Oct 10, 2016

Liberalism, Equality, and the Modern Corporation

The classical liberals saw themselves as egalitarians, attacking the undeserved privileges of the politically connected.

Classical liberals were astute observers of the political process, free from much of the romance with which we surround politics today. For instance, Adam Smith’s view of practical politics and politicians has often been described even as cynical; his work is filled with words of warning against trusting those who purport to act as agents of the common good. Smith had seen that despite their oaths and aureate rhetoric, political office holders often engaged in self-dealing and scheming opportunism. A system of equal rights was to be preferred both for its end results and for its respect of each individual’s dignity and autonomy. To condemn anti-competitive, state-granted privilege was, practically speaking, early liberalism’s reason for being. Thus, both in style and in substance, liberalism was consciously egalitarian, concerned with promoting social, legal, and material equality. Early liberals believed that the achievement of relative material equality would come naturally from making everyone equal before the law, secured from violence and fraud, though not favored or protected from competitors.

Contemporary political ideas about how we are to achieve equality are generally very different. Equality’s advocates, concentrated on the political left, argue that the state, simplistically identified with “public power,” must compensate for the failures of the free market system, offsetting the resultant wealth and income inequality. If equality and economic justice are our goals, though, it is not clear that we can trust the state, which appears to have serious conflicts of interest. As surprising and counterintuitive as it may sound at first, the state is a corporation and, in point of fact, the truest corporate monopoly we know. In “A Definition of the State,” political theorist and Cato Institute adjunct scholar Chandran Kukathas asks, “what does it mean to say that a state is a corporate entity?” He argues that “[t]he state is a corporation in the way that a people or a public cannot be,” a new legal person that, while not “the only possible political corporation,” is a preeminent or “supreme form of political corporation.” Here, we should consider the derivation of the word “corporation,” a story that begins with the Latin word corpus, likewise embedded in words such as “corpse” and “corporeal.” As corpus means “body,” these and other words stemming from it relate either to the literal, tangible body, or more abstractly to the notion of an artificial body, one formed from its component parts, but taking on its own rights and powers. Fundamentally, then, the corporate form signifies merely the presence of the underlying legal fiction, the idea that a new body or person has come into existence. The state is therefore a corporate entity in an important and rather uncontroversial sense. Any argument applicable to the privately-owned business corporation is equally devastating (if it is devastating at all) to the state, perhaps even more so, given the state’s unique defining features. First among these features is the prerogative, which the state quite perversely grants itself, to forbid competitors. Even the most powerful of today’s business companies almost certainly lack this power; indeed, wherever a going concern has been endowed with the authority to operate exclusively within a given business or trade, it has been through the grant of a special charter from some government.

It may surprise today’s anti-corporate progressives that the first modern corporations were created by the government, endowed with special powers and privileges—the access to which was carefully limited by law. Quite unlike the libertarian ideal of laissez faire, a true “hands off” approach, the active participation of political power was and is built into the very idea of the corporation. The modern state and the modern corporation grew up together.1 The earliest modern joint-stock companies, organizations like the Dutch East India Company, were effectively arms of the state, invested with a monopoly on trade and exercising many traditionally governmental powers. The testimony of history on the first modern corporations does not vindicate today’s sharp dividing line between “public” and “private” entities, for the state was instrumental in the creation of contemporary society’s most powerful organizations. An account of the origins of modern central banks proves similarly instructive on the treachery and corruption behind the modern corporate form as we know it. The archetype for subsequent central banks is the Bank of England, chartered in 1694 and designed specifically to serve political goals. Economist and expert on the history of central banking Lawrence H. White observes that the Bank of England “was founded … purely as a conduit for government borrowing,” at a time when the newly-crowned king, William III, desperately needed money to prosecute the Nine Years’ War. From those ignoble origins, the Bank quickly rose in power and prestige within the British political and economic system. “In 1697,” writes White, “the bank’s corporate charter was made exclusive: no other bank could be incorporated (given limited liability) while the Bank of England remained in operation.” The early modern era’s most significant economic interventions consistently advantaged special interest groups, strategically positioned to influence the ruling class. Contemporary political and economic events also illuminate the class nature of the state, its tendency to promote inequality rather than ameliorating it. Following the 2008 financial meltdown, among the American populace, there was widespread, bipartisan opposition to bailouts for major financial institutions that found themselves in dire straits, yet among the political class, these bailouts were supported as a matter of course, practically without a thought to either the political principles at stake or the moral hazard thus promoted. Government appears to be less a tool for promoting justice and equality and more one for thwarting their advancement.

