Chapter 11 - Corporations Suck

 

[I am writing a book and plan to post chapters as I go, here is Chapter 11. I've already posted the introduction and first four and you can start here to read them. I will update with links to the future chapters when they are done.] 

The modern world's view on corporations is split. On one hand, you have the right leaning people that believe in free markets and capitalism that tend to believe corporations are generally good for the world. But they are confused why these corporations always tend to be fairly radically liberal in their charity work. On the other hand, you have the left leaning people that are skeptical about corporations and think they might be taking advantage of people. But they are happy that Starbucks and Chase bank are both supporting the Marxist protests. But whether right leaning or left leaning, unless you are a complete Marxist, you have the sense that corporations are a somewhat necessary part of our economy and culture. 

 But what if corporations are not good for the economy or the culture? What if the Emperor has no clothes? 

I support economic freedom. I support the freedom to do with your property as you want without other people telling you what to do. This is why I support low taxes, low regulations, and oppose socialism. It is also why many would classify me as someone on the right. Until they read to this chapter...I oppose joint stock companies - that is, I think that publicly traded corporations are bad. They are bad for society. We would be better off without them. I love it when the government breaks them up. I love it when the government does things to hurt them.

What is the problem with corporations?

I see two major problems:

1) Limited Liability

2) Owner detachment from the day to day management

Limited Liability

Limited liability is a law that shields the owners of a business from liability for the misdeeds of the business. Although many businesses have this (including much less harmful businesses owned by sole proprietors), it is a law that large publicly traded corporations require for existence. If you buy a stock in General Motors, British Petroleum, or Starbucks, the worst that can happen to you is that you lose the value of the stock. You get a one directional benefit. The stock holders can make billions but they can only lose whatever they own in stock.

If, for example, you are a stock holder in Monsanto (now owned by Bayer) and cause a bunch of people to die and get cancer, you might worry that lawsuits might cause your stock to drop. But you do not need to worry about being personally sued.

But think about the justice of this. You get the benefit of whatever money Monsanto makes. You get none of the liability for the horrible things they do. Now stop and think. In a system where owners have one directional payoffs for taking risks that might harm others, what does this incentivize?

Let's say you are a sociopath and you do not care about people. You just want to make money. And you own stock in ten companies. Each makes chemicals. You have paid $100 for each stock ($1000 total). Each company can grow ten times their stock value by taking risks with the public health. There is a 10% chance that the risk will result in horrible health effects, get sued, and then go bankrupt (costing you 100% of that stock's value). What would you (a sociopath) want those CEOs to do? Let's do the math:

If they all take the risk, nine companies go from $100 to $1,000 in value. One company goes from $100 to $0. You walk away with $9,000.

If none of the corporations you invest in takes the risk, all 10 companies stay around $100 in value. You walk away with $1000.

What do you, the sociopathic stockholder, want? Of course you want them to risk people's health!

And guess what? You are a sociopathic stock holder you just do not realize it. You look at your 401k or your Roth IRA and you look at the balance. You care about it going up or down. If you are diversified, you do not care if any one particular company went bankrupt. You do not worry about lawsuits. You  just care about the total value going up.

You do not need to worry about being personally sued.

The families with dead relatives due to your investment strategy cannot touch your $9000.

This is the effect of limited liability. Of course it is not always death. It can be pollution. It can be selling porn to children. It can be building ugly buildings that ruin a skyline. It can be creating movies that glorify violence. And.... of course... it could be good things. Corporations do plenty of good things. But the sociopathic nature of the system says that the owners of the stock do not care very much about whether the corporation is doing good things or bad things. It just wants the stock to pay off. 

But is this a good system to have? Is this just? Well... if making a profit with limited downside while others bear unlimited downsides (those your corporation hurts) then no it is not just. The very nature of limited liability belies the foundation for western justice. The concept of liability in American law is based on the biblical concepts of liability. One famous passage that speaks to liability and justice comes in Exodus 21:29 when it speaks of the owner of an ox.

