Archive | October, 2011


28 Oct

What if the very basis on which every large corporation relied for its social currency was known to be a lie by anyone who bothered to look at it, but next to no-one else really knew it?

That’s basically the scenario I dealt with in the second essay answer to my Law and Society exam.

There is a basic myth on which capitalism is based that is used to communicate the core idea at the heart of the system.

If a person who owns property is ambitious, diligent, smart and hard working in how they develop and use that property, they should be entitled to the benefits of their labours by way of trading the resulting product for a profit in an open market.

This story seems so simple, obvious and over-recited (in one form or another) so as to appear boring,  benign or to have lost all meaning; but this simple little folk story of the man who tills his land while his neighbours sit and watch, is exactly what the modern corporation has abused throughout its development; to such an extent that its own make-up resembles nothing of the hard working property owner from the capitalist fairy tale.

The corporate structure has evolved itself well beyond any credible hint of a constraint by the forces it maintains it must contend with. It has emancipated itself from the “Market” – but keeps the word alive to serve as a the bane it must contend with, like the monster in a children’s bedtime story…..

Does the growth of the large, publicly traded modern business corporation exhibit a progressive emancipation from the constraints of both the law and the market?

The Market:

As corporations grow they are affected less and less by the constraints of the market. It is common knowledge that the market is particularly volatile to small companies which are just starting out. Few even make it through the first year and this is usually down to market pressures. Not being big enough to compete is a mantra which is repeated often when they fail, so at the other end of the scale it could perhaps be said that large corporations are too big to fail [ed. my emphasis added].

The large corporation has a number of obvious advantages when it comes to competing in the market system. Firstly just having more money than its competitors helps in securing more voting rights within the system itself. This means that the company can afford to withstand the pressures of competition or even buy them out which is often the case.

Secondly once a company has exhausted its opportunities for growth it will usually look for opportunities in other markets. By entering other markets it has therefore escaped the constraints of its original market and can continue to bolster its position in the original market as it continues to grow.

Management itself plays no small role in determining the effects of the market. As Chandler put it the visible hand of management has replaced Adam Smith’s invisible hand of the market.

There are many creative ways in which management finds ways to control aspects of a market. For instance corporations may use transfer pricing to move capital to where it is most desirable for the corporation to have it while evading certain production costs elsewhere in the production process. The effect of such a managerial circumvention of the market is to distort each of the Markets which it has operated in, in order to make its end profit.

The large corporation could argue that it is constrained by the market because it does not flourish in all areas. However it could also be argued that the reason the corporation doesn’t flourish in all areas is due, at least in part, to anti-trust, anti-monopoly laws acting in most areas.

Competition buy-out illustrates how a corporation need not flourish in all areas itself, but can acquire smaller companies with success in areas of a market where the corporation could not have gained access to. For instance in the music industry major record labels have tended to buy up the small independent labels catering to niche markets which the major label could not appeal to. In recent years there has been a major downsizing of competition via mergers between the major labels themselves creating less competition – the cornerstone of the market system.

Vertical Integration is another method whereby the corporation can consume other markets and escape the constraints of the market system. Vertical integration is when a corporation that makes one product buys the smaller firms which supply them the goods and services necessary to make their own products. Although this may not have significantly distortive effects on its own market it can have gross effects of the markets in which those suppliers were operating. For instance in 2003 Apple computers bought e-magic, a German software company which made high end audio production software for both the PC and apple computers. Once the merger was complete e-magic was no longer allowed to produce its product for the PC and effectively disenfranchising half of its market. Apple now entirely controls the market for that software and in order to use it the consumer must purchase the much more expensive hardware made by Apple.

A whole other set of major problems in constraining large corporation via the market system were illustrated by Christopher Stone in “Why Shouldn’t Corporations Be Morally Responsible?,” p. 434, in James E. White, ed., Contemporary Moral Problems, 5th ed. Stone believed that people who believe in the market system hold a few ill founded assumptions. They were based around how effective the communication and interpretation of market signals really was in reaching a desired outcome.

First there is the case of a person who is not aware of the fact that they are being harmed by the corporation. Such as when prior to the 1960s, the harmful health effects of smoking were not known so customers could not express their dissatisfaction with the company by boycotting the product.

Secondly, people who are dissatisfied with a corporation do not know where to apply pressure. That although they may boycott the product with which they are dissatisfied, and switch to an alternative they may still be supporting the same company because consumers are generally concerned only with the brand name, not who made it.

Stone’s argument therefore proposes that the system fails in this respect because the signal sent by the consumer is cancelled out by their support of a like product made by the same company. This idea may not exactly stand up under close scrutiny because corporations will usually stop manufacturing products which no-one buys.

