Corporation Nation-States

british east india company

dutch east india company

The first thing you learn about corporations in law school is the principle of limited liability:  the state trades the benefits of corporate business activities for letting investors off the hook if things run off the rails. The British and Dutch used this concept to colonize the world.

“Back in the seventeenth century, when the British and Dutch were first learning to exploit their overseas colonies, a problem emerged:  people were afraid to finance expeditions because they face jail if something went wrong and they couldn’t repay their loans. The solution these governments came up with was a corporate charter, which limited investors’ liability to the amount of their investment and nothing more.”

The Patterning Instinct:  A Cultural History of Humanity’s Search for Meaning, by  Jeremy Lent (2017). (Except where indicated otherwise, the quotes in this article are from this book.)

Technology hadn’t shrunk  the world yet, so the British and Dutch East India Companies (their flags are above) were granted autonomy to exercise state-like powers, such as the right to impose and collect tax, make treaties, wage war, take prisoners, and carry out the death penalty.

“Before long, though, it became clear that these legal charters created incentive to take inappropriate risks because the potential growth was greater than the downside. In England, after a series of spectacular frauds and a market crash, corporations were banned in 1720. The ban was eventually lifted when the Industrial Revolution generated demand for new investments in railways and other infrastructure.”

Corporate Republic, Wikipedia

Meanwhile, across the Atlantic,

“The political leaders of the United States, aware of the English experience, were suspicious of corporations. Thomas Jefferson wrote in 1815, ‘I hope we shall take warning from the [English] example and crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trail of strength and bid defiance to the laws of our country.’ Accordingly, corporations in America were given limited charters with tightly constrained powers.”

In time, though, American skepticism gave way to the need to finance war and reconstruction, and to carry out the USA’s own industrial expansion. Opportunists again turned to the corporation — much to Abraham Lincoln’s chagrin:

“During the turmoil of the Civil War, industrialists took advantage of the disarray, leveraging widespread political corruption to expand their influence.

“Shortly before his death, Abraham Lincoln lamented what he saw happening with a resounding prophecy: ‘Corporations have been enthroned…. An era of corruption in high places will follow and the money power will endeavor to prolong its reign by working on the prejudices of the people… until wealth is aggregated in a few hands…. and the Republic is destroyed.’”

President Hayes later joined Lincoln in this lament:

“As the nation reconstructed itself, it increasingly fell under the sway of corporate power. ‘This is a government of the people, by the people, and for the people no longer. It is a government of corporations, by corporations, and for corporations,’ lamented Rutherford B. Hayes, who became president in 1877.

“Corporations took full advantage of their newfound dominance, influencing state legislatures to permit charters to be issued in perpetuity that gave them the right to do anything not explicitly prohibited by law. A crucial moment occurred in 1886, when the Supreme Court designated corporations as ‘persons’ entitled to the protection of the Fourteenth Amendment.”

From these contested beginnings came the corporation-nation states which — just as Jefferson predicted — have since gained enough political and economic power to challenge national governments “to a trial of strength” and “bid defiance to the laws” of their countries of origin.

“Around the globe, more and more corporations are beginning to act like governments.

“They negotiate with guerrilla leaders, build roads, and set up schools. Increasingly, they’re setting labor standards in places where nations can’t or won’t.

“There’s only one problem.

“By accepting more social responsibility, they’re taking on more power just as a small but growing backlash against rising corporate power is taking hold in the United States.

“At the heart of this debate lies a simple question: Who should set society’s agenda – big business or big government? How Americans answer that could well determine the future of issues as diverse as campaign-finance reform and antitrust action.”

Rise Of The Corporate Nation-State, (Apr. 10, 2000).

The sheer size of today’s corporation nation states would have been incomprehensible to Jefferson, Lincoln, and Hayes. Consider, for example, this Business Insider article that compares the revenues of “25 giant companies” to the GDP of nations. It found that, in 2017,

  • Walmart’s revenues exceed Belgium’s GDP
  • Volkswagen’s revenues are greater than the GDP of Chile
  • Apple’s revenues in were higher than Portugal’s GDP
  • Amazon’s revenue exceeded Kuwait’s GDP
  • Facebook’s income was greater than Serbia’s GDP
  • Coca-Cola’s revenue was greater than Bolivia’s GDP
  • Visa made more than Bosnia’s GDP
  • Walt Disney’s takings exceeded Bulgaria’s GDP
  • Microsoft’s revenue surpassed Slovakia’s GDP

And so it goes. Even corporations like Netflix, Spotify, and Tesla make the bigger-than-countries list. That’s good for capitalism and capitalists, but it challenges the historical ideal that nation states ought to be in charge of running the world.

More next time.

