5
Liberty for Me, Not for Thee
Corporate capitalism embraces a predemocratic concept
of liberty reserved for property holders, which thrives
by restricting the liberty of employees and the community.
What seems eternal rarely is, and what calls itself freedom may not be freedom at all. I think, for example, of the make-believe games of my childhood, where we were free to make up whatever rules we wanted, but somehow we always ended up with rules making the neighborhood bully the winner. When we played at being horses, she was the golden stallion, I was the old gray mare. When we played cowboys and Indians, she was the cowboy, I was the Indian tied to the tree (with pretend ropes). But whenever I dared to find my voice and protest, she told me I was “breaking the rules.”
It’s much the same with our economy, where the wealthy somehow always end up the winners. When wealth interests seek government protection, we’re told that property rights are vital to a free market. When labor or environmental rights need government protection, we’re told about the danger of infringing on the free market.
We’ve seen in earlier chapters how the myth of property functions, but that’s just one of the two bedrock values of the capitalist idea structure. The second is liberty—often referred to as freedom of contract or the free market. These ideas likewise are worth taking apart.
FREEDOM OF CONTRACT
We’ll start with freedom of contract, which is based on the theory that in economic matters, we’re all free to make any arrangements (or contracts) that we choose. The government supports these contracts by making them legally binding, and by generally refusing to interfere in setting terms. In the Constitution, we find this principle embodied in Article 1, Section 10, stipulating that no state shall make any law “impairing the Obligation of Contracts.”
This represents a legal loophole that corporate governance has been ducking into in recent decades. In legal circles it’s become outmoded to say stockholders “own” corporations, but legal scholars manage to establish the same body of rights in a roundabout way—using the notion of contracts.1 Following the work of R. H. Coase, later developed by University of Chicago legal theorists Daniel Fischel, Frank Easterbrook, and others, corporate governance scholars now speak of the corporation as a “nexus of contracts.”2 They conceive of it as a place where various parties come together and contract for their rights, rather than a thing that someone owns.
The shift dates back to the 1932 publication of The Modern Corporation and Private Property, when Berle and Means noted that as a result of the separation of ownership and control in the public corporation, stockholders were no longer active owners but passive recipients of capital returns. This revolution in the nature of property meant we were “no longer dealing with property in the old sense,” they wrote, and the “traditional logic of property” no longer applied. Because of the additional facts of perpetual life and increasing corporate size, Berle and Means asserted that the corporation had “ceased to be a private business device and had become an institution”—a means of organizing economic life—informally, “an adjunct of the state itself.”3
These were genuinely revolutionary assertions. But in the nexus-of-contracts view that developed in later decades and that in recent years has become virtual dogma,4 the sharpness of their impact was blunted, like a dart absorbed into pudding. Contract theorists argue that there is still good reason to focus on shareholder value, because stockholders are “residual claimants”: they get only what remains when other claims have been paid. Maximizing the value of common stock thus ostensibly means maximizing the total wealth generated by the corporation.5
The difficulty, as progressive corporate law scholar Margaret Blair points out, is that the old notion of ownership has never really been supplanted but has retained a subliminal hold. In legal journals today, for example, there is much discussion of the “agency” problem in corporate governance—a formulation that views stockholders as principals, and managers or directors as their agents, with the problem being how to keep the agents loyal to the principals’ interests. But as Blair explains, “Why are shareholders the ‘principals’ in the relationship? Because they are the ‘owners.’ And why do we call them ‘owners’ and we don’t call other contracting parties owners? Because they have residual income and residual control rights. But why do they have residual control rights? Because they are the ‘owners.’ ” In short, she adds, there is a “gaping flaw in the logic of the Chicago School way of thinking about corporations.” Scholars may acknowledge in footnotes that stockholders no longer own corporations, but they proceed to treat the stockholder contract as the only one that matters.6
There are other problems with the nexus-of-contracts theory. The term residual implies that stockholder income takes second place to other income, when in fact maximizing stockholder income is the fundamental aim of the corporation. And in truth stockholders today don’t really get the residual—instead they get the whole thing, the entire market value of the corporation. They have the right to demand that the corporation be sold to the highest bidder, and the right to pocket the proceeds—which certainly represents ownership. In addition, the stockholder contract contains an element that cannot be contracted away, which is fiduciary duty. But still, we’re told, it’s a freely negotiated contract, so it’s legitimate.
