The End of Absolutism
Toward an Economic Constitution
(Chapter 12 of The Utopia Thieves)
A FOURTH leg of the Revolution that Never Was consisted of a challenge to the absolute supremacy, or tyranny, of the shareholder in the direction of complex corporations.
As we have seen, the shareholder is seen as being entitled to a residual income as the supposedly most committed and risk-exposed participant in production. But this implies a hands-on, proprietorial interest, as opposed to the reality of diffuse, absentee and footloose ownership: the joint-stock corporation.
The actual historical origins of joint-stock ownership lie in early globalised trading enterprises such as the Hudsons Bay Company and the British and Dutch East India Companies. In some cases, these firms built up modern infrastructures in lands formerly without towns, roads, canals or lighthouses. But by and large these trading firms were very controversial entities. They were seen as great pyramids designed to shift wealth toward their tops, oriented more toward various forms of plunder than actual production.
Adam Smith, a key founder of modern economics, was very skeptical toward the worth of the British and Dutch East India Companies. He saw them as vampires preying upon the toilers of the Indian subcontinent and neighbouring Asian territories in order to enrich a few people in London (the enslavers of Africans were even worse).
Smith was, however, more sympathetic toward corporations that harvested the resources of cold and thinly-populated frontiers; a way of getting rich that he viewed as more harmless in essence even if it, too, was a form of plunder:
When a company of merchants undertake, at their own risk and expense, to establish a new trade with some remote and barbarous nation, it may not be unreasonable to incorporate them into a joint stock company, and to grant them, in case of their success, a monopoly of the trade for a certain number of years. It is the easiest and most natural way in which the state can recompense them for hazarding a dangerous and expensive experiment, of which the public is afterwards to reap the benefit.
Through the construction of infrastructures such as roads and harbours, initially intended for the removal of logs, beaver pelts, nuggets of gold and the like, the corporation would unwittingly lay the foundation for future colonisation of the kind that involved settlers, farms and towns, of the kind that people like Smith judged to be more worthwhile.
The corporations should not live to see the day when the colonists came in numbers, Smith wrote. Instead, the infrastructures built up by early-days adventurers should pass into the hands of the colonial state.
Thus, Smith continued that:
A temporary monopoly [of frontier trade] may be vindicated upon the same principles upon which a like monopoly of a new machine is granted to its inventor, and that of a new book to its author. But upon the expiration of the term, the monopoly ought certainly to determine [i.e., come to an end]; the forts and garrisons, if it was found necessary to establish any, to be taken into the hands of government, their value to be paid to the company, and the trade to be laid open to all the subjects of the state.
An important, additional part of Smith’s concept of the Invisible Hand is the idea that, with their long-acknowledged tendencies toward the overpayment of managers, institutionalised irresponsibility and the general plundering of society and nature wherever they operated— tendencies just as notorious in Smith’s day as they are now— joint-stock corporations could not compete successfully with smaller enterprises run in a more hands-on and responsible fashion, once the earliest and wildest days of the frontier had passed:
The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account that joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers [i.e., entrepreneurs]. They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it.
Here, we see a second reason as to why it is that Smith supposed the joint-stock corporation to be something ephemeral, like the frontier itself.
In Smith’s mind, the activities of the joint-stock corporation tended to ‘determine’ (give way) to the state in the case of infrastructural investments.
And to give way to smaller, more hands-on sorts of colonial farms and firms in the cases of agriculture and manufacturing.
But in either case, the joint-stock corporation was not supposed to endure once the earliest and wildest days of the frontier had passed into history and legend!
Hurtling forward to the present, we see that the joint-stock corporation has endured, of course.
The most obvious and pre-eminent reason why the joint-stock corporation has endured, is that the greater complexity, and improved communications, of modern society have favoured bigness as a productive force, in ways that Smith did not foresee.
Also, bgness has made it possible to reap rewards from predatory behaviour, monopolising and cornering the market and terrorising subcontractors and suppliers, in ways that probably wouldn’t have come as so much of a surprise to Smith.
Through all this, the joint-stock corporate form has survived as the more-or- less default way of organising economic bigness. It is, however, a form of organisation that has parallels to the absolute economic royalism of old.
