Do Corporations Make Any Sense? - Pacific Standard

Do Corporations Make Any Sense?

If the old corporate goal was to claim as many assets and employees as possible, the new one is to hand production off to external vendors and contract labor.
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In the final years of the 17th century, a bunch of rich merchant sailors drafted a proposal for Queen Elizabeth I.

For years, they'd been sailing to India to trade spices on an ad-hoc basis, one Queen-approved charter at a time. Investors would form a committee to pool their resources, send off a ship, and, when it returned with spices or riches, they'd dissolve the group. The new crew proposed an indefinite charter during which it would hold a sanctioned monopoly on trade with India. The Queen agreed.

On the last day of the year of 1600, the East India Company was created. It was the precursor to the modern corporation, an organizational idea that's lasted more than 400 years. But will the corporation continue to be dominant forever?

"After mass production, the corporation made perfect sense as a way to gather capital in bulk. It was a perfect fit for the 20th century economy, but it's not eternal," says Gerald F. Davis, professor of management and organizations at the University of Michigan. "We're past the point where [corporations] are the most sensible way to organize the economy."

Davis points to a few factors behind this conclusion in the introduction to his book, The Vanishing American Corporation: Navigating the Hazards of a New Economy:

[R]ising inequality, lower mobility, a ragged social safety net, and politics dominated by the wealthy. But this time the cause is not the growth of the corporate sector, but its collapse. If we want to build an economy that works for all and that provides opportunities to the young, we need to start with an accurate diagnosis of our current situation.

To Davis, signs of the corporation's futility began in the 1980s and '90s, as the rise of financialization—in which financial services account for a higher share of national income than other sectors—transformed the American economy. The transformation came through a dismantling of New Deal-era protections, including decades of court decisions that chipped away at the Glass-Steagall Act, the 1933 legislation separating investment and commercial banking. As Suzanne Burger, a political science professor at the Massachusetts Institute of Technology, put it in a 2014 piece: "[S]ince the 1980s, financial market pressures have transformed U.S. corporate structure itself." Instead of manufacturing or services, Wall Street became the economy's driving force.

The Vanishing American Corporation: Navigating the Hazards of a New Economy.

The Vanishing American Corporation: Navigating the Hazards of a New Economy.

And in this new financial world, huge conglomerates were incentivized to either divide their holdings or die. "One in three Fortune 500 companies disappeared in a decade," Davis says. "They learned it doesn't pay to be big, but it pays to be small."

If the old corporate goal was to claim as many assets and employees as possible, the new one was to hand production off to external vendors and contract labor. Instead of the old practice of vertical integration, it had become more profitable and efficient to distribute production across the world. This altered the relationship society shared with corporations. You can see the results today: The days of lifetime employment with a single company, health-care and retirement benefits, and defined job ladders are gone.

"Now, no one expects to work anywhere for more than six months," Davis says. "Why should we put up with the ability of corporations to amass power and use money to corrupt our politics if they're no longer giving us what they used to?"

Davis says the future of the economy can go in two directions, depending on how quickly and powerfully masses organize. The first is the nightmare scenario: A few chief executive officers from a handful of companies (Davis suggests technology giants Google, Facebook, and Amazon as the likely trio) wielding unchecked power. "If Mark Zuckerberg wanted to sell Facebook to Vladimir Putin for one trillion dollars, he has the power to do so," Davis says. "It's a concentration of control we haven't seen in American history before."

This level of control used to come with the aforementioned benefits of corporate employment. But now? Executives wield this power despite offering job growth. "[Facebook] seems to create no jobs," Davis says. "They have 17,000 employees globally, which is far less than Circuit City had the year before they were liquidated." (When Circuit City shut down in 2009, it had 34,000 employees.) The end of this timeline is, as Davis puts it, "a really bad episode of Black Mirror," where executives of Facebook and Google answer to no one.

It's not inevitable, though. The other option—if a political movement takes shape and reintroduces a truly democratic control of wealth and goods—looks a lot like systems we already have. Worker-run co-ops like REI or Ace Hardware. Customer-owned mutual funds like Vanguard. Member-controlled and -owned credit union associations, like Desjardins in Canada. "You don't have to turn into Soviet Russia for things to be more accountable and democratic," Davis says. "Just look north [to Canada] for a more stable financial sector and lower inequality."

In fact, moving more in that direction—of democratically controlled associations and co-ops, of shifting health-care or retirement benefits from private businesses to public programs—would almost certainly have a positive effect on the long-held American belief in the value of entrepreneurism. "Start-ups have been in a death spiral for 40 years," Davis says. "The biggest reason is, if you start a business in the U.S., you have to pay for everyone's health care and retirement. We make it undesirable to start businesses. It's so risky, no sane person wants to do it."

What's particularly concerning for the U.S. is how ill-equipped the country is for an economy no longer led by corporations. "We're the only semi-civilized society that would imagine you should get health care from your employer rather than your government. Or that retirement should depend on employers," Davis says. "We face hazards that are not true of other parts of the world."

But, Davis says, whatever change is coming is happening soon.

"We're at the turning point," he says. "If we let these forces run free, we get corporate fascism. But the tools are there to create something really great if we choose to do that." 

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