Of Individuals and Institutions

The inadequacies of trying to apply to the twentieth and twenty-first centuries the philosophies of the 1700s and 1800s can clearly be seen as follows. When our government was established under the Constitution, people recognized that government would have a lot of institutional advantages and it could become an overwhelming force. One of the things that was done to prevent such potential tyranny was to have a series of checks and balances within the government. Another mechanism established to prevent tyranny was the Bill of Rights which provided people with protections against the government. The struggle for power was perceived in the 1700s and 1800s as one of Man vs. the State.

In American political thinking we thus took into account the power of the State, but we have never really taken into account the power of large corporations. Large corporations today are usually conglomerates, and are usually global in extent. These entities certainly have institutional advantages. They have tremendous resources. They can potentially exist for very long times, perhaps forever. Today, they are--as we have noted--global in extent.

Both our political and our legal theories treat corporations as if they were the same as biological individuals. In reality, we know that corporations have a great deal of institutional power. The disparity between theory and reality creates major problems for us. Even if you have a very wealthy individual, over time his or her family would become less wealthy. There is at least the inheritance tax. However, a corporation goes from one human generation to another and does not lose any money to inheritance taxes. So once money is in a corporation, it stays in the corporation. That is among the big advantages that corporations have. There are significant problems, indeed, about corporations from the point of view of democratic theory.

The question of how we handle this is a very difficult one--one for which we struggle for an answer. It would seem that people are losing out in this struggle. Some say, "We're losing control of our lives, and the problem is Big Government." They suggest, "Reduce the power of Big Government, and that will strengthen the power of the individual." But if you reduce the power of Big Government, what happens? You give more power to the corporations. And "we the people" have far fewer rights vis-a-vis the corporation than we do in relation to the government. Furthermore, we do not have any democratic input even theoretically into the decisions made by corporations. So very real problems exist here.
 
 

The Nadel Book

The main question that this book asks is: How can a corporation be made accountable to the people? How can they be made politically accountable? They're not just other persons, like you and me.

If we take our model, it serves as a very broad outline for the Nadel book. Part One of the Nadel book, which consists of Chapter 1, looks at the nature of the modern corporation. Part Two deals with how corporations affect the government, how they influence the government. (Then, of course, the government affects the people.) That's Chapters 2, 3, and 4.

This book is not like a textbook. This is a thematic book. In reading it the idea is that you should use the book, not the book use you. Understand the basic nature of the book. The book has a theme: How do we make corporations politically accountable? Why should we, do we need to, and how do we do it? The rest then fits into this general argument. The first part is about the nature of the corporation. The second part, how do they influence government. The third part, how do they influence people directly. And the fourth part, what are the problems and possibilities of making them accountable. Within that general theme each chapter has a place in the argument, and then each section of the chapter has a place within the chapter. So one of the questions to ask as you read each chapter, is how does it fit in with that general outline? In class, we are going to go over the general principles. I'm going to leave it to you to read in the book about some of the specific examples. I note, at the end of the Study Guide, the industries to which you should pay particular attention. I will not be going over in class those specific industries or examples. I may mention one or two, but I'm holding you responsible for getting them from the book.

Remember, there are a myriad of details in the book. What you want to grasp first are the general principles. And as you get the general principles, then you should note the examples from the listed industries. Don't be overwhelmed by facts and dates.

The book was written in the early 1970s, so we're talking about a work that is about 25 years old. Some of the examples may be somewhat dated, but not too many of them. The general principles hold very much today. What amazes me is that no more recent book of a similar theme has been written on the subject. If it were, I would have assigned it. In the 1970s, people explored the powers of corporations. Today, the corporations are much more powerful and we don't even think about them or learn about them as much, or research them to the extent we should.
 