The shareholders are nominally the sole decisionmakers, like an absolute monarch in days of old. Their will is enacted by the management, whom we can liken to courtiers or a scheming vizier: perhaps even more so given that the shareholders are often diffuse and not involved in the day-to-day running of the firm.
The workers, subcontractors and ordinary townsfolk don’t have any say at all in how things are run.
Well — if we put it like that, the anachronism of the conventional shareholder corporation is obvious. It’s a hangover from the times before the coming of modern democracy and modern constitutions. Simple as that.
Organisation is organisation. The arguments that have been used to assault absolutism in the name of democracy, pluralism and checks and balances in the political sphere, also apply to what Franklin D. Roosevelt famously termed the “economic royalists.”
Of course, when your chief object is simply to organise the plunder of a remote frontier, and to build whatever infrastructure is immediately needed plus a few forts to fend off anyone intent on stealing the goods — or taking them back? — a sophisticated system of governance might well be regarded as nice but not necessary to have.
But with today’s complicated technological jigsaws and professionalised careers, more emphasis has to be given to forms of organisation that reflect webs of interlocking commitment. Forms of organisation that prevent the many from being plundered by what FDR also dubbed a “ruthless few” still focused, as in days of yore, on making wealth trickle up.
For this now kills the goose that lays the golden eggs. The plundering of a frontier, where the wealth already exists and is simply waiting to be picked up after the fashion of golden nuggets, is one thing.
The plundering of a jigsaw-like network of modern producers, who may cease to make long-term commitments if they perceive the system to be an abusive relationship writ large — one in which footloose capital, and managers with no particular sense of commitment either, drive a hard bargains with those who are embedded in their communities and those who are committed to their vocations — is another thing altogether.
During the 1930s, the primacy of the shareholder and the financially opportunistic view of business that economists such as Clark had upheld began to be challenged by a new wave of economists, people such as Keynes (of course), but also less-well-known figures such as Adolf Berle and Gardiner C. Means, who jointly championed the idea of the “going concern.”
That is to say, the idea that the modern corporation, in charge of a hugely complex network of skills, should be managed primarily with a view to the permanence and cultivation of its productive relationships. Like some sort of a garden, rather than a frontier, in other words.
The idea that the corporation should be managed primarily to maximise the return to shareholders — returns already diminished in practice by the tendency, already evident in Smith’s day, for top managers to overpay themselves and loot the corporation from the inside— was thus now challenged still further by the idea that sustainability was now the over-riding concern.
In the 1930s the issue of sustainability was framed in social and industrial terms; today we tend to think of it as an environmental issue. But really, it’s the same issue and indeed, one that takes the same philosophical form in every context, whereby delicate webs of long-term relations are to be protected from being arbitrarily torn up by a ruthless few, who think that it would be immediately profitable for them to do so. Torn up, as if by a bored child who takes to a spider’s web glistening in the sun with a stick.
The more one reflected on issues such as long-term sustainability of webs of relations, the more superfluous the uninvolved shareholder, the so-called functionless investor, began to appear. “Why have stockholders?” Berle would eventually ask:
What contribution do they make, entitling them to heirship of half the profits of the industrial system, receivable partly in the form of dividends, and partly in the form of increased market values resulting from undistributed corporate gains? Stockholders toil not, neither do they spin, to earn that reward. They are beneficiaries by position only. Justification for their inheritance must be sought outside classic economic reasoning.
In the long run, in a modern democracy that had shed the last vestiges of absolutism and aristocratic privilege, the shareholder corporation could only be justified if everyone was a shareholder!
As for a looting management, this too was more likely to be curbed by an increase in industrial democracy, than any backward-looking attempt to reassert shareholder primacy.
The idea that modern capitalism, or whatever it is evolving into, works best if everyone is a shareholder — and if the shares are not too actively traded, as well — came to the fore in the 1946 film It’s a Wonderful Life, a prefiguration of later TV series based on creepy tales such as One Step Beyond, The Twilight Zone and The Outer Limits.
The film depicts a town that exists in two parallel universes, one of them pleasant enough (as in the poster) — and the other a horrible dystopia.
In one universe, the town is named Bedford Falls, a town where everyone’s savings (for most people do have savings in Bedford Falls) are invested, long-term, in the buildings and businesses of the town.
