One-Arm Bandit Inc.

March 25, 2018

 

Recently, Claire Lehmann from Quillette (@clairelemon) launched an open invitation to tackle polarization via making the best possible case for both sides of a debate. I wholeheartedly embrace her initiative and would like to give it a try with the touchy subject of corporations. Whether paladins of prosperity or bringers of doom, corporations (particularly those of the multinational inclination) leave no one indifferent.

 

Why are corporations such an important subject? Let's put it this way: a few years back a group of complex systems theorists at the Swiss Federal Institute of Technology in Zurich wrote a wildly interesting paper (you can it read here.) They worked with a database of 37 million companies and extracted all the 43,060 multinationals and their linked share ownership. First, they discovered that 1,318 interlocked companies represented 20% of global operating revenues, but, indirectly, through their ownership in blue chip and manufacturing firms, owned an additional 60% of such revenues. Second, when the researchers dug deeper, they ended up with a Leviathan of 147 entities, very tight knit, that controlled 40% of the total wealth in the network. The dangers of this hyperconnection, when peppered with concentration of power, is out there for everyone to see. That was the opinion of a Forbes contributor, who got immediately rebuked by a colleague noting that most of the Top 50 corporations in the list are investment companies, thus their apparent might merely reflects how people invest, e.g. via mutual funds, retirement accounts, etc., instead of some sort of evil plan to take over the world. Weakish argument, mind you, but an argument nonetheless. Look at the ranking below to get a taste of how countries GDP fare when compared to corporate revenues.

 

One side of the debate is, of course, that this a reflection of the values that have made the world extremely wealthy. And it is. The world has seen the greatest poverty reduction in human history. There are several theories about why that occurred but it is undeniable that a key role has been played by scientific progress and increasing trade, trends which are harnessed and boosted by the efficient pooling, management and investment of capital through the corporate form. When 42% of the world lived with less than 2 dollars a day back in the 80s, today it is 10%. And other benefits come with that, such as halving the rate of infant mortality in the past 25 years, the average life expectancy going from 52 to 72 years old in just five decades, or the primary school completion rate going from 74% to 90% in approximately the same time frame.

 

Even in something as polemic as the cost of progress to the environment there are arguments for both sides. The Club of Rome doomsayers said in 1972 that, by now, we would all be wandering in a deforested world and drinking acid rain. But it isn't so. Of course, corporations have been at the center of true environmental catastrophes, from the Bhopal disaster to the Exxon Valdez spill. Nevertheless, here's an amazing piece of info that definitely merits further research, i.e. the scarcity of a good determines its price, right? Well, if natural resources would be decimated by now (as predicted 46 years ago) their price would be stratospheric. But that is not the case. In five decades of tracking the price of a commodities basket, the World Bank data shows that they are, instead, cheaper both in absolute and relative terms. When they did their alarmist linear analysis in The Limits to Growth, the Club of Rome people did not factor in the tremendous innovative spirit of humans. And the key word is innovation, indeed.

 

Nobel prize winner Nicholas Murray Butler, who heralded the epoch of bureaucrat-infested universities, speechified once that the limited liability corporation is the greatest single discovery of modern times, even above steam and electricity. And make no mistake, there's a good case for the West becoming the greatest civilization that ever existed thanks to the limited liability company. But to call it a "discovery" or, as Butler said, something existing out there as an economic law based on everlasting human nature, is a stretch. An invention? Yes, absolutely, but there's nothing natural about the limited liability company. Conformity and, thus, gathering in groups, is as human as dipping Doritos in guacamole, so groups of people doing stuff together in an organized manner are a given. However, the modern corporation as we know it has had a complex and zigzagging gestation, birth, and adolescence.

 

You see, the Romans knew how to groove when it came to the law. Their body of rules is a marvelous example of a society preoccupied with the challenges of an expanding empire while maintaining the identity of their founding myths and traditions. Peter Temin, one of the best economic historians (in my humble taste) wrote a wonderful book in which using mathematical pyrotechnics and heaps of common sense, makes a case for the Roman market economy being the size of the Dutch one in 1600. The Romans were brilliant... and ruthless. Contrary to classicists' opinion that the Romans saw commerce as lowbrow, their most notorious orators were involved in it and the laws of the land adapted as good as they could to the vagaries of trade. What they did not have, though, was the concept of a different person with limited liability, as the modern corporation, but, instead, as in the peculium, they understood that if one gets involved actively in an activity, the benefit of limited liability is forfeited. One exception was the societas publicanorum, a distinct legal person with limited liability, similar to what today is the company. However, it was used exclusively for projects deemed too heavy on investment and risk but that were key for the social good. Sadly, a lot of vestiges from those years didn't make it until today and precious little remains on this legal form.

 

The Romans were so influential that their ideas and concepts lasted for thousands of years after their fall. The change took place only in the Middle Ages, when Pope Innocent IV performed one of the most audacious sleights of hand in legal history. He decreed the concept of fictitious person and, with it, changed the world forever. To put it in context, you must picture what Europe was in those days. Compared to the Islamic world and the Chinese, who ended up being badly impaired by the horrific empire building of the Mongols, mind you, Europe was quite backwards. It wasn't a unitary, well defined concept but, instead, a fragmented collection of fiefdoms, principalities, and loose territories. What kept Europe more or less glued together was the Catholic church and its marvelous bureaucratic machine. The doctrine and the Church's tentacles were some sort of nervous system extending throughout the land, but it was a fragile one due to the vast amount of properties owned through an institution formed by humans --you know, those who eventually die.

