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The Scorpion, the Frog, and the Corporation

Ernest Partridge, The Crisis Papers

September 12, 2006



“The public be damned, I work for my stockholders.”

William H. Vanderbilt
 


A scorpion, eager to get to the other side of a stream and unable to swim, pleads with a frog to allow him to ride on the frog’s back, across the stream.

“Certainly not,” said the frog. “You would kill me.”

“Preposterous!,” replied the scorpion. “If I stung you, it would kill the both of us.”

Thus assured, the frog invited the scorpion to climb aboard, and halfway across, sure enough, the scorpion delivered the fatal sting.

“Now why did you do that,” said the frog, “you’ve killed us both.”

“I am a scorpion,” he replied, “this is what I do.”


What corporations do is strive to maximize the returns on the investments of their stockholders. As Milton Friedman put it, “The social responsibility of business is to increase profits.” Unfortunately, if corporations  are unconstrained by law or regulation, they can, by simply “doing what they do,” suck the life out of the economy that sustains them. Like cancer cells, lethal parasites, and the scorpion, unconstrained corporations can destroy their “hosts,” without which they cannot survive, much less flourish.

By saying as much, I might appear to be favoring the abolition of corporations, like some far-out Commie nut case.

On the contrary, I approve of corporations. I have seen, in the former Soviet Union, the results of an alternative system, the “command economy.” It isn’t a pretty sight.

How can I disapprove of corporations when I am surrounded by devices and conveniences that were developed and marketed by corporations? The computer with which I write this essay and the internet that publishes it would be impossible without the corporate structuring of our economy. (However, let us not forget, they would likewise be impossible without government sponsored research and development).

So here’s Two Cheers for Capitalism. Thank God for Thomas Edison, Henry Ford and Bill Gates, and the millions of others who have, by exercising free enterprise, immeasurably improved our lives, as they proceed to improve their own.

But I withhold that third cheer as I view with foreboding, the dangers of capitalism and corporatism unconstrained and running wild.

My message is a simple one, if familiar: corporations are invaluable servants that can become ruthless masters, to prevent which: “Governments are instituted among men [and women], deriving their just powers from the consent of the governed.” This means that laws and regulations, which implement limitations and constraints, are enacted and enforced in behalf of “the public good.”

Remove these constraints, and the servant soon becomes the master, as well as the parasite which consumes its host, thus destroying both the parasite and the host on which it feeds.

Put simply, when the corporation is subordinate to government and the rule of law, prosperity throughout society is possible. But when government and the rule of law are subordinated to corporations, the result is ruin for all.

Bold pronouncements, all. Now to the supporting arguments.


The Corporation vs. Society.


The stakeholder problem. It is an article of faith among libertarians and regressives, a faith undiminished by the historical record or practical experience, that the unregulated free market of self-serving buyers and sellers will, “as if by an invisible hand,” yield the optimum social benefits.

This reassuring dogma conveniently neglects the “third parties” to economic transactions: the “stakeholders” – individuals affected by the transactions without their informed consent. These include individuals residing downwind and downstream from polluting industries, taxpayers who must pay for the medical costs of smoking, citizens at risk of injury or death from toxic chemical releases, and homeowners near airports. Add to these, the customers who are not informed of the consequences of their purchases: teen-agers induced to take up smoking, consumers of insufficiently tested drugs, etc. The costs of these third-party “externalities” do not figure into the profit-maximizing plans of corporations, unless those costs are imposed by force of law and regulation, which is to say, by government.

There is another remedy, say the libertarians: the threat of law suits by individuals harmed by corporate irresponsibility. Unfortunately, the regressive Republican Congress has pulled the teeth from this watchdog by enacting so-called “tort reform” – limitations on awards to plaintiffs. So today, damage claims by customers and stakeholders are simply regarded by large corporations, as “the cost of doing business.” (For more reasons why “the courts and torts” solution doesn’t work, see my “Privatization and Public Goods.”).


The Stock Market is geared for the short term. In contrast, wise and just social policy plans for the long term. Imagine two competing lumber companies: the first clear-cuts, moves on and leaves a ruined landscape. The other employs sustainable forestry, leaving ground cover and seed trees, and replanting seedlings, in the expectation of harvesting trees fifty years hence. As a result, the first company, free of the costs of sustainability, has twice the return on investment for the first two years than its competitor, and sells lumber at 80% of the price of the other. However, after ten years it is bankrupt. The second company, sustains lower profits and higher prices far into the future. If you were an “in and out” investor, which stock would you buy? This admittedly simplistic illustration distorts reality. Some far-sighted commercial enterprises do flourish, and “ruin and run” companies can and do fail. Nonetheless short-term planning is endemic to corporate structures.  Fortunately, this corporate myopia can be mitigated through subsidies and tax incentives -- i.e., through government intervention in the market.