 

Limited Sources of Information

On television all we see is how well the stock market is doing. We don't often hear about how poorly the worker in America is actually doing. Unfortunately, today, our television networks, newspapers, and radio stations are controlled by only a few major corporations. Who owns CBS? Westinghouse. Who owns NBC? General Electric. Who owns ABC? Think of the ears. Disney. And then you have CNN and Turner which are owned by Time-Warner. Besides owning the television networks, they own newspapers, satellites, radio stations, publishing houses. Our sources of information are controlled by a few, only a very few, major conglomerates. Is it any wonder that the sort of news that we get on television now reflects the needs of the corporations and not the needs of the people?

Let me put it this way. There aren't that many upper middle class people. But when you look at television programs, how many sitcoms deal with ordinary people. For years the only sitcom that dealt with working class people was Jackie Gleason's The Honeymooners. All the other characters were from the upper middle class. In the beginning of the 1970s, there was a lot of political awareness and there were some changes made, but they were mostly cultural and not economic. For example, African Americans appear a lot more on television today than they did before. Of course the differences between the real income of blacks and whites has also increased, and it has increased dramatically. The Women's Movement also had an effect. At least now some women are portrayed as having active roles, and that was usually not the case before.
 
 

Historic Background

To understand where we are today, it's important to put this in some historical and theoretical context. For most of human existence we were food gatherers. We had to follow the migration of animals and the change in weather pattern to where plants would be plentiful. We followed the rain patterns. About 10,000 years ago we learned how to domesticate animals and how to plant crops. So we went through the agricultural revolution which allowed us to stay in one place. In other words, the agricultural revolution, and technological revolution, was followed by a social revolution, the urban revolution.

In the ancient world, the different aspects of society were all part of one structure. The pharaohs were considered to be gods. They were also in charge of government and the economy. So society, economy, politics, and religion were all wrapped up into one social structure. In ancient Rome, we had the same thing: the emperors were considered gods. And society, the economy, and politics were pretty much part of the same structure. People viewed life in terms of the whole; individuals were seen in terms of the whole structure of society.

Under Christianity, people also saw legitimate authority as coming from God. And so, the kings ruled by divine right. The motto of the British royalty is Dieu et Mon Doit, God and My Right. If a king ruled by divine right, then you had to obey the king. So society came first and then the individual fit into the picture.

Feudalism.  Rome began to disintegrate around 300. As it did, Europe was plagued by a lot of nomadic tribes attacking settlements of farmers. You had the Goths, the Visigoths and so forth. You also had the Mongols coming from Asia all the way to Budapest. In fact, Hungarian is an Asiatic language. At that time, in addition to the farmers who were trying to till the land, there was another group of people who provided protection for these farmers. So a relationship developed in which you had a military caste and a farming caste. That served a useful purpose. It was the military's function to protect the farmers, and for that protection they collected a fee or a tax on what the farmers were producing. That made economic sense.

After some time, the need for military protection against the nomads had diminished greatly. However, the caste system of military people and farmers remained. Eventually, the farmers became known as peasants; while the military caste became the aristocrats or nobility. In Europe, this period of time was called the Dark Ages, although at the time Islam was at its height in the Middle East and North Africa.

When European society was organized in this way with the local nobility in charge of the land and the peasants working it, we called this form of organization, feudalism. In this arrangement, there was also a third caste or estate: the Church. And with the Church involved in all this, Europe was often called, Christendom. So again with feudalism, you had a single system which included religion, the economy, politics, and society.

Mercantilism.  Then came the Renaissance, largely as the result of artisans and scholars from the Byzantine Empire fleeing to Italy because of the fall of that empire to the Moslems. At that time, you also had knowledge coming to Europe from the Islamic academies of North Africa through Spain and Italy. Often the Jews, who lived in both the Christian and Islamic worlds, served as a conduit for this transfer of information and knowledge.

As the Renaissance or Age of Enlightenment progressed, the little lordships and principalities which had dominated Europe became united into the new kingdoms and new nations we know today. The new technologies which were developing then were largely advanced under the control or sponsorship of the king. Kings would give charters to private companies to carry out large economic projects. In this way, the king gave a charter to a company to colonize Connecticut. A charter was also granted to colonize Massachusetts. In Portugal, the king would grant a charter to a company to build a ship, or the Queen of Spain would provide a charter and support to Columbus to sponsor his activities of exploration.

