Tuesday, April 5, 2011

Why corporations exist

Corporations, as a concept, came into existence for three reasons:
  1. to make a profit, 
  2. to shield the partners from risk, and 
  3. to inject a central authority into person-to-person (lateral) relations.
According to Life Inc., corporations came into existence because the ruling class needed needed a way for their inert property (usually land or gold) to participate in a new mercantile economy. As Europe made its way out of the Dark Ages, a new social class emerged: merchants. Previously, commerce was conducted primarily on market day, under the careful watch of the local noble, so he could tax transactions. As prosperity increased, as did demand for goods and the need to do commerce on non-market days. Merchants satisfied this demand by buying from artisans, transporting the goods to customers, and re-selling at a profit. They didn't actually make anything, they made all their money by facilitating trade. The aristocracy was increasingly excluded from these transactions, especially when merchants crossed territorial boundaries, which was only exacerbated by the age of sail.

The nobles needed a way to get in on the game, without risking their reputation or their velvet tunics. Their wealth was tied to the land and was not increasing. At the same time, merchants needed larger sums of money to initiate more ambitious projects, such as longer journeys of exploration and more ambitious settlement or resource extraction projects.

So, the corporation was born. As Rushkoff wrote:
The corporation was not a business or a government entity, but a combination of the two.
Its government supporters-- the monarchs-- had the authority to write the trade laws and grant monopolies; its business participants-- the chartered companies-- would enjoy the exclusive right to exploit them.
Here we arrive at the first two reasons for corporations to exist: to make money for investors, who are people who do nothing more than contribute some capital, do no other work, and whose liability is limited to only their initial investment when things go wrong.

In the 17th century, aristocrats started granting charters to bestow exclusive rights to trade within a geographical region in the new world. The Hudson's Bay Company and the British East India Company are well-known examples of these. Thus, rulers were parlaying their sovereignty and initial stake in a voyage into central control of a monopoly and a share of future profits. Rushkoff again,
The chartered corporation was a bold grasp for permanent rule and permanent wealth that constituted a stalemate between the two groups. The contracts that monarchs and mercantilists wrote not only stopped their own decline from power; they stopped time, locking in place a set of corporatist priorities that to this day have not changed. Instead, these priorities work to change the world and its people to conform to the rules of central control.

People who had always engaged in business with one another would now be required to do so through monopoly powers. All lateral contact between people and businesses would not be mediated through central authorities. Any creation or exchange of value would have to be run through these centrally mandated companies, in a system enforced by law, controlled, by currency, and perpetuated through the erosion of all other connections between people and their world. Moreover, the emphasis of business would shift from the creation of value by people to the extraction of value by corporations.
This is the third reason why corporations exist. If they did not inject themselves into existing human relations, there would be no profit to be made. If a mercantile relationship didn't previously exist, they'd invent one.

To me the first two reasons are problematic, but defensible. Some projects are too large to be shouldered by a single person, but are worthwhile. People have different skills, all of which are needed to make the world turn around. But this third reason is the most despicable of all. A central authority is insinuating itself into relations between people and requiring them to organize their lives differently against their will, undemocratically, and without any accountability. This to me seems to be a violation of human rights.

Photo credits. Hudson's Bay Company graphic from Hudson's Bay Company Archives via Jeff Chapman, AVOC on a canon by zampano!!! on flickr, official seal of the Muscovy Company by the British Museum

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