There are a thousand hacking at the branches of evil to one who is striking at the root. – Henry David Thoreau
The previous piece called for an examination of what have unfortunately become called “root causes.” Our social, economic, and political maladies didn’t spring from the brow of Zeus; they grew slowly in response to perverse incentives. Those incentives arose from the decisions and actions of (mostly) well-intentioned persons who held political power. Because the consequences emerged over an extended period, those (mostly) well-intentioned persons never had to confront their errors.
Among our current crop of afflictions, the easiest case to analyze is the dominance of our economy – and to an ominous degree, of our politics as well – by a relatively small group of businesses. There are roughly four million businesses in operation in these United States today. Yet the economy is largely steered by the largest three thousand of them. Moreover, the concentration of economic influence has not ceased; the largest among those three thousand continue to grow, often at the expense of their smaller brethren.
This is not a healthy situation. Among other things, it’s given rise to the economic-political phenomenon of the “too big to fail” corporation, and the consequent willingness of legislatures to “bail out” such companies when events go against them. Surely we shouldn’t prefer this situation to one where a malfunctioning business can be allowed to fail without affecting the lives of millions (and the tax dollars of millions of others). But how did it come about?
As usual, there’s more than one cause, but what appears to me to be the key to the matter is corporate privilege.
The corporation is a legal construct that has some of the properties of a living person but lacks the full set of responsibilities of one. When a business incorporates, it diffuses responsibilities over the whole company that would otherwise attach to specific individuals in it. It also shields those individuals from personal liability for things they do in the name of the corporation. Also, corporations receive much different tax treatment than do individuals.
The tax matter is often in the public conversation, so let’s address that first. Different tax rates apply to businesses and individuals, but more to the point, corporations can deduct from its revenues far more things than a workingman. For example, a business can deduct the cost of maintenance on its headquarters as a cost of doing business; a workingman can’t deduct home-maintenance expenses from his income. Employees’ salaries, wages, and benefits are fully deductible; the workingman doesn’t have any comparable privilege. A sharp corporate tax accountant can make a substantial profit on annual operations look like a loss for tax purposes.
While it’s not obvious, the corporate form also provides an incentive to break the law, if it can be done profitably. This goes well beyond deceitful accounting. It reaches such operations as industrial espionage, vandalism and sabotage, the bribery of public officials, and smear tactics that target important competitors. Even when such crimes are revealed, a corporation that benefits from skullduggery is usually capable of protecting the particular individuals who committed the illegalities from personal exposure. Oftentimes a boughten legislator or jurist will assist in that effort.
So the corporate form provides advantages to the dishonest and unprincipled over the unincorporated business, the incorporated-but-honestly-operated business, and the individual. Moreover, a larger corporation will enjoy corporate privileges more extensively than a smaller one, because the larger, more complex corporation will have more niches in which to hide its naughtinesses. As I wrote in this piece:
Complexity privileges layabouts and villains.
Therefore, layabouts and villains will seek complexity.
If they can’t find it, they’ll attempt to create it.
Therefore once a corporation has a size advantage over its competitors, its exploitation of the range of corporate privileges can and will ramify and accelerate. Add to this that governments prefer to deal with larger companies rather than with smaller ones. Add further that governments can “outsource” various policies and operations that are Constitutionally forbidden to governments themselves, and the dynamic virtually leaps off the page.
Once all this is factored into the situation, the question changes from “How did this happen to the American economy?” to “Why did it take so long?”
For a few more thoughts on this aspect of America’s current economic maladies, see this old essay, which I wrote in 1997 after becoming disillusioned with contemporary economic thought.