You can tell the film was made before Senator McCarthy got going with his hunt for Reds under the bed. For, the dystopia of the film is not a Communist one, nor a fascist, Nazi or robot-ruled one, but is, instead, a town that suffers from an excessive form of capitalism, as compared to the community-minded Bedford Falls.
(The film’s director, Frank Capra, managed to escape being investigated by Senator McCarthy’s House Un-American Activities Committee. All the same, you probably couldn’t have made a movie like that in 1950s America, as opposed to the America of 1946.)
In the dystopia of It’s a Wonderful Life, the town is named Pottersville, after a ruthless businessman with the surname of Potter; who does not invest his store of wealth long-term but, rather, keeps it on hand as ready money in order to buy out those in debt (for most people in Pottersville are in debt) for fifty cents on the dollar.
The hero of the film, George Bailey, spends some time stumbling about in the derelict and sleazy Pottersville and nearly getting himself shot by the cops (twice), before waking up once more in Bedford Falls and concluding that Pottersville was all just a bad dream.
Judging the film by its poster, perhaps, many people are inclined to think of It’s a Wonderful Life as an exercise in sentimentality. In reality, as you can see in the following clip, much of the film is shot in the gritty 1940s style known as film noir.
The most sentimental bit is the ending: because Pottersville is all too real, and Bedford Falls, perhaps, the dream.
A few years after the making of It’s a Wonderful Life, corporations based in the new Federal Republic of Germany were democratised by ensuring that workers and other stakeholders gained a place on the upper, or supervisory, board, an institution which already existed for the purpose of keeping a closer eye on management from the owners’ point of view.
Closely analogous to a senate or upper house of parliament in the political world, the idea of a second or upper board was first introduced in the seventeenth-century Netherlands. A two-tier board is actually quite common around the world and not exclusive to Germany, by any means. But it is unfamiliar to us, because the English-speaking countries have so far resisted the idea in a similar fashion to other foreign ideas that they have mostly resisted as well, such as proportional representation and the metric system.
In the part of post-World War II Germany that was still capitalist, the broadening of membership of the upper or supervisory board was seen as part of a general move to make a lately tyrannical nation more democratic. It was well known, even at the time, that German business interests had engaged in fantastic conspiracies against the fragile democracy of 1920s Germany, of the sort depicted (fictionally) in the recent series Babylon Berlin. And that these conspiracies, initially aimed at restoring the Kaiser or creating some kind of military dictatorship, had ultimately come to favour Hitler as the preferred candidate of the extreme and unscrupulous right — the One whose path to the top was to be greased by any means necessary.
The view in fashion after 1945 was that if the German supervisory board became less of an elite club of like-minded plutocrats and gained a broader social membership instead, such business plots were less likely to happen. Or would, at any rate, be harder to organise.
But a possibly unintended consequence of the new law was that the supervisory board of German corporations now served to dilute the power of the shareholders, as well. From now on, German managers were beholden, not to the nominal owners of the firm, but rather to the one thing the diverse supervisors could now all agree on, which was that the firm should be managed for long-term sustainability, long-term growth, and long-term plans.
The results would, ultimately, speak for themselves. By the mid-1960s, the rather patient orientation of German capitalism, and that of a number of other Continental-European and East Asian countries, was starting to be compared in increasingly favourable terms to what was now being seen as the ‘short-termism’ of British capitalism and the ‘stop-go’ of the British approach to public investment as well.
An important statement of this point of view was the public intellectual Andrew Shonfield’s Modern Capitalism, first published in 1965. Relative to a resurgent Germany, Italy and Japan — how ironic — Britain, nominally a victor of World War II, was in comparative decline by the mid-sixties. In the view of Shonfield, and many others, this was almost certainly because the dead wood hadn’t been cleaned out as thoroughly in Britain as in the defeated nations: a group which in practice also included France, a land of continual protests and upheavals which was by then onto its Fifth Republic, the Fourth having fallen in 1958 and the Third, of course, in 1940. There is a Japanese expression, ‘victory disease’, which holds that it is good to lose from time to time. By 1965, the idea was in good standing in Britain as well, even to the point of supplying material for political jokes.
