Tom Hurst writes on liberty, free markets, private property rights, government and the Constitution from Nevada, USA
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ARCHIVE ARTICLE

In Praise of Corporations

By Tom Hurst, 3 June 2007

If you're a typical American, you probably have some strong views on corporations - and the things you accuse them of are almost certainly not very flattering. They rip us off every day, say consumers. They don't pay their employees enough (except for executives, who are overpaid), say some employees and leftist bleeding hearts. They pollute with impunity, say the greens. And they're in bed with the government, say cynics from all sides. In nearly all situations, it's "them versus us". But are these accusations valid, or are they irrational fantasies? As for myself, I favor the latter. Further, I would suggest that not only are corporations a natural economic phenomenon in free markets, but that we are far better off for having them. However, before I explain the many benefits they bestow upon us, let me defuse some of the common complaints.

First, do they really charge us too much for their goods or services? To answer that, let me ask you this: do you buy again and again from stores that you think have excessive prices? Of course not! You treat them just as you would stores that treated you badly, or stores that didn't even offer the goods or services you seek - you simply choose to not patronize them. After all, this is America, and there is no government making market choices for you in most cases. So, the reality is that most corporations simply can't make you pay more than you choose to. Yes, there are many companies that fail to provide things you want at prices you think appropriate, but so what? You certainly won't go without because the free market guarantees that there will always be other companies trying hard to convince you to instead buy from them because they are cheaper or better in some way than their competitor - and the savvy consumer uses this to their advantage. In the end, companies wanting to sell things - and you wanting to buy their things - is what makes us all better off. After all, a concluded sale simply represents a mutually agreed upon exchange by two parties who both think they are better off for the trade - no matter what an outside observer might think - since one or both parties would refuse to consummate the deal if it was not in their interest.

What about the "windfall profits" of oil companies that are in the news of late? First, realize that the appropriate economic measure here is the annual rate of return on investment, not the total amount of profit. To personalize this concept, imagine that your house doubles in value over 5 years. Are you then earning windfall profits that should be forcibly surrendered to our socialist government for the "common good"? I don't think so, and to be fair and just one must accept that oil companies are no more obligated to provide for others than you or I are. So, let's forget Marx's Communist Manifesto notion, "From each according to his abilities, to each according to his needs". The fact is that the rate of return for most oil companies is 8% or so - that's pretty typical for corporations in many types of business - and even then inflation (caused by the paper-printing Federal Reserve Bank and irresponsible, free-spending politicians) accounts for half of that. Yes, big oil does make huge amounts of profit, but then again they are huge companies with huge investments and huge cash flows. So, profitable, yes, but hardly the demons that they are made out to be. Look to the insurance, pharmaceutical, healthcare, banking and credit industries to see average rates of return several times that of the poor oil companies. Of course, rates of return like that are only possible because they are government-enabled pseudo-monopolies, but that's another article. In the end, if companies in all industries were to compete on equal footing with respect to government interference or pandering we would see much more reasonable profit margins - and that's what will be best for all of us in the long run.

And what about the salaries that companies pay their employees, especially those at the bottom of the ladder? First, realize that employees take jobs only if they are willing to work for a given rate of pay, and companies only pay the minimum required to attract qualified workers. This principle is proven by the obvious fact that most people work for corporations who pay them for their work. Because of this, all things being equal, wages tend to equilibrate across a given industry as workers seek higher pay at the same time that corporations seek to lower pay. That's why one can generally predict pay rates based upon what field someone goes into. And it's also why entry level employee wages are low and why minimum wage laws impoverish (via unemployment) the very people the laws seek to empower. You see, it's a simply a matter of skills and productivity. If an employee is so unskilled and unproductive that they produce less than the minimum wages worth of product, why would a company even hire them? After all, the goal of a corporation is to earn more income than their expenses - it's called making a profit, and without that they will go out of business, in part because they will not be able to attract investment. Of course, the flip side of this coin is that as employees demonstrate their responsibility and increase their productivity through experience or training, they will necessarily be paid a higher wage. If the company chooses not to pay them commensurate with their abilities, the employee simply takes a job somewhere where they will be paid what they are worth. In the end, what someone earns is a function of their value to the company, and that in turn is a function of their character and level of education and experience. So, to accuse corporations of paying too low is to misplace the blame. Like it or not, there are basic rules of sound economics that no law, regulation or desire can alter, and one is that people are simply paid what they are worth.

