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.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: