Environmental Ethics
and Public Policy
Ernest Partridge, Ph.D
www.igc.org/gadfly

 

A Dim View of Libertarianism

Ernest Partridge


V
 


Corporations: Invaluable Servants, Ruthless Masters


The libertarians’ position on corporations is divided. One faction holds that there should be no legal and regulatory curbs on corporations, since they are the result of free association of individuals. As such, corporations are entitled to full participation the “free markets” which, as we have noted, libertarians fully endorse.

On the other hand, Roderick Long, repeating a point that we made earlier, observes that “corporate power and the free market are actually antithetical; genuine competition is big business’s worst nightmare.” Moreover, Long continues, “Corporate power depends crucially on government intervention in the marketplace. This is obvious enough in the case of the more overt forms of government favoritism such as subsidies, bailouts, and other forms of corporate welfare.” And government interference with markets, as we have noted repeatedly, is the bête noir of libertarians. Long concludes, “small wonder that big business, despite often paying lip service to free market ideals, tends to systematically oppose them in practice.”

Finally, corporations raise problem for libertarians, in that the only feasible remedy for corporate abuse and for the protection of affected unconsenting third parties (‘externalities,” market failure) is government.

Even so, no discussion of free markets and privatization can be complete without a careful examination of the impact of corporations on society. For if government assets and functions are to be privatized, as the libertarians propose, most of them will surely be taken over by large corporations. Furthermore corporations are now, and will remain long into the future, the major players in the “free market” as well as the predominant force in government.


The Scorpion, the Frog, and the Corporation.

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.”  This fundamental objective, called "fiduciary responsibility, is enforced by the rule of law.  Unfortunately, if corporations are not constrained 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 personally 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 which preceded their commercial applications).

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 proceeded 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.”   Notwithstanding the aforementioned libertarian pronouncement that "there is no such thing as 'the public.'"  (Ayn Rand)

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. William Vanderbilt famously proclaimed, “the public be damned, I work for my stockholders.” The basic market transaction, celebrated by the libertarians, is between a buyer and a seller. No place here for unconsenting third parties, the “stakeholders,” who are affected by the transaction. (More about this "third party" in the previous essay, “Market Fundamentalism”).

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, acting in the long-term interest of the future "public".

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. (See my "The Public Interest and the Limits of Volunteerism").

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 (CMA, 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, during of the Bush administration and the relaxing of government regulation and oversight, the industry   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 is a disaster 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 promulgated by regressive politicians and their media supporters 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. (See Chapter 9, Remedial Economics for Regressives, in Conscience of a Progressive).

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 Experiment.

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, Bushistas, 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, with the advent of the Bush administration, cowboy capitalism was on the loose, and the American economy careened straight toward a precipice, over which it fell in August, 2008. Parasitic capitalism has poisoned its host and, absent prompt and radical treatment, both are doomed.

For consider:

  • In the past ten years, the incomes of almost all middle and low income Americans has stagnated or fallen, while the incomes of the top 1% have skyrocketed.
     

  • 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.


Fiduciary Responsibility and the Tragedy of Outsourcing.

My computer and I have been through a bad spell these past couple of weeks.

First, my router/modem developed a terminal malfunction, and then my new anti-virus software failed to install. Thankfully, three very capable and patient gentlemen at various technical support facilities found solutions.

These three gentlemen were, respectively, from India, the Philippines, and once again, India.

If you or someone in your family is about to graduate with a degree in computer science, don’t expect to find a job in the U.S. any time soon.

Amidst my computer worries, I bought a dozen or so electrical supplies from the local hardware: a surge protector, extension cords, a phone, that sort of thing. Glancing at the labels, I found that each and every one was made in China. And a new hard drive? From Malaysia.

No need to go on with this, you know about it already. It’s called “outsourcing.”

Damned greedy capitalists are dismantling our manufacturing base and shipping it overseas!

