The Socialists’ Hatred of the Corporation in Capitalism
The formation of the corporation as a business organization began centuries ago. The corporation, like other forms of the firm, was an object of socialist hatred long before it assumed its contemporary form. The objective in this brief essay is to show why corporations have been found contemptible by socialists in spite of the fact that their contemporary versions deliver many well-paid jobs, produce desired goods and services that make the life of the contemporary consumer of higher quality than that of kings and queens of former eras. Corporations also pay taxes that fund governmental social programs, they generate and produce new technologies, and they provide the engine of economic growth for national and world economies.
Since even legally organized corporations are still people (they are rarely managed by wildlife, are hardly ever staffed by robots, and mostly do not sell products and services produced by extra-terrestrial aliens), they display both noble and ignoble human proclivities. Corporations, therefore, are capable of performing inconsiderate, immoral, and even illegal activities. Capitalist societies long ago learned how to influence the behavior of the firm and to sanction them in various ways when guilty of such activities.
Space considerations make it inappropriate to expand on the argumentation of contemporary economists, both of the socialists who decry corporations and their managers and of the more market-oriented economists who defend capitalism’s organizational advantages and possibilities. For those interested, a substantial chapter of the book Socialism: Origins, Expansion, Decline, and the Attempted Revival in the United States provides a translation of the professional discussion among economists regarding the corporation in American capitalism.
Socialist Theories of Corporate Exploitation of the Working Class
Socialists have made the hatred of firms and corporations a central point of their doctrines, ideologies, and theories. Marx developed an economic theory which insisted that the manager’s pursuit of “surplus value” and profit was based on the exploitation of the worker. The firm contracted to engage workers for, say, twelve hours a day, but the workers produced enough in, say, eight hours a day to cover the labor costs of production. The workers were certainly not to be sent home at the end of the time it took to produce that much. They worked on and produced in that 12-hour working day excess product or “surplus value” that the manager pocketed for himself. Voila! There is exploitation. The theory sounded great to the workers who were encouraged to revolt and eliminate the managers who were guilty of the exploitation. But the theory was full of flaws that economists quickly pointed out to Marx and his followers. The interesting story of this theory and its effects are addressed in detail in my book Socialism, so we won’t distract from the narrative here by elaborating on the theoretical flaws.
It is very important to realize also what socialists like to forget, i.e., that the performance of corporations can also be kept within the bounds of acceptability by exposing them to competition. To keep these marvelous organizations producing our prosperity and happiness from the taint of dishonesty or corruption we can create regulations prohibiting unacceptable behaviors, we can produce laws to assure that people are protected from potentially unjust or damaging corporate actions. Importantly, we can subject our domestic producers to the competition that arises from breaking up monopolies, enhance competition by encouraging new entry into domestic markets, and by opening up our borders to foreign competition by importing products and services from abroad.
The Socialist Solution for Controlling Corporate Behavior
None of these solutions for assuring society of the acceptable performance of corporations is acceptable to socialists. They prefer having the government take over all the nation’s businesses. But this socialist alternative has been rejected by free societies. After the socialists took many millions of lives in the process of forcefully taking over the management and ownership of corporations in the Soviet Union and China, societies found this approach unacceptable. It was the approach of the centrally planned economies of the Soviet Union, China, Cuba, India, Venezuela and others. This “nationalization of industry” was the key doctrine of 19th century socialism and the primary element of central planning.
Unfortunately, nationalization overburdens the government agencies, which are in charge of the excessively bureaucratic management of state-owned firms. The centralized, command system destroys incentives, productivity, technological change, and efforts to maintain protection of the environment.
In Western Europe the totalitarian system of socialist planning was rejected. Most of those countries did indeed have socialist and communist political parties anxious to win the election that would permit them to construct a socialist economy. But over a century was wasted by those political parties insisting on nationalizing either the entirety of the economy’s firms or at least the “commanding heights” of the economy – the key industrial firms. The nationalized firms would be overseen by committees of parliament and the state’s hired managers would not seek to produce profits and efficiency, but follow instead the bureaucratically produced objectives of the political representatives of the society.
