Professor Bainbridge...on law, politics, religion, culture & food

Stay tuned.  Obama is ushering in a new era of Classical Liberalism.

Any non-phlegmatic lefty in legal academia would be smart to grab a copy of “On Liberty” and brush up at this point.

Classical liberalism relates to the rights and protection of individuals, not corporations.  Since much of economic activity involves corporations, not individuals, I fail to see how classical liberalism relates to economic analysis.  My point is that if you guys are libertarians, you should be AGAINST corporations, and protect individuals from them.  This was how our founding fathers viewed it, and Lincoln, and both Roosevelts.  And this is how the classical economists viewed it.  John Stewart Mill wrote that when the means of production are controlled by associations of any kind rather than individuals, it is socialism.

You are smart, Prof. Bainbridge.  You need to be for the individual and protect them from state sanctioned collectives!!  Ie, church, state, modern corporations.

"Since much of economic activity involves corporations, not individuals...”

It’s funny, I have never met a corporation, but I sure have met a lot of individuals (many of whom work for a corporation, sometimes even the same one).

Sarcasm aside, I do actually share a strong disdain for corporations (although, hypocritically I work for one and consult for many other others, which only fuels my dislike).  However, big corporations are only really dangerous when they get in bed with the government.  Besides, small business corporations and even large ones fail all the time, and on net I think that’s good thing.

One question, though, for Toby...you oppose “state sanctioned collectives”...do you oppose the state sanctioned collective that is my marriage (or anyone else’s)?

RE,
Corporations are totally “in bed” with government.  This is exactly the problem people had with the East India Trading Co. and why the Boston Tea Party happened. Corporations give money to government for favorable regulations in return.  Individuals lose out on this scam.
Toby

Toby,

Don’t rush to the opposite extreme.  When corporations reach a scale of billions of dollars of revenue, it is in their self-interest to pay lobbyists to go to Washington, D.C. and lobby Congress to do their bidding.  Everyone (reasonable) agrees that this is problematic for many reasons, but most importantly because it quashes the voice of a dispersed and uninformed majority.

But as RE suggests, there are many smaller corporations doing valuable work for people that could not be done without the network of contracts that is the modern Delaware corporation.  You can tweak things at the margin to improve them, but the jurisdictional competition for corporate chartering has produced the most efficient mechanism for organizing natural resources, labor, and capital that has ever been witnessed in the history of the world.

Don’t throw the baby out with the bathwater.  We want corporations.  We don’t want corruption.

If the theoretical argument I’ve made doesn’t convince you, then ask yourself this: Would there be any startups in Silicon Valley if there weren’t corporations?  Sure the Internet was invented at DARPA.  But it was the startups like Netscape, eBay, and Amazon that demonstrated its potential for transforming our lives for the better.

Dear Michael F. Martin,
So you agree that we need to throw out the bath water, which is in this case the large, widely-held modern corporation.  They should not have the rights that they were given (e.g. free speech), and we should protect individuals from them.

We do not need them in the coffee industry, or in clothing, or restaurants.  Having them in these industries only crowds out the free market, making it difficult for owner-run businesses to compete, not because they are more efficient, but because they tend to exploit things more.

Btw, you’re argument needs some support.  I think Amazon etc. would still be in business without the help of VCs.  I don’t see why giving these start-ups favorable regulations over individuals is good. And I would ask you to explain the following: :"the jurisdictional competition for corporate chartering has produced the most efficient mechanism for organizing natural resources, labor, and capital that has ever been witnessed in the history of the world.” To be blunt, I think this is just a BS sentence.

Toby
“Protect the people and individual freedom from the modern corp!” Toby Reed

Toby,

I think you’re being facetious, but it’s hard to tell online, so I’ll state for the record that the “bathwater” was corruption and the “baby” our system of corporations.

As far as evidence for my views, I see plenty.  In fact, the examples you point to of industries without corporations are constituted by corporations.

I’ll infer that you’re somehow distinguishing LLCs from other forms of corporations.  And that you somehow find LLCs less objectionable than C corps.  My question is do you have a principled basis for that distinction?  I would submit that there is no difference in kind between the two—within Delaware they exist within an ecosystem of various mechanisms for corporate governance.  The empirical fact that more C-corps have widely dispersed shareholders is an artifact of the SEC rules, not a result of the mechanisms of corporate governance.  To wit, you see the same problems with publicly traded LLCs that you dislike in C-corp.s

Corporate governance needs reform.  Government corruption needs reform.  But we need to be very careful about articulating our reasons for making changes, because simply excising a major legal institution from what is considered a contractually acceptable way of organizing land, labor and capital is likely to have lots of unanticipated negative consequences.