Stone’s second example on this point may have more purchase. That some large corporations are so nebulous, a confusing mix of small companies and departments, that it is difficult to discern which point of the corporation to apply pressure to. Even governments have problems doing this.

Stones third example of ill held assumptions of the market systems efficiency is that people are always in a position to apply pressure of some sort to the corporations. The market system does not offer an appropriate negotiating interface where grievances can be communicated. Consider the situation where a corporation may make products with which there is great dissatisfaction in the general populace but the market system fails to offer them a means of sending these signals because the products manufactured are not available to the dissatisfied consumer, for example an aeroplane manufacturing facility which has huge negative effects on its surrounding environment, or a weapons manufacturer.

Stone’s final example of an ill held assumption is that the pressure does not get translated into the right kind of changes. He cited the example of the metal lids on children’s yoghurt which cut their tongues when licked. After the company fielded a lot of complaints they began an advertising campaign on the correct way to use the lids ignoring the fact that “it is easier to change the design of the can than it is to change the natural tendencies of a child.” Eventually the company was forced to change its containers but at what cost to the children.

Stone also points out that when consumer action against a corporation is effective via market signals, it may result in unintended or disproportionate consequences. If a product is pulled it could cost the jobs of hundreds of workers and have little effect on the company itself.

Escaping Legal Constraint.

The very inception of the modern corporation as an unincorporated joint stock company was an act of legal escape. Since then the law has failed to keep up with and sufficiently control its development. Instead it has tended to ratify the developments which the corporate form has undergone under its own steam and claim them as its own, only rarely pulling it up when the unintended consequences are no longer conscionable.

Even this description does not go far enough to explain just how stretched the legislature has been in accommodating the modern corporation throughout its development. The race to the bottom is the perfect example of how governments have used their legislature to attract corporations for their own financial gain. It is also helpful in identifying how governments have become disproportionately influenced by business interests via an array of political pressure techniques at the disposal of the corporate sector.

There has been a constant erosion of the law used to keep corporations from growing too big. For instance it used to be the case that a corporation could not own shares in another company. Since that law was overturned it opened up the market to the possibility of mega-monopolies. Some of the mega-corporations of today would exemplify the examples which law makers had in mind at the time that law was made. The finite lifetime rule in which a corporation had to end at some point (like a trust) would have helped this situation too.

The myth that big business hides behind, that they are analogous to small private property owners, has been used effectively to subvert the law and the public’s general perception about what it actually is. The corporation has been responsible for stretching the meaning of private property so far and so fast that the law has failed to properly adapt to it. Although most critical writers point out this fallacy, the corporations have been successful in perpetuating its acceptance by ignoring the arguments existence.

Also possibly the most common method corporations use to escape the law is to escape the laws jurisdiction. If a country has a legal framework which is no longer favourable to the corporation’s interests, they can simply relocate their operations while still reaping the rewards of continuing the sale of its products in that market.

When this occurs it effectively undermines the governments of such places favourable treatment to the corporations in any case.

Public or Private

26 Oct

I recently visited the University where I studied and gained my Law and Commerce degrees. I wanted to use the internet so I visited the library, sat down at a computer, and tried to login; testing to see if my username and password were still accepted by the system. Low and behold it worked!

Not only was I able to use the internet, my favourite bookmarks from almost a decade ago were still available. More of a suprise came in what was still contained on the server: all of my documents from my last year of study.

I opened a document that was an essay answer to one of my final exams. It was for a paper called simply “Law and Society”, which I always thought was a strange name because the paper dealt with the history of the rise of the corporation and its effects on society. I thought that “Corporation” or “Capitalism” should have appeared somewhere in the title because when I signed up for it I had no idea that the topic would be so focussed on that subject.

In the end it was probably my favourite paper during my time at uni, and one of the most useful in informing my world view. You see most people take the current social structure, where corporations weild so much power, governments give in to almost every corporate whim and most of the populace feel powerless to effect meaningful change in their society, as a given. But the corporation in its current form is really only a new development; less than 150 years old in fact.

Its proliferation and success at achieving its aims for the private investors that its structure services, has had an effect on global society akin to the introduction of a foreign species into a virgin ecosystem. It has thrived to the detriment of all the natural resources that sustained it.

I reproduce the essay answer here for your information. It summarises an important history particularly in the wake of the Global Financial Crisis, and the Occupy Wall Street movement. I also have two other essay answers to the same exam that I will post in the near future because they contain information that I believe everybody should know. I also provide them as background to a future blog on the Occupy Wall Street movement.

