“Public” vs. “Private” Sector

The distinction between the state, or “public” sector, and the “private” sector economy, is universal in commentary and policy analysis. But in the case of the corporate economy, it’s almost meaningless. First of all, the large corporation cannot be called “private property” in any meaningful sense. And second, the relationship between the corporate economy and the state resembles nothing so much as an interlocking directorate.

1. The idea of the large corporation as the “private property” of its shareholders is, in most cases, utter nonsense. Berle and Means, in The Modern Corporation and Private Property, pointed this out as long ago as 1932. Even right-leaning libertarian defenders of the corporation are forced, against their instincts, to minimize the shareholder’s real ownership ties to the corporation.

The orthodox teaching among Mises’ followers is that of the “entrepreneurial corporation”: the corporation is not a managerial bureaucracy, but a simple extension of the entrepreneur’s will, subject to his absolute control through the magic of double-entry bookkeeping. For instance, in “Sean Gabb’s Thoughts on Limited Liability,” Stephan Kinsella started out by citing Hessen’s defense of the corporation as a simple contractual device by which the owners of capital manage their joint property, no different in principle from a partnership.

But in the same article Kinsella, in order to justify shareholder limited liability, suggested that the difference between shareholder and lender was only one of degree, and that the shareholder was simply another class of contractual claimant (as opposed to residual claimant, or owner). He was forced, in fact, to retreat to an argument very like that of Berle and Means: that the shareholder’s “property” in the corporation is largely fictitious, and that real ownership is associated with control.

What are the basic rights of a shareholder? What is he “buying” when he buys the “share”? Well, he has the right to vote–to elect directors, basically. He has the right to attend shareholder meetings. He has the right to a certain share of the net remaining assets of the company in the event it winds up or dissolves, after it pays off creditors etc. He has the right to receive a certain share of dividends paid IF the company decides to pay dividends–that is, he has a right to be treated on some kind of equal footing with other shareholders–he has no absolute right to get a dividend (even if the company has profits), but only a conditional, relative one. He has (usually) the right to sell his shares to someone else. Why assume this bundle of rights is tantamount to “natural ownership”–of what? Of the company’s assets? But he has no right to (directly) control the assets. He has no right to use the corporate jet or even enter the company’s facilities, without permission of the management. Surely the right to attend meetings is not all that relevant. Nor the right to receive part of the company’s assets upon winding up or upon payment of dividends–this could be characterized as the right a type of lender or creditor has.

In the comments below, he added:

I think the manager is more analogous to a sole proprietor. They have similar control in making policy, hiring and directing employees. You [quasibill] think the shareholder and proprietor have more in common–becuase they are both “owners”.

And in a comment at my blog, he wrote:

It is bizarre that there is this notion that owners of property are automatically liable for crimes done with their property… Moreover, property just means the right to control. This right to control can be divided in varied and complex ways. If you think shareholders are “owners” of corporate property just like they own their homes or cars–well, just buy a share of Exxon stock and try to walk into the boardroom without permission.

In fact even the right to elect the Board of Directors, the only real right of control possessed by shareholders, is largely symbolic. Corporations are generally controlled by inside directors who engage in mutual logrolling with the CEO, and a proxy fight by shareholders is usually doomed from the outset.

The threat of hostile takeover, of which corporate defenders have made so much in their arguments for “a market in corporate control,” was in fact a significant threat only for a limited time in the early- and mid-80s, immediately following the junk bond innovation in corporate finance. Even then, arguably, the hostile takeover was the action, not of investors, but of the management of the acquiring corporation acting in their own interests. In any case, corporate management quickly altered the internal rules of corporate governance to make hostile takeover extremely difficult through such devices as “poison pills,” “greenmail,” and “shark repellent.” As a result, from the late ’80s on, most takeovers were friendly actions, made in collusion with the management of the acquired firm.

The dominant model of MBA behavior since the 1980s, arguably, amounts to management promoting its own interests at the expense of the shareholder: starving, milking, and asset-stripping, and generally gutting the long-term productivity of the enterprise, in order to inflate artificially high short-term numbers, and game their own bonuses and stock options.