Exodus 21: 29 If the ox has a reputation for goring, and its owner has been warned yet does not restrain it, and it kills a man or woman, then the ox must be stoned and its owner must also be put to death.…

The passage is clear that the owner of a beast who kills shall be held responsible for the actions of the beast.But limited liability is a violation of this basic foundation of justice in western law.

Owners detached from management
But you might respond, limited liability is in place for many businesses not just corporations. Why are corporations any worse than any other company. In a sole proprietorship or a small company owned by a handful of owners, there is a connection between the deeds of the company and the owner. No one wants to be Mr. Monsanto. No one wants to sit there and say, "I chose to make money by risking the health of human beings." There is a personal pride or shame attached to the owners of the business. But with publicly traded companies, there are millions of owners and no one person is responsible. The managers can say (rightly), "we were paid to maximize profits." And they are right. Managers are not paid to be nice people. They are not paid to be socially responsible. They are paid to make profits.

Who are they paid by? The owners. Who are the owners? Stock holders. Who are the stockholders? A bunch of sociopathic investors like you and me that just care about returns on investment.

But if I manage the company I own, I can make decisions that reflect how I feel. If I own a small slice of a multi-billion dollar company, I want the managers to try to make as much money as possible.

Spreading out ownership and then making the owners and managers separate people is a sure way to make the company function like a sociopath. Focused on profit. Not caring about anything else.

The patron saint of modern capitalism, Adam Smith, is on my side with this criticism. He famously wrote,

"The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company."

He is, of course, talking about the financial returns and well being of the company. But I think it is clear and obvious that this refers to the moral behavior of the company a well. A manager - disconnected from the owner - cannot be expected to act with the same moral integrity that the owner himself would act.

We now have a nation that is built for corporations. Corporations have lobbyists that bribe and bully politicians. Corporations have marketing budgets to make you like them. Corporations rule modern society. And corporations are sociopaths that are monomaniacally focused on profits without any of the depth and moral concern that your average actual person has.

But you might object to at this point. What about all the charity corporations do? Isn't that proof you are wrong? And I will answer the question with another question: why does the charity work often come with the companies name attacked and why is it so often attached to high profile charities or social justice movements? And why do these efforts often directly conflict with the political and cultural leanings of the very managers directing the charitable efforts? 

The answer is that none of this is real charity. None of it is done with the end goal of helping people. It is all done with the end goal of helping the corporation. Corporations know they have a reputation problem and they know that they need to make loud public charitable efforts. And they need to do it most with the people most likely to hate corporations: the left. The right cheerfully accepts corporations but the left, with its Marxist leanings, tends to be more skeptical. So corporations donate to LGBT activists, Black Lives Matters, and Planned Parenthood. This tends to keep everyone happy enough to avoid boycotts or reputational harm. So that they can sell more stuff and make more profit for the sociopathic stock holders like you and me. 

But it doesn't need to be this way. The first publicly corporations didn't start until the 17th century and corporations did not become a central part of Western economies until the 19th century. And the United Kingdom's Limited Liability Act (imitated throughout the West), that set the stage for the massive corporations of today didn't come about until 1855. Other 19th century acts removed regulations and together with Limited Liability the domination of the corporation grew and grew. In 1855 the culture and the power in society was found mostly in the church and state. In the 21st century would any doubt that almost all the culture and power in society lies in the hands of massive corporations? Unelected. Unordained. And institutionally sociopathic. 

We built this on purpose. Not that long ago in the scheme of things. Was this a good move or a bad move? The question answers itself. What it the alternative? Private ownership. Small partnerships. Family run businesses. Any structure where the owners are responsible for both the reputation and the liability of the company. Which is how almost all businesses were until extremely recently in the history of the West.

Any time traveler coming to the 21st century looking at this world we built would think, "what is with all these giant corporations running everything?" We all merrily accept them. But the emperor has no clothes. It is insanity.

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