Personally, I would prefer to see more work done on theories of corporate government and accounting rules.  Changing how we think about the rules is more important as changing the rules themselves.  What we think is what we perceive.  Rules are simply tools.

Michael,
I am saying that in most industries, such as coffee (eg Starbucks), corporations should not be allowed to compete as it makes it difficult for owner-run businesses to compete.

I am using the exact same distinction that Berle and Means made, which is that large, widely-held corporations are much different from small corporations.

Corruption will not go away if huge corporations are present.  They go hand and hand, and this is exactly how Jefferson, et. al. felt.  Large corps enable a concentration of wealth and power in the hands of the elite, making it difficult for individuals to compete.

My request to you: please discuss only the large, widely held corp so as not to get distracted. This the institution, in addition to church and state, that Jefferson wanted to protect individuals against. Thanks.

Toby,

I’m still not getting your point and I’m not trying to be stubborn.

Last I checked, Starbucks was still run by its founder.  He seems to have a very owner-oriented attitude toward his company, which is actually not doing terribly well right now in comparison to its smaller competitors.  Starbucks succeeded by providing good coffee AND a public space for people to gather and socialize.  Now that the Starbucks atmosphere feels more like McDonalds to many people, its market share is going to level off.  There is plenty of room for smaller corporations to innovate into that market.

Berle and Means?  That was a long time ago, friend.  I’m going to guess that you’re not a fan of Henry Manne.  Fine.  But have you read the recent work by Hansmann and Kraakman on affirmative asset partition theory?  Have you considered how hard it would be to be an entrepreneur without the corporate form being available as a substitute for contract in forming a stable pool of capital, remote from the reach of investors’ creditors?

I can discuss only the large, widely held corporation and it is still not clear to me how the rules of corporate governance are responsible for the oppression of individuals.

Now if you were arguing for an expansion of antitrust liability or something like that we could talk.

And by the way, Jefferson was a much better executive than he was an economist.  I believe many of his pre-presidency ideas were misguided and impractical.  Madison was the better theorist.  Jefferson was a good president for the same reason, however.  He was very attentive to facts, even facts inconvenient for his personal theories.

The fact is that individuals do not need to be protected from any menacing form of institution—whether it be widely held corporations or churches.  Individuals need to be protected from one-another.

Madison had the right idea when he suggested that the role of government is to provide a level playing field in which people are prevented from resorting to the ultimate tactic of violence or coercion.  Non-violent conflict promotes cooperation, although it puts us on a razor’s edge.

Dear Michael,
I don’t want to get off track, so let me address a few of your points, then state my thesis.

First, I referenced Berle and Means so that you would know the context of my terms e.g., “the modern corporation” as I am using it is B&M;’s huge institution.  This is one standard and accepted definition.

Second, Starbucks pays $3x the rent of competitors; this I know from experience as it happened on State St. in downtown Ann Arbor.  They can charge less because they pay their employees less than owners need to support themselves. They have the advantage over individuals since the Company Act of 1862 (?) et. al. 

Third, and relatedly, the founder of Starbucks is not the owner anymore; he is more like Ronald McDonald as a CEO, imo.  Seriously, Starbucks is a collective institution that impedes the basic right of individuals to control their own destiny through owning a business.

Fourth, as for Madison, check this out the quotes below.  In a nutshell, he thought the ability to revocate charters was enough to protect individuals from monopolies (i.e., east india trading co.)

My Thesis: Modern Corporations are collective institutions; thus, individuals need protection from them.  They are not part of the free market economy, they impede it.  My partial solution: lower taxes on owner-run business, proscribe corporate political contributions, etc.  Power to the individual!!!!!! 

Related to above:
Madison to Jefferson re. Bill of Rights.
With regard to monopolies they are justly classed among the greatest nusances in Government. But is it clear that as encouragements to literary works and ingenious discoveries, they are not too valuable to be wholly renounced? Would it not suffice to reserve in all cases a right to the Public to abolish the privilege at a price to be specified in the grant of it? Is there not also infinitely less danger of this abuse in our Governments, than in most others? Monopolies are sacrifices of the many to the few. Where the power is in the few it is natural for them to sacrifice the many to their own partialities and corruptions. Where the power, as with us, is in the many not in the few, the danger can not be very great that the few will be thus favored. It is much more to be dreaded that the few will be unnecessarily sacrificed to the many.

