Corpora&on III: The Rise of the (Social Calcula&ng) Machines or
“Malefactors of Great Wealth”: TheModern Corpora&on, Private Property, and Public Poli&cs J. Bradford DeLong Professor of Economics, U.C. Berkeley delong@econ.berkeley.edu OLLI April 13, 2010
In This Lecture • Some Economic Theory
– Price vs. quanKty signals and efficient allocaKon
• Some Economic History
– The feudal system – The industrial revoluKon – ConKnent-‐wide scale of economic acKvity
• The corporaKon as soluKon • The corporaKon as problem • Conclusions
– SuggesKons for further reading
Some Economic Theory • • • • • •
Supply and demand Price signals — “markets” QuanKty signals — “plans” When supply is flat relaKve to demand... When supply is steep relaKve to demand... Economic efficiency
– It’s bad to produce things nobody really wants – Or to fail to produce things that people do want – Whether you want a decentralized, price signal-‐ coordinated “market” or a centralized, quanKty signal-‐ coordinated “plan” depends on how things really work • Thus war economies are command economies
Supply and Demand
Price Signals — “Markets” • Set up a market, and have producers produce unKl their cost is just about to rise above what they think the market price will be...
Quan&ty Signals — “Plans” • Set up an administraKve structure, and have somebody calculate and then instruct the producers how much to produce...
When Supply Is Flat Rela&ve to Demand...
• The costs of producing the wrong amount are small, but the costs of producing at the wrong price can get very large...
When Supply Is Steep Rela&ve to Demand...
• The costs of producing at the wrong price are small, but the costs of producing the wrong amount can get very large...
Economic Efficiency as a Goal • It’s bad to produce things nobody really wants • Or to fail to produce things that people do want • Whether you want a decentralized, price signal-‐coordinated “market” or a centralized, quanKty signal-‐coordinated “plan” depends on how things really work on the ground – When costs are steep — when resources have valuable alternaKve uses in other industries as scale changes — markets show to their best advantage... – When costs are flat — when the value of resources outside this industry is more-‐or-‐less the same — then planned coordinaKon shows to its best advantage... – Thus war economies are command economies, for in them it’s not just that the value of resources outside war producKon is fixed but rather that it is very low...
Some Economic History • The feudal system
– Personal Kes of dependence and obligaKon – Hereditary succession qualified by other consideraKons – How to fit towns and other groups into this system?
• Commercial and industrial revoluKons – Partnerships – Seek greater conKnuity of structure • East India Company, etc.
– Larger-‐scale producKon processes – Larger-‐scale distribuKon processes
• ConKnent-‐wide scale of economic acKvity
– These reach their height in the nineteenth-‐century post-‐Civil War United States
The Feudal System • Personal Kes of dependence and obligaKon • Hereditary succession qualified by other consideraKons – William Marshal and Isabel de Clare
• How to fit towns and other groups into this system? – By creaKng a ficKKous “person” who can be slo^ed into the feudal hierarchy
Personal Ties of Dependence and Obliga&on • Fief and Homage • King – Duke/Marquis/Earl/ Count • Viscount/Baron/Lord – Knight » Manor/Serf
Hereditary Succession Qualified by Other Considera&ons • Gets people into ranks and jobs... • Sets expectaKons... • Gets long-‐term incenKves in order... • With sufficient flexibility to make the system sorta work — some of the Kme...
How to Fit Towns and Other Groups into This Feudal System? • Make them into a ficKKous “person” • All the people living in London cannot be arranged in a feudal hierarchy... • But the corporaKon of London can – It can swear homage and provide supply – And receive benefices
Commercial Revolu&ons – Start with partnerships – But seek greater conKnuity of structure • East India Company, etc.
Industrial Revolu&ons • The shid from circulaKng to fixed capital • Impossible to dissolve the partnership, distribute the goods and then reform — even if you wanted to
The United States as the Leader in the Development of the Corporate Form • ConKnent-‐wide scale of economic acKvity magnifies the advantages of large-‐scale planning of economic acKvity – Absence of internal tariff barriers – Unequaled internal water transport — especially ader the Erie Canal and the Lake Michigan-‐Mississippi Canal
• Rapid mobility and growth puts a premium on impersonal rather than personal Kes in economic organizaKon • Large U.S. corporaKons – – – – – – –
John Jacob Astor’s American Fur Company Boston Manufacturing Company Cornelius Vanderbilt’s New York Central Railroad McCormick HarvesKng Machine Company Carnegie Steel American Telephone and Telegraph Standard Oil
The Corpora&on as Economic Solu&on: A Few Considera&ons • The economic problems that the corporaKon solved • The problem of coordinaKon – QuanKty signals – Bureaucracy and rouKne — with flexibility
• The problem of scale
– Stakeholders: customers, suppliers, workers, creditors, gamblers, managers, supervisors
• The problem of accountability
– Oscar Wilde: “ The problem with socialism is that it would take too many meeKngs” – Form of government peculiar to Berkeley: rule by those who have nothing be^er to do with their Kme... – Could pick any one of the stakeholder groups to have control • The corporate form picks risk-‐bearers • Others have, at least in theory, contract rights only
The Corpora&on as Economic Solu&on: A LiVle Evidence
The Corpora&on as Economic Problem • The problem of uncounted external costs – PolluKon – Income distribuKon
• The problem of unvalued external benefits
– CommuniKes of technological pracKce and knowledge – “Sweet commerce” and human sociability
• The problem of ill-‐informed consumers • The problem of consumer self-‐control • The gap between corporate theory and corporate reality – The problem of collecKve acKon – The problem of moral hazard – Thus the links from gamblers to supervisors to managers are extraordinary imperfect
The Corpora&on as Poli&cal Problem: Some Theory • Problems of collecKve acKon arise in high poliKcs as well as in “shareholder democracy”
– Special interests vs. the general interest in lobbying and propaganda – Special interests vs. the general interest in campaign contribuKons and voKng
• CorporaKons have a big edge in mobilizing resources to influence poliKcs in their preferred direcKon – Which is almost surely not the preferred direcKon of their workers, suppliers, customers — or even of their shareholders – Especially in technical details that fly under the radar • Tim Geithner’s problem right now...
