Prosperity

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Colin Mayer. Prosperity: Better Business Makes the Greater Good. Oxford: Oxford University Press, 2018.

“What are companies for?” says the cover of the August 24-30 issue of The Economist. The cover story reports:

…[T]he Business Roundtable has either seen the light or caved in, depending on whom you ask. On August 19th the great and good of CEO-land announced a change of heart about what public companies are for. They now believe that firms should indeed serve stakeholders as well as shareholders. They should offer good value to customers; support their workers with training; be inclusive in matters of gender and race; deal fairly and ethically with all their suppliers; support the communities in which they work; and protect the environment.

This change of heart is applauded by some but criticized by others, including the editorial board of The Economist itself. It goes against the dominant view of the corporation that was proclaimed by Milton Friedman in Capitalism and Freedom (1962):

[T]here is one and only one social responsibility of business––to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Corporations are the instruments of individuals, their shareholders, and “business” as such cannot have responsibilities…only people can have responsibilities.”

Colin Mayer, professor of management at Oxford, has written Prosperity in opposition to this “Friedman doctrine”:

The message of this book is that the Friedman doctrine is not a law of nature. On the contrary, it is unnatural; nature abhors it, if only because it has been the seed of nature’s destruction. If it ever deserved to have its time, the Friedman doctrine has had it. It is not the business paradigm of the twenty-first century, and as long as we continue to believe it to be so, the greater will be the damage it inflicts on our societies, the natural environment, and ourselves. Few social science theories are both so significant and misconceived as to threaten our existence but that is precisely what the Friedman doctrine is doing in the twenty-first century.

I’m going to side with Mayer right from the outset. Sociologists like myself are generally suspicious of a doctrine that defines social responsibility so narrowly and individualistically. Having taught family sociology for many years, I don’t know a sociologist who would claim that the family exists only to serve its own members. It is a social institution with many responsibilities to society, such as acting as an “agency of socialization” to transmit the culture to a new generation. Why should economic institutions be so different?

The classical answer is that the economy is the realm of free-market competition. The pursuit of economic self-interest motivates people to produce something they can exchange for what they want. The “invisible hand” of the competitive market reconciles competing wants and produces the greatest good for the greatest number. So except for a few “institutional” economists and other minority views, economists have viewed the economy as an aggregation of competing individuals rather than a sociocultural organization of cooperating social actors.

Does this individualistic view make much sense in the era of giant corporations? Surely the corporation is a social institution, and as such must have responsibilities to society at large. If its only responsibility is to make profits for its shareholders, then it is primarily an instrument of the wealthy, since the richest 10% of the population owns over 80% of the corporate shares. Unfortunately, there are a lot of ways for powerful corporations to serve shareholders while performing disservices to others, such as workers, consumers, or future generations hurt by a degraded environment. The only defense against a self-serving, potentially sociopathic corporation is the law. But American corporations are also defined as legal persons in law, with the right to spend unlimited amounts on political campaigns (although not by contributing directly to candidates). They have considerable power to block regulations they don’t like. The Friedman doctrine plus Citizens United is a formula for plutocracy, not service to the common good.

Is a corporation just a machine?

Mayer’s critique of the Friedman doctrine is more than just a common complaint about corporate misbehavior and a call for more government regulation. What I found exciting about this book is its intellectual depth, as Mayer draws on fields as diverse as history, biology and philosophy to challenge the conventional view of the corporation. He doesn’t just want to regulate it; he wants to redefine it by understanding it in a larger context:

The release of the corporation from the rule of shareholder rights [will] presage a new age of enquiry into the role of the corporation in contemporary society that extends beyond the current confines of economics and finance to embrace all of the humanities, sciences, and social sciences.

First, Mayer points to the variety of corporate forms and functions that have emerged over the course of history: the “merchant trading company established by royal charter to undertake voyages of discovery,” the “public corporation created by Acts of Parliament to engage in major public works,” the private manufacturing corporation, the service firms and financial institutions, and the transnational corporation. Recently he sees the rise of the “mindful corporation” that runs less on traditional forms of capital and more on information and ideas. More on that later.

