Corporations as Unelected Governments and the Quest for Economic Liberty

By Jacob Assa

“I hope [that] we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial by strength and [to] bid defiance to the laws of our country.”

-Thomas Jefferson,
Letter to George Logan, November 12, 1816.

Introduction

Neither liberalism nor neoliberalism ensures liberty, and both often work against it. The rise of universal suffrage and political and civil rights in many countries has created an appearance of democracy, but the importance of the economic sphere in the modern industrial world has rendered this noble idea nominal at best. True power lies with the wealthy, and plutocracy may be a better label for our political and economic system than democracy. With this in mind, this paper looks at the role of corporations in the ongoing social struggle for economic liberty.

Democracies have a long history of economic oppression. Greece and Rome, as well as the antebellum United States, had limited democracies (for example, of men only) supported by slavery. Communism boasted economic equality at the cost of political freedom, but it really did not provide other freedoms to people in choosing their occupation, working hours, or work-life balance. Modern capitalism, whether of the European social-market or American liberal-market variety, purports to give people such choices, and uses the ideology of the free market to justify its existence and reproduction. But can there really be economic liberty (in politically democratic societies) without checks and balances on concentrated economic power?

There is no shortage of academic literature or political material on the harmful interference of elected governments, in economic markets. All Republican candidates for the US Presidency this year subscribe to free market goals of making government smaller and of encouraging private enterprise. These have been at the core of neoliberalism since former US president Ronald Reagan and former British Prime Minister Margaret Thatcher came to power over 30 years ago.

What is less attended to, however, is the interference of corporations in our societies and politics, and — yes — in markets themselves. Today’s mega-sized multinationals are a far cry from Adam Smith’s idea of an economy where small producers follow their own interest and end up serving the public good through the invisible hand of the market. Smith’s baker, brewer, and butcher were proprietors or small business owners, and the pin factory Smith described employed ten workmen. Today’s large corporations have all the markings of bureaucratic, economic governments, but without the mandate of a democratic election. They are governments of the rich, by the rich, for the rich, and there is nothing invisible about their heavy hands.

Over half a century ago, in The Modern Corporation and Private Property, Adolf Berle and Gardiner Means presciently described the state-like role assumed by the modern corporation:

There is increasing recognition of the fact that collective operations, and those predominantly conducted by large corporations, are like operations carried on by the state itself. Corporations are essentially political constructs. Their perpetual life, their capacity to accumulate tens of billions of assets, and to draw profit from their production and their sales, has made them part of the service of supply of the United States. Informally they are an adjunct of the state itself.1

The term unelected government has sometimes been used in reference to technocratic entities such as the World Bank, International Monetary Fund (IMF), European Union (EU) and other regional and international organizations. Despite this convention, this paper considers corporations a better fit for the description of unelected governments in a global economy. When comparing government action and corporate action in markets (and politics, it is important to bear in mind that the former is answerable to the electorate at large, while the latter is only to shareholders (and frequently only to a few powerful ones). Given this asymmetry of accountability, corporations can be far more dangerous to the goal of liberty (both economic and political) than democratically-elected governments. Beyond the lack of universal public involvement in corporations, they also are not democratic in nature due to the disproportionate power of shareholders. Furthermore, corporations even interfere in political elections to further cultural or moral goals that exceed their original commercial aims.

Our era is not the first to witness the oppressive powers of corporations. The infamous British East India Company combined cut-throat mercantilism and sheer brutality in its control of Bengal, where the corruption and market-cornering activities of its executives caused the 1770 famine, estimated to have cost 10 million lives. The British East India Company also had the commercial monopoly on trade with the American colonies, and it was this corporation’s tea that was dumped into Boston Harbor on 16 December 1773. As Jane Anne Morris wrote in 2001, “The people who founded this nation didn’t fight a war so that they could have a couple of ‘citizen representatives’ sitting in on meetings of the British East India Company….They carried out a revolution in order to be free of oppression: corporate, governmental, or otherwise.”2 Although government power in this century has been held in check since the end of the Cold War, with the recent rollback of many of the New Deal regulations, such as the repeal of the Glass-Steagall Act’s affiliation restrictions in 1999, corporate power has been rising to take its place and often with harmful effects. Most free-market supporters are unaware that markets do not exist in a vacuum, and that corporations compete with and manipulate governments for economic control. Once again, private corporations have the upper hand, one most definitely visible to those looking for it.

