Corporations Should (and Do) Serve the Public

A quick complaint. We often talk about non-profit and for-profit corporations as if they were radically different kinds of things. In some ways, that makes sense, because they do usually run according to different funding models, have somewhat different obligations, etc. But in another, very particular but deeply normative way it doesn’t make sense. Specifically, we often argue something of the form, “non-profits exist to serve the public, for-profits exist for private gain.” Corporations are not natural kinds, they are technical-legal assemblages people, tools and rights, sanctified by states. In the 16th-18th century, corporations in England were specifically chartered by the monarch with particular tasks (like opening up and maintaining trade with India). Until the late 19th century, corporations in the US could not receive general purpose, unlimited-life charters, but rather were chartered for specific tasks considered to be in the public interest (at least avowedly), like constructing a specific railway. In exchange for these socially useful undertakings, corporations were granted legal privileges, especially limited liability (i.e. the corporation was liable for damages and debts, not the directors and owners individually). Investors and entrepreneurs were certainly out for private gains, but they accessed the corporate form because they were allowed to do so because, at least in theory, there was some sort of public gain.

At least since Milton Friedman’s famous essay, “The Social Responsibility of Business is to Increase its Profits”, popular discourse has largely accepted the idea that the best way business can serve the public is by making money the best it can (see also the rise of the concept of “shareholder value”), although the large and growing corporate social responsibility movement disagrees at least in part with this understanding. But that’s still a debate about the best way for corporations to serve the public.

To summarize: Corporations are a privilege granted by the state, not a natural right, and thus should always (in a normative sense) produce a net good for the public.*

*Note I am ignoring some really tricky problems surrounding transnational corporations in part because my knowledge of how incorporation works for such companies is much sketchier, and because the notion of a “public” gets fuzzier once it’s no longer coterminous with the population governed state.

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3 Comments

  1. Andrew

     /  January 12, 2012

    Another point related to corporations, but from a slightly different (varieties of capitalism) POV: in America “corporatism” is a very bad word, and often because the word is misused.

    For both the (anarchist) Left and Right it means the combination of government and business – and this is bad because this gives business more power over society (the Left) and/or because it gives government more power over society (the Right).

    Often quoted is Mussolini’s quote about how “Fascism should more properly be called corporatism because it is the merger of state and corporate power.” Thus the Left and Right both use that quote to their own ideological ends and throw the “f-word” at anything and everything they don’t like (think of the Tea Party & Glenn Beck in recent years).

    The problem is that Mussolini’s quote isn’t quite accurate. They have corporatism in present-day Germany, France and many other European societies – no one but the most ardent Libertarian or Anarcho-Syndicalist would call these societies fascist in any meaningful sense.

    Just like corporations come in many different forms, so do corporatisms. America’s version of corporatism is one that usually excludes the voice of labor, for example, and I would argue that government here is much more deferential to business than the other way around. European corporatism is “tripartist” and is much more inclusive of labor’s voice as well as that of business management & government.

    European corporatism has undoubtedly allowed more egalitarian distribution of economic growth between both capital and labor, rich and poor, and I think that the problem in Europe now is that their past corporatist arrangement is breaking down for various reasons.

    I know the above comment wasn’t quite on-topic, but your interesting post got me thinking about a related word that is also often misused and causes much sloppy thinking

  2. I think Friedman’s version of the claim was just a restatement of the invisible hand: Firms, including corporations best serve the public by maximizing their profits. If there is a problem in the market such that prices are giving the ‘wrong’ signals, governments should fix that directly, not by asking firms to change their objectives.

    If you buy that argument, it precludes lots of things that firms might do to increase their profits, such as lobbying for favorable changes in the rules or ignoring the rules when they can get away with it.

    By contrast, since the 1980s and shareholder value, there’s been much more of the idea that corporations are morally obliged to maximize profits by whatever means are feasible.

    • Andrew

       /  January 20, 2012

      @Prof. Quiggin. Interesting point on the recent shift on the role of corporations – it seems that many of the “old” Friedmanite-types such as Brad DeLong and perhaps Simon Johnson are arguing for a return to the “business may maximize profit but only through fair competitive behavior” against the post-1980’s Gekko-ites