The evil brother that is corporate law

Trenz Pruca of the Daily Kos community discussed capitalism and democracy in four posts. Sources are included in each post. In the first he described the life cycle of capitalism. Stage 1 is production and competition featuring small firms. There are inventors and hungry upstarts. Stage 2 is consolidation in which firms swallow competitors and acquire political power. Stage 3 is financialization in which speculation replaces production, which becomes optional. Finance is sacred. Factories collapse and no one notices. A bank sneezes and Congress has billions in bailout. Stage 4 is oligarchic management in which wealth concentrates and the state guarantees elite losses and protects elite profits. What Adam Smith praised was stage 1. He would be appalled at stages 3 and 4. It is a historical pattern that Venice, Netherlands, and Britain followed. Corporations are not capitalism. They were invented to encourage risk through limited liability. Ownership is diffuse among passive shareholders leaving decisions to executives, fund managers, and lobbyists. The value shifts from product to stock price. More money can be made trading assets than producing goods. Capitalism isn’t broken, but complete. There are ways out of this, but they will be painful. Capitalism is a brand. It describes itself as stage 1 so as to protect the wealth that accumulates in stage 4. In the second part Pruca describes a way out, which is democratic socialism. First we have to get an accurate view of socialism, beyond what Republicans say it is so they can discredit it. Democratic socialism is practiced in the Scandinavian countries. It keeps markets, private firms, and competition. It adds, universal services, strong worker power, government that regulates capitalism, public or cooperative ownership of essential sectors, and political equity so government can’t be bought. Democracy is the steering wheel to capitalism or can be seen as capitalism with guardrails. This creates broad ownership rather than concentrated. Businesses can fail without wrecking society. There are strong unions and collective bargaining. There is confusion because people often confuse “capitalism” with “big business” and “socialism” with “government doing everything.” Pruca wrote:

The defining difference between late-stage capitalism and democratic socialism is not markets. It is power. Who controls the surplus? Who sets the rules? Who captures the gains? Who bears the risks? Who writes the laws? Who funds the political class? Who can be allowed to fail without destroying society? Late-stage capitalism answers: capital. Democratic socialism answers: citizens. Everything else follows.

Oligarchy is not fate. In the third part Pruca sorts through definitions. Some people describe stage 1 as capitalism, others describe stage 4 and use the same term. The two groups talk past each other and the rich and policymakers exploit the confusion. We need to define capitalism not as a fixed idea, but a historical lifecycle system. That allows us to criticize capitalism without rejecting markets. If capitalism is a fixed idea than taxing capital is attacking capitalism. Regulations, union rights, and anti-corruption laws are then socialism. But if capitalism is a historical system that can degrade into oligarchy then taxing capital, regulation, and all the rest are maintenance, keeping the system for eating itself.

Capitalism does not just create wealth. It creates the conditions by which wealth governs unless democratically constrained. ... If capitalism is seen as historically self-transforming, reform becomes essential to prevent decay.

Democratic socialism does not mean the government owns everything and there is bureaucratic central planning. That’s state socialism, which is different. Democratic socialism prizes the democracy and provides the guardrails to capitalism. We’re used to thinking about state socialism because of WWII and Cold War language. We’re used to socialism being a synonym for authoritarianism. We’re taught capitalism is freedom, regulation as socialism, and equality as tyranny. In summary: Capitalism is a historical system and will evolve into oligarchy unless democracy intervenes. Policy depends on accurate definitions and descriptions and America’s political paralysis is a result of linguistic confusion (which is made worse by those in power). We can’t get a better system until we accurately describe this one. In the fourth part Pruca clarifies the problem isn’t corporations, it is the evil brother that is corporate law. Corporations derive their power not from capitalism but from law. Georgetown historian Carroll Quigley argued:

Without public control over corporate personhood, corporate lifespan, and corporate liability, no society can remain fair, democratic, or functional.

Early American corporations were not all powerful. They were:

granted charters sparingly, limited to specific purposes, barred from owning other corporations, subject to periodic re-approval, restricted in asset accumulation, constrained in stock issuance, and limited in voting rights so no shareholder could dominate.

These rules were pro-democracy. The idea of corporate personhood does not appear in a law or court opinion. It does appear as a headnote by a court reporter in 1886. States had a race to the bottom and Delaware won that race. I had read elsewhere that corporations went to various state legislatures, no doubt with money and promise of jobs, asking them to loosen state corporate laws. That’s why most corporations are registered in Delaware and the state as a separate corporate judicial system. This is another example of the actions of the social hierarchy. Get a bit wealthier than others and one has money to meddle in politics to make wealth accumulation a bit easier. A bit more wealth, a bit more meddling. The cycle can continue. Back to Pruca. That meddling meant corporations became immortal. No limit on purpose or consolidation, no obligation to the public. They switched from being economic tools to sovereign entities. But capitalism can work just fine with all the smaller corporations. With the immortal corporations...

attempts to raise wages are blunted by corporate pressure, attempts to regulate are captured by corporate lobbyists, attempts to tax are negotiated like hostage situations, and attempts to provide public goods are undermined by private interests.

Sen. Elizabeth Warren has introduced the Accountable Capitalism Act. Its components. Corporations with more than $1 billion in revenue need a federal charter. It must consider the interests of not just stakeholders, but workers, customers and communities. At least 40% of board seats are elected by employees. There are limits on political spending (I would prefer none). Executives can be held accountable. Other ideas out there: Corporate personhood leads to corruption. Anti-trust is a tool to preserve democracy. Democracy can’t exist with private empires. Liability rules should scale to corporate impact. One corporation can’t own another. Transparency in risk, taxes, and supply chains. Quigley said:

The danger isn’t “the market” — it’s the corporation that has stepped outside both market discipline and democratic authority.

Pruca says that corporations must be subject to national review because corporations operate nationally and internationally, states don’t have the capacity to regulate them, and a corporate failure can crash the economy. The question isn’t whether capitalism is good or bad. It is: Who rules whom? Pruca’s answer:

Any institution that enjoys the privileges of personhood, immortality, limited liability, and political power must be subject to the nation’s democratic authority, No exceptions. ... Wealth, power, and economic activity must operate within democratic boundaries, not outside them.

As I wrote all that I got to be thinking of the Robber Barons of the late 1800s. They sound like late-stage capitalism. I don’t remember, if I learned at all, how they were defeated.