However, these companies were not chartered simply so they could make money; they often had a governmental purpose. For example, the British East India company received a charter to develop India economically, but it was also responsible for setting up local governments and building a railroad system. The British East Africa Company was also granted a charter for economic purposes, but the building of a railroad from Mombassa to Lake Victoria helped create a structure through which European style government could be introduced to the interior of that continent. Prior to this the Arabs who had settlements for hundreds of years in what is now known as Kenya, had only penetrated the continent for a distance of about ten miles from shore. This sort of economic, political, and social system was called mercantilism. Under mercantilism the economy was centrally directed through the chartering of private businesses which also served public functions.

Capitalism.  One of the ideas we discussed when we talked about the Declaration of Independence was that the modern way of viewing things was not to start with society first but to begin our considerations with the individual and to stress individual freedom. This concept of individualism expressed politically by Thomas Jefferson in the Declaration of Independence, was called liberalism. Individualism expressed economically is called capitalism.

It is rather significant that Adam Smith, the founder of classic capitalism, first published his major work, The Wealth of Nations, in 1776. The type of classical capitalism Adam Smith discussed was also known as laissez-faire capitalism. Laissez-faire is French for to leave alone.

Adam Smith believed that if certain conditions existed in the economic makeup of society, then the government could leave economics alone and that through the operation of market forces alone the economy would automatically be directed toward the public good. The conditions which Adam Smith specified include:

      Requirements of Classical Capitalism

1. There would be small businesses;
2. There would be many businesses;
3. No one would control these businesses. They would run according to random market forces;
4. The businesses would be in vigorous competition with each other; and
5. There would be business failures.

Those businesses which produced the best goods at the lowest prices and were in good locations would succeed; whereas businesses whose products were too expensive, were of a poor quality, or were located inconveniently, would fail.

Thus the visible hand of the king would not be needed to direct the economy to serve the public good. The economy would be self-directed in the direction of the public good.  Instead of the visible hand of the king's authority, you would have the invisible hand of random market forces. So Adam Smith was not simply interested in the free operation of random market forces which he viewed as a means. He was interested in the ends, that of an economy directed to meet the public good.
 
 

Theories of Countervailing Forces

At this point it is important to note the mechanism used here, and to be aware that it is the same mechanism used in our legal and political theories. That principle is one of dynamic tension, of pitting one force against another.

In our political system, we deal with these forces on the larger (macro) level. At the beginning of the term, we mentioned that Aristotle had discussed this in terms of a mixed form of government where government by the one, the few, and the many were made part of the same system and kept a watchful eye on each other. Our Constitution talks in terms of the legislative, executive, and judicial branches, and we often phrase the dynamic tension between them a system of checks and balances.

In the economics sphere, Adam Smith talked about the principle operating on a smaller (micro) level. Each of the many small businesses would be pitted against one another, fiercely competing with each other. The outcome of this struggle would be determined by random market forces.

In our legal system, we pit one lawyer against another in an adversarial process--one representing, let's say, the defendant and the other representing, let's say, the general public.  The idea here is that you try to ensure that the rules are fair, that you achieve what is known legally as procedural due process. Once you are sure that the rules are fair, you hope that out of the contest of wits the truth will prevail. Now of course we know that there are problems with this, but the basic theory still remains one of dynamic tension. We are not setting up a system of overarching principles of justice; we are setting up a fair contest, and hope things will work out well.

Thus the classical democratic political system, the classical laissez-faire capitalist economic system, and the legal system which has come down to us through Common Law, are all based on the principle of dynamic tension or countervailing forces.

 In concluding our discussion, it is most important to remember that Adam Smith's theory of laissez-faire capitalism--of having the government leave business alone and letting random market forces operate in the marketplace--was more than an economic theory; it was also a political or moral theory. Random market forces under laissez-faire capitalism would direct the economy to serve the needs of the people. He called these random market forces, the invisible hand, and he sometimes equates the invisible hand with the hand of God.
 