That’s why the big retailers have essentially stripped themselves of human capital. Thirty years ago if you walked into a store, you were likely to be served by career employees who knew the product lines and customer tastes inside and out. Today if you go into Lowe’s and need help, the likely response from the minimum-wage high school kid is “I dunno. I guess if you don’t see it, we ain’t got it.” That’s why, when you go into a hospital, your nurse is likely to have eight patients (and your orderly ten, fifteen, or even thirty patients), and you can expect to go five days without a bath or linen change, and shit the bed waiting 45 minutes for a bedpan. And you’d better count on getting an MRSA infection before you get out. An MBA is someone who would break up all the furniture in his house and burn it in the fireplace, and then brag about how much he’d saved on the heating bill this month.

Generally speaking, Michels’ Iron Law of Oligarchy operates in the corporation: corporate management will always have an advantage over those on the outside it allegedly “represents,” in gaming the internal rules to thwart outside control.

To summarize this portion, the corporation in practice is simply a free-floating aggregation of unowned capital, controlled by a self-perpetuating managerial oligarchy which exercises all the material rights of control without ever having acquired an “ownership” right by any legitimate means (i.e., by actually buying into the equity it controls and uses to feather its own nest).

The obvious comparison is to the thousands of industrial enterprises in the Soviet state economy. They were theoretically the “property” of the people or the workers, who exercised no actual control over them. In practice, they were controlled by the upper levels of the Party and state apparatus, a self-perpetuating managerial oligarchy which milked the state economy to support their lavish lifestyle of dachas, fancy cars and GUM department store privileges.

The modern corporate enterprise is not the legitimate property of anyone. It isn’t the “property” of the shareholders at all, in any meaningful sense. And although it’s the de facto property of the managers who loot it for their own benefit, it doesn’t belong to them in any legitimate sense.

2. The boundary between the corporate economy and the centralized state, likewise, is largely fictitious.

If we went back in time seven hundred years, it would be meaningless to ask whether some great feudal lord was a “private” landowner, or part of the state. In that society, the landowning classes were the state, and the state was the landowning classes’ rent collection agency. The great landlords, under the Old Regime, controlled the commanding heights of the state apparatus; the king and his nobles owned the land of the entire realm in feudal legal theory, and used the state’s coercive power to extract rents from the people actually living on and working the land.

Under modern state capitalism, likewise, the management of the corporate economy and the management of the state apparatus consist largely of the same rotating pool of personnel.

A typical pattern is for the same individual to go from being a director or vice president in some large corporation, to being an under-sectetary or assistant secretary or deputy agency chief appointed under some administration, and then back to being a director or senior manager in a large corporation. The interlocking directorate system, that ties together the large banks and industrial corporations, also includes the state. It’s hard not to think of Marx’s catchy little phrase: “executive committee of the ruling class.”

At the same time, the several hundred dominant firms in the corporate economy, and the structure of power they constitute, depend on ongoing state intervention for their continued existence. The state subsidizes their operating costs, to the extent that for many of the Fortune 500 the total sum of direct and indirect corporate welfare exceeds their profit margin; if state subsidies and differential tax advantages were eliminated, they would immediately start bleeding red ink and sell off subsidiary enterprises at fire sale prices until we had a Fortune 50,000. And with the collapse of profitability and share value that would result from the extraction of the government teat, it’s likely that many of those enterprises would be bought up at pennies on the dollar by their own workers, or simply abandoned to workers (like the recuperated enterprises of Argentina).

The stability of corporate oligopoly markets, and the administered (or “cost-plus markup”) pricing that they makes possible, depend on the cartelizing effect of state regulations in protecting the large corporations from full-blown market competition.

This is true, especially, of so-called “intellectual property,” which is the biggest single tool for cartelizing industry. AT&T was built on the foundation of the Bell Patent Association. Numerous industries have created cartels by the exchange or pooling of patents (for example, Westinghouse and GE cartelized the home appliance industry in the 1920s by pooling their patents). The American chemical industry was created almost from scratch during WWI, when the Justice Department seized German chemical patents and distributed them among the fledgling American chemical firms. Alfred Chandler’s account of the dominant firms in the early consumer electronics industry consists almost entirely of which patents were owned by which firm.

The dominant sectors in the global corporate economy depend almost entirely on a business model based not just on copyright and patent ownership, but on the draconian upward ratcheting of IP law under the Uruguay Round of GATT and the Digital Millennium Copyright Act: entertainment, software, electronics, biotech, and pharmaceuticals. They would not exist in a remotely recognizable form without these state-enforced monopolies.

International IP law, specifically the long terms of patents, locks transnational corporations into control of the latest generation of production technology, and effectively relegates Third World countries to the supply of sweatshop labor for Western-owned capital.