Homo Economicus [2]

homo economicus

Despite its detractors, the concept of homo economicus is a mainstay of economic theory and policy-making because it has become a cultural myth, and cultural myths hold tight even if they perpetuate societal ill health. That’s is the perspective offered by London economist and Guardian columnist Peter Fleming in his book The Death of Homo Economicus: Work, Debt and the Myth of Endless Accumulation (2017). This is from the book blurb:

“In today’s workplaces we work harder and longer, labouring under the illusion that this will bring us more wealth. As this myth becomes increasingly preposterous, it’s time to understand why we believe in it, and where it came from.

“The Death of Homo Economicus explores the origin of this oppressive myth, in order to destroy it. The story begins with the creation of a fake persona labelled the ‘dollar-hunting man’, invented by economists Adam Smith and Friedrich Hayek. Today, this persona, driven by competition and ego, is used by politicians and managers to draw a veil over the terrible reality of work under capitalism.

“Creeping into all aspects of life, the desire to constantly compete and accumulate must be resisted if we are to create a better way of life for all.”

In this short book promo video, Prof. Fleming challenges the notion that humans are “a money-chasing animal” and that society as a whole prospers when dominated by “self-interested individualism.”  “The [homo economicus] ideal never really gained traction from the beginning.” he says, “because we don’t act as individual self-seeking beings, we live in a society and we live in communities.”

Author and entrepreneur Jeremy Lent agrees:

“Capitalism is based on the premise that the most desirable state of affairs is economic growth, which can be attained most effectively through free markets in which assets are privately owned. Based on this credo, the primary responsibility of government is to provide the infrastructure necessary for the free market to conduct its business with minimal constraints.

“Some important assumptions about human nature underlie these beliefs. Individuals are understood to be motivated primarily by financial self-interest. They are assumed to be rational in pursuit of this goal, and their “rationality” is believed to lead them to act competitively rather than cooperatively in the marketplace.

“Another crucial assumption holds that the aggregation of all these individuals competitively their own financial gain leads to the most beneficial outcome for society.

“These assumptions about human nature are not self-evident truths; however, the money-based system constructed by capitalism encourages and rewards these traits over other traditional, community-oriented values, creating a self-fulfilling prophecy about the nature of human behavior.”

The Patterning Instinct:  A Cultural History of Humanity’s Search for Meaning, Jeremy Lent (2017)

As The Guardian said in its review of The Death of Homo Economicus:

“‘Homo economicus’ is the totally made-up creature who is the proletarian hero of mid-20th-century economics: going about his daily life with unimpeachable rationality, efficiently calculating ways to maximise his self-interest.

“But people don’t actually live like that, as the behavioural economists Amos Tversky and Daniel Kahneman pointed out. It is a refuted model, yet its malign influence persists.”

“Malign” or not, competitive capitalism has become a cultural norm. Again from The Guardian’s book review:

“Our entire lives, [Fleming] argues, have been economified. The ruling narratives of work and commerce hypnotise us into thinking of our very selves as micro-businesses, so that it becomes ever harder to imagine life outside the paradigm of capital investment, productivity and profit.”

Free market champion Mises Institute agrees that economics would be better off if homo economicus went extinct.

“The problem … is that homo economicus is not actually necessary to understanding human behavior or how markets work. In fact, understanding of markets would be improved by not resorting to the homo economicus model at all… because it fails to provide a useful or accurate metric or model for human behavior.

“Thus, Ludwig von Mises noted that the homo economicus model described behavior for only one small type of human action, and failed to account for the behavior of consumers:

‘The much talked about homo economicus of the classical theory is the personification of the principles of the businessman. The businessman wants to conduct every business with the highest possible profit: he wants to buy as cheaply as possible and sell as dearly as possible. By means of diligence and attention to business he strives to eliminate all sources of error so that the results of his action are not prejudiced by ignorance, neglectfulness, mistakes, and the like…

‘The classical scheme is not at all applicable to consumption or the consumer. It could in no way comprehend the act of consumption or the consumer’s expenditure of money. The principle of buying on the cheapest market comes into question here only in so far as the choice is between several possibilities, otherwise equal, of purchasing goods; but it cannot be understood, from this point of view, why someone buys the better suit even though the cheaper one has the same “objective” usefulness, or why more is generally spent than is necessary for the minimum — taken in the strictest sense of the term — necessary for bare physical subsistence.’

“If an economics model tells us very little about consumer behavior, then its value is limited, to say the least.”

The Homo Economicus Straw Man, Mises Institute (Oct. 26, 2016).[i]

Curiously, von Mises’ argument suggests why homo economicus persists in capitalism theory:  it may not describe consumer behavior but it does describe his prototypical “businessman,” who is also his prototypical capitalist.

Continued next time.

[i]  The image above is from this article.