This approach proved to be a large zero in effectiveness. After the Second World War socialist parties came to power, since the memory of capitalism’s “failure” had led to the Great Depression, the misery of which was concluded only by the economic stimulus of the tragic WWII. So people were ready to try socialism when peace came. But economic planning had no perceptible positive effect on those economies and the nationalization scheme, transforming private firms into miniature public bureaucracies, functioned with the usual (negative) effectiveness of socialism. European voters heeded the warning of Friedrich Hayek (author of The Road to Serfdom) that these socialistic planning arrangements would inevitably prove destructive to personal and societal freedoms and prosperity, and they voted the socialists out of office before the latter could establish and impose tyrannical institutions on their citizens.
The Failure of Socialist Central Planning to Solve the Problem of Corporations
Under capitalism, every firm and household has its own plan. Once the economy is taken over by the governmental bureaucracy, all those private plans are eliminated and the government produces one massive, single plan to control all the subtle and complex relationships extant in the free economy. In the countless logical and legislated arrangements, planning gaps result from incompleteness or inconsistencies in the formal plan. Thus, there are openings for individual choices that are counter to the plan. Mostly, these lead to black markets or even a vast “second economy” that produces goods otherwise not obtainable, but also generates mountains of illegality and injustice.
When the government tried to take over the leading sectors or commanding heights of the economy, not much regulation happened at all. The parliament was not inclined, nor was it capable of providing business correction or effective management of the industrial sectors of the economy. The result was that inefficiency was rampant and positive regulatory effects were quite invisible. It didn’t take long for the government to see the desirability of getting out of the micro-management of the economy. At that point, advocacy for the restructuring of the private economy was moribund, which is simply to say that socialism disappeared.
Now, consider again the “democratic socialists” of the United States, as addressed in other posts on this website. These socialists are “democratic” only in that they attach themselves to the Democratic Party. They actually desire to be dictators of any environmental and/or economic activities of the nation if only they can gain control. They may still be the old-time socialists who have otherwise disappeared from the earth, because they mention in various ways their desire to restructure the economy. But they now also say they would be like the Scandinavian socialists of contemporary Europe, without realizing that there are no socialists in Sweden and the other countries alluded to. (For details and evidence on this paragraph, please see below my posts I and II entitled Democratic Socialists: “We Need Swedish and Scandinavian Socialism.”)
Sweden, the most notable of these countries clearly distanced itself from trying to restructure their economy with the programs that failed universally in democratic Europe. Sweden correctly calls itself a capitalist economy. The Scandinavians have retained an egalitarian tradition and maintain significant redistribution of incomes. Finland even tried to implement a universal basic income that proved unsuccessful. But in Sweden’s capitalist economy, everyone works and, unlike the stated objective of the democratic socialists in the United States, who want the rich to pay for all social programs, everyone in Sweden pays their taxes. So there is no kinship between American and Scandinavian “socialists”.
Socialism and the Problem of “Moral Hazard” in Corporate Management
The reader will understand that the modern corporation is run by professional managers who are not the owners of the firm. The corporation’s owners are its stockholders, whose interests should be served by the hired managerial team. It is called “moral hazard” when the management pursues its own interests rather than the interests of the owners. This negative behavior and other negative proclivities require laws and regulations delivered by government, but there is a tendency in the governmental bureaucracies of Western societies continually to increase regulatory activity until the costs of compliance are prohibitive and creativity is stifled.
Because of this tendency, periodic regulatory reforms referred to as deregulation become highly desirable.
The prudent, non-bureaucratic government will find it difficult to ignore regulation of its industries, but over-production of regulations is counterproductive. It is much wiser to expose firms to rigorous competition than to attempt to direct them through micromanagement. Under competitive conditions the corporation must try to attract customers and achieve long-term clientele loyalty by fair pricing and by providing an excellent, competitive product. The competitive effort must also be enhanced by global integration of the economy: borders must be opened to foreign competition.
