What’s the purpose of a corporation? To protect power and privilege

Earlier this month, a group of 181 CEOs, including those of many of the country’s largest and most influential companies, signed a statement signaling commitment to the betterment of society and to “an economy that serves all Americans.” 

This short “Statement on the Purpose of a Corporation” reflects the idea that today big business must drive at more than just increasing the stock price. It must also lead in protecting the natural environment, enriching the lives of employees and deliver value to consumers.

Defining the purpose of a corporation is no small task, the statement’s concision notwithstanding, but its sunny words belie a rather less noble history. 

The modern corporation, as we know it today, was born of state power. It was chartered specifically as a vessel for a variety of anti-competitive special privileges. The earliest corporations furthermore operated in an environment shaped decisively by state power, both hard and soft. 

Lorraine Talbot, an expert on corporations and corporate law, explains: “Early corporations, created by the granting of a charter, were exercises in inequality and an unfree economy. Indeed, inequality was the very virtue of such incorporations, as charters were granted in order to elevate the economic and legal rights of the corporation in question above those of their actual and potential competitors.” 

Talbot points to the East India Company as an example, noting that its charter from the government “granted it monopoly trading rights, covering the whole of the East Indies.” 

While no one seriously questions this account of the modern corporate form, we nevertheless entertain the facially absurd notion that corporate titans represent “the free-market system,” as the Statement suggests.

Free-trade liberals of the 19th century explicitly framed their laissez-faire philosophy as a challenge to mercantilism, the forerunner of corporate capitalism, based as it was on the unholy marriage of corporate and government power. 

This was a time when the position in favor of smaller, less intrusive government was a decidedly left-wing one. As economists Spyros Economides and Peter Wilson observe, free-trade liberals of the eighteenth and nineteenth centuries regarded the state “as synonymous with ‘privilege,’ with the landed aristocracy, with corruption, and with mercantilism.”

Fast-forwarding to the present, few take the time to consider what is really meant by “the free market,” even (perhaps especially) its most vocal defenders. 

The constant misidentification of the existing corporate economy, as a proper free market, has so thoroughly permeated the discourse that it is not even noticed as itself quite controversial. This myth is damaging, especially so because it spreads a false idea of the causal relationship between socially and economically harmful monopoly power and legitimate competition, private property and individual rights — treating the former as a natural outgrowth of the latter.

Economic research consistently shows “that higher levels of regulation are associated with higher levels of market concentration and market power.” Incumbent companies thus engage in rent-seeking by lobbying for regulations that protect them from competition. 

This is not a new insight, yet progressives — who are quick to point out (correctly, by the way) that government has been captured by corporate interests — confusedly ask for still more government involvement in and control of the economic sphere. 

Upon considering the incentives at play, history, and empirical findings, we simply have no reason to believe that the state will counterpoise the power of large multinational corporations rather than stewarding and protecting them. Indeed, government is ultimately only a corporate monopoly itself, with a framework of incentives that is even worse than that of big business.

If the state has always had its thumb on the scales for the rich, powerful and connected (and history shows that in fact it has) then it is absurd to think that we can use state power to rein in multinational corporations, the dominance of which originated in government. 

This fact, the clear historical and empirical connection between political power and economic power, has important implications for contemporary left and right alignments. 

The political right frequently seems confused about what exactly it wants to defend, existing economic power and privilege or the philosophical principle of free and open competition. 

Likewise, the political left can’t seem to pinpoint the thing to which it actually objects, a rigged corporate system that privileges the powerful and handicaps the poor and working classes or a genuine free market. 

Conservative Republicans and progressive Democrats share their uncritical acceptance of the baseless myth that corporate power and government power compete, that the one waxes as the other wanes. 

Although history tells a complicated story, much more often than not, the two go together and work together, monopoly forces of privilege, centralization and coercion. Indeed, from a class analysis perspective, it is wrong to treat economic and political power as separate at all. 

Something like a free-market leftism or a left-wing decentralism ought to be a viable alternative position, seriously considered by (among others) those on the social justice left who question the practical or instrumental case for correcting inequality and hierarchy with state power (read: inequality and hierarchy) and libertarians who are simply and sincerely motivated by freedom for the individual and suspect that such freedom would produce an economic reality very different from the existing one.

David S. D’Amato is an attorney, an expert policy advisor at both the Future of Freedom Foundation and the Heartland Institute and a columnist at the Cato Institute’s Libertarianism.org.