 

The doctrine of the 'persona ficta' split the mystical 'body' from the natural 'body', solving many issues in one go, both doctrinal and practical. And, not only that, but it spread to political bodies, cementing the concept of sovereignty and eventually making Europe the forefront of modern civilization. If the people who form a 'body' are its lifeblood and unite under an concept that transcends the earthly existence of humans, the vested authority can go on permanently without reference to he who occupies the leadership position. For the Church, it allowed to own property regardless of who sat at the throne of Peter. For Europe, it meant States, their power emanating from the people and going on regardless of who ran the show. This was an interesting leap for the corporation (a corporeal existence after all), when the innovation linked to the Romans' conception of the societas publicanorum. The first corporations were created via a royal charter and, thus, allowed investors to enjoy limited liability, but it was the people (through their monarch) who granted the charter, thus meaning that the corporations took on enterprises that were considered for the good of the nation, e.g. colonize the Alaskan wild, searching for spices in the Orient, etc.

 

Enter the 1800s. In those days "hiding" behind a corporation was shameful. People thought that only those who were up to no good needed to do business without putting their reputation and entire patrimony at risk. At best, when people pooled efforts to do business, it was through a partnership, a "purer" legal form if you may. It didn't shield anyone involved from liability and it depended on the involved parties remaining together for it to go on. But other countries were starting to offer limited liability elsewhere and in Britain, the nascent industrial powerhouse of the world, the members of Parliament were worried about investment going elsewhere. I like to call this the "race to the bottom" birth of the modern corporation. When the company was allowed to happen without involvement from the monarch via a charter, and anyone could enjoy from limited liability, it wasn't an instant success. People, as said, were embarrassed to hide behind a legal device when, by doing business, were asking others to trust them. But, as all good things in life, it eventually caught up. And Europe became the greatest civilization humanity has ever seen. Pooling of capital allowed for railroads to crisscross the land and today permit other outlandish projects like going to Mars or tweaking the human genes.

 

But there's the other side of the story. Perhaps internalizing the transaction costs of doing business inside a firm, instead of the open market, makes for a solid case. But if you would see what corporations are used for today the reality is that the world would be in a constant revolution. And not a nice one. When one thinks of corporations it is not only the behemoths with thousands employees, adventurous plans, and a spillover effect on their communities. It is about completely empty shells deployed throughout several jurisdictions and readily available for financial wizardry. Trillions of dollars are funneled out of the reach of communities through tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low tax jurisdictions where no economic activity takes place. Entire societies have collapsed due to financial shenanigans, both legal and illegal, and the common denominator is the creative usage of the corporate form.

 

But this is where both positions collide. I like the term coined by Professor Dine, from Queen Mary University of London, to refer to companies. Prof. Dine calls them "moral deflection devices" because, by separating us from the consequences of our actions, they allow people to vilify them while, at the same time, enjoying the fruits they provide. Look at the Riot Hipster in this photo, for example. Not only this guy is, evidently, a massive douche, but he also symbolizes what Prof. Dine is talking about. Where else can you find a protestor "fighting the power" and attacking corporate greed all the while he's taking a selfie with an iPhone? They have a point, though. At the same time that material wealth has soared in the past century, the world is bereft of social cohesion. We're poisoned by skyrocketing divorce rates, teenage pregnancy, decreasing educational quality, violent crimes, and suicides. Furthermore, the massive amount of wealth created coexists with a historical income inequality, measured best by the Gini coefficient. Now, inequality is a normal feature of nature, for we're all different and, thus, it is bananas to even dream that we're all going to achieve the same outcomes. In the research by Starmans, Sheskin and Bloom, it is very clear that humans don't mind unequal societies but loathe unfair ones. And what the Gini coefficient is showing is that people are starting to mind inequality because it is too much and, perhaps, they think, originated not by honest hard work but by other means. People don't mind their income and consumption in the abstract but relative to others. Think of Mark Zuckerberg suing Hawaiians in order to get his dream plot of land, plus the massaging of corporate accounting by the Enron buccaneers, plus the subprime crisis. It is just too much. The abuse of the corporate form and the riches it has afforded, coupled with the sheer douchebaggery of its beneficiaries, has peaked.

 

So, the first thing that both sides of the debate ought to recognize is that this isn't a black and white issue. And, second, that there is no chance in hell that anyone can have the moral high ground. Those sanctifying corporations as epitomes of the free market miss the point that corporate might comes, partially, from the state subsidies of personhood and limited liability --which aren't possible to achieve through private contracting. And those demonizing corporations benefit from them too and, frankly speaking, aren't willing to let go of the comforts achieved through them. I like to think that this is an issue of wanting one's cake and eat it too. Everybody wants to live well but isn't willing to assume the cost, and the candle is burning from both sides.

 

Such a situation wouldn't be possible if one of the sides would be 100% in the right. I don't know what the solution could be, but what I do know is that a solution won't be found unless both sides get together and listen to each other's concerns. Until then, get ready for more laissez-faire paladins and occupy whatever, both suffering from a severe case of cognitive dissonance.

 

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