Economic Power

In economic terms, corporations today are bigger than many countries. In the June 2011 issue of Business Insider, Vincent Trivett wrote that in 2010 there were 25 major American corporations that had revenues bigger than the Gross Domestic Product (GDP) of entire countries. For example, “if Wal-Mart were a country, its revenues would make it on par with the GDP of the 25th largest economy in the world [Norway], surpassing 157 smaller countries.”3 Other examples of bigger-than-countries corporations in 2010 include Yahoo!, bigger than Mongolia; Visa, bigger than Zimbabwe; and eBay, bigger than Madagascar.

These sizes give corporations tremendous economic clout on the market for purchasing products such as raw materials, allowing them to squeeze suppliers. This financial capacity also allows for shopping for business-friendly and regulation-light states or countries to operate within, as well for locations with manageable labor forces. Monopsony, a term coined by Cambridge economist Joan Robinson in 1933 to describe this situation, refers to the existence of a single buyer in a market (rather than a single seller in a market, as in a monopoly).4 Think of the company town, where all employees work for the same big manufacturing firm, and they cannot really ‘choose’ other job unless they move because there is only one buyer available for their labor. While manufacturing company towns have lately been on the decline in the US and other industrialized countries, accompanied by a shift toward the service sector, the situation of brute corporate power is still very much present in many developing countries. The recent scandal involving Apple’s FoxConn plant in China, in which 150 workers threatened suicide because of intolerable labor conditions is just one of many examples of how a powerful corporation can exploit workers in a dramatically asymmetrical economic environment.

Taxing Power and Market Distortions

Economic size alone does not make corporations akin to unelected governments. They also have enormous quasi-fiscal powers, using both their spending power to persuade policy as well as their indirect taxing ability. How is this accomplished?

For one answer, we could look to most traditional economics textbooks, which teach students the deadweight loss effect of government taxes. The premise of deadweight loss is that without government taxes consumers pay marginally less than they would be willing to, and producers charge a little more than they would actually settle for leaving both parties ‘surplus.’ Accordingly, the government tax represents a wedge inserted between consumers and producers, reducing both the consumer’s and the producer’s surpluses and wasting valuable resources beyond what the government gains in tax revenue, hence the term deadweight loss. This view has come under doubt from different quarters recently, even on its own economic terms. Recently, for example, economist David George has written that “[t]he view of government as an external, nondemocratic force is best understood as an outcome of the pre-democratic roots of economic thinking as well as the skeptical public-choice view of government as comprising self-interested actors.”5

Nowhere however, is there mention of the possibility that corporations levy a deadweight loss on the economy as well. Even without public market power — in the case of either a monopoly or a monopsony — the process of corporations extracting profits and distributing them to share-holders indicates that there is a surplus which is not divided between consumers and producers (workers), but given to owners. Given the relative magnitude of corporations compared to governments today, the corporate deadweight loss for the world economy seems to dwarf the effects of government taxation. One important difference, though, is that Government tax revenues often are used to pay for public services, and they also are subject to political processes. Corporations, on the other hand, socialize costs — and losses, when bailed out— and privatize profits.

Thus it is far more urgent to look at corporate interference in the economy than it is to squabble over the size of government or its tax rates. We are quietly being taxed by non-elected economic governments and, instead of questioning their right to do so, we shower them with subsidies and protect them from legitimate taxation via our elected governments. Champions of the “private” sector forget to mention that the main beneficiaries of their advocated policies are not individual citizens, but mostly large corporations and their executives. These are neither private in the sense of an individual person, nor truly public as a democratically elected government is intended to be. This ambiguity explains why corporations fall between the cracks in discussions about the (false) dichotomy between private and public, a classification which is a remnant of the Cold War.

In this context, it is also interesting to note that since the end of the Cold War many people consider central planning to be a thing of the past. After all, even the most active fiscal policies in capitalist countries today do not have the same control over the economy as those of communist governments in the former USSR. This evaluation, however, leaves out the fact that corporations are economic central planners. Large corporations today can manage prices, consumer demand, wages, and employment rates. There is very little resemblance between a bureaucratic corporate structure and the heroic image of the entrepreneur championed by Joseph Schumpeter, among others.6

Political Power

In addition to acting as unelected governments and undemocratically allocating surpluses, corporations try to influence our elections, governments and courts. With the advent of US corporate personhood in the 19th-century, “[c]orporate owners were replacing [Alexis] de Tocqueville’s ‘equality of conditions’ with what one writer of the time, W. J. Ghent, called ‘the new feudalism . . . characterized by a class dependence rather than by a personal dependence’”.7 Today’s corporate capitalism combines the wild speculative traits of mercantilism with the tribute-entitlement of feudalism. This might be the worst of both systems as it places profit over productivity and ownership over work.

