In 1924, King Camp Gillette—the inventor of the disposable razor blade—coauthored a book with Upton Sinclair, the progressive journalist famous for triggering the pure foods movement after publishing The Jungle, a muckraking account of the meat-packing industry. Sinclair was lending his writing talents to Gillette in the hopes of offering a more persuasive case for an idea that Gillette had been advocating since his first book, The Human Drift, published thirty years prior.
Gillette’s idea, which he formulated long before he founded his razor blade company, was to bring about a socialist utopia by means of a giant corporation. Their corporation would vertically integrate to control the production process from the point of extracting the raw materials to the distribution of the product to consumers, while ensuring equality of wealth and working conditions among its members. Essentially, the idea was that economies could more easily be centrally planned through the use of enormous corporations enjoying grants of monopoly privilege.
Murray Rothbard, however, disputed this idea in two ways. First, large corporations have the same problems as states when it comes to economic calculation. So corporations do not solve the problem of central planning. Rothbard also disputed Gillette’s vision of the corporation itself. Gillette employed a theory of the corporation—a theory later described more fully by Walter Lippmann in The Good Society—that corporations were government grants of privilege to enterprises that produced a public good. But Rothbard contended corporations were merely “free associations of individuals pooling their capital.”1 The divide between Lippmann and Rothbard, in fact, reflects the two prevailing theories of the corporation that guided nineteenth-century jurisprudence.
The legal realities of corporations have changed significantly over time. The apparent plausibility of Rothbard’s theory and Lippmann’s theory has changed over time as well.
The Corporation as an Agent of Government
After the American Revolution, individual states began chartering corporations at an historically unprecedented rate. The bulk of these charters were granted to transportation and finance companies (turnpikes, canals, banks, insurance, and eventually railroads). Over the first half of the nineteenth century, though, manufacturing and mining businesses also enjoyed wider access to the corporate form of organization. At this time, the prevailing theory of the corporation was Lippmann’s theory. The traditional idea was that to provide a public service, corporations need significant capital, and a grant of monopoly privilege ensures profit so that these corporations can attract the necessary investors. This is the “grant” theory of the corporation, reflecting the protectionist view of mercantilist economics.
At this time, corporations were seen as agents of the government. They were regulated through their charters, which legislatures had to approve through the same process used to pass legislation, and the charter could be revoked at any time. When John Marshall wrote the majority opinion for Dartmouth College v. Woodward in 1819, after the state tried to revoke the college’s original charter, which had been granted by George III, he ruled that corporate charters were contracts that, once granted, could not be altered or rescinded. Although he chipped away at the regulatory authority legislatures had over corporations chartered in their states, Marshall’s opinion gave a formal legal expression to the grant theory of the corporation.
Shortly after this ruling, a wave of democratic populism led to the expansion of suffrage. Voting rights were no longer tied to property ownership. Historians like to focus on the continued restriction of the franchise by the categories of race and gender, but this fails to appreciate how pathbreaking it was to abandon class as criterion for voting. The newfound political influence of a significant portion of the population led to the election of Andrew Jackson to the presidency (1829) and ushered in a wave of political reforms at both the state and federal levels of government.
The Democratization and Privatization of the Corporation
The democratic mood of the Jacksonian majority brought attention to the issue of corporate privilege that the grant theory of the corporation embodied. The United States, by this time, had more corporations than any other country in the world (though it was not yet the dominant form of business organization), and the Jacksonians waged war against the monopoly privileges that state governments conferred upon these corporations.
The result was an underappreciated American innovation: the general incorporation law. The first such law for manufacturing enterprises was introduced in New York in 1811, but the Jacksonian movement ushered in a wave of general incorporation laws that continued through the century. Today, we take it for granted that to form a corporation we can simply fill out a document (you can now do this without even leaving your house, thanks to the internet). But in the 1820s, this idea was truly revolutionary. Instead of businessmen lobbying for corporate privileges, which predictably led to favoritism to protect government cronies and enrich politicians, people no longer needed the sanction of their legislatures to incorporate their businesses.
The spread of general incorporation laws was an uneven process, and the early statutes were highly restrictive. Over time, as states competed to attract businesses and prevent capital migration to other states, general incorporation laws expanded and liberalized. The Jacksonians also gave ideological fuel to these changes through their sustained criticism of monopoly privilege, ushering in the free-banking era through the extension of general incorporation laws to financial enterprises. By the mid-1870s, general incorporation laws were dramatically more liberal, standardized, and accessible than they had been fifty years prior. Many states had also amended their constitutions to prohibit special charters entirely, but even in the states that still granted special charters, general incorporation had become the most common process of establishing a business.
