Modern Corporations are Not as "Free Market" as We've Been Led to Believe

When you think of "free markets", you think of the corporation, right? Of course, the corporation is the quintessential attribute of the free market, isn't it? I've become surprised to find out that corporations in the modern United States are nothing like they used to be--back when they really did contribute to a free market.

In the fourth chapter of his very enlightening book, When Corporations Rule the World, David C. Korten describes what the ultimate free marketeer, Adam Smith, thought of what corporations had become in the Europe of the 1770's:
Adam Smith saw corporations, much as he saw governments, as instruments for suppressing the beneficial competitive forces of the market. His condemnation of corporations was uncompromising.

...The Wealth of Nations and the signing of the U.S. Declaration of Independence both occurred in 1776. Smith and the American colonists both shared a deep suspicion of both state and corporate power.

In the young American republic, there was little sense that corporations were either inevitable or necessary. Family farms and businesses were the mainstay of the economy, much in the spirit of Adam Smith's ideal...
It was corporate monopolies issued by the British government that so riled the American colonists that they ultimately secured their independence from "The Crown."

As a natural result, the fledgling United States

The limitations placed on the early American corporation were a blueprint of the hatred the new Americans had for English corporate empire. Now, jaded as we have become, we have adopted exactly their sinister anti-free-market practices and allowed them to be practiced by our most elite, who use their advantage as a bludgeon to further separate themselves in wealth from the rest of us.

abhorred corporations as now constituted in...the United States.

Early U.S. Corporate charters limited the ability to amass personal power. Members of the corporation were liable for all debts incurred by the corporation. Corporations were chartered for very prescribed purposes and for a limited number of years, and they could be revoked by the state courts and/or legislatures. States were able to limit corporate rates of return. Juries were allowed to assess damages for corporate-caused harm.

The Federal Government could not and did not issue corporate charters. Chartering of corporations is not listed in the Constitution as an authorized function of the federal government. This was affirmed by the 1855 Supreme Court case, Dodge v. Woolsey, which stated that
...combinations of classes...united by the bond of a corporate spirit...desire limitations on the sovereignty of the people [through corporations]. But the framers of the Constitution were imbued with no desire to call into existence such combinations.
This bedrock principle began to crack

Early U.S. Corporate charters limited the ability to amass personal power. Members of the corporation were liable for all debts incurred by the corporation. Corporations were chartered for very prescribed purposes and for a limited number of years, and they could be revoked by the state courts and/or legislatures.

during the disorder caused by the Civil War. Large companies that had been made rich through the supply of armaments to both sides of the great conflict were able to buy off a plethora of legislators in the Charge of the Corporate Light Brigade. Initial corporate inequities arose when conflicted legislators granted the war tycoons massive moneys and lands to expand the Western railroads (the railroad was not in and itself a bad thing, but it was bad in the way that its construction ultimately occurred).

This transformation had begun just prior to Abraham Lincoln's death. He observed the phenomenon enough to note that
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.
Rutherford B Hayes who came to the presidency by secret negotiations in 1876, ultimately saw the problems of corporations. He said:
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.

For a while, citizen groups were able

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.


--Abraham Lincoln

to persuade state courts and legislatures to revoke charters of overweening corporations. Gradually, however, the monopolists were able to buy off state legislatures and change the laws governing corporations. From this time, laws began to grant limited liability and perpetual corporate charters. As Korten states:
Corporations soon had the right to operate in any fashion not explicity prohibited by law.
And that, in a nutshell, is how previously limited operations became corporations that now have taken on the personalities, but not the risks, of people. That, also, is how we have gradually become used to the unwholesome concept known as "too big to fail".

And that, in a nutshell, is how previously limited operations became corporations that now have taken on the personalities, but not the risks, of people. That, also, is how we have gradually become used to the unwholesome concept known as "too big to fail".

The modern corporation--how else could we have come to a near consensus that government handouts are legal to give to gigantic automobile manufacturers? How otherwise would bankers be able to garner boatloads of fiat money without losing their corporate charters from a federal government that has no Constitutional authority to grant their charters in the first place, let alone give them any "free" money?

The limitations placed on the early American corporation were a blueprint of the hatred the new Americans had for English corporate empire. Now, jaded as we have become, we have adopted exactly their sinister anti-free-market practices and allowed them to be practiced by our most elite, who use their advantage as a bludgeon to further separate themselves in wealth from the rest of us. As a natural result, we have become the equivalent of the English monster we sought to destroy.

Should we really be surprised now that our modern-day pied pipers are leading the world into economic ignominy?




Comments

  1. "Members of the corporation were liable for all debts incurred by the corporation."

    I like that - definitely a far better way of doing things than bail outs and what is ultimately a socialist system for the corporate elites.

    Excellent Post!

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  2. I'm glad you're enjoying the book. I agree that it is incredibly revealing. I'm bothered when people talk about private property rights when defending corporate interests: The entire purpose of the modern corporate charter is to gain an exemption from private property, free market laws. After all, the essence of incorporation is the elimination of liability of the incorporating members for the actions of that corporation. How is that "free market," where you deal with the consequences of your actions? Too many free market advocates don't understand this fundamental flaw in their defense of corporate actions.

