How Corporations Affect Us Directly
© Marc A Triebwasser, 1998  
 

The Blurring of the Boundaries Between Public and Private

The factors that lead to a blurring of the boundaries between the public and the private include the following:

1.) There is very extensive cooperation between governmental and non-governmental organizations. It is, therefore, often difficult to know where the operations of one begin and those of the other end. In the late 1800s, the struggle for power was seen as a battle between Big Government and Big Business. Today, the interactions between them have become so cooperative and institutionalized themselves that they often seem to work as one continuum exerting pressures on the individual.

2.) The impact and nature of actions taken by non-governmental or private entities on their own have a deep impact on the general public. The rules that banks, telephone companies, credit card companies, and so forth issue affect us all.

The services of these companies are so necessary in conducting business--and, in fact, in just functioning--in the world today that we have to go along with their rules.

3.) The direct role that private interests play in the making of government policy. As we saw in our discussion on The Influence of Corporations on the Government, this occurs largely through campaign financing, lobbying activities, and the operation of captured regulatory commissions.

4.) The alleged dominance of private elites in public life.
 
 

Public Policy

We usually think of public policy as being made by the government. However, some private institutions, such as large-scale corporations, exert such heavy influence on the public that they can also be said to make public policy. In other words, these institutions may be nominally private in nature, but they are certainly public in effect. In the 1950s, a political scientist named David Easton defined public policy making as the authoritative allocation of values. In other words, public policy making consists of three elements-authority, binding decisions, and the allocation of values for society.

The allocation of values may be defined as the distribution of goods, services, honors, statuses, opportunities, costs, etc. Usually something is considered to be valuable from an economic perspective if it is in short supply. A policy is authoritative for society if it is binding regardless of the sources of that policy.

Decisions are usually made binding through the mechanisms of punishments and rewards. This is usually how government operates. If you run a red light, you are subject to a fine and sometimes to imprisonment. This is a punishment. This is how government discourages an activity. On the other hand, if government wishes to encourage an activity, it may offer the citizen some rewards. For example, since the government wants to encourage home ownership, the interest paid on a mortgage may be deducted from your income for tax purposes. Interest and finance charges on other loans are not tax deductible. Also, since the government wants to encourage savings, it has instituted such programs as the IRA and the Roth IRA. The non-taxability aspects of these accounts is a reward.

These avenues of making decisions binding are usually not available to corporations, although the corporation may issue coupons or rebates on the purchase of some goods. The way corporations usually make their decisions binding is through a process called situational bindingness. Situational bindingness is accomplished by limiting our choices. For example, in the movies it is not possible to buy unsalted popcorn. Popcorn in the movies is always salted because they want you to buy soft drinks.

If you are purchasing a new car, you most often do not have the choice of simply buying powered doors so you can install some security systems. You have to purchase a whole package consisting of powered doors, powered windows, an adjustable steering wheel, and perhaps alloy wheels-even if you don't want most of the items in the package. You either get the whole package or you don't get powered doors, and therefore can't install the security system you want.

If you go to purchase an airline ticket between two points, there may be several airlines "competing" in that market, but somehow they all charge the same high fare. The simple fact is that you either purchase the product or service under the conditions that the producer wants you to or you don't purchase it at all. You have no other choice. That is what we mean by situational bindingness.
 
 

Economic Concentration

In order to achieve the conditions necessary to produce situational bindingness, there must be economic concentration in the industry at hand. Although economic concentration is regarded as an extremely bad thing in classical, laissez faire capitalism, it is one of the hallmarks of a corporate economy. Here any one major industry is usually dominated by only a few large businesses. Some of the types of economic concentration which exist in corporate economy are as follows:    

Horizontal Monopoly - a company that owns all the businesses on a certain level of business in a particular market.

Vertical Monopoly - a company that owns at least one business on each level of business in a market.

Oligopoly - just like a monopoly, except, instead of one business dominating a field, several do.

