by Daniel Bell
For Clausen, one crucial question is: In what social context does the corporation operate today? As an article in Fortune by John Davenport reported: “To keep this giant money machine profitably growing is the first business of Alden Winship (Tom) Clausen.... It is of some significance that... his thoughts turn often to: how to alleviate if not cure the blight now spreading at Hunter’s Point and south of Market Street [in San Francisco]; how to crack the city’s hard-core unemployment; how to cope with student unrest at Berkeley or down the peninsula at Stanford.”
In defending these objectives, Clausen confronted directly the views of Friedman. As the article in Fortune reported:
At the moment Clausen and his associates are less interested in modifying their bank’s capital structure than in charting a course through a period when capitalism itself is under intense attack....
...Business, he argued, has to concern itself with nonbusiness problems today if it wants to be around tomorrow. The Friedman view is okay in the short pull. “But in the long pull, nobody can expect to make profits—or have any meaningful use for profits—if the whole fabric of society is being ripped to shreds.”
There is, equally, a different question, apart from social expediency: Below the surface of this clash of views, there lies an important but seldomly explicated or confronted question about the nature of the corporation. Friedman sees the corporation as fundamentally an “artificial person” and the corporate manager as simply an agent of individual shareholders. Clausen sees the corporation as having a kind of life of its own, and hence having a certain freedom of choice in balancing its contribution to the long-range needs of the community against the immediate demands of owners.
And, as the writer John Davenport, himself a distinguished conservative, comments: “There may be dangers lurking in Clausen’s view of corporate autonomy, but there is surely something unrealistic in the view that society is just an atomized collection of individuals.” 15
The heart of the matter is the question of the nature of the corporation. Is the corporation primarily an instrument of “owners’— legally the stockholders—or is it an autonomous enterprise which, despite its particular history, has become—or should become—an instrument for service to society in a system of pluralist powers?
A classic debate on that question was initiated forty years ago in the pages of the Harvard Law Review by A. A. Berle and Merrick Dodd. Berle held to the view at the time (he later revised his views) that all corporate powers are powers in trust for the benefit of the stockholders. Dodd argued that legally such was the case, but the use of private property was deeply affected with a public interest and that the directors should be viewed as trustees for the enterprise as a whole—for the corporation viewed as an institution—and not merely as “attorneys for the stockholders.” Berle responded that, since one could not offer “a clear and reasonably enforceable scheme of responsibilities to someone else,” Dodd’s proposal would place the control of the organization entirely in the hands of management. The problem, as he saw it, was: If there is not a prior legal statement of responsibility to the stockholders, how does one prevent management from exercising arbitrary social and political power, or from becoming overreaching and self-seeking?
This legal—and sociological—issue remains. Is the manager primarily a trustee for absentee investors? Or is the role of the manager, as Frank Abrams, when he was chairman of the board of Standard Oil of New Jersey, put it, to conduct his affairs “in such a way as to maintain an equitable and working balance among the claims of the various directly interested—stockholders, employees, customers and the public at large.”
Private Property or Private Enterprise?
The modern business corporation has lost many of the historic features of traditional capitalism, yet it has, for lack of a new rationale, retained the old ideology—and finds itself trapped by it.
Unhappy is a society that has run out of words to describe what is going on. So Thurman Arnold observed in connection with the language of private property—the myths and folklore of capitalism—which even thirty years ago was hopelessly out of date. The point is that today ownership is simply a legal fiction.
A stockholder is an owner because, in theory, he has put up equity capital and taken a risk. But only a minor proportion of corporate capital today is raised through the sale of equity capital. A more significant portion of capital comes through self-financing, by the success of the enterprise itself. In the last decade, more than 60 percent of the capital investment of the nation’s 1,000 largest manufacturing firms was financed internally. Retained capital is the basis of the rise in net assets of large corporations. And the growth of retained capital is the product of managerial skill. (Equally, a large portion of new capital is raised by debentures, which become a fixed charge against earnings, rather than through floating equity or risk stock. Debentures hinge on the stability of the company and the prospect of repayment—again a managerial problem.)