When this contracting occurred, no one says; it was presumably in the distant past, like the time the British were said to have contracted with their king to rule them forever. As Kent Greenfield of Boston College Law School notes, the contract theory doesn’t involve actual contracts, which even Fischel and Easterbrook admit. They say instead that their theory explains the “logic of corporate law,” and stockholder rights are rules that “people would have negotiated” if they could have. “Perhaps the corporate contract,” they write, “is no more than a rhetorical device.”7
But still, this airy contract is said to give stockholders their ironclad rights—for the state is not to interfere in contracts. In like manner, employees are said to have freely contracted for their wage, so that’s all they get. They are believed to have freely consented to an arrangement where they have no property rights and no governance rights—much like wives of old, who were believed to have freely consented to the loss of their property rights upon marriage.
If this idea of freely agreed-upon contracts seems like sleight of hand, we might note that it serves a vital purpose. As Francis Fukuyama wrote, “All regimes capable of effective action must be based on some principle of legitimacy.”8 And in a democracy—whose twin principles are liberty and equality—there is no better foundation for the capitalist economy than liberty.
THE FREE MARKET
If freedom of contract is the legal variant of liberty, its economic variant is the free market. Here we find the notion of an invisible hand guiding individual actions to work out to the benefit of all, which is the doctrine of the self-regulating free market. Although the invisible hand is commonly attributed to Adam Smith, it was an idea pervasive in the early eighteenth century, related to the theory popularized by the philosopher Leibniz that postulated a preestablished harmony of the universe—making this the best of all possible worlds. As historian Robert Anchor described it in The Enlightenment Tradition, the theory was that a “hidden hand” led to “a basic harmony of interests among men in the long run.” Hence it was “only necessary to release everyone to pursue freely his own self-interest in order to realize a harmonious social order.”9
By the end of the eighteenth century, philosophers had pretty much abandoned the idea of the hidden hand and basic harmony, after the violence of the French Revolution had made clear that harmony was not the order of the day. But the idea is still found in economics classes today, where it is taught not as philosophy but as science. It’s no accident that it had its genesis in the aristocratic age. That era may indeed have been the best possible world for the nobility, but it was decidedly not best for everyone else. This point was made hilariously by Enlightenment philosopher Voltaire in his satiric novel Candide.
It’s a satire worth remembering, for it comes from the same cultural milieu as The Wealth of Nations, published in 1776. Candide, published in 1759, chronicles the tale of the sweetly named Candide, who is thrown out of a baron’s castle and subjected to outlandish perils—until the end, when he becomes a nobleman himself (via an invented pedigree), and lives happily ever after. In his wanderings in between, he is nearly frozen to death, has his leg cut off, is cast into a dungeon, is shot, caught in an earthquake, and cast adrift in a shipwreck, to name but a few of his calamities. In one scene, he encounters a fire where three thousand people have perished, and he discusses it with the ever-present philosopher Pangloss.
“What a shocking disaster!” cried Candide.
“All for the best,” said Pangloss: “these little accidents happen every year. It is very natural that fire should catch wooden houses, and that those houses should burn. Besides, it delivers many honest people from a miserable existence.”10
All these misfortunes, Pangloss explains, are indispensable, for “private misfortunes constitute the general good; so that the more private misfortunes there are, the whole is the better.”11 All things are for the best in this best of all possible worlds.
One can imagine a similar lampoon today, of an individual sweetly named, say, Lucky, who loses a vast inheritance and is subjected to endless economic perils—until the end, when he wins the lottery and lives happily ever after. In his wanderings in between, he might be forced to take a temporary job without benefits, spend all his money on credit card interest and late fees, finally land a back-breaking factory job, only to be laid off, whereupon he would be sent overseas to a garment sweatshop, where he might be fired for trying to unionize, and would at last be thrown into a stream polluted by Texaco. At various points, he would be visited by an economist, lecturing about how the invisible hand of the free market leads events to work out to the benefit of all.
I do not mean to be unkind to Adam Smith. The truth is, he published The Wealth of Nations in a time of innocence, before the effects of industrialization had fully arrived. But as historian Karl Polanyi observed in The Great Transformation, those effects came swiftly. A few short years after Smith’s book was published, it became clear that pauperism was rising even as wealth soared. Riots were occurring more frequently. Industrial towns were becoming wastelands.12 By 1817, Robert Owen lamented that laborers were “infinitely more degraded and miserable than they were before the introduction of these manufactories.” Industrialists, meanwhile, were amassing great fortunes.13
At work was something Polanyi termed “the two nations” effect: the tendency of capitalism to uplift some even as it degraded others. There was perhaps only one unique era, historian Eric Hobsbawm noted, where the two nations effect was not in evidence. This was the quarter-century following World War II, when a rising tide actually did lift all boats, bringing luxuries like the refrigerator, the private washing machine, and the telephone to the masses. But as Hobsbawm observed in The Age of Extremes, postwar industrialization was “backed, supervised, steered, and sometimes planned and managed by governments.”14 The free market was remarkably successful in that era when it was notably not free.
