by the elite, such as political dissidents or ethnic minorities. It is here that the political autism of mainstream libertarians manifests itself, as they will defend the rights of business owners to discriminate without regard for context. Corporations, acting at the state’s behest, can effectively force people to stop participating in socioeconomic life by reducing their options and then cutting off those options. Those who lose their stake in society are both at risk of being destroyed by it and incentivized to destroy it in order to create a new system that serves their needs, paving the way for both genocides and terrorist attacks.

Solving the Problem

Fortunately, there are several methods which may be used to confront the problem of corporatism. The initial step is to gain enough political power to turn against them the very legal systems that empower them. Once that is done, the process of eliminating the corporate form may begin.

First, the worst behaviors of overzealous corporate leaders must be curtailed. If a corporation is chartered or registered under the laws of a particular state and that state has a constitution demarcating the limits of its claimed powers, then no such corporation should exceed those limits, for no entity should delegate powers to others that it does not have itself. For example, an incorporated social media firm or payment processor in the United States should be prohibited from banning users who are not breaking laws because of the First and Fourteenth Amendments.[23] Only a purely private business should be able to discriminate in this fashion within territory governed by US law. Because taxpayers are forced to pay for the legal structures that corporations use, any funding grants or bailouts they receive, and any public works they perform, to let the taxpayers be denied service by these entities is doubly unjust. This method could be used against almost all corporations as of this writing, though corporations in countries with unwritten constitutions may be unaffected.

Second, the power to tax and regulate is the power to destroy. Libertarians and free-market conservatives tend to balk at the prospect of wielding this power, but so long as they are unwilling and unable to mount an effective challenge to it, it will exist and be wielded by someone. Progressives have no scruples about using state power to perform social engineering, and the presence of such scruples among their opponents explains much of the current imbalance of political terror. If the goal is to eliminate the corporation and the concept of limited liability, then the taxes and regulations on such companies could be made so onerous as to give them no choice but to adopt another business model. Of course, an adjustment period of perhaps two years would be necessary to avoid unnecessary economic disruption, and carrots for adjusting to a type of unincorporated unlimited liability company with haste could be employed alongside the aforementioned sticks. Once all companies have either transitioned to a new model or failed because they cannot survive under free-market conditions, the doorway back to corporatism can be sealed.

Third, it is necessary to break up the largest and most powerful states. Corporate power is ultimately derived from state power, and a large tree cannot be supported without large roots. In a world of thousands of smaller polities, no governance structure would be powerful enough to grant the dangerous advantages that corporations currently enjoy. Whether by amicable separation, cryptographic disempowerment of states, secessionist movements, or civil wars, the scale of governance must be reduced as much as possible in as many places as possible so as to limit the potential power of whatever corporations survive the purge.

While the plan of using state power against corporations followed by a localization of state power is being carried out, there is an important role to be played by private actors. Technological innovations, such as cryptocurrencies, enable new forms of business organization. These forms should be innovated and developed in order to create more alternatives that can help businesses transition to a model which does not depend on the state. Smart contracts built into blockchains can offer most of the legitimate advantages of incorporation without the illegitimate advantages or negative externalities. Moreover, purely private businesses can be built for the primary purpose of competing with establishment-favored corporations.

Rebutting Objections

One may anticipate several objections worthy of consideration. First, there is the sheer difficulty of the task at hand. Corporations wield immense power, and will exercise that power to defend their privileges. It is true that eliminating corporations will be a daunting task, but that which is created and perpetuated by humans can cease being created and perpetuated; it is only a matter of who has the will to do what is necessary to win. In fact, there was a time when people faced great challenges precisely because they were difficult for the sense of accomplishment and pride in achieving real progress. Doing battle against such a formidable foe may be just the sort of challenge that people need to give their lives meaning and purpose.

Traditionalists are most likely to object that corporations have existed in one form or another for millennia, and are thus a natural outgrowth of governance structures. This is both an appeal to tradition and an appeal to nature. Traditions can emerge in one set of circumstances as a collection of best practices, but be counterproductive in a different cultural milieu. It is also possible for traditions to form not as best practices, but as practices which are just functional enough to avoid being abandoned or as practices which keep a particular group of people in power, regardless of merit. That corporatism seems to naturally emerge from statism and become worse as democracy spreads is not a defense of corporatism, but an indictment of statism and democracy.

Another reactionary objection is that corporations can increase the effectiveness of governance by coupling the efficiency of markets with the functions of government. If governments ruled justly, this objection could be valid, except for the potential pitfalls already discussed. Unfortunately, this is frequently not the case, meaning that entrusting state functions to private actors results in the worst of both worlds: criminality under color of law carried out in service of profit above all else.

Critics from across the political spectrum will likely point out the role of limited liability in encouraging risky but beneficial ventures by protecting investors from losses beyond a certain point. In more modern terms, the absence of corporate privileges can lead to missing markets because of coordination failures that would occur without government intervention. This objection commits the broken window fallacy twice. First, it ignores the coordination failures that corporatism causes by creating negative externalities, thus resulting in missing markets in pollution mitigation. Second, it overlooks the economic activity that could have occurred had chartered and registered corporations not attracted investment capital to them and away from purely private companies. It also fails to interpret missing markets as a market signal that a certain market should not exist. Additionally, reactionaries should understand the shortcomings of basing economic considerations on utility alone, working instead with the principle of sacrifices producing greatness.