If one were to follow the logic of Friedman’s argument, as he does—it is his strength and weakness that he always follows the logic of his argument, to the very end—one would have to outlaw or at least discourage self-financing. Under the “pure” theory of market capitalism, a firm risks a stockholder’s capital and then pays back any profits—in the form of dividends—to its legal owners, the stockholders. If it seeks to risk that money again, it should ask those stockholders to reinvest that money, rather than withhold it from them and reinvest it by managerial decision. Friedman argues that it is only the “double taxation’ (through corporate and personal income tax) of dividends that prevents such a desirable state of affairs from emerging. But I should say that such a state of affairs is neither desirable nor possible. Given the pattern of stock ownership today—particularly with the growth or mutual funds, pension funds and trust funds—the stockholder is often an “in-and-out” person with little continuing interest in the enterprise. Such an in-and-out procedure may be a useful discipline for management and a measure of economic performance—but then it becomes a form of countervailing power, not ownership. True owners are involved directly and psychologically in the fate of an enterprise; and this description better fits the employees of the corporation, not its stockholders. For these employees, the corporation is a social institution which they inhabit. It is politically and morally unthinkable that their lives should be at the mercy of a financial speculator.
In other words, the corporation may be a private enterprise institution, but it is not really a private property institution. (If the assets of the enterprise are primarily the skill of its managerial employees, not machinery or things—and this is preeminently true in the science-based industries, in communications, and in the so-called “knowledge industries”—then property is anyway of lesser importance.) And if ownership is largely a legal fiction, then one ought to adopt a more realistic attitude to it. One can treat stockholders not as “owners” but as legitimate claimants to some fixed share of the profits of a corporation—and to nothing more.16
The Meaning of “a Corporation”
What then is a corporation? If one goes back to the original meaning of the term, as a social invention of the late Middle Ages to meet some novel problems, a corporation was an instrument for self-governance for groups carrying on a common activity (artisan guilds, local boroughs, ecclesiastical bodies); it often had common economic assets, and its existence would persist beyond the lives of its individual members. Those who were “members” of the corporation were those directly responsible for its activities, those who were the legatees of the past members, and those chosen to carry on the work.
A business corporation today—like a university today—can be viewed in this original sociological conception of the term. Indeed, if one begins to look on the business corporation more and more on the model of the university, then the fallacy of ownership becomes more apparent. Who “owns” Harvard or the University of Chicago? Legally the “corporation,” as composed b
y the overseers or the trustees. But in any sociological sense this is meaningless. The university is a self-selective ongoing enterprise of its members (administration, faculty, students, and alumni, with differential responsibilities and obligations) who seek to carry out its purposes with due regard to the interests of the particular community which constitutes the university—and also to the larger community that makes the university possible.
As a business institution, the “corporation” is the management and the board of directors, operating as trustees for members of the enterprise as a whole—not just stockholders, but workers and consumers too—and with due regard to the interests of society as a whole. But if this view is accepted, there is a significant logical corollary—that the constituencies which make up the corporation themselves have to be represented within the board of corporate power.17 Without that, there is no effective countervailing power to that of executive management. More important, without such representation, there would be a serious question about the “legitimacy ’ of managerial power.
How such constituencies might be represented is a question to be explored. A dozen years.ago, Bayless Manning, Jr., until recently the Dean of the Stanford Law School, sought to picture the corporation as if it were in law what it often is in fact, as a kind of “voting trust” wherein the stockholder delegates all his rights, except that of collecting dividends, to the directors. In order to establish some check on the board of directors, he proposed a “second chamber,” an “extrinsic body,” which would review decisions of the board where conflicts of interest arose—such as compensation of officers, contributions to other enterprises (universities, community efforts, etc.) not directly related to a company’s business, clashes with a public interest, etc.
It is beyond the scope of this essay, and the competence of the author, to estimate the viability of these—or other—specific proposals. The problem is there; it is not going to go away; and discussion of possible resolutions is anything but premature.
From Bitterness to Banality
As a debate on these issues continues, one important consideration should be kept in mind—the bitterness of one generation is often the banality of another. Who, today, gives a second thought to savings bank life insurance? Yet this idea, authored by Louis D. Brandeis in Massachusetts, was fought for five months in passage through the legislature and was marked by one of the bitterest fights ever witnessed on Beacon Hill. (One line of attack was that people would not voluntarily seek insurance, and that they would not take it out at all if the expensive system of soliciting by agents were done away with.) The issue gave Brandeis a national reputation, and eventually brought him to the Supreme Court. The reputation remained, but the issue itself soon faded.
The lesson, however, was not, and is still not wholly learned—reforms will never be as sweeping in their effects as their proponents hope, and the results will rarely be as damaging and apocalyptic as the opponents fear. Workmen’s compensation was an issue that inflamed a generation of radicals and was fought by industry on the ground that it would relieve the workman of “individual responsibility” for his actions; yet who today would deny that industrial safety is a legitimate cost of factory operations?
