issue thirteen

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(1240 words)
Why Corporations Are Not "Free"
(in any sense of the word)
Andrew S. Taylor
[Updated monthly on the full moon]
THE RECENT FINANCIAL CRISIS has been widely portrayed as a failure of "free-market" ideology. The premise put forward is that the market meltdown resulted primarily from lack of regulation. Without defending the Bush Administration or free-market ideology - neither of which I support - I think it extremely important that we do not misconstrue the history of what has led to the current crisis. It is all too easy to make the current "bad guys" the default scapegoat for all that ails us. If we are naive enough to believe that our problems begin and end with lack of oversight, it is all but inevitable that the same problems will recur. It is not simply a matter of regulation, but of the degree of power we concede to corporations and government in the first place.

It must be understood that mere lack of regulation could never have produced the current crisis. The financial corporations responsible for perpetrating it are creations of the government. The very concept of "limited liability" upon which corporations depend to amass the vast amounts of capital necessary for their enterprises is a legal fiction, invented for the precise reason that it allows the incorporated business to become more rich and powerful than it ordinarily would in a free-market scenario. Furthermore, many additional regulations are required to make such companies publicly tradable and attractive to everyday investors. While there was, indeed, little regulation at the top in recent decades for these businesses and their new instrumentalities, that top rested on a pedestal of privilege and security that could only have been maintained by a powerful government.
This distinction is more than just academic. Many have argued that the financial bailout, like similar bailouts that have preceded it in the past two decades, allows for business to profit from its risk-taking without having to accept the price of failure. This is true, but only half-true, and the half that it leaves out is overlooked at our peril. This is because we are not talking about businesses that naturally arose of their own accord in the first place.
Corporations have, for hundreds of years, served as the private-sector muscle behind public-sector aims. Governments have used the corporation as a tool for economic domination since the days of "chartered companies" like the Dutch East India Company. When a government decides it needs to monopolize a natural resource, obtain and secure territorial holdings, maintain a properly subdued labor-force, or build up its military or industrial base, the corporation is its most effective tool for doing so. This is because real free-markets are often slow and unwieldy, incapable of winning arms races, plundering territories, or establishing world-wide banking systems. Corporations are therefore not a product of the free-market, but rather a means of overcoming it. It is no coincidence that the corporate environment so frequently derided by those who work for them is typified by its anti-individualistic traits, by its dress codes and uniforms, by its strict hierarchies and tight control over internal information. The corporation is the means by which an economic power enacts its will on a national and global scale without the troublesome constraints of democracy and equity, all the while hiding behind the mask of private enterprise.

The goal need not always be so nefarious, of course. In the modern era, the government may, for instance, use the power of the corporation to fund what it believes will be affordable housing, though when such assistance ends up exploiting the very people it purports to help, the hazards of the "unregulated market" become an easy scapegoat.

It is one thing to argue that businesses, created and maintained by individuals without any help (and indeed often much hindrance) from the government should rise and fall on their own merits. But it is another thing entirely to make this argument on behalf of the corporation - a collective entity supported at the expense of every taxpayer. It is the taxpayer, after all, who provides the financial support for the regulatory apparatus which makes the corporation viable. It is time that we acknowledge in our public discussions that large corporations are not mere businesses, and that they do not come into existence of their own accord. If we are to avoid such catastrophes in the future, we must recognize fully and permanently that corporations are created to serve a greater purpose, and that if that purpose does not benefit society, the corporation should be dissolved by the revocation of its charter. This is hardly a "progressive" notion; it merely returns America to its original relationship with the corporation as it existed at the time of our founding.

Contrary to assertions by ideological libertarians, there is no "natural" or Constitutional right to form a corporation. The "freedom of contract" often cited by such pundits was clearly not intended by the authors of the Constitution to extend to the limitless complexity of the giant corporate entities of today, since the founders themselves saw no conflict between the Constitution and the strict limits placed on corporations during the time in which they lived (limits which, quite conspicuously, were not observed by Great Britain, recognized then as a tyrannical power). The phrase "freedom of contract" does not actually appear in the Constitution. What does appear, in the Ninth Amendment, is the dictum that no state shall pass any law "impairing the Obligation of Contracts" (emphasis mine). This was essentially an extension of the ban on ex post facto laws into the civil arena, and its primary purpose was to prevent chartered businesses established by the States from fleecing creditors. It does not follow from this that the government is obligated to enforce any contract entered into by any group of individuals, regardless of complexity or outcome.  

An individual's freedom to bargain for and enter into a contract of their choosing does not translate into a mandate for the government to recognize it. In fact, any contract between individuals, including contractual agreements to limit the liability of investors, is only binding insofar as there is a government to enforce it should a party to the contract default. It is a well-established principle of contract law that the government can refuse to enforce a contract if doing so is too costly, or is detrimental to social policy. While a contract to supply apple-seeds to a farmer needs no more backing than the jurisdiction of a local sheriff or judge, the complex contractual arrangements necessary to support a securities firm are the product of more than a century of legal precedent, and an elaborate regulatory apparatus designed to protect corporate commerce. While a corporation could certainly exist without the support of a powerful state, it would be a mere shadow of its present self. Without the government, such companies could never become the profit-engines that they do.
We should never again be placed in a situation where "the right of the government to interfere" in the operations of corporate entities is placed on the table for discussion. We absolutely and unquestionably do have a right to interfere with them, since we create them and support them in the first place. They must therefore either justify their existence to us by making our lives better, or they must cease to exist. We may base this assertion upon the most sacred contract of all: the social contract between a government and the people it is supposed to serve.


M  C  R

This work is copyrighted by the author, Andrew S. Taylor. All rights reserved.