The Corporation as Government Economic Intervention

The following is a guest post from Mike O’Connor (the fourth of a series–see the first post here, the second here, and the third here). Mike is one of the original USIH bloggers and a founder of the Society for U.S. Intellectual History. He is the author of A Commercial Republic: America’s Enduring Debate over Democratic Capitalism, which will be published in May by the University Press of Kansas. The book’s Facebook page can be found here, and information from the publisher is available here.

In the 1886 decision Santa Clara Country v. Southern Pacific Railroad, the Supreme Court declared that corporations were entitled to Fourteenth Amendment protections hitherto reserved only for individual human beings. (I posted on that case some years ago.) In its decision, the court provided literally no justification for this radical new understanding. In the nineteenth century, however, Supreme Court justices also rode circuit in the federal appeals courts. Thus it was that Justice Stephen Field, a member of the court and well-known advocate of laissez faire, had written the appellate decision in the “corporate personhood” case. It is reasonable to assume that the justices intended to affirm Field’s reasoning when they issued their decision upholding the lower court’s finding.

Field’s justification was a surprising one. He did not declare that these corporate rights were necessitated by some recent development, or a change in the status of the corporation. Instead, he paradoxically grounded the rights of a collective entity on the longstanding American intellectual tradition of liberal individualism. “Whatever affects the property of the corporation,” he wrote, “necessarily affects” the “interests” of those who comprise it. Thus he argued that the Fourteenth Amendment did not extend new rights to group entities, but merely recognized individual rights that had long existed. These privileges applied “not to the name under which different persons are united, but to the individuals composing the union. The courts will always look through the name to see and protect those whom the name represents.”

Grounding the claims of corporations on the rights of the individuals, however, contradicts the traditional grant of other powers, most important among them limited liability, that no individuals possessed. Thus Field’s logic was contradictory and somewhat tortured, and the problems with this construction eventually generated a tradition of attacks on corporate privileges. Perhaps the most influential work in this regard came from Adolf Berle and Gardiner Means. A lawyer and economist, respectively, the two Columbia University colleagues both later went to work for the administration of Franklin Roosevelt. In their 1932 book The Modern Corporation and Private Property, they noted that the liberal concept of property had taken shape in the eighteenth century, and that it no longer described the forms typically taken by modern ownership. While the older firms were “limited in size by the personal wealth of the individuals in control,” their modern analogues were “great aggregations in which tens and even hundreds of thousands of workers and property…belonging to tens or even hundreds of thousands of individuals, are combined through the corporate mechanism into a single producing organization under unified control and management.”

The owners of the modern corporation are, by and large, stockholders who have no desire to actually run the company and no way to institute their decisions if they did. Those who do exercise such dominion over the business—its managers—do not stand to realize any change in their own economic status by the successful (or incompetent) running of the business. As a result, the two traditional connotations of the word ownership—interest and control—no longer inhere in the concept. Under such conditions, Berle and Means asked, does the fact that “an owner who exercises control over his wealth is protected in the full receipt of the advantages derived from it” mean that it should “necessarily follow” that “that an owner who has surrendered control of his wealth should likewise be protected?”

Berle and Means believed that the correct answer was “no,” and sketched what they thought a better understanding might portend. Since owners have abrogated one of their traditional roles “by surrendering control and responsibility” of their corporate property, they have consequently “surrendered the right that the corporation should be operated in their sole interest,” thereby releasing “the community from the obligation to protect them to the full extent implied by the doctrine of strict property rights.” But the fact that managers have taken on some of the prerogatives of ownership does not mean that corporate interests default to those of the managers. Instead, the two groups have “cleared the way for the claims of a group far wider,” as “the community” is now “in a position to demand that the modern corporation serve not alone the owners or the control but all society.”

History did not see Berle and Means’ recommendations put into effect. A contemporary writer and activist, however, has addressed some of the same issues from a different angle. Marjorie Kelly, an activist and writer who co-founded and edited Business Ethics magazine, wrote The Divine Right of Capital in 2003. In that book, she argued that today’s “common-sense” understanding of the corporation holds that such businesses are property that is owned by stockholders. This conception implies that “(1) the corporation is an object that can be owned, (2) stockholders are sole masters of that object, and (3) they can do what they want with ‘their’ object.” Though this statement seems straightforward enough, Kelly’s careful unpacking makes it clear that it is fraught with complications. The notion that a corporation can be owned is ontologically problematic. What sort of thing is a corporation? It certainly has assets, like buildings and land. But the corporation itself owns those things, and is therefore separate from them. Given these observations, Kelly suggests that the corporation itself is not a piece of property, or any sort of object at all. She argues that the social, political, economic and legal construction that we call a corporation is, in fact, a “human community.” It is more like, say, an Elk’s Lodge or a monthly reading group than it is like a pickup truck. But human communities are not well understood as property; neither, suggests Kelly, is the corporation.

What then happens if we think of a corporation as a human community rather than as a piece of property? The primacy of stockholders becomes less obvious. They provide the capital to make the business work, and that is important. But it is not necessarily more essential than the labor that makes the business work, or local community that makes the business work, or the natural resources that make the business work. Anyone associated with any of those entities has a stake in the corporation, and it is only the social construction of the corporation as property that makes the primacy of the stockholder appear naturally primary to that of other stakeholders. “Private property owners have assumed sovereign power economically, not by vote, but by ancient prejudice.”

Despite having been written seventy years apart and following significantly different courses of reasoning, these two books push for similar conceptions of the role and responsibilities of the corporation. This commonality is rooted in the fact that they both find significant flaws in the influential Gilded Age understanding of the corporation. Under that conception, someone like Stephen Field could work to grant special privileges to business interests while simultaneously claiming to disavow government economic intervention. By its very nature, however, the corporation owes its existence to the state. As such, it will always serve as an expression of whatever values the government seeks to promote. The later writers recognized this in a way that Field did not.