    Conservatives like to talk about the dangers of government which is too big. I don't understand why they don't similarly worry about the danger of any other "big" organization, such as the corporation. If you don't like bailing them out when they are "too big to fail," why give them the power to grow so big in the first place? How can we expect them to do anything other than corrupt local governments (the corporate welfare issue we've discussed before) when they are far more powerful than those local governments?

    We absolutely need to rein in and diminish the corporate entity in the U.S. (and world) if we are to restore any sense of economic sanity.

    Korten's second book on the subject is The Post Corporate World. Mostly it reiterates the ideas of When Corporations... But I would recommend you read the preface of the book. In it, he makes an interesting analogy between capitalism (which he differentiates from "free market" theory by its adherence to corporatism) and cancer. I'd love to hear what you think about that concept.

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  3. I was struck by the term "combinations" in Dodge v. Woolsey and Lincoln's use of the term "corruption in high places."

    Making the gain of an organization private while making some or all of the risk of that same organization public is a gross injustice. This same principle should apply to individuals.

    Still, Lincoln foresaw wealth aggregated in the hands of a few. Today we have the broadest investor class in the world. While extreme wealth (more than anyone could possibly enjoy in a lifetime) is certainly aggregated in the hands of a few, wealth is spread far more generally than it was in Lincoln's time.

    Along with that, risk has been broadly spread as well. That's why pretty much every investor has seen a significant drop in portfolio value over the past 16 months.

    While owners of corporations should be liable for corporate debt, I completely disagree that government has any legitimate authority to limit corporate rates of return. UNLESS the corporation has accepted public favors (i.e. special tax treatment, infrastructure, etc). Then the corporation has by default accepted government as a partner and must accept the limitations it imposes.

    The real problem, as you allude to in your post, is that corporations seek for and get government favors and rule changes that benefit them, when government should be in the business of working to keep a level playing field.

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  4. Hey, a buddy of mine told me to read this entry and I gotta say, thanks. Not only for what you wrote, but that it's on an LDS blog.

    @derekstaff

    I'll never get the "conservative" v. "liberal" thing. Conservatives worry about big government but generally think these monster corporations are good. Liberals fear these huge corporations and so the solution is... have them merge partially with the government to form a single huge corporation?

    Large things are inherently dangerous and inherently corrupt.

    @Reach Upward

    "I completely disagree that government has any legitimate authority to limit corporate rates of return."

    A corporation is a government creation, plain and simple. While I would say I agree with the spirit of what you're saying, forming a corporation is not a right, it's a privilege. The state can impose pretty much whatever limitations and taxes it wants to. Nevada, for instance, has a booming market for people to incorporate because it's cheap, the restrictions are lax and it doesn't share information with the IRS. It becomes a selling point of the state and encourages business here.

    It's the kind of thing local governments need to fine tune according to their needs. Corporations are benefits though, not rights. You have no inherent right to most of the protections and privileges offered by a corporation. (And on top of that, in theory, you can have a huge business without incorporating.)

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  5. Great Post Frank!
    Although Marx had shown (long before anybody else) it would happen to any capitalist system sooner or later. This is what I was talking about all this time, that currently monopolies have bought off the government and are growing it for their benefit. According to Marx this is the final stage of capitalism. He calls it monopolistic capitalism. So, what is going to happen next? Collapse or something else? Collapse is imminent (according to Marx), since the people cannot keep up in the ever accelerating hamster wheel. But will it be done by the people or some other way? Hard to tell. People are extremely ignorant about their role, actually are completely slave minded. they have lost the spirit of freedom together with their brains. First they need to get rid of communist paranoia, and educate themselves before something can happen.

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  6. @cult hero

    Like I said, I have no problem with government regulating corporations if the corporations have accepted special treatment from the government. You suggest that this is always the case, and that may be so.

    But you also go on to infer something that I also believe: that we run into a serious problem when corporations manipulate government. It seems to be a completely intertwined thing. A more complete union of the two is portrayed in the dystopian future in the film Wall-E.

    For our anonymous Marx fetishist, it might be valuable to look at history and realize that we were much worse at monopolistic capitalism during the railroad baron days than we are today. And yet we did not immediately follow the path prophesied by Marx.

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  7. cult, I think that if the power of corporations were diminished, then we wouldn’t need as large a government.

    Reach, the whole point of incorporation is to be granted reduced liability (ie, accountability for the consequences of their decisions). There would be no incorporation if it were not for that grant. As Frank pointed out, that grant used to be offset by restrictions in the scope of that corporate entity and by direct accountability to the stakeholders (via the need to petition government to have the corporate charter renewed). Those checks and balances have been removed in the name of “private property” and “free markets.” In other words, modern corporations are innately “socialist” by the definition which you and Frank prefer for the term. In the name of true free markets, the state has every right and obligation to restore those checks and balances.

    And regarding your comment to the anonymous Marxist, a case could well be made that we did not follow the path Marx predicted because the liberal/progressive movement took hold, moderating and restraining the free market with needed protections for workers, the environment, and the public, so that the capitalists could not achieve the complete monopoly they pursued.

