What exactly is the libertarian argument regarding corporations? There are a few different positions and they usually differ depending on where on the political spectrum the person is coming from. Sometimes they come down to the personal preferences of the individual making the argument. It is tempting to blame state intervention for the stuff we find dissatisfying about the world around us. We’d all love to think that the world would run exactly as we would prefer if the state were to get out of the way. But lets face it, this is not the case. The free market would probably lead to results that a lot of libertarians would find distasteful. The world we live in today certainly leads to outcomes that people find distasteful. But are these outcomes necessarily the result of corrupt collusion with the state?
There is no doubt that the state distorts the economy and manipulates the market in innumerable ways. We all know that an unregulated market economy would likely look very different than the one we have today. This realization however is not much use when making judgments and decisions about the world we actually live in. So how do we judge the institutions around us? The question should be whether or not favors from the sate are actively sought and whether the state is used as a weapon against others. Certainly corporations would not be the only offenders in this respect.
One standard libertarian complaint about corporations is that they are a legal construct of the state. This is true. Corporations are chartered or licensed by the state. Linked with this is the complaint that members of corporations enjoy limited liability. The corporation becomes a legal person that has its own assets and liabilities separate from the assets and liabilities of its members. Thus the personal assets of the members are shielded from any liabilities incurred by the corporation.
For a lot of libertarians this is enough to show that corporations are necessarily unethical and enjoying unearned privileges from state violence. I disagree. There are a lot of good reasons to incorporate your company given the nature of the world we live in. For many companies incorporation is a cost of doing business. You cannot engage in certain types of business or grow beyond a certain size unless you get a corporate charter. Often times certain kinds of taxes can actually be avoided by incorporating, and you can hardly blame people for trying to keep more of their own money. For small businesses where the owners could be wiped out by a lawsuit it certainly makes sense to incorporate. The state monopolized court system is out of control. Malicious lawyers often manipulate envious juries into awarding huge payouts to plaintiffs simply because the plaintiff is poor and the defendant is rich, regardless of the merit of the complaint. This kind of legalized looting is a threat to big companies as well with mass class action lawsuits. At least the personal assets of corporate members can be protected in instances where a corporation has been targeted for looting by lawyers and entitlement-minded individuals.
Of course the flip-side of this is that it can potentially lead to abuse and the personal assets of the abuser will be protected. But this is the fault of the state, not of people that purchase corporate charters from the state in order to do business. There is no reason why all people that have purchased a corporate charter are necessarily engaging in bad behavior or should be held collectively responsible for the bad actions of others. If we are going to criticize corporations just for being corporations then we have to include all corporations, not just the big ones. Many corporations are just one person or a partnership between two people. Pretty much every business save for a few tiny little enterprises would necessarily have to be declared immoral.
And why would it only be the purchase of a corporate charter that we would object to in terms of the granting of state privilege? A driver’s license or a passport purchased from the state grants the holder a privilege that a person that has not purchased one does not enjoy. But does that mean that the person who has purchased one is unethical? Certainly not. They are just trying to get by in the real world. What about the privileges granted to labor unions in the form of exclusive collective bargaining rights? Interestingly many people that complain about the privileges granted to corporations are silent when it comes to this.
Could corporations and limited liability exist without state intervention? I think the answer is yes, but the issue is debatable. The legal form of a business enterprise as a fictitious legal individual is too useful and productive to not be a feature of a free market. I see no reason why private free market courts would not recognize this legal construct in an imaginary future libertarian society. How would this form of business organization be prohibited in a theoretical free market if not by the state?
A common complaint about corporations is rent seeking behavior. That is behavior which is characterized by seeking protection or subsidy from the state rather than competing on the market. It is the attempt or practice of extracting income by manipulating the political environment rather than offering value. This is often an entirely justified complaint. This complaint however is usually only leveled at big corporations and it is almost always made in conjunction with other less justified complaints. Rent seeking and protection is not restricted to big business. Small businesses certainly do their fair share of rent seeking and receive a good deal of state protection depending on where you are. In New York City big retailers like Walmart are kept out through various legal means in order to protect small businesses. The result is of course fewer jobs, higher prices and less selection for residents. In some poorer neighborhoods it is difficult to get fresh produce close to home because of these kinds of laws.
So the question of rent seeking is an empirical question, not a theoretical one. Corporations differ from company to company and industry to industry. There is no theory that can cover all behavior by corporations and fit them all into a nice clean package, though many have tried to do this. Theory can tell us that if a number of companies try to form a cartel to cut production and raise prices and this cartel is not backed by the state it will fall apart. But theory cannot tell us whether or not companies will seek to form cartels, or how each individual company will act in relation to the state.