The two nations effect offers an apt parable for capitalism. But it is a story of conflict—like democracy itself. Aristocratic capitalism prefers the parable of the invisible hand, which (Pan)glosses over the system’s imperfections. Little things, like the Great Depression. Like the Asian crisis of 1997–1998, when stock markets crashed around the world. Or like 30 percent of workers today making a poverty-level wage.15
In reality, if the invisible hand does not always function very well, the free market does not always extend its freedom very far. When economic texts and the business press trumpet phrases like free enterprise, free trade, and the free market, there is a contradiction staring us in the face: that free enterprise is in the business of trampling freedom.
The police would need a court order to do what corporations do routinely: tape conversations, install cameras, and monitor computers. Employee surveillance like this occurs at nearly three-quarters of major companies—more than double the number of just two years ago, according to a recent American Management Association survey.16
More pervasively, 86 percent of major corporations do drug testing.17 It’s so commonplace, we fail to see how horrific it is. Imagine that agents of the federal government showed up at your door and said they were conducting a drug screening, so would you please pee in the jar? And when you went to the bathroom, they trailed you and watched, to make sure you didn’t cheat. You would be justified in screaming about police state tactics. Free enterprise does the same thing daily, and no one screams.
It’s chilling to see how intimate the corporate invasions of privacy can be. A Nabisco plant in Oxnard, California, refused to allow female employees the simple freedom of deciding when to go to the bathroom, forcing some to wear diapers to work. The women filed a class action in 1995—citing “bladder and urinary tract infections … from being forced to wait hours for permission to use the rest rooms.” The company settled in 1996 on undisclosed terms.18
What incidents like this point to is the fact that there are virtually no mechanisms within companies to ensure employee freedom. At progressive companies, white-collar workers might find management sympathetic to their personal needs. But in the legal construct of the corporation itself, employees generally have no due process, no right to privacy, no protection against unreasonable search and seizure, no representatives to take their side, no say in governance, no free speech, no jury to hear their case. Those are democratic freedoms, and they stop at the company door.
Inside the corporation, there is one primary legal freedom: to maximize profits for shareholders. Liberty is the value invoked to legitimize this pursuit of gains for the wealthy. It’s the pursuit of self-interest in a free market, we’re told. We rarely stop to observe that the corporation’s “self” is equated with wealth holders. The liberty that capitalism invokes is thus a medieval notion of liberty. It is liberty of property: freedom as the right to the undisturbed possession of property. In the days of the feudal barons, this meant freedom from the king’s interference. The lord of the manor could do what he liked within the bounds of his own estate, and his serfs had no recourse.
In the democratic era, we recognize a different concept of liberty, liberty of persons: the right to full personhood, no matter how low one’s station. All human beings have the right to dignity and freedom. This is a liberty we turn to government to protect. But where liberty of property is paramount, liberty of persons does not exist.
For the community, democratic freedom means the right to make laws. But this freedom, too, is trampled by financial interests—often via the World Trade Organization (WTO). In the Oxford English Dictionary, one definition of freedom is “exemption from arbitrary, despotic, or autocratic control.” But the autocratic WTO allows nations no such freedom.
Consider patents, for example. India’s Patent Act once kept all foods and medicines in the public realm, to assure broad access. But the WTO said this offered insufficient protection for corporate property rights and demanded the law be changed, which it was in 1999. Thus we see that in the global economy, what is at work is not free trade but protection for property rights. Similarly, inside corporations, what is at work is not freedom of contract but protection for wealth holders—again in the name of property rights.
In this repetitive invocation of freedom, we see what John Kenneth Galbraith calls “innocent fraud.” It may well be innocent, because it is largely unconscious. But it is nonetheless fraudulent, because it conceals structures of power. Galbraith made this point in his article “Free Market Fraud” in The Progressive magazine, where he remarked that the word capitalism had fallen out of fashion. “The approved reference now is to the market system,” he wrote, and this is a shift that “minimizes—indeed, deletes—the role of wealth.” Instead of capital owners in control, “we have the admirably impersonal role of market forces,” he wrote. “It would be hard to think of a change in terminology more in the interest of those to whom money accords power. They have now a functional anonymity.”19
In like manner, free trade grants corporations a functional anonymity. Instead of corporations dominating the world economy, we have the admirably impersonal role of free trade.
