Corporations and Their Purpose

Economics Economics Questions
1

I suppose this is a question, technically, but I’d like some discussion. I’ve been a reader of the Mises Institute for 3 short years, so pardon me if I’m terribly ignorant. As far as I know, I’m the only person from whom I’ve heard this argument. Which gives me the uneasy feeling that I’m way off. Or I haven’t read enough yet.

I posit corporations exist to provide consumers with a product in demand. In a free market, their profts (or lack thereof) would simply be a reflection of how efficiently they provided that product. Things such as wage payments or distribution of benefits (insurance, vacation, etc) are only leverages to compete beyond the marketplace of their product. This flies in the face of those, such as Occupiers, who think corporations exist only to make money. In addition to those – I’ve seen libertarians take this stance – who think corporations exist only to make their shareholders money.

Now, even if someone did go into business just to make money, how would they do that? Successful entrepreneurs gauge the economy exceptionally well, and therefore are the most efficient at providing their product or service. This ultimately leads to more, or more efficient, production in society, and consequently, a higher standard of living. So, even if a person’s reasons for going into business are amoral, or worse, immoral, in a free market their end product is almost neccesarily moral.

This is, of course, invalidated by a state. Especially a powerful, central government. In this case, the immoral businessman can skirt by not providing for society, because he can bribe (lobby) the law and policy makers. This is what we have now with Big Pharma, Agribusiness, Big Oil, Wall Street and the Military Industrial Complex, among many others.

Am I completely off base here? It sounds like a logical argument to me, but I’m sure some of you more mentally inclined Austrians will be able to tear it apart somewhere… Not that I’d be upset. I’m just trying to learn here. Thanks for any insight.

Viam Fibonacci

2

Well, of course businesses must provide a product that will have demand. As Milton Friedman explains, you can be the greediest man in the world and that wouldn’t give you a penny unless you satisfy the wants of your customers. What is not so obvious is that with new inventions there is no literal demand but it must be created.

So yes - there is a common misconception that people just magically enter the market and make money. This is not so and, as you point out, only happens if they provide an actual valuable service.

3

I agree with the part about new inventions. It’s curious then, when certain unproven startups (Solyndra) get funded. They didn’t prove themselves, but through lobbying were able to buy themselves some money (ha!). Would I be wrong to assume something similar with airlines? The airline industry is highly subsidized. Therefore, there is little incentive to improve efficiency or their product, because they’re going to get their money either way. I haven’t been around too long, but it seems airline technology has been stagnate for 40 years, no?

Another question if I may. What if any difference would you say there is between a corporation and a business? Are those words interchangeable? I use them that way, but now am thinking that “corporation” carries a negative conotation while “business” has come to mean mom and pop type stores.

Viam Fibonacci

4

I am not familiar with the airline business, though I do know that it is quite regulated and that the airlines in fact like this. You can learn this and much more if you hang around here and check out articles like these: http://www.cato.org/research/articles/cpr28n4-1.html

As to “corporation”: I am (once again) not sure about the terms, though I think that corporations have LLC protection (granted to the my government upon petition), while not all businesses have it.

5

A corporation or company has juristic personality - they’re referred to as ‘juristic persons’ as opposed to ‘natural persons’. If you are sold a defective widget which injures you, by a company, you sue the company for satisfaction - you can only sue the directors (executive officers) of a company for their actions in their official capacity if they were using the facade of the company fraudulently for their own interests, or if it can be shown that they were acting against the interests of “the company”, e.g. insider trading, using the company to launder money - that sort of thing. A director has a contract of employment with the company he represents, which generally sets out their personal rights and responsibilities towards each other.

This separate juristic personality for the company is a type of limited liability for the directors and investors in the company, because the company is considered to be a person with its own assets and liabilities - the directors aren’t on the hook if the company goes bankrupt, because it was the company’s money.

Technically, no one ‘owns’ a company. The directors are actually employed by the company. The shareholders - more specificially, those who hold the shares with voting rights - control the appointment of directors etc, but they do not legally ‘own’ the company either.

A “business” is any business entity, which could include a simple sole proprietorship, in which everything related to the business is actually owned by one natural person, or a partnership, which is basically the same, except there is more than one co-owner. In sole proprietorships and partnerships, the business does not have its own juristic personality - the assets and liabilities of the business are held personally by the owners, and they just as liable for them as they are for their personal assets and liabilities. In a partnership, the partners are normally jointly and severally liable regarding the conduct of their business, but they can restrict their liability vis-a-vis each other with contractual arrangements.

The key difference between a company/corporation and other types of business entities is that the company has its own juristic personality, recognised by a state judiciary. Other types of business entity do not have seperate legal personality to their ‘owners’. I personally doubt that the ‘corporation’ could exist on a free market, because there wouldn’t be anyone with the authority to recognise such a thing. You can’t force people to pretend that you’ve abdicated your legal personality to a piece of paper. The only “policy reason” I’ve heard for why corporations have such a state-granted privilege is that it allows directors to take risks that they wouldn’t with their own money, which sounds like a pretty bad reason to me…

A corporation is structured similarly to modern state. They’re also their own juristic persons, with executive officers in formal control and shareholders who vote. And they have limited liability - it wasn’t Truman who bombed Japan, after all, it was the United States of America. You can decide for yourself whether the citizenry are the controlling shareholders, or the product…