From a laissez-faire perspective, the economic growth that followed easing of restrictions on corporations and greater privileges granted to them may seem to prove the case in their favor. This is a post hoc ergo propter hoc fallacy; the fact that an enormous increase in prosperity occurred after limited liability became common and the creation of corporations changed from charter to registration does not mean that the latter caused the former. It is impossible to determine how much of modern prosperity has occurred because of corporations, in spite of them, or because of other factors, such as the exponential growth of knowledge and technology.[24] Of course, any other factors are inextricably linked to corporations. What can be said for certain is that economic growth is not the be all, end all that some capitalists make it out to be. For what shall it profit a people to be physically enriched but morally and spiritually impoverished?

Finally, libertarians will object that state power in general and taxation in particular are morally criminal and should not be used in pursuit of any socioeconomic goal. The political autism of this approach has already been addressed, so let us focus on the particular policies being advocated. The policy of taxing and regulating corporations out of existence is not designed to collect taxes. The idea is to require businesses to avoid the tax by changing their form. If this succeeds, then the economy has been engineered in the direction of liberty. If this fails because businesses opt to suffer through exorbitant taxation and regulation rather than reform, then this gives and advantage to purely private businesses while engineering society against obstinate stupidity. The idea of localizing state power by whatever means are necessary will meet opposition from libertarians who misunderstand the non-aggression principle, but this is resolved by articulating a correct understanding of libertarian philosophy.

Conclusion

The ancient root of corporations is in myths about deities which exist nowhere except in the minds of believers. The current form of corporations empowered by nation-states is only possible due to the monopoly of the state, which is based on aggressive violence rather than any legitimate property claim. While the pre-modern chartered companies were created by more legitimate powers, especially in pre-democratic times, they are still legal fictions that a rational philosophy should oppose. Corporations are therefore incompatible with libertarianism and should be replaced by other forms of business organization, such as common-law partnerships and cooperatives. Recent technological advances offer novel means of aiding this replacement, but turning state power against the corporate power it has created will almost certainly be necessary. Though there will be many objections to such a radical approach, none of them withstand proper scrutiny. Everything that corporations have done that should be done can be performed by purely private companies without the drawbacks of greater statism.

References:

  1. Harari, Yuval Noah (2015). Homo Deus: A Brief History of Tomorrow. HarperCollins Press. Ch. 4.
  2. Berman, Harold Joseph (1983). Law and Revolution (vol. 1): The Formation of the Western Legal Tradition. Cambridge University Press. p. 215–6.
  3. Prakash, Om (1998). European Commercial Enterprise in Pre-Colonial India. Cambridge University Press.
  4. Imperial Gazetteer of India vol. II (1908), p. 6.
  5. Keay, John (1991). The Honorable Company: A History of the English East India Company. MacMillan-New York.
  6. Ibid., p. 113
  7. Carswell, John (1960). The South Sea Bubble. London: Cresset Press. p. 75–6.
  8. Harris, Ron (1994). “The Bubble Act: Its Passage and Its Effects on Business Organization”. The Journal of Economic History. 54 (3): 610–627.
  9. Davies, Paul Lyndon (2010). Introduction to Company Law. Oxford University Press. p. 1.
  10. Mayson, S.W; et al. (2005). Mayson, French & Ryan on Company Law. London: Oxford University Press. p. 55.
  11. “Limited Liability and the Known Unknown”. Social Science Research Network. 2018.
  12. Pulbrook, Anthony (1865). The Companies Act, 1862, with analytical references and copious index. London: Effingham Wilson.
  13. Limited Liability Company Reporter (2001, Jun. 4). “Historical Background of the Limited Liability Company”.
  14. Dies, Edward (1969). Behind the Wall Street Curtain. Ayer. p. 76.
  15. Nasaw, David (2006). Andrew Carnegie. p. 578–88.
  16. Smiddy, Linda O.; Cunningham, Lawrence A. (2010). Corporations and Other Business Organizations: Cases, Materials, Problems (7th ed.). LexisNexis. p. 228–31.
  17. Ibid., p. 241
  18. The Law of Business Organizations. Cengage Learning.
  19. Nellis, John; Menezes, Rachel; Lucas, Sarah. “Privatization in Latin America: The rapid rise, recent fall, and continuing puzzle of a contentious economic policy”. Center for Global Development Policy Brief, Jan 2004. p. 1.
  20. Faiola, Anthony (2005, Oct. 15). “Japan Approves Postal Privatization”. Washington Post.
  21. Megginson, William L. (2005). The Financial Economics of Privatisation. Oxford University Press. p. 205–6.
  22. Citizens United v. Federal Election Commission, 558 U.S. 844 (2010)
  23. Santa Clara County v. Southern Pacific Railroad Co., 118 U.S. 394 (1886)
  24. Roser, Max; Ritchie, Hannah (2018). “Technological Progress”. Published online at OurWorldInData.org.

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