Conglomerate - a company that owns unrelated subsidiary businesses in many different markets.

Cross Subsidization- occurs in a conglomerate when one subsidiary temporarily subsidizes a new venture by another subsidiary. The subsidiary engaging in the new venture does not have to look for outside sources of capital, as would an independent business. After it has had a chance to make money by selling its new product or service, it can pay back the other subsidiary.

Another advantage subsidiaries of conglomerates often have over the independent businesses with which it is competing in the same market, is that a subsidiary of a conglomerate can obtain technical services (engineering, legal, accounting, advertising, etc.) from corporate central at extremely reduced rates, whereas the independent businesses have to obtain these services from the outside at the current rates.

Multinational Corporations (MNCs)- companies, usually conglomerates, that have subsidiaries in several countries. Today, most businesses seeking international leadership try to have subsidiaries in Europe, North America, and the Pacific Rim. They usually have subsidiaries in many countries, and today are often called global companies.
 
 

Pricing

In classical capitalism, it is assumed that the price of goods is under no one's control, but is determined by random market forces and the interaction of supply and demand. A way of viewing this is to say that a merchant sells a product or service for whatever price the market allows. The difference between this price and the cost that the vendor must expand to produce the product, is the profit that the business person is able to obtain.

In a market with a high degree of concentration, such as a corporate economy, the producer is able to determine the price to be charged for the product. Usually, competitors do not engage in the price competition and therefore charge the same high price. If the consumer wants the good or service, he or she must pay the high price. This price--one that is set by the producer, and not by market forces--is called an administered price.

This leads to a very different relationship, under a corporate economy, between cost and price. Profit in a large corporation is distributed to the owners (the stockholders) as stock dividends . However the corporation does not distribute all its profits to its share holders; rather it keeps some within the corporation. These funds are known as either rolled over profits or retained earnings. This situation can be seen in the accompanying diagram.

From a classical perspective, these retained funds should either be distributed to the owners as dividends, given to the workers as additional wages, or used to reduce the price paid by the consumers. These are all biological individuals, and they should enjoy the rewards of good business. The idea of a corporation-an artificial individual--retaining money for itself does not fit from a classical perspective.

These retained earnings represent an additional amount that the consumer is forced to pay. If the corporation were a government, this additional amount paid would be considered a tax. Since the consumer has no say in the decision making process of corporations, especially in decisions as to where those additional funds will be spent, this can be said to amount to a situation of: Taxation without representation!

Furthermore the decisions on how these retained earnings are to be spent, are made by the managers of the corporation, and not the owners .
 
 

Resource Transfer

Resource transfer involves exchanging one valued quantity for another. If I have a stamp collection and sell it, I now have money at my disposal to buy other things I want, but I no longer have the stamp collection. Or a manufacturer may sell his or her goods to a retailer. These are all examples of resource transfer. If manufacturers want to increase their profits by not installing scrubbing devices in their chimneys and thus polluting the air, this is also a resource transfer. These manufacturers have transferred resource increased profits for the resource of less clean air.

If we consider this manufacturer in an interaction with a retailer the manufacturer may increase his or her profits and at the same time reduce the cost of the goods to the retailer by engaging in such air polluting practices. In this case both the manufacturer and the retailer do well. It is the public that suffers from the loss of clean air. This loss is considered to be an externality. An externality is a cost borne by a third party who is not directly involved in the transaction at hand (in the above example, the manufacturer's sale of the product to the retailer). We thus see that the costs involved in a process may not necessarily be borne by the same parties who enjoy the benefits gained in that same process.

What we are more concerned about from a political or social perspective is that some of the benefits gained by economic institutions are at the cost of resources lost to the general public. This may be in the form of the loss of clean air, the loss of clean water, a decrease in worker safety, or a decrease in consumer product safety. These are considered to be public goods. Unfortunately, our legal system has much better mechanisms for protecting private goods than for protecting public goods.