Socialism and the Corporation: A Love-Hate Relationship

By Iain Murray

Wednesday, August 5, 2020

 

Socialists would rather the traditional American firm did not exist. Animosity towards the capitalist boss for reaping all the rewards of his employees’ labor, or (perhaps worse) towards the joint-stock corporation, where workers don’t even know who they’re being exploited by, is a staple of socialist rhetoric. Ideally corporations would be replaced by worker-owned cooperatives or nationalized sectoral industries, but if not, they’ll be strictly controlled through regulation, and their owners and stockholders taxed to oblivion.

 

Margaret Thatcher called this “the politics of envy.” Her message that it was sinful successfully countered the idea that profit is about greed and turned the British Labour Party from a democratic-socialist party to a social-democracy party for over two decades.

 

But now the politics of envy is back in a big way. Not only are corporations accused of greed, they are alleged to be destroying the planet. New-style businesses such as Uber are accused of not just exploiting workers but outright cheating them. Yet increasingly socialists, realizing the political impossibility of getting rid of the corporations, are turning to co-opting them instead.

 

Corporations grow up because entrepreneurs need to find investors to help finance their businesses. In addition, to keep transaction costs low, they need to hire employees rather than contract for each individual routine transaction. That’s the foundation of the corporate structure of owners, management, and workers.

 

For the past century, that structure has been under attack by socialist activists, who have long viewed corporations as ideological battlegrounds, with management arrayed against workers. You will probably notice there a shift in target from Marx: Management is the enemy, not ownership. In fact, much of the Naderite-era attack on corporations was based on the idea that corporate management did not act in the stockholder owners’ interest.

 

Ironically, however, the National Labor Relations Act and similar New Deal laws set the corporate structure in stone, in the name of “protecting” workers against management. Certain aspects of the employment relationship were guaranteed by government enforcement — including overtime, unemployment insurance, paid time off, opportunity for union representation, and other requirements on employers. This required a corporate form of business.

 

Before the modern corporation, economies were characterized by what Adam Smith called “the system of natural liberty,” where businesses were small in scale and owners invested their personal assets into the venture and freely contracted with other businesses and individuals for services.

 

This model lost out to the corporation because of what are called transaction costs related to identifying and contracting with other businesses to perform a service for you. It was far easier and more reliable to directly employ someone to do the job, even when required to offer the protections imposed by law. That’s why the corporation survived for most of the last century despite the increased costs of hiring.

 

Corporations also reduced transaction costs within their own organizations — and the prospect of internal strife among workers — by devising innovative new business arrangements. The franchising business model turned many workers into potential owners. New management models turned other workers into junior managers. The “us versus them” model that created labor strife broke down, and union representation in the private sector plummeted.

 

But in recent years the costs of contracting with another party have been coming down. In some sectors of the economy, corporations are being replaced by networks or platforms that enable two-sided markets, where the purchaser of a service can buy it from a small-scale supplier rather than a large corporation. The most famous example is Uber, which provides a network matching riders to drivers, so they don’t have to go through a taxicab firm. And despite having some corporate features, Uber is a very different animal from a taxicab company.

 

Given the Left’s hatred of corporations, you’d think that socialists would cheer this development. Not so. Instead, many view Uber as exploitive — perhaps even more so than a 1930s-era corporation, because it deprives workers of New Deal–era legal protections based around the corporation.

 

Previously, workers who set their own hours and had significant control over the way they worked were regarded as independent contractors, free from the requirements of much of employment law. But now California, through its AB5 law, is leading the way in redefining contractors as employees. So the woman who goes on a ride-sharing app to earn some extra income driving passengers while caring for a sick relative is no longer an independent contractor, but an employee of the app firm. Understandably, companies affected by this law are cutting workers.

 

During the Obama administration, there was a rash of attempts to make corporations more liable for employees; for example, a change in overtime rules to eliminate huge swathes of junior management positions — something that would have interfered with the aspirations of ambitious young workers (employers would probably cut back on or even eliminate overtime opportunities).

 

The National Labor Relations Board ruled that franchisor companies are “joint employers” of their franchisees’ workers, making them responsible for day-to-day matters like individual workplace conditions and working hours — a burden that would make franchising a much less attractive business model for companies seeking to expand.

 

While both these regulatory expansions were changed under the Trump administration, they are still very much in the playbook of the labor-union movement, and Democrats in Congress are trying to make them law. Paradoxically, this suite of policies actually reinforces the old corporate structure that was set in place in the 1930s. The result will be more large corporations based on an “us versus them” paradigm that pits management against workers — in other words, the very corporate structure socialists claim to hate.

 

There are two reasons that socialists want to see this structure continue. First, it gives government agencies immense power over employment conditions. Second, large corporations are easier to unionize than smaller companies. And the dues paid by employees for union representation — which they may not even want — make large corporations a huge source of funds for political campaigns.

 

Corporations know this. The political and cultural attacks on them have helped lead some of them down the road to “woke capitalism,” which we’ll discuss in the next part. The politics of envy may end up not destroying the corporation, but making it a vehicle for socialism. It’s a good bet that Marx didn’t see that one coming.