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Corporations versus The State πŸ”— 1439057922  

I hear arguments along these lines all the time:

Liberal: "Evil corporations! They have corrupted our once virtuous government! We need more 'democracy'."
Conservative: "It's the evil government's creation of moral hazard that's incentivizing our once virtuous businesses to act in a reckless manner!"
and they never seem to resolve themselves; generally they agree to disagree. It is quite rare that the parties to these debates step back and realize that it takes two to tango; and even then they rarely realize why the dance floor is there in the first place.

Even those who recognize that the modern western state is basically Fascism, don't generally go in to why all of the western republics seem to always go this way. For some, I suppose it is not sensational enough, as the reality requires no conspiring by elites; for others, the reality would kill too many ideas which they hold sacred, and they do not investigate further in order to protect against having an existential crisis. In any case, the fundamental reason why the modern state and corporations tend towards this cartelization with each other is because structurally and functionally, they are the same.

Defective by Design

To demonstrate this, let me provide a couple of definitions, so as to facilitate straw-man attacks against this piece. When I say the "modern western state", what I mean is some sort of government in which the populace elects representatives to carry out the political aims of the populace. When I say the "modern western corporation", what I mean is some sort of organization in which shareholders elect various agents to carry out the economic aims of the shareholders. If you're paying attention, I'm sure you have noticed some similarities in those two definitions.

In fact, the only meaningful difference between the two are their aims and stakeholders. Many would believe that this would be enough difference to keep these parties distinct; however, when one truly understands incentives, you realize that the means always color the ends. In fact, the longer the means are in place, the more likely they are to become the ends themselves.

The means in this context are twofold: agency and limitation of liability; both have defects which make the possibility of effective shareholder control less likely as the size of the organization grows.

The Agency Problem

Agency is the notion that one can delegate the particular details of implementing a policy to someone else in exchange for payment. Where this breaks down is fairly well understood, just look up the "principal-agent problem". The usual hierarchal organization of governments and corporations practically always exacerbates this.

In the most degenerate stages of the agency problems in corporations, we see both executives abusing the company long-term to maximize short term bonuses; we also see situations where executives don't see rogue business units under them. Similarly, we see this in the large republics; practically all of them are actually run by their bureaucracies.

Limited Liability

As a result of the difficulties in caused by the agency problem in large organizations, the notion of limited liability always comes up either de-facto or de-jure. For example, if a corporation does some hideous polluting and as a result several people are killed, the shareholders are not held to account; this is because by law they have no direct control. Similarly, if a government decides to genocide some neighboring country (and fails), it's people are not directly held liable -- reparation payments are limited to their government, which inevitably finds a way to default on such.

The state, of course, does have an interesting extra measure here that is related to how not only they will abuse others which are not stakeholders, but how they also will abuse their own stakeholders (see Principal-Agent problems above). This concept limiting the liability of the agents against their principals is called "Sovereign Immunity," and this may perhaps be the only way in which the corporate model is superior to the modern western state. Still, even this type of immunity seems to be coming to many corporations as well. This phenomenon is known as "regulatory capture".

The fundamental defect in limiting liability is that it solves the problem of corrupt agents by corrupting the principals. Shareholders will be much more willing to go along with morally reprehensible, but profitable, actions when they have no reasonable expectation of blowback. Similarly, voters can get behind monstrous atrocities like enslaving generations yet unborn for a stimulus check today, as they know they'll never be held to account even if the bill came due tomorrow.

Consequences & Solutions

The consequences of these problems are quite far-reaching. Some Austrian School economists would even go so far to say that ultimately the issue with the modern corporation is that it suffers from the same economic calculation problems that plague all states, due to elements of central planning being present in corporations. Indeed, this problem becomes even worse when paired with the state, as they create a culture of competition in centralization, where the pressures to preserve your respective organizations actually drive you to centralize more due to mutual parasitism.

The astute reader might now be thinking that direct democracy or perhaps even monarchy is a solution to this nearly intractable problem. While Monarchy is indeed an improvement (as limited liability clearly is not present), and the autocrat has longer time horizons, it is at best only a mitigation strategy. It will inevitably suffer from out of control agents as size increases. On the other hand, consider direct democracy. If your "democracy" just ends up electing more agents, you will achieve at best a monarchy with multiple personality disorder. At worst, it is indistinguishable from republicanism and will degenerate into fascism. If instead your democracy ends up implementing all it's directives directly, I ask why vote at all? Such a system is really indistinguishable from anarchy; so don't bother going through with the ballot ritual and skip straight to free markets.

However, I suspect that radical decentralization of such a sort will be a bridge too far for most. Most fear their own failures so strongly (usually due to extreme sanction on such during childhood) that they will not be able to resist setting up liability limiters. Only time will tell whether de-centralization's obvious robustness and superior ability at satisfying the needs of it's stakeholders will win; I suspect such will happen only after the greatest achievement of centralization (global government) fails miserably.

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