– the vital difference between a “firm” and a “corporation”
from Peter Radford
I am learning that it takes a while to come to terms with the trauma of an attempted coup.
Various people are reacting differently depending on their state of mind prior to the attempt. What catches my eye, given my own perspective on the role of business in society, is the pressure emerging on our large corporations. Having spent the past few years busily ignoring the moral corruption and ineptitude of the Trump regime business leaders are suddenly trying to appear pious. Many of them are suspending their support for political groups and individuals. Others are suspending social media platforms that were used to organize insurrection and ferment violence.
This is all too little too late.
The equivocation that allowed major corporations to support Trump whilst overlooking his manifest moral failings simply so that they could benefit from tax cuts and reduced regulation stains those corporations forever. It is an example of the transactional thinking produced by a rigid application of the flawed notion of shareholder value permeating the business world.
Let’s set the record straight: corporations are wards of the state. They exist because the state says they can exist. That’s what obtaining a corporate charter implies. Actually it is an explicit, not implicit, relationship. In return for being given a charter a firm, which then becomes a corporation, commits to providing socially beneficial services. It is a classic example of a state/private sector partnership. The charter brings with it a variety of benefits available only to corporations. So as firms accept those privileges they surrender their market purity: they become hybrids, they become agents of the state.
It is the inability of most economists to understand the vital difference between a “firm” and a “corporation” that has bedeviled the development of our understanding of institutions and their role in mediating transactions in the face of radical uncertainty. Firms and corporations may look similar when viewed through the narrow lens of economics, but they are very different structures with very different consequences for economic development.
This is not the place to opine further on that difference, except to point out to anyone interested, that, as wards of the state, modern corporations are obligated to act socially responsibly. That includes not funding politicians who advocate violence or who seek to undermine democratic elections. So acting responsibly is not some amazing attribute of a “woke” corporation. It is an expected attribute. It is something we ought to demand. Indeed: acting otherwise ought to bring with it the potential loss of the charter that is so central to the corporations survival.
This is a moment when getting rid of our muddled thinking about what appear to be arcane definitions of what a “firm” is becomes vital. We need to shift this discussion out of academia where it is doomed to wallow in endless hair splitting, and get it into a more open domain where we can build pressure on our corporations to be sensitive to the socio-economic consequences of their actions.
Finally: let’s also be clear. We have for far too long outsourced swathes of socio-economic policy making to the business sector where a transactional attitude born of a false theory has produced a level of inequality, insecurity, and inequity that has undermined the nation and torn its social fabric wide open.
We need to take back into the democratic domain that policy making so that we can all invest in the outcomes.
So it is good that business is under pressure. It has run free too long.