The Founders’ Constitution
Volume 1, Chapter 14, Document 47
http://press-pubs.uchicago.edu/founders/documents/v1ch14s47.html
The University of Chicago Press

The Papers of James Madison.

And there you are. Toby

Toby,

I appreciate your perspective on these problems, which is (as I’m sure you aware!) relatively under-represented within academia, which receives much of its funding from publicly traded corporations.  But I want to challenge you to sharpen your thesis, because it doesn’t adequately acknowledge some of the very important benefits that we have received from corporations with widely dispersed shareholders.

Your thesis:

“Modern Corporations are collective institutions; thus, individuals need protection from them.  They are not part of the free market economy, they impede it.”

My response:

Your thesis does not acknowledge a huge part of the data set we have on the relationship between large organizations and individuals.  SOME large corporations oppress their employees and cheat consumers for the benefit of their managers, shareholders, and creditors.  SOME churches (a/k/a) cults take advantage of the psychological needs of their members to manipulate them into harming themselves and other people.  But not ALL.  In fact, many if not most, of these institutions composed of widely dispersed individuals produce net benefits for ALL stakeholders involved (managers, employees, shareholders, creditors).

If there is an a priori reason to believe that partnerships should be favored over corporations, then I do not know it.  Certainly no argument or evidence that you have presented here has persuaded me otherwise.  Rather, corporations and partnerships are apples and oranges.  Corporations are needed when lots of capital needs to be raised quickly, and corporations pay for being able to do that in the form of higher taxes.  Partnerships are needed when less capital is needed, and closer alignment of interests between owners and managers is needed.  It is fun to imagine how someday, somehow all firms might be run as partnerships, but for now at least, forming and deploying large pools of capital still requires a separation of ownership and control.  And remember that (unlike gov’t) that structure is formed by a contract with employees and shareholders, which can be renegotiated or sold!

Now for a few quick replies to your responses:

The Berle & Means theory of the corporation may be modern.  But there was this whole postmodern thing, and then structuralist thing, and now some people are saying we’re post-structuralist or post-post-structuralist.  I don’t bother keeping up with the names of these things.  I just know that plenty has happened in the theory of corporations since Berle & Means.  I would at least brush up on the state of the art in the theory of the corporation before trying to abolish the things.

Re Starbucks in Ann Arbor: sounds like Starbucks is sharing part of the money they don’t pay the employees with the landlords in Ann Arbor.  Can’t I feel sad for the employees and happy for the landlords and assume that Starbucks is making the best decisions it can for all stakeholders.  (Incidentally, it seems like they’re not anymore.  So maybe you’re right, but the market seems to be taking care of that for us.)

“Starbucks is a collective institution that impedes the basic right of individuals to control their own destiny through owning a business.”

This is just wrong.  Starbucks sells coffee and pays people to help them do that.  Nobody who doesn’t like their coffee or their terms of employment is forced to buy Starbucks or work at Starbucks.  What makes you think otherwise?

For a dramatic example of how powerful this voluntariness principle is as a disciplining force to large corporations, consider what is happening to GM and Ford now that gas prices are above $4 / gallon.  No gov’t authority is going to have to force them to take into account the environmental harms of low MPG cars anymore.

Madison was on the right track.  I would say his idea about revoking charters was a predecessor to the law of antitrust.  But the law of antitrust has learned a few things since Madison… and one of them is that simply revoking charters isn’t necessarily going to solve the problem of anti-competitive conduct.  You have to go after the root of the problem, which is fraud or coercion, which is typically due to the misbehavior of a person or small group of people.

But you’re on the right track by suggesting that gov’t is needed to solve this problem, and that we should be vigilant to ensure that gov’t isn’t favoring one group over another in enforcing the rules.

Thanks for the link.  I’ll check it out.

Micheal,
I guess I’m not being clear in my thesis.  I am saying that individuals need to be protected from corporations because they are collective institutions. Thus, like there is a separation between church and state, there should be a separation between corporation and state.

Also, corporations, like “Starbucks is a collective institution that impedes the basic right of individuals to control their own destiny through owning a business.”

You responded: “This is just wrong.  Starbucks sells coffee and pays people to help them do that.  Nobody who doesn’t like their coffee or their terms of employment is forced to buy Starbucks or work at Starbucks.  What makes you think otherwise?”