 

 Harnessing Technology

All this, of course, was theory. In practice, the technologies brought forth during the Age of Reason in the 1600s, 1700s, and 1800s were often more expensive to put in place than any single individual could afford. Such a person would often not have enough money or capital to get such a business going. And so, people had to find ways of pooling their money. The first mechanism that they used was the joint stock company. However, one problem with this was that if you invested in a joint stock company and if that company caused damages or for some other reason was liable to somebody, each of the shareholders would be liable--and they would be liable, not only for what they put in, but for a proportion of the damages equal to the share of stock they held. Therefore by investing in a joint stock company, you put at risk your own personal fortune. Under these conditions, if people were going to be far away from the management of a company, they would not necessarily want to invest. It would not be prudent. So some other mechanism was needed.

Limited liability. This other mechanism was the business corporation. In the United States if a company is incorporated, its name is followed by the letters Inc. In England, it is followed by Ltd. Ltd. means limited. And what is limited? Your liability is limited. So with the corporation, if I invest £100--or $100--and the company carries major damages, I might lose the 100 pounds (or dollars) I originally invested in the corporation, but that was all I could lose. The concept of the state recognizing a corporation and granting its investors limited liability was extremely important to the development of modern business and the utilization of modern technology. It allows people to invest in companies and for companies to accrue the amounts of money or capital that is necessary to build or construct the sort of facilities--textile mills, ships, etc.--necessary to harness the newer technologies becoming available. Individuals would have enough money to do so. The corporation and the concept of limited liability were extremely important social inventions.

Early corporations were sometimes involved in a lot of speculation. One such corporation in which English nobility invested was the South Seas Company. When that company failed, a lot of nobility in England lost their fortunes. As a result of this, Parliament passed the South Sea Bubble Act. This was meant to curtail the growth of corporations. However, because the law was so poorly drafted, it actually formed the basis for the future formation of corporations. So the South Sea Bubble Act was the act that gave corporations a major place on the British business landscape.
 
 

Early U. S. Business History

The United States was a young country at the time. We were not doing things on the scale on which some of the leading powers of the day were engaged. You really did not have to have that much money to start a business. So, the concept of the corporation was usually reserved for companies that served a public purpose. Colonial--and later state--governments would grant incorporation to certain companies which would gain a profit, but would also serve a specific public function. And this was done so infrequently that the legislature would pass a special bill each time a company needed to be incorporated. This was known as special incorporation.

The early corporations in America were basically ones that built canals, railroads, or roadways (turnpikes, as they were called). On a turnpike, you had a gate at the beginning of the highway. The gate revolved around a stick-like device or pike. In order to get on the highway you paid the fee, and turned the pike--and thus the gate. That is where the name turnpike came from.

Thus in America, corporations were first formed for a public purpose. There was a concept of quid pro quo. If the government grants you the privilege of incorporation and limited liability for you to make money, the government can also demand something from you; i.e., that you serve a public purpose. Quid pro quo is a Latin phrase which means if I do something for you, you are going to do something for me.

In the early days of this nation, we had something akin to general stores. Companies would manufacture a product and also sell it. Others would import goods and also sell them. As the country developed, businesses began getting specialized.

With the election of Andrew Jackson, the first democratic president, in 1828, the country's attention turned westward. Instead of looking toward Boston and Virginia, and toward England for leadership; it looked westward toward the frontier. At first, the term "west" might mean Ohio which is where the National Road across the Appalachians ended. Later, it meant St. Louis and the Mississippi. Still later, it meant California and the Pacific.

By the l840s, you had a lot of small businesses run by self made men, people who were not descendants of the founders or heir to large fortunes. These businessmen were very proud of their business activities. They were entrepreneurs. In those days, of course, you could start a small business and own it. You would be your own person, your own boss. It was not like today, where you go to work and wind up working as a manager of a local business or franchise of a national chain. Today, most often you're not your own boss. In those days, you were.