Were it as simple as that, it would be a waste of my effort writing about it and of your time reading yet another complaint about that which is painfully familiar.

But outsourcing, and the consequent loss of millions of American manufacturing and service jobs, is not the plain and simple result of corporate greed. It is, instead, an inevitable result of a combination of factors, including:

  • the successful enactment of the libertarian dogmas of “the invisible hand” and “trickle down,” namely the conviction that individual entrepreneurs and corporations will, by seeking only their own economic gain, obtain the best results for society at large. These are "dogmas" because they are "proven," not by historical evidence or practical experience, but rather through repetition.
     

  • the corollary libertarian dogma that government has no justification whatever in interfering with the economic activities of private individuals and corporations. In the words of Milton Friedman, “There is nothing wrong with the United States that a dose of smaller and less intrusive government would not cure.”
     

  • fiduciary responsibility: the legal requirement that the primary responsibility of the corporation is to its stockholders, not the public.

Thus the necessity of outsourcing is beyond the control of any single corporation’s executives or board of directors. It is a thus a tragedy, in the sense defined by the philosopher Alfred North Whitehead: a consequence of “the remorseless working of things.” As long as these conditions obtain, jobs will gravitate toward the individuals accepting the lowest wages, i.e., those abroad, and the middle class will wither as wealth flows from those who create the nation’s wealth to those who own and control the wealth. These are conditions that are destined to ruin the economy of the United States.

“As long as these conditions obtain...” The obvious solution, then, is to change “these conditions.”

So why don’t corporate executives simply behave like good Americans, and keep those jobs stateside?

Because, quite frankly, if they were to do so, they would be taken to court by the stockholders and sued. And they would lose.

In these essays I have, on a couple of occasions, quoted William Vanderbilt's remark, “The public be damned, I work for my stockholders.”  I have also cited Milton Friedman's 1970 New York Times article,  “The Social Responsibility of Business is to Increase its Profits.” The title says it all.

The knee-jerk liberal response is that these quotations are expressions of plain lousy attitudes. Sadly, it's much worse than that.

It’s the law!

The fiduciary responsibility of corporations, first and foremost to their stockholders, has been articulated in numerous court decisions, and in the statutes of several states. And so, as Daniel Brook writes in Huffington Post: “Corporations have a fiduciary responsibility to maximize profits even if it means betraying the nation, trashing the environment, or fomenting unconscionable levels of inequality. Nothing is unconscionable for a corporation because they don't have consciences; they're not really people, whatever the courts may say.”

Accordingly, my internet service provider and the company that makes my anti-virus software simply had no choice: they had to hire tech support workers in India and the Philippines and to fire their American technicians. Had they not done so, they would have been put at an insurmountable competitive disadvantage with their rivals who have no qualms about outsourcing. The profits and stock value of the “socially responsible” corporations would drop, causing losses to their stockholders – i.e., those to whom they owed “fiduciary responsibility.”

And then the company would find itself in court, facing a winning law suit by the stockholders.

Obviously, corporate activity affects more than managers, employees and stockholders. Corporations also involve customers who are entitled to be protected from fraud and from defective products. Civil courts exist to reimburse customers for damages from corporate abuses, and few if any libertarians would object, in principle, to the exercise and enforcement of civil law. Because civil suits can be costly and impact upon the corporate bottom line, corporations have a fiduciary responsibility not to engage in fraud or to sell defective products. (Unfortunately, as the recent Supreme Court decision on the Exxon Valdez suit reminds us, corporate-friendly courts can reduce civil settlements to trivial sums, "the cost of doing business," that fail to deter corporate malfeasance).

In addition to injured customers, there are unconsenting third parties, “stakeholders,” who are affected by corporate activities. These include persons residing downwind and downstream from industrial polluters, teen-agers “hooked” on cigarettes leading to a shortened life of addiction, taxpayers who pay for the public health costs of smoking, ecosystems damaged by pesticides, citizens whose government is corrupted by corporate lobbying and campaign contributions, and humanity at large the future of which is imperiled by global climate change.

