At one end is the view that a corporation is an organization of individuals designed to provide goods and services to consumers, companies and other institutions. Society benefits in a variety of ways, including the many goods and services that these corporations efficiently produce, as well as the many jobs that they create.
At the other of the spectrum, is the view of the corporation as an organization that will use all lawful means for its single-minded objective of generating profit and wealth. As we have seen with the financial crisis, that single-minded focus on wealth can degenerate into a behavior dominated by greed, where a relatively small number of people will do whatever they can to earn large sums of money without worrying about the impact of their actions on the larger society.
Which view of the corporation most applies today, and which best describes its likely evolution over time? Does the overriding focus on wealth creation of the for-profit corporations create unique risks for democratic societies, and as a results their power must be carefully controlled by government and other societal interests? Or is it a legal entity designed to promote the conduct of business and economic life in general, which should be entitled to many of the same rights and responsibilities of individuals in a well-functioning, civic society?
These question have been with us for a long time, at least since Adam Smith - the Scottish philosopher who is considered the father of free-market, free-trade capitalism - and his contemporaries started to lay down the foundations of modern economics and capitalism in the second half of the 18th century. The Wealth of Nations, which he wrote in 1776, is generally regarded as the beginning of modern economics.
Smith believed that wealth creation in a competitive commercial economy should be guided by the market’s invisible hand. He used this metaphor to indicate that, “in a free market, an individual pursuing his own self-interests tends to also promote the good of his community as a whole,” and that “the free market, while appearing chaotic and unrestrained, is actually guided to produce the right results by this so-called invisible hand.”
For years, many thought that Smith was thus advocating a laissez faire style of capitalism in which corporations and individuals should be encouraged to focus on wealth creation with very few controls, checks and balances. But, as I learned more about his life and works, I discovered that nothing could be further from the truth.
Adam Smith was a very moral man. While The Wealth of Nations is his opus magnum, he wrote a number of other books, including The Theory of Moral Sentiments, in which he argued that sympathy, the human ability to have a strong feeling of concern for another person, is required in an economic system in order to achieve socially beneficial results.
In an excellent 2009 Financial Times opinion piece, Harvard economics professors and 1998 Nobel Prize winner Amartya Sen observed that in affluent countries, where it has been most successful, capitalism is pragmatic, not ideologically pure, and that this pragmatism goes back to the days of Adam Smith. “It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed . . . People seek trade because of self-interest – nothing more is needed, as Smith discussed in a statement that has been quoted again and again explaining why bakers, brewers, butchers and consumers seek trade. However an economy needs other values and commitments such as mutual trust and confidence to work efficiently.”
Professor Sen further explained that in a capitalist system, mistrust and lack of confidence in others have far-reaching consequences and have greatly contributed to generating the financial crisis and making the recovery so difficult.
I strongly agree with this pragmatic, non-ideological, balanced approach to capitalism. On one side is the fierce competition and self-interest inherent in open, free markets. On the other is the supportive community behavior and sympathy found in well functioning human societies. I feel that this approach, which balances the interests of the individual with the interests of society, is the path that capitalism must follow.
How does this balanced view of capitalism apply to corporations? Should we expect corporate behavior, - that is, the behavior of its managers and directors, - to be guided by something like the human ability to feel sympathy toward another person, as well as by wealth creation and the market's invisible hand? Can we allow corporations to act in ways that undermine trust and confidence in the functioning of markets, given the potential negative, far-reaching consequences of those actions to society?
The answers to these questions depend on which view of the corporation we want to emphasize. If we think of a corporation primarily as an legal entity whose overriding purpose is making money, then it is hard to bring sympathy, trust and confidence into such an abstract, de-humanized view. But, if we think of a corporation as a collection of individuals organized to better achieve a common end, then the same sympathy, trust and confidence that we expect from the individuals members of the organization should apply to the corporation as a whole.
In the last few decades, the pendulum has arguably swung too far toward the abstract view of the corporation. And nowhere is that more evident than in Citizen’s United v Federal Election Commission, a recent 5-4 decision by the US Supreme Court holding that corporate funding of independent political broadcasts in elections cannot be limited under the First Amendment.At the crux of the case was whether a corporation can use its funds to pay for political broadcasts for or against a candidate in the immediate run-up to an election. The majority argued that since corporations are essentially collections of individuals, they are entitled to the same free speech rights as individuals, including the constitutional right to fund independent political broadcasts. The First Amendment, they argued, barred the government from limiting such corporate expenditures.
The dissenting opinion argued that since corporations can amass considerable more money and power than individuals, they can have a disproportionate influence on elections and can thus threaten to undermine the integrity of elected institutions. This concern for democratic integrity makes corporations different from individuals for purposes of free speech.
In the conclusion to his dissent, Justice John Paul Stevens wrote:
“At bottom, the Court's opinion is thus a rejection of the common sense of the American people, who have recognized a need to prevent corporations from undermining self government since the founding, and who have fought against the distinctive corrupting potential of corporate electioneering since the days of Theodore Roosevelt. It is a strange time to repudiate that common sense. While American democracy is imperfect, few outside the majority of this Court would have thought its flaws included a dearth of corporate money in politics.”
As Adam Smith originally showed us, the fierce competition and self-interest inherent in open markets can nicely co-exist with the human concerns that watches over and cares about the interests of society. Critical to the success of open, democratic societies is that they be guided - not by ideology, - but by the pragmatic principle of checks and balances, the brilliant architecture underlying the American system of government. Its built-in flexibility enables the country to adapt to vastly varying conditions. If any part of the system becomes too prominent, the other parts react to limit its powers and bring the overall system back in balance, be it between the different parts of government, or between government, corporations and individuals.
I believe that corporations are best understood as organizations of people designed to better serve other people and the larger society. And I believe that in the decades ahead, it is important to bring out and emphasize the human side of corporations. As we do, we will be creating a better economic system and a better society for all.
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