The Corpora&on as Poli&cal Problem: Some History • Nelson Aldrich, Chairman of the Senate Finance Commi^ee, Senator from Standard Oil – Abby Aldrich Rockefeller
• Henry M. Jackson, Senator from Boeing • “The most profitable subsidiary of the Pennsylvania Railroad CorporaKon is the Pennsylvania state legislature...”
The Corpora&on as Poli&cal Problem: Some Law •
Stephen M. Bainbridge, William D. Warren Professor of Law, UCLA, 2007: –
•
William O. Douglas, dissent in Wheeling Steel CorporaKon v. Glander , 337 U.S. 562 (1949): –
•
“The most cursory glance at these [amenments] discloses a unity of purpose... which cannot fail to have an important bearing on any quesKon of doubt concerning their true meaning... the one pervading purpose found in them all, lying at the foundaKon of each... mean the freedom of the slave race, the security and firm establishment of that freedom, and the protecKon of the newly made freeman and ciKzen...”
JusKce John Marshall Harlan’s opinion in Santa Clara County vs. Southern Pacific Railroad: –
•
It has been... since 1886 that a corporaKon is a 'person' within the meaning of the Equal ProtecKon Clause of the Fourteenth Amendment. Santa Clara Co. v. South. Pacific R. Co.... [H]ow strained a construcKon it is of the Fourteenth Amendment so to hold.... It requires distorKon to read 'person' as meaning one thing, then another within the same clause and from clause to clause...
JusKce Samuel Miller, 1872: –
•
“[T]he post-‐Civil War cases in which the Supreme Court held that the corporaKon is a legal person for purposes of certain ConsKtuKonal purposes followed from the legislaKve history of the 14th Amendment.... Congress subsKtuted the word "person" for the word "ciKzen” precisely so that the provisions so affected would protect not just natural persons but also legal persons, such as corporaKons, from oppressive legislaKon.... (Admi^edly... the legislaKve history is not uncontroverted)...”
“The proposiKons... belong to a class which this court should not decide unless their determinaKon is essenKal.... [T]he court below might have given judgment... upon the ground that the assessment... included property... the state board was without jurisdicKon to assess.... As the judgment can be sustained upon this ground, it is not necessary to consider any other quesKons...
J.C. Bancrod Davis, Headnote to Santa Clara County vs. Southern Pacific Railroad: –
“The court does not wish to hear argument on the quesKon whether the provision in the Fourteenth Amendment to the ConsKtuKon, which forbids a State to deny to any person within its jurisdicKon the equal protecKon of the laws, applies to these corporaKons. We are all of the opinion that it does.”
Conclusions • The corporaKon as poliKcal problem: policy: – Countervailing power:
• CorporaKons, but also labor unions, ciKzen’s groups, grass-‐roots but durable party organizaKons • CorporaKons used to be one of many intermediary groups — “secondary bodies” that consKtute “natural associaKons that halt abuses of power,” in Tocqueville’s phrase • But now?
– Milton Friedman’s soluKon: • • • •
The corporaKon should not speak The corporaKon should not presume to be a ciKzen The corporaKon should not presume to be a public benefactor The corporaKon should not pool the resources of its stakeholders for any but the narrow economic purpose of making valuable things at low cost
• The corporaKon as island of central planning — necessary island — within our market economy • The corporaKon as flawed decision-‐making mechanism – The problems of corporate control are sKll unresolved
Sugges&ons for Further Reading • J. Bradford DeLong (1990), “Did J.P. Morgan’s Men Add Value?” (Cambridge: NaKonal Bureau of Economic Research Working Paper 3426). • MarKn Weitzman (1974), “Prices vs. QuanKKes,” Review of Economic Studies 61:4 (October), pp. 477-‐491. • J. Bradford DeLong (2007), “A Short Dialogue on Santa Clara County v. Southern Pacific Railroad Company,” Grasping Reality with... <h^p://delong.typepad.com/sdj/2007/02/a_short_dialogu.html> • Wheeling Steel CorporaKon v. Glander, 337 U.S. 562 (1949) <h^p:// caselaw.lp.findlaw.com/scripts/getcase.pl? court=US&vol=337&invol=562> • Adolf Berle and Gardiner Means (1932), The Modern Corpora>on and Private Property HD2795 .B53 1991. • Charles Francis Adams (1886), Chapters of Erie and Other Essays (New York: Henry Holt).