Such reforms are always an expression of a revision—implicit or explicit—in the American “public philosophy.” This kind of “revisionism” is inevitable as men and societies change, and as the dominant values assume a new shape. The private enterprise system has been the primary institution of Western society not because of its coercive power but because its values—economizing and increasing output of material goods—were congruent with the major consumer values of the society. With all its obvious imperfections the system “worked.” Today, however, those values are themselves being questioned, not in the way socialists and radicals questioned them a generation ago—that they were achieved at the cost of exploiting the worker—but at the very core, the creation of more private goods at the expense of other social values. I return to a point made earlier that unlike the polity, no one, meeting collectively “voted in” our market economy. But now votes are being taken.
It seems clear to me that, today, we in America are moving away from a society based on a private-enterprise market system toward one in which the most important economic decisions will be made at the political level, in terms of consciously defined “goals” and “priorities.” The dangers inherent in such a shift are familiar enough to anyone acquainted with the liberal tradition. In the past, there was an “unspoken consensus,” and the public philosophy did not need to be articulated. And this was a strength, for articulation often invites trials by force when implicit differences are made manifest. Today, however, there is a visible change from market to non-market political decision-making. The market disperses responsibility: the political center is visible, the question of who gains and who loses is clear, and government becomes a cockpit.
But to be hypnotized by such dangers is little less than frivolous. No social or economic order has a writ of immortality, and the consumer-oriented free-enterprise society no longer satisfies the citizenry, as once it did. So it will have to change, in order that something we still recognize as a liberal society might survive.
Whether such a change will represent “progress” is a nice metaphysical question that I, for one, do not know how to answer. This is a society that has rested on the premises of individualism and market rationality, in which the varied ends desired by individuals would be maximized by free exchange. We now move to a communal ethic, without that community being, as yet, wholly defined. In a sense, the movement away from governance by political economy to governance by political philosophy—for that is the meaning of the shift—is a turn to non-capitalist modes of social thought. Ana this is the long-run historical tendency in Western society.18
CHAPTER
5
* * *
Social Choice and
Social Planning:
The Adequacy of Our
Concepts and Tools
THE intellectual life of man,” William James once remarked, “consists almost wholly in his substitution of a conceptual order for the perceptual order in which his experience originally comes.”1 A conceptual scheme is a set of consistent terms which group together diverse attributes or properties of objects or experiences, in a higher order of abstraction, in order to relate them or distinguish them from other objects or experiences. To some extent, our intellectual—and political—problems derive from the fact that we use intellectual concepts and paradigms that are products or summations of an older order of experience. In economics, we have the “theory of the firm,” but the modern corporation is not simply the firm writ large, and we have no coherent intellectual model to account for its behavior. We still think of the individual as the unit of social decision (and on such questions as the number of children to have, or on consumer purchases in the market, he—and she—is the unit) but on most of the questions which affect major allocation of resources or the social map of the country, the unit is the group, or the government, and we have no adequate theory of public goods and social choice. We all know that problems of scale completely distort the shape of the society, yet in discussing our governmental structures we still use the language, and often the assumptions, of two hundred years ago.
The first order of questions, therefore, is the adequacy of our concepts as related to the purposes at hand. In dealing with the changes in American life, I intend to set forth some propositions which question the older formulations and, in part, to propose a number of new ones which may be more adequate in understanding some perplexities about American life.
These questions, some of them rhetorical, some of them ambiguous (as are all true questions), are presented here in the guise of “notes.” Notes are often a difficult form for a reader. He wants a tidy exposition which makes its points in linear fashion (ideally with some elegance of expression) and which comes to a specific conclusion. In a curious sense, this is a peculiarl
y “American” demand. The presumption is usually made that every problem has a solution, and one can march toward it in direct, linear fashion. Indirection is irritating. It suggests ambiguity or complexity, which, in the American vernacular, becomes translated as evasiveness or hesitation. American iife is based on experience, not sensibility; and this, too, is an aspect of the “national style.”
SOCIAL CHOICE AND SOCIAL VALUES:
THE NEED FOR A NEW CALCULUS2
“The great society”—that is, in the occurrence of the phrase—has many forebears, but none, perhaps, as startling as Adam Smith. In The Wealth of Nations, he wrote:
According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to errect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.3
To encounter the phrase “a great society” in the context of what are, for Adam Smith, the legitimate functions—and indeed the limitations—of government is striking in the light of the problems of the great society today. For Adam Smith was one of the men— the other was John Locke—who “planned” the United States of America. I use the word “planned” —awkward in this context— quite deliberately. For both Smith and Locke laid down the conditions—derived from some specific philosophical assumptions —for the operation of the society that was to emerge in the United States.