In sum: For most investors, the sooner and the greater the return, the better. But societies flourish when citizens are psychologically and morally invested in the long-term success of their nation. It’s called “patriotism.”


Corporate Volunteerism doesn’t work. Corporate officials often proclaim, in person or through their trade associations, that government regulation is unnecessary, since voluntary acts of “good corporate citizenship” will suffice. No company, they argue, can afford to be ill-thought of by the public.

To be sure, corporations will contribute to civic enterprises and strive to be “good corporate citizens.” It’s good public relations, which means a worthwhile return on the modest expenditures involved. But when public service collides with the bottom line, the results are all too familiar and predictable.

I found this out when I served for seven years on the Public Advisory Panel of The Chemical Manufacturers Association  (now The American Chemistry Council). (See My Seven Years as a Corporate Token).

Following the 1984 disaster at the Union Carbide plant in Bhopal, India, the CMA established a program of “Responsible Care®” toward industry workers and toward the public in general. The published principles of the Responsible Care program are commendable and uncontroversial, describing just the sort of behavior one would expect of an industry cognizant of its public responsibilities.

At the three to four yearly meetings of the Panel, various industry initiatives and programs designed to ensure safety and environmental quality were presented to us, and we visited numerous plant facilities and ecological restoration areas adjacent to the plants. All quite impressive.

I will credit the chemical industry with fine corporate citizenship, at least with regard to numerous “small things.”

However, since the advent of the Bush administration and the relaxing of government regulation and oversight, the industry has failed spectacularly to meet its civic responsibilities. Immediately after the Supreme Court decided the outcome of the 2000 election, the Public Advisory Panel was abolished. Then followed three responses to public issues by the CMA/ACC which together have undone the gains of the Responsible Care program. The first was opposition to efforts to meliorate global warming. The second was an attempt, in conjunction with the EPA (!) to test the toxicity of insecticides on human subjects: infants younger than 13 months. This “CHEERS” program was abolished by congressional action. Finally, the industry thwarted congressional efforts to require strict security measures at chemical plants.

As a November, 2003 60 Minutes broadcast dramatically demonstrated to an audience of millions, the insecurity of chemical plants are disasters waiting to happen, since it is apparent that a terrorist with a satchel charge might be able to simply walk into a facility and set off an explosion that would release chemicals that could kill hundreds of thousands. The protection of these facilities is a public imperative, to date still unrealized. It is clear, at last, that the chemical manufacturers will not volunteer to secure these facilities. So they must be made to secure them by the only agency capable of enforcing that security. That would be the government, of course. (Follow this link for more about these issues and the American Chemistry Council).


Unregulated free markets are self-eliminating. One of the great myths of regressive politicians is that mega-corporations support free markets. In fact, they don’t. Competition forces down prices and compels product and service improvement. That’s good for consumers, but bad for corporations, which much prefer monopolization, for themselves at least, and “free markets” for their competitors. Witness Microsoft and the media conglomerates.

Once a corporation (or a consortium of corporations) takes control of a market, they can set their own prices and make their own rules. If they control the market on some insignificant widgets, consumer demand will keep the prices down. But if they control essential and indispensable commodities, such as food, water, prescription drugs, gasoline, heating fuel, or electricity, they are free to set prices that will impoverish their customers.

The remedy is obvious, and has worked well in the past: the enactment and enforcement of anti-trust legislation. And in the case of “natural monopolies” such as electricity, the remedy is regulation. And that means, of course, government.


The Great Experiments.

Libertarians and regressives of the Republican right insist that once government regulation of business is abolished and the free market is allowed to function without constraint, prosperity for all will follow.

That’s the theory and the promise. However, history has proven otherwise. For example, in the twenties, under successive Republican administrations, business was given free reign, unconstrained by “government interference.” And that led to the Great Depression. After the fall of Soviet Communism in August, 1991, Russia was overrun with right-wing, free-market economists from the West, bearing advice, which was, unfortunately, all too often taken. The Russian economy collapsed as enterprising former industrial managers seized control of these resources and became instant billionaires and almost the entire population was impoverished. Finally, with the fall of Baghdad in 2002, Bushites, led by Paul Bremer, saw a fresh opportunity to establish a free-market utopia. Today, 60% of the Iraqis are unemployed.