What about what many people consider to be excessive executive pay? Personally, I do think executive pay is out of line, but not for the reason that most people subscribe to, that such high pay is unjust. As a pure capitalist, I simply believe it's foolish to pay someone millions of dollars per year just because a company is large, when from what I've seen, I can guarantee that in all cases one could hire someone equally talented for a few hundred thousand per year at most. But the bottom line is that companies can pay their employees whatever they choose, even if it's obviously unnecessary. I would suppose that executive pay is absurdly high mostly because government laws or regulations enable a small cabal of directors to reward themselves and their friends. It would be best for everyone if stock-holders would step up and stop this wasteful spending that makes their investments less profitable.

Are corporations monster polluters? Maybe in the past, but if companies tried it now they'd be taken to court by every green group in the country. Unfortunately, our government chose to solve the problem of pollution by unleashing fierce regulation - regulation that dramatically reduces productivity - enforced by the iron fist of government coercion. More effective, and certainly more Constitutional, would be to limit pollution by enforcing strong individual property rights wherein those affected could sue for damages. In any case, the pollution issue is essentially a non-problem these days. As an aside, natural resource consumption or depletion by corporations has very similar characteristics, and the solution is the same. When property rights are strong and enforceable, "tragedy of the commons" problems - wherein everyone has claim on a resource but no one has responsibility for or ownership of the resource - vanish instantly. Pride of ownership and selfish self-interest really do make things better!

Finally, do corporations unduly influence government? Sadly, many of the largest companies are guilty of undue influence to the degree that their standard operating procedure is to contribute money to politicians in exchange for various profit-increasing political favors. Indeed, the primary purpose of lobbyists is to arrange for such donations and to later remind the politicians who they owe favors to. So, yes, companies use their influence to get subsidies, encourage eminent domain takings for their own use, hamper domestic competition, gain protection from foreign competition, or just to get fat government contracts. That said, many companies do not do this - indeed, many are too small to have such an influential voice. Further, and more importantly, the large companies that do get in bed with government only do so because government allows and encourages it. Simply stated, if we were to have a government true to our Constitution - one where government spending and responsibility is nearly nil - there would be few favors to hand out, hence little or no problem. So, to end this corporate corruption, citizens need only elect officials who will follow our Constitution to the letter. Unfortunately, politicians also buy votes by handing out favors to various groups (paid for with tax dollars, ironically), so nearly everyone who votes is also responsible for perpetuating this problem.

Now for the benefits of corporations - and I must say it's an impressive list, so get ready to love them! First the obvious: in response to our demand they provide us with all sorts of goods and services which we simply could not provide for ourselves. And, make no mistake, they only provide these things because they want to profit; call it corporate greed if you wish, but the bottom line is that as we demand products and services, companies fill the void in order to make money. Further, when companies and the individuals that work for them specialize in various trades, not only does productivity increase, but they bring things to market that we would never imagine, things that otherwise would never appear. Truly, corporations working in a free market almost magically produce innovation, technology and infrastructure at ever lower costs - and these all work to give us more time and/or wealth, that is, to make us prosperous. In short, corporations are directly responsible for our high and increasing standard of living. We not only get innovative goods and services that we want, but competition and the resulting productivity increases insure that prices always go down and quality always goes up. That leaves us more money to spend on or invest in other things. As Sam Walton once said, "We'll lower the cost of living for everyone, not just in America, but we'll give the world an opportunity to see what it's like to save and have a better lifestyle, a better life for all." Frankly, I consider myself fortunate that Sam and others like him were around to make my life better. Of course, the flip side of this miracle is what we find in government and government-enabled monopolies; Lew Rockwell puts it best: "Clearly the biggest monopolist of all is the U.S. government. No competition is allowed, the quality of output is continually falling, the prices are continually rising and the consumer is treated shabbily." Oh, how totally true that is! Finally, those of us who are not self-employed or independently wealthy almost always work for corporations, large and small. Since we could sell our services elsewhere if we chose, we are not dependent on the corporations that employ us per se, but while in their employ they do, in a sense, provide for us. And the free market demands that they do it in style.