It was small business people like these who founded the Republican Party in the 1850s. The Republican Party also contained former Whigs and former Federalists who still believed in mercantilism. They believed the Federal Government should direct the economy and charter private companies to build roads, railroads, and canals. Alexander Hamilton who founded this country's financial system was a federalist and basically a mercantilist. However in the 1840s and 1850s, the small business people prevailed with their newly adopted philosophy of laissez-faire.
 
 

The Emergence of Big Business

In the 1870s and 1880s, the transcontinental railroads were built. They changed the shape of America, and of American business to a great extent. The railroads allowed for the mass distribution of goods. This ability to distribute goods over a wide area in turn allowed for mass consumption. To meet the needs of mass consumption, we needed to have mass production. That required large factories. At first, we are considering large industries like the railroads, petroleum, coal, and steel. We are also talking about manufacturing.

As we started to build these large businesses, it became necessary to coordinate a lot of the specialized small businesses that existed at the time. Large businesses found that to perform such coordination, it was better to buy out these small businesses and form large scale companies. If you wanted to have a huge company and produce a large amount of goods, you needed to have control over the process. So you would buy out your suppliers, and buy out your competitors.

By 1896 with the election of William McKinley, there was a clear recognition of the dominance of these large scale corporations. We also witnessed a movement from a philosophy based on small business laissez-faire capitalism to one based on Big Business. This caused a split in the Republican Party. Teddy Roosevelt, who was from the small business wing of the Republican Party and had already served as a Republican President, ran against the Big Business-dominated wing which controlled the Republican Party in 1908. He ran under a separate political party called the Bull Moose Party. This allowed Woodrow Wilson, a Democrat, to be elected President in a largely Republican era.

The importance of moving to a Big Business model of doing business cannot be overstated. In order to administer a business that was so large and involved so many aspects, a new form of business organization emerged which continues to this day: the large scale business corporation.

Ownership became separated from management. People bought stock in a company and knew nothing, or very little, about the operation of that company. They were not interested in being involved in management. They were simply interested in making money.

In managing the large scale corporation, new theories of administration were needed. We were moving away from the idea of the entrepreneur, the businessmen of the mid-1800s, to a much more structured and powerful organization. No longer were you to be your own person. You had to work for an organization in order to make a living.
 
 

The Rise of Big Government

Many people in those days saw the large scale corporation as a danger to democracy and to the free market. They tried to break them up and return to small business capitalism. Such sentiments led to the Sherman Antitrust Act passed in the 1890s, followed by the Clayton Act. These acts tried to split up monopolies, or to prevent them from being formed in the first place. Another important act along these lines was the Federal Trade Commission Act. These were passed because people were afraid of the power of Big Business. With the Sherman Act, the Clayton Act, and the Federal Trade Commission Act, the general idea was that of pitting the power of Government against Big Business.

As businesses grew large in scale, Government had to increase in size in order to regulate Big Business. In order to control the railroads, the first independent regulatory commission, the Interstate Commerce Commission, was formed in 1883. That was followed by the formation of a great many other regulatory commissions--largely under Republican presidents and Republican Congresses. And so, it was in response to the rise of Big Business, that we witnessed the emergence of Big Government. By the 1920s, the government had become so large that an act was passed in 1921, the Federal Budgeting and Accountancy Act, to attempt to deal with the immense growth that had taken place, and to organize the Executive Branch in a more efficient manner.
 
 

The Science of Administration

By the 1920s, what dominated American thought was a philosophy of administration. In those days it was called The Science of Administration. At the beginning of the twentieth century, people were so enamoured of science that in order for something to be fully accepted intellectually, it had to be called a science. So we had the science of administration. This school of thought was later divided into public administration as far as government is concerned, and business administration which deals with business. But in the 1920s, it was all combined in the concept of the Science of Administration and the model was being applied to both industry and government. Some believe this Science of Administration would solve all our problems. Just as some people today believe that if you have the right computer program you can solve all the world's problems. It simply is not true, of course. Garbage in, garbage out--you know. But there always seems to be a lot of wishful thinking going around.