Intellectual property plays the same central protectionist role in today’s corporate global economy that tariffs did for the old national corporate economies.

Most safety and quality regulations serve in practice to limit competition in terms of the features covered by those regulations. The minimum standards enforced by the regulations usually become a maximum. Their effect is exactly the same as if all the firms in an industry got together to formulate an industry quality and safety code in order to reduce quality and safety competition to a manageable level, except that by acting through the state they avoid the destabilizing possibility of defection by individual firms. And in practice, safety and quality regulations absolve the corporation from meeting any standard of civil liability higher than the state’s dumbed-down, lowest common denominator regulatory standard. Under the common law of nuisance, as it existed into the early nineteenth century before the courts eviscerated it to make it more “business-friendly,” a firm was liable for any harm it caused–period. Today, if a firm pollutes the air or water in a manner that causes objective harm, but falls within the limits set by the EPA, it can use those limits as a fig-leaf to escape tort liability for the harm it does. Monsanto has attempted to use FDA standards as a club to suppress commercial free speech, arguing that it should be illegal to advertise milk as free from recombinant Bovine Growth Hormone; it is libelous, they say with a straight face, to suggest there is something deficient in practices which fully meet FDA standards.

On the most general scale, Gabriel Kolko argued that it was the Clayton Antitrust Act which first made stable oligopoly markets possible. Its prohibition of “unfair competition” made destabilizing price wars illegal for the first time, and for all intents and purposes placed each industry under a government-sponsored trade association.

The best analogy I’ve ever seen for understanding the close ties between the state and the corporate economy, and their conjunction in a single state capitalist ruling class, was thought up by Brad Spangler, in “Recognizing Faux Private Interests that are Actually Part of the State“:

Let’s postulate two sorts of robbery scenarios.

In one, a lone robber points a gun at you and takes your cash. All libertarians would recognize this as a micro-example of any kind of government at work, resembling most closely State Socialism.

In the second, depicting State Capitalism, one robber (the literal apparatus of government) keeps you covered with a pistol while the second (representing State-allied corporations) just holds the bag that you have to drop your wristwatch, wallet and car keys in. To say that your interaction with the bagman was a “voluntary transaction” is an absurdity. Such nonsense should be condemned by all libertarians. Both gunman and bagman together are the true State.

The implication of this, he followed up elsewhere, is that “the true state is the entire political class, the parasitic net beneficiaries of the coercive apparatus of government.” And more specifically, “corrupt government ‘privatization’ schemes that benefit large corporations are thus seen as mere transfer of assets to a different arm of the political class…” In fact he cited Murray Rothbard’s argument, which I plan to treat more fully in a future post, that corporations that get the majority of their profits from state intervention should simply be regarded as state enterprises and expropriated by their own workers, transformed into genuine private property in the form of worker cooperatives.

Update:  TGGP, in a comment to another thread, posted a link to an excellent piece at 2Blowhards I’d forgotten about:  “The New Class and Its Government Nexus, Part I.” It described the New Middle Class as  a collection of,

financiers, senior corporate and government bureaucrats, and professionals (doctors, lawyers, accountants, etc.), all of whom collect high incomes without being required to put their own money at risk. These people make up most of the people in the top 10% of the income distribution, and a very high percentage indeed of people in the top 1% of the income distribution. (Another, much smaller chunk, of the people in the top 10% and the top 1% are entrepreneurs, who are assuredly not members of the New Class; they are economic experimenters and risk takers, as their high bankruptcy rate demonstrates.)

This ties in with what I said above.  Corporate management, through its control of organizations, collects all the benefits of actual property ownership.  But because what it exercises is mere control over property that really isn’t owned by anybody, it has none of the risk of personal loss that comes from having actually invested their own resources by buying into the property (holding, at best, stock options that are a tiny fraction of the equity they control).

I believe this was one of Mises’ criticisms of the Lange model of market socialism:  the manager of a state-owned enterprise was not a genuine entrepreneur, even when he had administrative incentives to maximize the profits of the enterprise, because all he risked was loss of future income; he didn’t risk the value of the enterprise itself, because he hadn’t invested his personal wealth in it.

This entry was posted on Thursday, March 27th, 2008 at 2:21 pm

Translations for this article:

Anarchy and Democracy
Fighting Fascism
Markets Not Capitalism
The Anatomy of Escape
Organization Theory