It was in this environment that the legal theory Rothbard espoused displaced the grant theory of corporations. The “association” or “partnership” theory held that, as Rothbard suggested, corporations were merely voluntary associations of investors pooling their capital. It was under this theory that the Supreme Court in Santa Clara County v. Southern Pacific Railroad, ruled that corporations are “persons” in the eyes of the law and are therefore protected by the Fourteenth Amendment. In this view of the corporation, which libertarians frequently agree with, the rights of the corporation are derived from the rights of the individual corporators. It is worth noting, however, that Southern Pacific was not a product of market competition; it was a nationally incorporated railroad that enjoyed special privileges and subsidies granted by the federal government.
This new doctrine helped facilitate the liberalization of corporation laws that eventually culminated in the New Jersey general incorporation laws of the 1880s, which gave legal sanction to holding companies—corporations that own stock in other corporations. This facilitated the budding merger movement, in which companies consolidated into trusts to regulate competition and stabilize prices (more specifically, to prevent prices from falling due to competition). But voluntary combination meant that corporations lacked any teeth to enforce anticompetitive agreements. So corporate leaders turned to the government in what was essentially an attempt to return to the mercantilist era of rent seeking, monopoly privilege, and strict regulation of trade.
When Adolf Berle and Gardiner Means published their landmark book, The Modern Corporation and Private Property, in 1933, they brought attention to the concerning growth in influence that corporate executives had. As they note, “the modern corporation…placed the wealth of innumerable individuals under the same central control.”2 Their study ushered in a wave of scholarship examining this problem, virtually all guided by the assumption that corporate leaders were essentially ideological libertarians whose personal interests naturally compelled them to oppose any government intervention in the economy, backed by the powerful influence of the capital from dispersed investors that they controlled.
This is often true in the case of smaller corporate entities. But when it comes to large corporate enterprises (i.e., “big business”) it appears that the old notions are winning when it comes to the view that large corporations are a sort of “public” entity.
The Triumph of the Progressive View of Corporate America
The traditional narrative of this history is one of selfish businessmen lobbying against government regulation but ultimately facing defeat at the hands of the heroic Progressives, who were enemies of corporate wealth. But as Rothbard and a handful of revisionist historians such as Gabriel Kolko have noted, the reality was quite the opposite.3 Business leaders and Progressive reformers happily jumped into bed with each other. King Gillette, in his proposal for bringing about a socialist utopia through a monopoly corporation, reflects both sides of this partnership. Rather than being anticorporation, Progressives are better understood as “corporatists,” seeing the consolidated corporation as the answer to competitive capitalism and “selfish” individualism. Corporate leaders saw federal economic regulation as a mechanism to protect their position in the economy by reducing economic competition.
The first attempt to return to mercantilism was to pass a federal incorporation law, undermining the competition between states that decentralized governance encourages. Businessmen as prominent as John D. Rockefeller and James J. Hill supported the effort to pass a federal incorporation law. But when this law failed over disagreement about specific provisions, businessmen and Progressive activists turned to regulatory mechanisms such as the Federal Trade Commission (FTC). These efforts peaked during the New Deal, when President Roosevelt signed the National Industrial Recovery Act, which invited the heads of the largest companies in every industry to Washington to fix prices and write regulations that would be enforced against their small competitors.4 Although the Supreme Court overturned this law, the practice it introduced survived in various forms, as is evident today by the corporate presence in Washington, DC.
Historians have been remarkably complicit in perpetuating the myth of laissez-faire businessmen commanding the influence of stockholder capital to fight against government regulation. Kim Phillips-Fein, for example, in Invisible Hands: The Businessmen’s Crusade against the New Deal, tells the story of corporate executives working to overturn FDR’s policies. But the characters in her narrative consist almost entirely of pundits and intellectuals, such as William Buckley Jr., Ayn Rand, F.A. Hayek, and Ludwig von Mises (and her description of Mises’s writings as “political texts” suggests she never opened any of them).5 The myth of corporate libertarians vs. heroic Progressives persists, because left-wing academics and journalists never bother to test their assumptions against the evidence.
In reality, the concern over the concentrated influence of corporate special interests that Berle and Means articulated is valid, but not because corporate special interests will prevent economic regulation, but because they consistently agitate for it. Little has changed in the past century. Corporate executives continue to agitate for favorable regulations, contrary to the media narrative, as we see in Big Tech’s support of net neutrality and, most recently, calls from hedge fund managers for government intervention in the stock market after millions of small investors drove up the stock of GameStop. Patrick Newman recently posed the question, “Are we on the cusp of a new Progressive Era?” I would suggest that the Progressive Era never really ended.
© Greg Nash GOP lawmakers call for Pelosi to be fined over new screenings
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Written
on 8.February.2021.