We can tell from some basic information whether or not a company or industry is being protected by the state. A good indicator is how many companies there are in the particular industry or sector. For years in the US there were the “big 3″ auto manufacturers and the “big 3″ broadcasters. Clearly these companies were arm in arm with the state and the state made sure they faced no competition. Another indicator is whether or not the company or industry is characterized by expanding production and falling prices or cutting production and rising prices. Companies that are receiving state protection are far more likely to cut production and raise prices. They will also become increasingly dependent on rent seeking as a strategy rather than serving customers and will actually become unable to operate at all without the state. Again the big automakers come to mind. GM at this point is basically a government department. Other sectors like retail, electronics, computers and software are characterized by continuing innovation, expanding production and falling prices.
Another question is whether the corporation could exist at all without the state. Certainly “defense” contractors that manufacture weapons of mass destruction would have no customers and could not exist without the state. To even consider these corporations private entities is kind of silly. They are socialist. Ultimately it’s important to look at the facts of a particular corporation’s relationship to the state before issuing a blanket condemnation of all big corporations as immoral rent seekers.
Of course the most common, and least justified, complaint about corporations is that they are just too big. This seems to be purely a matter of personal preference on the part of the person making the complaint. Many people do not like the culture or the aesthetics of large corporations. Often times people look down on the sort of people that tend to be customers at Walmart, Starbucks, McDonalds or whatever big company may be the current favorite whipping boy of chattering elitists. These people often attempt to find an argument as to why outcomes that they find personally offensive are necessarily the result of bad behavior.
Left-libertarian scholar Kevin Carson has developed a theory as to why big corporations are necessarily subject to the same kinds of calculation problems as the state. He makes some valid points, but in general his argument fails and is not backed up with any evidence at all. The argument is that large corporations, like the state, are too big for those at the top to have all the information they need to make good decisions and that they are necessarily characterized by calculation problems and pervasive irrationality. It may be true that some large corporations suffer from information problems, but this is not the essence of the socialist calculation problem. The calculation problem is not a result of a general lack of information, but a specific lack of price information in the factors of production. The state has absolutely no idea how to price its services or whether or not these services are even wanted by the public. The people that act as the state have no profit or loss test by which they can gauge demand for their “services”, nor do they really care about such things. They just take money from people and distribute it in such a way as to expand their own power. No profit seeking organization has this pricing problem.
The problem of information in large corporations is in fact often solved by compartmentalization. Large companies are broken down into smaller units that make their own profit and loss calculations. Some companies fail at this, but companies fail all the time for a lot of reasons. Unless they are protected or subsidized by the state a company that does not efficiently get information to decision makers and makes bad calculations will fail.
Carson’s point is not helped by the fact that he provides no examples from the inner workings of a large corporation to back up his theory. All of his evidence is based on another person’s article about the typical large corporation. At the end of his piece he provides an anecdote about the irrationality of decision makers at a hospital at which he worked. This is no doubt all totally true, but health care is by far the most regulated and controlled industry there is. More than half of all health care costs in the US are paid for by the government. As of 2009 over 98 million Americans were on Medicare or Medicaid. This does not include those on the Children’s Health Insurance Program and those under the tender care of the Veteran’s Administration. Only 998 out of 5,795 hospitals in the US are run privately for profit. On top of that most hospital staff are organized by state protected labor unions. Given these facts it is hardly a surprise that a hospital is characterized by pervasive irrationality on the part of decision makers. Given all the bureaucratic red tape that must be dealt with, the best way serve customers would probably not even make the agenda of a hospital board meeting.
Carson insists that all large corporations are subject to the same problems as this hospital because they all operate within the same system, but this is clearly not the case. In fact, almost no other businesses are subject to the problems that the health care industry faces. Certainly software manufacturers, fast food joints, coffee houses or big-box retail chains do not face the kind of problems that hospitals do. Of course on a free market health care would consist of a variety of products and services bought and sold on the market that follow the same laws of economics as every other product or service bought and sold on a market. But given the fact that the government sets up different regulatory bodies and rules for different industries the claim cannot be made that all big corporations are operating within the same system.
Ultimately, there are legitimate complaints that can be made about the conduct of both big and small businesses in regards to rent seeking. Complaints about this behavior have to be specific though, not just theoretical. You need to have facts. The fact that an organization has purchased a corporate charter or is particularly large is not necessarily an indicator of bad behavior. Bigness does not automatically mean badness.