But no matter. History be damned. So once again, thanks to the Bush administration and a compliant Congress, cowboy capitalism is on the loose, and the American economy is careening straight toward a precipice. Parasitic capitalism has poisoned its host and, absent prompt and radical treatment, both are doomed.

For consider:

  • In the past six years, the incomes of almost all middle and low income Americans has stagnated or fallen, while the incomes of the top 1% have skyrocketed. (For specifics, see Paul Krugman’s latest column).
     

  • Consumer credit has increased to the point that the national credit card is about “maxed-out”. Add this to the increasing interest rates, and the inevitable result must be a sharp drop in consumer spending and an increase in personal bankruptcies.
     

  • Corporations, driven to reduce labor costs and thus increase profits, and heedless of the social and economic consequences, have shipped (“outsourced”) millions of industrial and now service jobs overseas, further reducing the consumer base in the United States.
     

  • Similarly, corporations and the super-wealthy have sought, and found in a compliant Congress, “tax relief” through numerous tax loopholes and overseas tax shelters. Thus, government revenues have plummeted while deficits have soared.
     

  • As a result, domestic spending for social services, education, scientific research and development, and physical infrastructure has been cut dramatically.

No modern economy can survive without an educated work force or an operating physical infrastructure or a population of consumers with disposable incomes. And yet, in their misguided pursuit of “corporate self-interest,” the corporations starve those very institutions that sustain them.

Unconstrained corporatism, through its control of the media and the federal government, has brought this about.


The inevitability of governance.

The anarchism of the libertarians and the regressive right is a delusion, and a dangerous one at that. For just as no organized game can continue without referees, no civilized nation can endure without a government. In competitive sports, it is the objective of each team to win the game. Referees have a separate function: to protect the integrity of the game by enforcing the rules, without which there can be no game. So too with governments and their laws and regulations. They exist to enact and enforce the rules that make an enduring market possible. They enforce traffic laws, without which travel would be impossible; they assign frequencies to commercial radio and TV stations (originally, in 1934, at the request of the broadcast industry). Governments enact and enforce regulations that protect the public from contaminated food and dangerous drugs, from unscrupulous investment schemes, from fraud, libel and slander, and do not forget, governments exist to protect corporations from unscrupulous competition and monopolization by competitors. (See my “Kill the Umpire”).

Corporations, as William Vanderbilt emphatically asserted, exist for the benefit of their stockholders. Ideally, governments exist to represent and act in the interests of all the people, and that ongoing entity: the nation. And if a government fails in these duties to the people and to the future, then the people have the right to improve it or, failing that, abolish it and replace it with a new government. (Read The Declaration of Independence.  It’s all there).

For example, although I have a stake in clean air and water, I can’t vote out the governing board of a polluting corporation; not unless I am a stockholder, and a wealthy one at that. However, I can elect representatives that will enact laws and regulations that protect me and other stakeholders from the abuses of the corporation. In short, if corporations, in the proper pursuit of profits for their stockholders, are also to operate to the benefit of society at large, they must be regulated by the only agency legitimately qualified to act in behalf of the general population, and that would be a democratically-elected government.

So we come to an unspectacular conclusion: capitalism and corporations are good things, but it is possible to have too much of a good thing. For these worthy and indispensable servants of the body politic can become cruel and insufferable masters, to prevent which, we establish laws and regulations – i.e., government.

Today, in Bush’s America, we have way too much of these “good things,” as they now undermine and destroy the institutions, the economic foundations, and the political structures that sustain us – and the corporations as well.

The solution is also compellingly obvious: let’s return to the system of regulated capitalism, of checks and balances, of the rule of law, and of a government of, by, and for the people, that has served us so well for over two-hundred years.

In the previous administration, under such a regime, the American economy enjoyed unparalleled prosperity, the country was at peace, and the United States of America and its political traditions were respected throughout the world.

Let’s bring back that which was proven to work in the recent past.

If it ain’t broke, don’t fix it.


(Author’s note: This essay is a brief statement of an argument developed at length in my book-in-progress, Conscience of a Progressive.).


Copyright 2006 by Ernest Partridge

 


Ernest Partridge's Internet Publications

Conscience of a Progressive:  A book in progress. 

Partridge's Scholarly Publications. (The Online Gadfly)


Dr. Ernest Partridge is a consultant, writer and lecturer in the field of Environmental Ethics and Public Policy. He has taught Philosophy at the University of California, and in Utah, Colorado and Wisconsin. He publishes the website, "The Online Gadfly" and co-edits the progressive website, "The Crisis Papers".   His e-mail is: gadfly@igc.org .


Crisis Papers editors, Partridge & Weiner, are available for public speaking appearances