(Of course it goes without saying that it was better for fascists and militarists to lose to the forces of democracy, rather than the other way around.)
For a time in the mid-to-late sixties, it seems that Britain was becoming more modern and hip. The ‘swinging London’ of the late 1960s prefigured the later, ‘cool Britannia’ of the early, optimistic years of Tony Blair’s Labour administration in the UK exactly thirty years later, from 1997 until the Iraq war of 2003.
But in both cases, the cultural revival was more style than substance, an exercise in painting over the socio-economic rust: precisely the sort of thing that inspired the cynicism of Jarman’s Jubilee.
There was only one way to strike at the roots of relative British decline and this was to reduce the power of old elites, to give ordinary people more say in the running of the economy: not necessarily for radical ends but simply, at a minimum, to try and create some kind of national consensus in favour of a longer-term, more responsible approach to the management of the increasingly complex industries of the late twentieth century.
And to try and engender a more responsible approach in the civil service as well; as opposed to the rather flippant disengagement from real social problems, the spin-doctoring and papering-over of cracks that was the running joke of the later Brit-comedies Yes, Minister and Yes, Prime Minister.
The idea that shareholders and managers should share real economic power with other ‘stakeholders’ was seriously floated in the time of late-sixties Swinging London and again, under Blair, in the time of Cool Britannia. But on both occasions style did not give way to substance.
For unfortunately, substantive economic reform in a stakeholding direction was precisely not the sort of remedy for national decline, whether absolute or relative — some of it inevitable, of course, as the rest of the world overcome its immediate post-World War II prostration — that the elites of British society, nor of the other Anglophone victors of World War II, were prepared to countenance.
Instead, precisely the opposite message was preached. A radical, corporate libertarianism that demanded a return to free-market fundamentals: the dismantling of all forms of economic democracy, and a return to the idea that the economy should be managed purely for the interests of the shareholder. The memory of Adam Smith was invoked by these economic fundamentalists, though in truth hardly any of them had ever read his works, so it seems; for if they had they might not have been so sanguine about stratospheric managerial pay rises and the futures of great industries being sacrificed to the immediate interests of the ruthless few.
Here, too, we saw a ‘revival’ that was ultimately — in the long run — more of a cultural sugar high than anything substantive.
The slogan “make America great again” would be used by Ronald Reagan in 1980, again by Bill Clinton in 1991, and again, most recently, by Donald Trump.
Ah, crappy videotape — those were the days!
But seriously: such is the shortness of our memories, that the solution to decline is more cuts to investment and in taxes for the rich, in order to make America great again. And again. And again.
You do wonder whether such Cassandras as Walter Scheidel are right: that real reforms to arrest decline, as opposed to pseudo-reforms designed to protect the position of existing elites, really only happen when a nation has hit rock bottom, somehow, like Germany in 1945.
A condition also seen in the English-speaking countries, though less drastically, in the Great Depression and the early years of World War II, with all the New Deal- and welfare-state-type reforms that these uncertain years engendered.
And that some version of the victory disease, perhaps, has since prevented the Anglophone nations from really getting to grips with issues of post-WWII decline first felt in Britain from around 1965 onward, and in the other countries from about 1975.
And which have been, so far, treated as a trigger not for actual political revolution in form of a further advance of economic democracy, so much as counter-revolution: a doubling-down on old forms of undemocratic economic fundamentalism, wrapped in cultural sugar-pills.
With President Joe Biden’s US $4 trillion package and renewed endorsement of trade unionism, so reminiscent of the old New Deal but seemingly going further, it may be that the decades of a reactionary response to post-World War II decline are actually at an end, and that we will see something more constructive, at last, in the years to come.
I will leave the last words to one of the giants of mid-twentieth century Swedish social democracy, Gunnar Adler-Karlsson:
Låt oss i stället beröva våra nuvarande kapitalister en efter en av deras äganderättsfunktioner, så att de om några decennier står kvar formellt som kungar, men reellt som mer eller mindre maktlösa symboler för en förgången tid.
Or in other words,
Let us instead deprive our present capitalists bit by bit of their economic powers of rule, so that in a few decades they will remain formally as kings, but in reality as more or less powerless symbols of a bygone era.