Read what I wrote again, then respond.  I am talking about the inability of individuals to compete as coffee shop owners against Starbucks. 

As I said before, Starbucks pays more for rent in order to force competitors out of the market.  I don’t want to reiterate everything.  Are you not getting this? 
Toby

PS I have read a Hell of a lot more than B&M;on corporations.  I mentioned B&M;so that you might have a base-line understanding of my terms.

Toby,

I think I get what you’re saying now.  And I think we’ve mapped out our difference in opinion.

First, I think your use of the term “collective institution” is somewhat idiosyncratic.  To me, it seems like your picture of corporations is frozen in time.  I think if you looked into history, you would find that any “collective institution” you dislike was once run by the individuals that you do like.

For example, you don’t like how Starbucks undercuts local coffee shops now because its scale permits it to operate at lower cost.  But at one point, Starbucks itself was the local coffee shop that was struggling to get customers and turn a profit.  At what point did Starbucks go from being the kind of local coffee shop that you like to the “collective institution” that you dislike?

Also, I read what you wrote again.  I still think it’s wrong.  I can’t see how Starbucks has “impeded” anybody’s right to start a competing coffee shop.  Certainly they haven’t stopped Peet’s, Caribou, Coffee Bean & Tea Leaf, Seattle’s Best Coffee, and other franchises.  Neither have they stopped my favorite coffee shop, Barefoot Roasters, from offering higher quality, higher priced beans to their customers who happen to be capable of distinguishing the difference between Barefoot coffee and Starbucks.

And I didn’t mean to be snide or suggest that you hadn’t read anything other than B&M;.  It just seemed strange that you would rely on them.  There is some more recent scholarship that would make it easier for you to argue your case, such as the work by Larry Ribstein on “the Uncorporation.”

I’ll probably let you get the last word in response to this message (if you feel so inclined).  I feel like I’ve figured out the contours of our disagreement well enough to satisfy myself that I understand what you dislike about the B&M;corporation.

Micheal,
I can’t help but believe that you have a vested interest (probably financial) that hinders you from understanding my point.  I will say it one more time:  individuals need to be protected from collective institutions (state, church, corporations). 

I infer from your comments that you are not familiar with B&M;.  Again, I am talking about the modern corporation.  This has nothing to do with “post modernism” as you seem to think.  It refers to the widely-held gigantic corp. that arose between 1890 and 1910 (or so), which they thought needed to be conceived of differently from small corporations (i.e., aggregate theory did not apply).

Regarding your assertion that Starbucks has “economies of scale”, this is a convenient catch phrase that says very little. Starbucks was granted favorable regulations over the individual (eg limited liability, perpetual life) and does not pay it’s retail employees what owners need to be paid in order to live.  For the 3rd time, Starbucks crowds out the market, making it very hard for owner-entrepreneurs to compete.

Finally, your references to terms from neo-classical economics (e.g. “economies of scale) are inappropriate for corporations.  Both classical and neo-classical economics assume an owner-entreprenuer with a natural profit motive and private property.  The corporation as a collective has none of these.

Your mention of how collectives start from an individual again makes me think you have a vested interest (aka hidden agenda) to distract us from the point.  The point is silly and irrelevant.

It is sad that you can’t see that individuals should be protected from collective institutions (e.g. corporations).  America was founded on this premise and libertarian thought embraces it.

I guess that is the final word since you think you understand the “contours” of my argument.
Toby
PS In the interest of full disclosure, I have no financial interest in my position.

Toby,

I agree with you that “collective institutions” need to be kept under watch because they can harm individuals.  I disagree with your claim that “collective institutions” are somehow separated from the rest of the economy, or that there is somehow something inherently suspicious about them.

Michael

P.S. At least with respect to this set of issues, my incentive-caused biases should just about cancel each other out.  In my work, I don’t make money unless both individuals (inventors) and “collective institutions” (large corporations) are both content that they have received value.

Micheal,
I never there was something “suspicious” about corporations. I said that they crowd the free market and impede the ability for individuals to own their own business.

You have a HUGE vested interest if you’re a VC or angel investor.  It is no wonder that you can’t understand what I’m saying. You probably have a family that depends on you to do what you do without hating yourself.  If you were to agree with me, you would need to consider the ethics of what you’re doing.

If you’re at all religious, looking at yourself in my mirror would be frightening indeed.  So there you have it. It is fear that drives your ignorance, which is too bad, for you, for everyone.
Toby