Is the large publicly traded modern business corporation better characterized as public or private?


Originally corporations had to be set up by parliament and were limited to carrying out public services. Incorporated joint stock companies allowed private citizens to pool their money to get shares in the joint undivided stock, but a large portion of the profits always belonged to the crown.

This corporate form was most successful during the colonisation period of the 16th-17th centuries when in England the Crown would grant national charters allowing merchants to trade in particular parts of the world. The important aspect of the joint stock company is that it was primarily set up to collect revenue for the crown.

The public purpose of a company was an important aspect from the very beginning. When the parliament incorporated a charter it was always done to achieve some public purpose. Even if the granting of monopolies got out of hand the state maintained the ultimate control over the company.

The thin end of the wedge came when private actors who wished to enjoy some of the features of the corporate form began to take some of its attractive characteristics and put them to use outside of government control and without serving a public purpose. This was the advent of the unincorporated joint stock company.

The main feature which unincorporated joint stock companies sought to approximate was the ability for a number of individuals to pool their money in order to reach greater economic goals than they could separately. Although they appeared similar, in law they were treated merely as partnerships and the owners were still subject to personal liability.

Once the limited liability corporation was really given the go-ahead during the US railroad boom, the corporation really started to take on a life of its own. Limited liability gave the owners of the company a high degree of protection from prosecution in their personal capacity, and publicly traded stock did away with the idea of partnership.

The most significant departure from the corporation’s traditional role in this period was the loss of the public aspect to its constitution and therefore loss of democratic control. Previously under the British system the government had full control over a company’s behaviour, whether it was in its commercial interests or not. Now though the corporation was free to develop on its own.

The Private aspects of the Modern corporation

The starting point for looking at the characterization of the corporation as a private entity is its ownership and control. Because the modern corporation is not owned by the state, or controlled by the state the argument runs that it must therefore be a private entity.

Bowman however believes that although the ownership of a corporation is in the hands of private actors, it is diffused over so many people, and controlled by an oligarchy of managers who are not necessarily driven by personal gains via profit, that the corporation takes on its own political character.

Therefore the question now arises; if it is a body of political power, where does this place it in the public / private distinction?

Traditionally the first argument to be presented that the corporation is public is due to its public effect. Because large corporations are so big and have such a large number of stakeholders a large public effect is inevitable.

Often entire communities are based around the operations of a single company who play a very state like role in many instances. The film “Roger and Me” follows the effects on the community of Flint Michigan which was completely centred around a General Motors manufacturing plant as GM decided to close up shop and leave. Because most of the town worked at the plant when the company left it turned the town into (supposedly) America’s worst place to live. Its public effect was obvious, the unemployment it caused meant people couldn’t afford to pay their rates, property prices plummeted, and the city council suffered a massive loss of revenue because it could no longer claim tax from the company; it destroyed the towns economy.

The leaving of a community does frame a companies public effect quite well, but even in cases where corporations continue to prop up entire communities, they wield so much political power that they can appear to be integrated with local bodies of government.

Another common argument is that corporations exist to provide services for society, and as such they are a public body. Consider the case of a town where its groceries are sold through only one store, a supermarket. When the supermarket set up there had been a number of grocers, but it put them all out of business. One day however the super market chain folds and the supermarket closes leaving the inhabitants of the town without a food supply. Often in such cases the government will have to step in to ensure the supply of goods to the people, therefore fulfilling the public role that the supermarket had filled.

Corporations also conduct state functions. Increasingly corporations are taking over functions traditionally carried out by the state. Either through privatisation or contracting services out. The usual argument given in support of these actions is that corporations are more efficient at carrying out these roles.

The question therefore becomes; what exactly are corporations more efficient at doing? The answer is of course making a profit. In the case of State Owned Enterprises (SOEs) this can work to the advantage of the government when such SOEs do in fact return a profit, but the scope for the benefit of the consumer/ society as a whole narrows.

A capitalistic corporation only seeks to turn a profit by squeezing the resource for as much as they can get. This may in turn afford the state good revenue to put into other areas but at the cost of a cheap efficient service vital to the needs of the public. An Example of this in New Zealand might be the railroads which were sold to private investors in 1996. Each owner would speculate about how much the service and the land which was attached would increase in value and sell it on without maintaining or improving the safety or the service. Eventually the Government had to step in and buy it back because it was too valuable to the public to allow it to continue to erode.

This pattern of governments is becoming more and more common as more and more state assets are sold off. Corporations care little for the public roles they are filling but only the pursuit of profit. When they fail at either providing the service or turning a profit the government is required to step in to clean up the situation or bail them out. In such instances it can leave little doubt that corporations should be characterised as public.