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  8. Reach Upward,
    I am not blind devotee of Marx. In my numerous posts I have pointed out to his mistakes, actually one big mistake. So, you are not correct in your epithet, which you probably believe to be offensive.

    But it is better to be a Marx fetishist rather than one unable to see beyond his nose.

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  9. Anon, I meant no insult. I felt I was merely being descriptive. Please pardon me if I caused offense.

    @derekstaff
    Many economists would disagree with you on progressivism solving the problems of the robber baron era. Rather, they will show you careful studies demonstrating that improvements in working conditions, the environment, etc, directly resulted from increased general prosperity and that the progressive policies aimed at these problems were instituted after most of the improvements had actually taken place.

    Your proposition that government wouldn't need to be so big if corporations weren't so large is quite intriguing.

    I do not have a problem with a system that more broadly spreads risk among willing participants. But, there is clearly a problem with a system that spreads risk to unwilling participants, whether it be dubbed "free market" or anything else.

    My first real career was in accounting. I saw the unfortunate aftermath of some poorly designed partnerships where investors (mainly retirees) sought legal tax shelter. Unlike corporate shareholders, the partners were not shielded from the shoddy (and often illegal) activities of the managing partners that peddled the partnerships.

    It was heartbreaking to see these people lose all of their investments and then have to cough up as much or more money besides to cover the bad behavior of the managing partners who were -- not surprisingly -- nowhere to be found. But the market taught a lesson and these types of partnerships rapidly faded.

    I suppose that if today's corporations were instead partnership entities, we'd see very different market behavior than we are seeing today. Perhaps there would be no "too big to fail" corps out there.

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  10. RA
    Your apology is accepted. But your descriptive epithet is not even close. Again, fetishists do not see flaws in the object of worship. Whereas, I do see a great mistake in Marx's theory of a perfect society, communism.

    But my point is that it is stupid (descriptive), at least a waste of time to ignore his exhaustive treatise on capitalism and monopolism, and to dive in to discuss books which are only rediscovering the bicycle.

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  11. Frank, thanks for the heads up on this great post.

    I agree with the comment "that corporations seek for and get government favors and rule changes that benefit them."

    Check out http://www.ourcaucus.com/ and watch the presentations about money in politics.

    I prefer the term "free market" over Capitalism because its focus is freedom, not money (capital). Capitalists get focused on the materialism and competition with other businesses. Free Market focuses on liberty and cooperation others. I am turned off by candidates that focus solely on some measure of "prosperity," such as Bill Clinton's "It's the economy, stupid!"

    Because of our business's unhealthy focus on competition and materialism the "contest" overflows into any arena that will give the competitors an advantage, including getting the government to give them favorable conditions. The competitiveness leads to dishonest business practices.

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  12. Reach, I’ve seen studies which challenge those free-market advocate conclusions. But let us suppose you’re right, and those improvements were a result of the general prosperity. Does that then justify the injury, illness, and deaths of men, women, and children due to inhumane and dangerous labor conditions and due to environmental corruption? It isn’t just an academic question or hindsight recriminations; the same processes are now being repeated in the third-world. Do we just say “well, that’s the price they had/have to pay for our prosperity”? Because that seems a pretty poor free market if the person who pays the price of development does not reap the benefits.

    Bradley, I think your distinction between capitalism and free market is a valid one. Sadly, I think a great many who claim to support free market principles are actually very narrowly focused on financial issues and financial indicators (I recently mentioned this in a post of my own), competition, profits, and materialism, thus in truth supporting what you call capitalism instead of freedom.

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  13. Bradley,
    Can you explain how exactly the 'free market' is about cooperation, while capitalism is about competition. Are you saying that 'free market' is just another definition of Zion? What do you mean with 'cooperation'? Are you saying that 'free market' is not capitalism? Please explain your point. It does not make any sense to me.

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  14. Corporations can and do became just as tyrannical as any government. They do not seek to just amass wealth but power as well. They are no longer about providing goods and services to benefit all people but have become like plantations that enslave many to benefit a few. They have taken power away from the people so much that Politicians now routinely ignore the will of the people to carry favor with corporations that have now gone multi-national and have no elegance to any nation. Americans are no longer a truly free people and as long as government and corporations are calling the shots we will always be in bondage.

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  15. "They are no longer about providing goods and services to benefit all people...?" When have they ever been about benefiting people, moreover all. What are you talking about? In the free market or capitalist system, a system driven by capital, money, nobody is and has ever been about providing goods and services to benefit anyone but himself. Capitalism is and has always been an egocentric, competitive economic system. In capitalism nobody is interested in anybody's well being.

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  16. Thanks for all of your excellent comments. Sorry that I haven't been able to respond to them all. Ken, I'm actually surprised that you agreed with my premise.

    In Korten's book (When Corporations Rule the World), he distinguishes between Free Market (where people work together for everyone's best interest) and Capitalism (where they don't.

    I like that definition.

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  17. It turns out someone has changed the term free market to mean Zion.

    Congratulations to all of you

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  18. An interesting post from Planet Money regarding the size of corporations today and the impact they have on all of us.

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