Thus does it stand to reason that corporatism, the apotheosis of the corporate system, the method of social organization that places the corporation at its center, is nothing at all like free-market liberalism; it is rather a form of crude collectivism, predicated on the idea that it is not the individual that is the basic acting element in society, but the group—be it defined by race, class, profession, or otherwise. A society organized in such a way cannot hope to achieve equality of any desirable kind. Just as mercantilism was an essentially corporatist system, a precursor to later corporatism composed of various public-private partnerships, so is today’s crony capitalism a version of corporatism. It is a creature of government power, rooted in inegalitarian special treatment for big business and systematic attacks on individual rights.

Thinking about the state in this way—as itself a corporation and as the begetter of the modern business corporation—helps us answer the question of how best to achieve equality and distributive justice. For the present purpose, we shall simply take for granted the premise, itself controversial, that the left’s general arguments about economic inequality are well-founded—that a level of wealth and income equality is to be desired. Assuming the truth of this normative contention, we are left with the practical question, the “but how?” question, which is decidedly empirical. And a more accurate picture of the state and its historically central, decisive role in the development of the corporate economy undermines many of the easy myths about the practical effects of free markets.2 Prevailing attitudes seem to simply assume that government intervention in the economy is per se egalitarian in its effects, motivated by the righteous populist desire to pursue the attainment of distributive justice. So far, however, history seems to suggest that the effects of intervention are either uneven (and often unpredictable), or else markedly inegalitarian in the aggregate, advancing the interests of rich insiders at the expense of the common man. It turns out that liberals of the eighteenth and nineteenth centuries understood this well and advocated free markets specifically as an alternative to the cronyism of their time. Sociologist Gøsta Esping-Andersen writes, “To Adam Smith, the market was the superior means for the abolition of class, inequality, and privilege. Aside from a necessary minimum, state intervention would likely stifle the equalizing process of competitive exchange and create monopolies, protectionism, and inefficiency: in short the state upholds class; the market can potentially undo class society” (emphasis added).

A paradigm shift is in order. Rather than accepting the terms of the current debate, both sides of which treat today’s vast inequalities as the natural and inevitable outcome of free markets, we might instead consider the ways in which free markets preclude wealth concentration in the first place.3 Doing so would represent a return to classical assumptions about both the distributive consequences of economic freedom and those of intervention. Where free markets are distributive in practice, government intervention is concentrative, driven by pressure groups and opening the door to unsavory connections between those groups and lawmakers. This seemed obvious to early liberals and their audience, and their political strategies reflected their assumptions; consistent free traders tended to favor radical expansions of suffrage, satisfied that watering down the political power of the landed aristocracy would result in more trade-friendly public policy. The great free-trade parliamentarian Richard Cobden, for example, encouraged the middle class to purchase land, thereby acquiring the franchise, and suggested that women too should have the right to vote. The repeal of anti-market policies was rightly regarded as in the interests of common people, as a step in the direction of economic equality. Egalitarians can learn much from market-loving classical liberals like Cobden. The high walls of economic privilege, cemented by the bonds between political and economic elites, create the stronghold within which many of history’s largest fortunes ultimately rest, safe from competition. And of course large concentrations of wealth naturally attend concentrations of legal privilege. Freed from the constraints of privilege and barriers to entry, competitive pressures are continuously threatening profit margins and challenging existing products, services, and methods. No political system or theory can promise perfect economic equality, but free-market liberalism—today called libertarianism—would realize a worthwhile economic equality.

  1. In An Empire of Wealth, John Steele Gordon writes, “Next to the nation-state itself, the joint-stock company was the most important organizational development of the Renaissance and, like the nation-state, made the modern world possible.”
  2. As liberalism scholar Deborah Boucoyannis points out, the assumption “[t]hat the market economy inevitably leads to inequality is widely accepted today.” For Boucoyannis, that assumption is wrong; she suggests that we “question why steep inequality is accepted as a fact, instead of a pathology that the market economy was not supposed to generate in the first place.”
  3. See Deborah Boucoyannis, “The Equalizing Hand: Why Adam Smith Thought the Market Should Produce Wealth Without Steep Inequality.”