Traditionally big business has been held to belong in two separate compartments. This goes back to the classical liberal stance that the state should not interfere with private property, but as the corporation has developed faster than the State has been able to cope with, it has as we have seen, adopted many of the states functions. Here a tension arises between the private nature of a corporation’s ownership and the public nature of its function.

In “Global Reach” Barnett and Muller illustrate the dichotomy of how the corporation has managed to out-adapt the state in terms of control, political power and acquisition of resources. Corporations have become so efficient in the central planning of their operations that they have gained sufficient political power to gain a strong influence over the state.

At this point it begins to appear that the public/ private distinction cannot be maintained. The State and Corporation have developed so closely and have become so intertwined that their separation may no longer be possible.

The classical liberal maxims got so caught up in what they were trying to achieve that it now appears to be an unsolvable case of wanting their cake and to eat it too. It was fine to keep the state from entering their private commercial affairs, but they didn’t see a problem with trying to influence the state to meet their own ends, or to take on public functions in a profit seeking exercise.

Front On

9 Oct

I am totally baffled by the disgusting quality of Australian television advertising.

I was enduring the long ad breaks they seem to have in this country and couldn’t help but remark at how mind destroying-ly bad the ads were to my 14 year old brother. Being the tack that he is, he pointed out that the reason most of the advertisements in Australia are so bad is because most of them use the exact same production technique of filming the entire ad from a camera placed directly in front of the subject person.

No panning, no profile shots, nothing of the like. A dolly shot? – you must be joking! You are lucky if you are indulged with a zooming shot.

It begs the question what the marketing company’s are paid for by the corporates in this country. The quality of dreck they force viewers to sit through to get to the next slither of programming shows just how cynical the advertising agencies are here. Although it is hard to see where to draw the line between the advertising agency and the client when attributing the blame.

I don’t know if it makes the outlook better or worse whether the corporate client was complicit in filming techniques. Obvioulsy they would have had to give it the go-ahead at some point so lets just say they’re in on it.

But why so many? Where’s the imagination? Advertising agencies have massive departments called simply CREATIVE. I can only imagine the creative department must be the place artistic souls go to die of mediocrity. At least in this country.

I dated a marketing exec from one of the big three advertising agencies for some time so I have a pretty good insight into how cynical an industry it really is. 18 months of being intimately involved with people in the industry did nothing to dispell my Hicksian view of the franchise.

A New Zealand audience wouldn’t have a bar of it. You can bet your bottom dollar ratings would drop through the floor if someone tried to spill that shite into their loungeroom. It got me thinking “What is the difference between NZ and Australia that would allow such a low quality of advertisement to be industry standard”?

I think that that there are probably a couple of interconnected factors at play here. First are the obvious cultural differences, and second is the some degree of social conditioning.

To view Australian television advertising’s lack of diversity, it would help to see why NZ is so much better (please don’t interpret this as a suggestion I think NZ advertising is good! There are varying degrees of terrible).

NZ as a culture has a sense of creativity at its very core. Whether it be in the arts, or making the most from a length of number 8 wire, kiwi’s are creative people and expect, on some level, to be challenged by new ideas. They also bore easily. Given its small population and remoteness NZ has done pretty well in spite of other culture killing factors like – not having any money. As a result New Zealand almost completely lacks a defineable mainstream culture.

Sure commercial radio still plays the same tunes it plays everywhere else in the world; The newspaper runs the same stories in essentially the same format as their foreign counterparts, and TV plays the same episodes of desperate housewives a week after they air in the States – but try and appeal directly to the “Mainstream New Zealanders” for anything and you find them out to lunch. Just look at Don Brash’s 2005 election campaign if you need any proof.

But I digress; What I’m basically trying to say is that if you are being forced to sit through a set of ads to get to the next section of programme you shouldn’t be insulted with a creative and mentally stimulating vacuum for 5 – 7 minutes. It’s cynical beyond words, but if that is the general level of quality that passes for an ad, you can hardly make a complaint to the AMCA.

I suppose the most frustrating aspect of all of this is that we are expected to vote with our remote, and by NOT buying the products in question. The effect of switching the channel and not patronising the companies who’s products are advertised in such a mind numbing fashion, is so far removed from the creatives that make the ads that you can’t really expect the advertising companies to connect the dots; particularly when we’re talking about the status quo. The only way to turn it around is for there to be a significant and prolonged shift in creative style and for that, I’m not holding my breath.

PS: I tried to find some video links to examples of the ads that I was talking about but couldn’t find any. Apparently they’re too inane to even bother posting on youtube.