The entity described by Friedman is not what corporations have always been, but what they have become in modern times. “[W]e find the corporation progressively losing its public sense of purpose as its investment tail increasingly wags the administrative dog and the corporation becomes a rudderless vessel, not well suited for voyages into uncharted seas to eternity.”

Mayer calls Friedman’s view a “property view of the firm–shareholders are owners of the firm in the same way as they possess a home or a washing machine.” And the firm they own is also a kind of machine:

The traditional analogy of firms is with engineering not biological processes. A firm is a form of production in which different inputs—capital, labour, land, materials—are combined to produce an output of a good or service. It is a mechanical process that continues so long as the inputs are fed into the corporate machine and it stops when the inputs are no longer available.

Just as a machine can have a best design to achieve its fixed purpose, a corporation can have an optimal system of ownership and governance. “That optimal structure has often been associated with the Anglo-American system of shareholder ownership and control, and there has, until recently, been a widely held view that the world was converging on it.”

Another implication of mechanistic thinking is that corporations, like machines, have no purposes of their own. Once my watch is designed and engineered to tell time, it can’t do anything else. Questions of purpose disappear from analysis and discussion if corporations are just doing what they must do, which is maximize profits for their owners.

This machine-like conception of the corporation is not dynamic enough to account for corporate innovation and evolution, which could include re-purposing.

[I]n a world of creation rather than consumption where companies and individuals are innovating not just implementing then this mechanistic view of institutions and individuals as automatons guided by unobservable forces cannot apply….Once economics strays from the confines of markets and contracts then it has little to say about processes that involve the creation of products and processes, which previously had not even been contemplated.

This is a problem that goes well beyond corporations. Our understanding of society and nature is enhanced if we acknowledge a creative process of self-organization operating at multiple levels–individual, institutional, societal and beyond.

A more organic view

Organic metaphors have played a larger role in sociology than in economics, so Mayer’s conception of the corporation comes as no great shock to a sociologist. “The corporation is not just a profit-generating machine. It is a living, evolving entity capable of consciousness of its living environment and its potential to contribute to it.”

The corporation represents a distinct level of organization, with its own agency and its own effects on other levels of organization, both lower and higher. The idea that corporations have some of the rights of persons is not unreasonable, as long as they have responsibilities both to their constituent individuals and to the society and natural world of which they are a part. If they only existed to serve their shareholders, then any separation of ownership from management would be a potential problem, since managers might not do what owners wanted. This “agency problem” has been a longstanding preoccupation in economics and business administration. But if corporations can have diverse and multiple purposes, some autonomy of management from ownership is an opportunity. “[T]he very thing that Friedman saw as a deficiency of the corporation is an attribute allowing it to balance the degree of commitment it offers to different parties with the control that it exercises over them.”

Rather than carrying out a fixed purpose, corporations innovate by bringing together and serving many forms of capital, not just financial. These include:

…human capital (employees, suppliers, and purchasers), intellectual capital (knowledge and understanding), material capital (buildings and machinery), natural capital (environment, land, and nature), social capital (public goods, trust, and social infrastructure), and financial capital (equity and debt).

Today financial capital is only a small part of the world’s total capital, and placing it at the center of economic life inhibits needed innovation. The actions of the corporation can either create or destroy capital of any kind. For example, it can create human capital by training workers or destroy it by rendering existing workers useless.

In the organic view, the corporation is not a machine with a fixed purpose, but an active constructor of collective purpose, “a rich mosaic of different purposes and values.” Accordingly, it has the potential to build trust with any combination of the many constituencies associated with the forms of capital listed above. It can contribute to the greater good because it chooses to, not just because it is coerced to do so by government regulation.

Underlying Mayer’s conception of the corporation is a broader philosophy of life, one that reverses “the question from what should one expect of life to what should life expect of us.” Individuals do not participate in institutions just to get things for themselves, but to lead meaningful lives by identifying with purposes beyond themselves.

