Streetwise Professor

January 22, 2010

Corporations are People Too

Filed under: Economics,Politics — The Professor @ 4:19 pm

Legally, anyways.  That was a key issue in the recent Supreme Court decision re McCain-Feingold.  I don’t have a lot to say about the specifics of the decision, as campaign finance law is way too arcane for me.  Suffice it to say that I am inherently skeptical about any regulation regarding elections designed by incumbent politicians.  People yammer about conflicts of interest all the time, but there’s a colossal one for you.

I just wanted to make a quick point about a debate between Stevens and Scalia carried out in the opinion and the dissent.  Stevens noted that the Founders were deeply skeptical of corporations.  Indeed so.  Scalia noted that there are so many corporations today.  Also true.  The interesting question is how we got from A (Stevens) to B (Scalia).

The story is told in the North, Wallis and Weingast natural state book Violence and Social Orders I’ve blogged about several times, mostly in the context of Russia.  The relevant chapter is primarily based on John Wallis’s work.  The basic story is that hostility to corporations–reflected very well in Adam Smith’s Wealth of Nations–was due to the fact that historically, English corporations were created by the crown, and were essentially very profitable favors provided to the politically connected.  They were, in NWW terms, part of the “closed order” of the natural state, in which access to certain contracting forms was limited to a select powerful few.  This animus towards corporations was inherited in the United States, but in the early years of the 19th century, state legislatures confronting issues associated with the financing of new infrastructure turned the corporate form into a prop of an open order system in which this contracting form was made available to all.  Rather than limit the right of incorporation to an elite, they made it available to everybody.  The system changed from one in which legislatures had to grant every incorporation, to one in which pretty much anybody could incorporate if they met a set of general, universally applicable requirements.  Hence, the proliferation of corporations.

Thus, Stevens was historically right, but his inference was wrong.  The kind of corporation that Adam Smith and the Founders detested was a quite different from the modern corporation that developed in the 19th century.  The name was the same, but the entire conceptual and legal basis for corporations old and new were completely different.  Indeed, almost inversions of one another.  The transformation of the corporation from a creation of the closed order to an essential element of the emerging open order explains the empirical phenomenon that Scalia cited.

This illustrates one of the dangers of assuming that the meanings and connotations of words in the 18th century (or any other time) remains unchanged to this day is quite dangerous.

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  1. More unchanged than you might think. NVRI argued previously that, “[T]here is no reason to make such allowances for corporations, which are creations of the state.”

    I heard a commentator say something identical today. That phraseology is quite common even now, though it would take a rather tortured reason to say that corporations were, in fact, created by the state because they are filed with the state. It made sense before, when they were charted into existence by the crown, but not now when people create a corporation simply by filing the appropriate paperwork. Admittedly, after the filing is complete a new legal entity exists that did not exist before. I think referring to that entity as a creation of the state stretches the truth, however, rather like asserting that a child is the creation of the state because recording their birth affected their citizenship status.

    Anyway, the much more interesting issue in this case is just how far the USG argued it could go in the name of fair elections. The exchanges regarding the publishing of books are chilling.

    Many progressives are moaning over the rights corporations will now have (I say hep hep hurrah), but I hope at least one of them could see the future if the court had ruled the other way after arguments like this:

    CHIEF JUSTICE ROBERTS: Take my hypothetical. It doesn’t say at the outset. It funds — here is — whatever it is, this is a discussion of the American political system, and at the end it says vote for X.

    MR. STEWART: Yes, our position would be that the corporation could be required to use PAC funds rather than general treasury funds.

    CHIEF JUSTICE ROBERTS: And if they didn’t, you could ban it?

    MR. STEWART: If they didn’t, we could prohibit the publication of the book using the corporate treasury funds.

    Comment by ThomasL — January 22, 2010 @ 9:06 pm

  2. My problem with the concept is this: If I do something bad as an individual, I will be punished for it. I may be put in jail, or, if the crime warrants it, even forfeit my life. But if I do the same thing under the “corporate veil”, I am immune from punishment, and as it is only an abstraction, so is the company I created.

    Comment by Stretch — January 22, 2010 @ 11:06 pm

  3. Regardless of their basis, corporations like Google have about as much in common with the interests of the average American citizen as the East India Company had with the interests of the average Englishman (or Gazprom has with the average Russian).

    I can just about see it a few post-peak oil decades down the line Exxon oligarchs sending American conscripts to fight national liberation movements in Saudi Arabia or Nigeria.

    Comment by Sublime Oblivion — January 22, 2010 @ 11:07 pm

  4. Don’t forget the context of this decision.

    A group of people formed a corporation in order to produce and market a documentary highly critical of a public figure. They were denied the right to advertise the movie or to sell it on pay-per-view by the USG on the basis that it was a documentary highly critical of a public figure that was running for office.