Further, since all corporations, private or public, are ultimately owned by individuals, we all (to the degree one has savings or investments) become wealthier as corporations prosper. They are not an abstract construct as some people claim, but exist because we own them, work for them, and even manage them. Out of self interest we should be encouraging them to do ever more, and to do it ever better. And we shouldn't as a matter of public policy discourage their generation of profits or investment in their (i.e. our) future by taxing them. Aside from taxes discouraging investment, the basic fact missed by proponents of corporate taxes is that corporate taxes and tax compliance costs are just another business expense that corporations pass on to consumers via higher prices. What this means practically is that individuals who consume products and services indirectly pay all corporate taxes *plus* the cost of corporate tax compliance - a cost often estimated to equal or exceed the total tax corporations pay! So, to tax a corporation is the same thing as taxing individuals (which we already do), except that tax compliance costs are substantially less for individuals. In the end, corporate tax is just another technique or scheme that government uses to hide taxes on individuals - taxes that if levied directly upon us would make us blanch, or perhaps revolt!

As an aside, the obvious unintended consequence of the corporate taxation scam is to price American made products and services out of many markets. This translates, of course, into job outsourcing and, ultimately, unemployment in America. As for the numbers on this, some years ago I saw a list showing the percent of the retail price of various products and services that consisted of taxes already paid - I recall the average was on the order of 30%, and some items were 90% tax! Corporations would be incredibly competitive (and hence profitable) - even with China - if corporate tax and tax compliance costs were taken out of prices they charge. Thus, a rational person would choose to increase market efficiency by eliminating all corporate taxation and the unnecessary and expensive bureaucracy it creates. True, if government spending didn't decrease, we would see higher individual taxes, but even then price decreases would more than make up the difference because we would be totally eliminating corporate tax compliance costs. And with the increased transparency of the cost of government, people might finally see that the vast amounts of money big government consumes is truly the worst investment they could possibly make. Finally, the icing on this cake would be to reduce or eliminate the (unconstitutional) laws and regulations that unnecessarily hamper corporations and thus greatly increase the cost of everything they produce for our consumption. This would work to make American goods and services even less expensive, thus driving job creation and increasing our prosperity.

If you still don't like corporations - though I find it difficult to imagine why anyone would dislike them - I would encourage you to take matters into your own hands. After all, America is a more or less free market, and when you choose to not patronize a given company, you send them a clear message that they need to do things better or differently. Indeed, as the venerable Sam Walton said, "There is only one boss: The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else." So, the power to ruin any corporation, no matter how large, is in the hands of the public. If enough people don't like and thus don't patronize the company, it will fail, period. Of course, companies would much rather make a profit dealing with you, so they will endeavor not to fail - which means that they will try to offer products and services that you want at prices that you think appropriate. There's no magic here, just common sense. Nor is there any corporate evil, but just a little beneficial self-interest.

Even foreign corporations operating in America are far from evil. Yes, they do often take their profits home, but only the profits. The oft ignored fact is that the vast majority of the wealth they create and spend stays here in the form of salaries they pay to American workers and money they pay for American supplies and infrastructure. So, even foreign companies operating in America or foreigners owning American companies continually enrich each and every one of us. And, to take this to the extreme, many foreign-owned companies operating in other countries also enrich Americans indirectly by producing inexpensive products and services. When we can buy such inexpensive offerings instead of expensive alternatives, we again increase our standard of living because we not only can buy what we need, but have extra money (that we would otherwise have already spent) that we can invest or use to acquire whatever we consider wealth. The bottom line is that even foreign corporations "exploiting" (as many proclaim) America are in reality good for us.

I'll conclude with a quote by champion of capitalism Ayn Rand that summarizes the wonderful contribution that corporations have made to America's economy: "Abundance was created not by public sacrifices to 'the common good', but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America's industrialization. They gave the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance - and thus the whole country was moving forward and profiting, not suffering, every step of the way." So, in the end, we're all far better off with corporations than without them. Indeed, they are in large part responsible for the standard of living that we enjoy today. And the final reality we must accept is that excepting scale there is little practical difference between mega-corporations and family-run neighborhood shops. So, like it or not, since we do own them and often work for them, I would argue that, ultimately, we *are* the corporations!

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Tom Hurst - Defender of liberty, free markets, private property rights, and the Constitution