Anyway, this philosophy was accepted as the modern philosophy. However, there is a very important aspect to all of this, and one we need to consider very carefully. When we discussed classical democracy or classical capitalism, we were talking about the importance of the individual--whether as a citizen, a small business person, or a consumer. The emphasis here was always on individuals. With administrative theory, decisions are made at the top in the organization and work their way downward. Power is organized vertically and hierarchically--for the good of the organization. So we moved from a bottom up way of organizing society as found in classical democratic theory and in classical capitalism to the top down model of administration. And over time, our society has adopted a top down way of seeing things, even while giving lip service to the opposite.

The rise to prominence of national television after the 1950s only served to exacerbate the situation. Television presents us with a top down, one-to-many form of mass communication. With television the viewer is being talked at, not talked to. There is little room for participation which is the hallmark of democracy. This may be fine for movies, and other entertainment purposes; it is not fine when applied to the political process.

It does, however. fit in very well with the top down way of thinking about organization found in administrative theory. It does not fit in with the bottom up way of viewing the community as expounded in classical democratic theory.

In line with the administrative model, both Republican and Democratic governmental leaders have pushed big governmental programs since the beginning of the century--despite the Republicans' rhetoric to the contrary.
 
 

A Corporate Dominated Economy

As businesses grew in size, it became essential for them to be able to plan. When Henry Ford produced the Model T Ford, it took only a few months to begin producing a new product. On the other hand, it took the Ford Motor Company over three years to begin producing the Mustang. The fact is that today, in order to obtain components for a new model automobile, one has to have the design of these components ready several years in advance.

Let's take the example of the electric power industry. It takes about ten years from the time you first have the idea for a new power plant until it is built and operational. It takes another 30 years for the plant to be operating in order for you to recoup your original investment. Building a power plant costs hundreds of millions of dollars.  So you want to make sure you are going to be able to recoup that large of an investment. To do so, you must be able to plan--and plan at least 40 years out.

In order to be able to plan, you need stability in your environment. You need to have a stable supply of raw materials. You need a stable supply of labor. And you need a stable customer base.

To insure a stable supply of raw materials, it may be necessary to control the political process in Third World countries to insure access to these materials. A revolution could upset your access to these materials. To insure stability in your labor supply and in your customer base, you may need to greatly influence the domestic policies of the advanced industrial countries in which you operate.  In other words, to be able to plan, you need control of your environment.  And since the government has such a great influence on that environment, you need to control governmental structures. So, in the words of the first chapter of the Nadel book, big businesses engage in a quest for hegemony--for total control over its environment.

It is these imperatives of the technology--and not simply greed or ideology--that leads a large scale corporate dominated economy to have certain characteristics. In order to handle industrial technology efficiently, you need large businesses. Because of their size, you only have a few businesses dominating any one industry. Because of the size of their operations, the size of their investments, and the time needed for their large scale undertakings to reap a profit, you must be able to plan. In order to plan, you need stability in your environment--including the price which you can get for your goods. So you do not want to be in price competition with your rivals. Instead, you engage in non-price competition. Because these businesses are so large, many workers and, in fact, whole communities are affected by these businesses. They also have very large effects on other businesses. Therefore, the government is afraid to let these large scale businesses fail. In other words, we have the phenomenon of:  Too large to fail.

Let us summarize these conditions of a corporate dominated economy in the following chart:

      Characteristics of a Corporate Economy

1. Large businesses;
2. Few businesses;
3. Planning by producers;
4. Non-price competition; and
5. "Too large to fail"

Now I am telling you our current corporate economy is not capitalist.  Is nothing sacred?

So--contrary to popular opinion--we now know that our government is not guaranteed to be a democracy, and the major portion of our economy is not capitalist.

What's worse, classical laissez-faire capitalism is the sort of economy that theoretically automatically works in the public interest. However with a corporate economy, there is no reason to assume that it will work in the public interest. We have to purposely adopt additional mechanisms specificallly designed to push it in that direction.  Left alone, it will not act in the public interest.  It will exploit people, not serve them.  This is the real danger.