Add to this, American workers who lose their jobs to outsourcing; victims of “collateral damage” resulting from the fiduciary responsibility of corporations to reduce labor costs and thus to increase profits and the return on the investments of the stockholders.


Who Speaks for the “Stakeholders”?

Who else, but the government?

Many, and perhaps most, corporate executives, when confronted by the economic and social devastation brought on by outsourcing, might reply: “Yes, it’s horrible! But what can I do about it? If I insist on hiring American workers at American wages, my firm will go broke or, before that happens, the Board of Directors will fire me. I’m helpless!”

Sad to say, they are right.

Alternatively, one might bring together the CEOs of all the competitors, and try to persuade them to agree not to outsource. Problem is, that might be collusion, which is illegal. Or if not, there would be no sanctions against violating the agreement, and enormous advantages would be gained by any renegade firm that did so. It's a paradigm case of the tragedy of the commons: that which is good for all is bad for each. Without the enforcement of sanctions there is an irresistible temptation to defect from the agreement.

In any case, missing from that assembly would be delegates representing those unconsenting but seriously affected third parties, the “stakeholders.” Their claims against the corporations would exact costs that would adversely affect “the bottom line:” profits and returns on investments. And the corporations, by law, have that fiduciary responsibility to maximize the bottom line.

Leave it to the unregulated free market, the profit motive, and fiduciary responsibility, and the stakeholders, which is to say the general public, is screwed. Given these conditions, there is no escape from this “remorseless working of things.” It is a tragedy.

So the solution is compelling: abolish the conditions that bring about the tragedy.

The stakeholders must be given a place at the table that determines corporate policy.

And there is one and only one institution qualified to represent the stakeholding general public. That would be a representative government, such as that established by the founders of our republic.

“To secure these rights, governments are established among men, deriving their just powers from the consent of the governed.”

"We the people of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."

How strange and sad it is that we have allowed the libertarian dogmas of market fundamentalism, “the invisible hand” and “trickle down” to cause us to forget the founding principles of our republic, and to forget the lessons learned from a difficult history since that founding.

We’ve tried laissez faire capitalism, and each time it has failed all but a very few wealthy and privileged individuals, and eventually those too when the economy collapses.

We learned from the crash of 1929 and the depression that followed, that corporate greed, unconstrained and unregulated, can lead to a ruined economy. Then we recovered, not by abolishing capitalism, but by reforming it and regulating it with agencies of government acting in behalf of "we the people," i.e. the stakeholders.

Through tax incentives, tariffs, and other laws and regulations, the government can end and reverse the outflow of jobs from the United States. Goodness knows there's abundant work to be done within our borders. The physical infrastructure of the U.S. is in an advanced state of decay, and only government appropriations can repair it, with jobs that by their nature can not be outsourced. Like it or not, the petroleum age is on its way out, opening the necessity for the development and implementation of alternative and sustainable energy sources. Here is a compelling opportunity to re-establish our dismantled manufacturing base. And be assured that if we don’t take the lead in ushering in the solar age, some other country will do it and we will be left behind.

The lessons of history notwithstanding, we have tried market fundamentalism and minimal government once again, and they are failing once again. The United States of America is near bankruptcy, our currency is in decline, we are massively in debt to our rivals, our manufacturing base has been dismantled, and we are despised the world over.

“When you are in a hole, the first thing to do is stop digging.”

Time to stop digging and to start climbing out.


And so, at last, we arrive at a refutation of Ronald Reagan:  In fact, Government is the solution to our problems -- or at least to many if not all of our problems.  Still need further argument?  It's in the next essay.

 

6.    The Necessity of Government

 


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" (www.igc.org/gadfly) and co-edits the progressive website, "The Crisis Papers" (www.crisispapers.org).  Dr. Partridge can be contacted at: gadfly@igc.org .