Besides their meddling in the democratic process, corporations also weaken elected governments’ ability to do their job as mandated by their voters. Reporting on the last World Economic Forum in Davos, David Rothkopf explains how:

…Corporations play nation-states against one another as they venue-shop for more attractive tax or regulatory regimes. This arbitrage undermines nations’ ability to enforce their own laws. Indeed, the rise of big stateless corporations, which now rival many countries in terms of economic and political clout, poses special new challenges to governments.8

Add to this the recent phenomenon of super-PACs channeling huge amounts of money into election campaigns, and it becomes apparent that unelected corporate governments are able to outmaneuver democratically elected representatives,, who once elected, are lobbied and coddled by big businesses, making even the best election process far less meaningful. David Stockman, a former budget director for Reagan, discussed this problem recently in his conversation with Bill Moyers about crony capitalism: “The courtship of politics and high finance have turned our economy into a private club that rewards the super-rich and corporations, leaving average Americans wondering how it could happen and who’s really in charge. As a result, we have neither capitalism nor democracy. We have crony capitalism.”9

Since crony capitalism leaves us with neither a real democracy nor a truly competitive market economy, whichever solution we choose must acknowledge the importance of the economic sphere and its interdependence with the political. Karl Polanyi’s insistence that the economy is embedded in society must be taken seriously, and implemented directly in our democratic process.10 It is not enough to have the right to vote, since unelected governments often yield more power than those we elect (often with the latter’s blessing). We must bring liberty, by checks and balances, to the economic sphere, and only then can we move from a nominal to a real democracy.

From Nominal to Full Democracy

Having surveyed the dangerous political and economic impacts of corporations as unelected governments, the next step is to ask what can be done. Here are some ideas:

  • Reverse corporate personhood: Returning to the distinction between citizens and corporations — the latter an institution of the state produced for the sake of its citizens — would bring back balance and ensure humans are sovereigns over both elected and unelected governments. Corporate charters can be granted for a fixed time period once again, and be subject to revocation in case of abuse.
  • Reform campaign finance law: The McCain-Feingold Bill and other policies point the government to the direction of limiting private donations to election campaigns. This is not an impossible utopic vision, as many countries allow only public funding to candidates, as long as they have a minimum number of signatures.
  • Re-subject corporations to national and international regulation: Globalization does not have to mean economic anarchy. Transnational corporations require transnational institutions to monitor, to regulate and to restrain them.
  • Create stake-holders rather than shareholders: Following the German and Japanese models among others, it might be useful for US corporations to add workers and other representatives to their corporate boards to ensure that the public at large, which includes small shareholders, is not disenfranchised and taken advantage of by a few powerful shareholders.

1 Adolf Berle and Garnier C. Means, The Modern Corporation and Private Property, rev. Transaction ed. (New Brunswick, NJ: Transaction Publishers, 1986), xxxviii.

2 Jane Anne Morris, “Corporations for the Seventh Generation,” in Defying Corporations, Defining Democracy, ed. Dean Ruiz (New York: The Apex Press, 2001), 82.

3 Vincent Trivett, “5 US Mega Corporations: Where They Rank If They Were Countries,” Business Insider (27 June 2011); available at: http://www.businessinsider.com/25-corporations-bigger-tan-countries-2011-6?op=1.

4 Joan Robinson, The Economics of Imperfect Competition (New York: Macmillan and Co., Ltd., 1933).

5 David George, “Is it Time to Bury Dead-Weight Loss?” Review of Political Economy, 24:1 (2012): 1.

6 Joseph Schumpeter, Capitalism, Socialism and Democracy (London:George Allen & Unwin, 1942).

7 Jeffrey Kaplan, “Consent of the Governed: The reign of corporations and the fight for democracy,” Orion Magazine (November/December 2003); available at: http://www.ratical.org/corporations/CotG.html.

8 David Rothkopf, “Fixing Capitalism Means Taking Power Back From Business,” Time Business (19 January 2012): available at: http://business.time.com/2012/01/19/command-and-control/.

9 Bill Moyers, “David Stockman on Crony Capitalism,” billmoyers.com (9 March 2012); available at: http://billmoyers.com/segment/david-stockman-on-crony-capitalism/.

10 Karl Polanyi, The Great Transformation (Boston, MA: Beacon Hill, 1944).