Corporate Dreams: Big Business in American Democracy from the Great Depression to the Great Recession

Chapter 3 - From Public Purpose to Private Profit

22 Chapter 3 From Public Purpose to Private Profit A poorly understood but vitally important factor in the course of American economic development was the transformation of corporations from instruments of social purpose to organizations for individual profit. In early America corporations were created mainly to accomplish public objectives such as the building of roads and canals. Even early American banking corporations often had an at least partly public purpose. The currency—the medium of exchange—that they created was in short supply and was a desperately needed public good. Today, of course, the primary goal of most corporations is not to enrich the public. Shareholders are supposed to be the corporations’ primary beneficiaries. During the nineteenth century the business corporation underwent a transformation from the people’s employee to the people’s employer. Incorporation is a Latinate word describing the practice of treating a group of individuals as one body (corpus), with a life independent of any of its members. Long before there were business corporations , there were philanthropic corporations, educational corporations, and governmental corporations. In 1075, for example, William the Conqueror issued a corporate charter to London, making it an entity distinct from the rest of England. His goal was to give London, the richest city in the country, a basis for local government and, not incidentally, taxes with which to fill the royal coffers. The English crown also issued corporate charters to universities and charitable institutions. As opposed to the city of London, universities and charities often received tax exemptions. Just as important, their charters provided a legal basis for governing these institutions through corporate boards whose members were usually appointed. It took five hundred more years before European imperialism led to the modern world’s first business corporations, the most famous of which were the Dutch and the English East India Companies. The latter was formed in 1600 by a charter from Queen Elizabeth I granting the company monopolistic trading privileges in the East Indies. So too with the Levant Company, the Muscovy Company, the Hudson Bay Company, and many others. England established some of its American colonies through corporations such as the Virginia and the Massachusetts Bay Companies. All of these seventeenth-century English business corporations had a public purpose, which was to enable England to compete with France and Spain for empire in the Americas and Asia. The powerful French and Spanish crowns could raise taxes and armies relatively easily, giving them a seeming advantage in the struggle for imperial expansion. The English crown lacked such power because of the ascendance of parliamentary government. English monarchs therefore relied on grants of corporate privilege to encourage their powerful subjects to invest in empire building. Americans’ experience with the East India Company, whose tea they threw into Boston Harbor in 1773, helped make them wary of corporate power. The Scottish moral philosopher and economist Adam Smith—author of the bible of free-market ideologues, The Wealth of Nations (1776)—won the hearts of Americans partly because he loathed business corporations in general and the East India Company in particular . Smith used the East India Company as an example to support his warning that corporations were “a great enemy to good management.” What is today called the “agency problem”—the fact that managers are supposed to act as agents of stockholders but often act in their own interests instead—made Smith an opponent of business corporations in general and their managers in particular: “. . . being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance. . . . Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.”1 Smith also cautioned that business corporations could not be trusted to exercise political power.2 His primary example was the East India Company’s 1770 monopolistic cornering of the rice market in Bengal. The result was starvation for a million or so Bengalis. Today, Smith’s From Public Purpose to Private Profit 23 strictures against corporate power are mostly forgotten. Some who think of themselves as adherents of his free-market ideas unwittingly contradict him by arguing that government should not regulate business corporations . Smith was for free people and free markets, not free corporations. After Americans won their independence from England and the East India Company, they did not quickly forget...