But with this concept “freedom,” corporations and the wealthy have their hands on the tail of a tiger. And that tiger is likely to turn on them. It has done so before, when it turned on the aristocracy that once claimed freedom as its exclusive prerogative. Liberty was memorably invoked at Runnymede in 1215, when King John of England affixed his seal to the Magna Carta, formally limiting the divine right of kings. At the time its protections extended only to the upper classes, staving off encroachment on their liberty from above, from the king. But eventually it would open the way for new encroachments from below, as commoners claimed liberty for themselves.20
The spirit of capitalism, in an unconscious way, remains tethered to that field at Runnymede. For it still claims liberty as the exclusive right of the wealth-holding class. It does so in a clever way, with a free market ideology that conceals two assertions, not each equally valid. First, there is an assertion that natural processes are self-regulating. And this is undoubtedly true. We see it in nature, where the renewal of life in spring comes on its own, or in our own lives, where the drive to make money brings us to do our part in holding the world together. Our economic drives are part of the natural order and are trustworthy.
But the second assertion is less true, and it is this: that the corporate governance structure embodies the natural order. This does not follow logically from the first, for it glosses over the institutionalized power of wealth.
We might note that while employees and the community are left to the protection of the invisible hand, wealth is protected by the visible hand of government and corporation. But this is something, it is hoped, that will be overlooked.
To help us begin to see it, we might, for a moment, imagine a different arrangement of institutional power. Picture a free market in which labor rights are enthroned in law, and property rights are left to the invisible hand. This would be a world in which we believe employees are the corporation. They are, after all, the ones running the place. Hence only employees could vote for the board of directors, and the purpose of the corporation would be to maximize income for employees. In theory, stockholders would receive income they negotiated through contracts. In practice, the corporation would dictate those contracts with little real negotiation, and stockholders could accept the terms or go elsewhere, only to find other corporations offering nearly identical (and dismal) terms.
In this world, stock would be sold in a manner controlled entirely by the corporation, much as wages are set today. Stockholders would appear alone at the company, where they would be taken into a room and made an offer. There would be no reliable way to compare current stock price to past price, to compare the price one person receives to what others receive, or to compare prices from one corporation to another. Wage and benefit data would be published daily in the Main Street Journal, and the movement of the Dow Jones wage index would of course be tracked nightly on the news. But returns to shareholders would be considered proprietary information and would not be given out.
If stockholders tried to improve their negotiating position by organizing into mutual funds, corporations would threaten to cut off payments altogether. The companies would talk about replacing stockholder money with funds from people overseas who were willing to accept lower returns.
And of course overseas, stockholders would have even less power. Although free trade agreements would provide intricate protections for labor and environmental rights, they would offer capital no protections. “What does capital have to do with trade?” pundits might ask. “Trade is about goods and services and the people who create them, it’s not about capital.”
When the newspapers said “the corporation did well,” they would mean that employees did well. Stockholders might have seen no dividend increases in years. Some might even have seen their income terminated in “capital layoffs.” But whenever anyone dared to suggest changes in this economic order, they would be said to be “tampering with the free market.”
That’s what we’re told now. But we don’t have to buy it. We can begin to see through the sleight of hand of the free market and the nexus-of-contracts corporation, just as our ancestors saw through the sleight of hand of the divine right of kings.
As it turned out, it wasn’t necessary to abandon belief in God in order to change the monarchy. And it is not necessary to discard belief in the free market in order to change corporate structures. There is indeed a natural order to our economy, and it is an order where competing self-interests can at times work out to the benefit of all. But that is a far cry from the existing order, where the self-interest of capital is given exalted standing.
In moving toward freedom, societies move in stages, German philosopher G.W.F. Hegel believed. Early monarchical societies “knew that one was free,” he wrote, “the Greek and Roman world only that some are free; while we know that all men absolutely … are free.” The movement from one stage to another was an evolution Hegel saw as virtually inevitable. As he wrote: “The boundless drive of the World Spirit, its irresistible thrust, is toward the realization of these stages.”21 In the flow of history, the middle stage—where only some are free—is not likely to be sustainable.
We are not likely to suffer forever bullies who make up rules that suit only themselves. One day, surely, we will wake up, as I finally did in my childhood games, and see that the ropes binding us are only pretend.