The mindful corporation

Notice that Mayer described the corporation as “capable of consciousness.” That’s a bold claim, considering that more mechanistic thinkers minimize the role of consciousness even at the individual level, let alone at the collective level.

The Machine Age has been heavily influenced by a philosophy of mechanistic reductionist materialism. The mechanistic part says that everything is some kind of machine. The reductionist part says that the way to study the machines is to break them down into their mechanical parts and show how the interactions of the parts explain the whole. For example, the discovery of the structure of the DNA molecule, which occurred around the time computers were being developed, encouraged biologists to think of living organisms as chemical machines running a genetic “program”.

To the extent that the mechanistic metaphor holds, it’s rather convenient for science, since human understanding of the machines we invent gives us a leg up in understanding nature. But the price we pay for that apparent understanding is to render illusory or irrelevant some treasured aspects of our subjective lives–consciousness, experience, free will, meaning, purpose and value. For example, what we call “mind” may be seen as nothing but the software that runs on the hardware of the brain, and that makes us no more than a sophisticated robot. We are conscious of what we’re doing, but the real causes of our behavior are not our conscious intentions, but mechanical processes that normally lie beneath our awareness.

In the twentieth century, that kind of extreme materialism was adopted by many philosophers and scientists in preference to a discredited mind-body dualism, which thought of mind as a ghostly, immaterial thing inside the material body. An alternative to both views is to regard mind as a creative process enabled by physical mechanisms without being determined by them. Some philosophers (and here I go beyond Mayer) associate that creative process with a certain kind of complexity, the complexity of a higher-level individual as opposed to a mere aggregation of parts. Both a living cell and a puddle of water consist of molecules, but only the cell would be considered an individual. Similarly, both a multi-celled organism and an aggregation of bacteria consist of cells, but only the multi-celled organism would be considered an individual. In humans and other animals, a multitude of cells cooperate to create a special kind of individual event, an experience. We have no formulas or algorithms to deduce how a unique experience is synthesized from a multitude of inputs. Yet a novel experience can change the subsequent course of events throughout the body–a decision about what to eat, for example–so that consciousness matters after all. The life of a high-level individual is enabled from the bottom up, but also organized from the top down. It harnesses lower-level mechanisms to serve emergent, higher-level purposes.

If what we mean by “mind” is such a creative process, then the objection to using that term at multiple levels of complex organization is less cogent. One can distinguish a highly-organized group of people from a mere aggregate such as a crowd. People in a crowd interact, but people in an organization cooperate to create higher-level events such as policy decisions. They don’t just obey laws of nature; they create new rules that cannot be deduced from those laws. The corporation is a higher-level individual in its own right, and the corporate “mind” is the cooperative process of defining corporate reality (that is, creating the corporate culture).

For Mayer, this is not just a description of what humans do but an insight into how nature works. That’s why he cites Thomas Nagel’s Mind and Cosmos: Why the Materialist Neo-Darwinian Conception of Nature Is Almost Certainly False. Nagel is a philosopher, but a number of distinguished scientists have also been questioning the twentieth-century understanding of genetics and evolution. The issues are complicated, but they involve how much causal weight to assign to the molecular level (DNA) alone, and how seriously to take the organism as an active user of both genetic and acquired information, whose decisions affect its own quality of life as well as the survival of its genes. (See, for example, Jablonka and Lamb’s Evolution in Four Dimensions and Jesper Hoffmeyer’s Biosemiotics.) The conception of an organism as a slave to its “selfish genes” (Dawkins) may be just as much an oversimplification as the conception of a corporation as a slave to its selfish shareholders!

Thinking of the corporation as a higher-level individual rather than a machine helps us see how it can have such subjective qualities as values, purposes of its own, integrity, and even kindness. Idealistic to be sure, but no more than we expect of other institutions, such as families and churches.

To summarize, while Milton Friedman conceives of the corporation as a single-purpose machine serving its owners, Colin Mayer sees it as a more organic and evolving entity within an organic and evolving social and natural world. I find Mayer’s view eminently more sociological, as well as consistent with the most coherent philosophical position I have studied.

Continued

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