    Lest any more need said, once this came before the court, the USG showed under questioning that its position was that it had the authority to ban the publication or advertising of any book, movie, etc. that depicted a candidate in any manner whatsoever, advocated the election of a candidate explicitly, or could be construed to advocate it implicitly if that book, movie, etc. was funded by a corporation — even a corporation that existed for the sole purpose of publishing books, movies, etc.

    There were existing exemptions for “media outlets” but the exact nature of those exemptions and the meaning of a “media outlet” the USG claimed to interpret for itself.

    It is hard to imagine this is what Anti-Federalists intended when they insisted on the Bill of Rights.

    Comment by ThomasL — January 23, 2010 @ 1:16 am

  5. Stretch: I have to disagree, and strenuously. First of all, certain acts are criminal if undertaken by a corporate officer, and are punishable by imprisonment. Indeed, the sentencing guidelines establish punishment on the basis of the cost of the offense. If you are an officer of a big company–or even a lower level employee (ask Jamie Olis)–and you engage in a criminal act, the economic effects of that criminal act are likely to be large, which means a very long, long prison term. Second, research by Peltzman and Jarrell in the 1980s showed that criminal acts, or even non-criminal things like product recalls, have outsized effects on the stock prices of the firms that engage in this conduct. The stock price consequences far exceed the direct costs associated with the misconduct. Corporate shareholders pay bigtime for corporate malfeasance. Incorporation is not a get-out-of-jail-free card, by any means.

    SO:hopefully more on your point later. Like Adam Smith, and Milton Friedman, I concur completely that individual business people, and individual corporations are frequently quite malign. The question is what is the appropriate systemic mechanism to reduce/control/mitigate this potential misbehavior. Like Smith, Friedman, Schumpeter, etc., I believe that competition (always imperfect, admittedly) is the best defense, but that a large fraction of regulation in fact has the effect of reducing competition. The EICo or Gazprom were/are effectively immune from competition due to the protection of the state. Google didn’t exist until recently, and its entry sharply curtailed (but didn’t eliminate) the dominance of Microsoft. Now Google is trying to game the legislative/regulatory system in order to secure its place. Although, like all systems, it is imperfect, I’d much prefer a system in which creative destruction operates than one in which the state uses coercion to prevent this process from occurring. That’s the best way to control corporate power.

    The ProfessorComment by The Professor — January 23, 2010 @ 11:57 am

  6. […] to address the legal and political issues addressed by the court.  I just want to pass along a useful bit of historical observation from Streetwise Professor: Stevens noted that the Founders were deeply skeptical of corporations.  Indeed so. Scalia noted […]

    Pingback by The Founders were deeply skeptical of corporations « Knowledge Problem — January 24, 2010 @ 4:10 pm

  7. To the Professor’s Comments:

    1. You claim to disagree with Stretch on his criminal responsibility point, but in your failed attempt to do so you fail back to a natural person as the actor and the punished. If the Court had used your analogy and said you have to look to natural persons in the case before it, then the decision would have gone the opposite way 9-0.

    2. For the past 30 years (since 1980), our nation’s view of the use of the corporation was to return to the Guilded Age. I do not need to remind you that that outlook did not work well in the late 19th Century nor did it work well for the past thirty years. Monopolies have been bad for nations for hundreds of years, well before our nation’s founding and they are still bad. Texas, for example, was founded on the idea of individuals with small businesses – that is the origin of our unlimited homestead exemption. And by the way, doesn’t the Court’s decision mean that corporations have to have the homestead exemption, as natural persons do, based now on equal protection grounds? How about marriage? If the state-created person of a coporation must constitutionally have the same rights as a natural person, then marriage cannot be denied, nor probate, nor running for office. The right to spend “one’s” money being declared a fundamental right of a person, natural or artificial, the other rights we had traditionally identified with being a natural person have no constitutional leg to stand on any more.

    Comment by Sterling Minor — January 24, 2010 @ 7:07 pm

  8. […] seems like forever ago, but it was only 2010.  That year I wrote about the Citizens United case, in which the Supreme Court established that corpor….  The post responded to criticisms of the decision, notably in the Stevens dissent, that cited the […]

    Pingback by Streetwise Professor » Is the Constitution of Liberty Credible? — October 17, 2011 @ 5:30 pm

  9. Wow, this is really unpleasant to read on the screen with the background picture. You really should get serious and make it so that it’s MUCH easier to read.

    Comment by Dan — January 7, 2015 @ 7:29 pm

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