Economic Update: The Capitalist Corporation

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[S9 E40]

This week on Economic Update, Professor Wolff examines the structure and functioning of the large capitalist corporation dominating modern economies. He discusses their basic economics and influence on politics and criticizes rationales for corporate profits such as "risks" and "entrepreneurship" and he also explores the parallels between corporate structures and monarchies.

Transcript has been edited for clarity.

Welcome, friends, to another edition of Economic Update, a weekly program devoted to the economic dimensions of our lives: jobs, incomes, debts, ours and our children's. I'm your host, Richard Wolff.

I want to begin today by responding to something many of you have written to us to ask for, an analysis of the modern capitalist corporation. You’re right to ask me to do that because it is the dominant form in which our economy is organized. It's the decision-making center of what happens in our kind of capitalist economic system.

It wasn't always that way. It used to be that employers were many, many people, and that they were relatively small, each one with 5, 10, 20, 50 employees. That era is long gone. We are now dominated, and I'll show you how I mean that, by very large entities, or enterprises, if you like, and the dominant one that does most of the business in our society is the corporation. And so, it deserves some analysis.

Recently, corporations have made decisions that affect all of us in dramatic ways, and I thought I'd run through them just to establish why it's important to understand how corporations work, because it's shaping our lives.

Think of the following: the Boeing Corporation makes airplanes, two of which crashed, killing over 300 people, and it now emerges that that corporation, at its leadership level, made all kinds of decisions to save money at the expense of safety, etc., that caused those crashes. Think, likewise, of the corporation called Volkswagen, in Germany, that decided to cheat on emissions testing, polluting the air, and damaging the lungs and [air] we all need to survive. Think of the more recent Juul vaping scandal, in which, after decades of suffering the results of what cigarette corporations did, we are now discovering that the e-vaping, e-cigarette phenomenon is just as deadly. Those were decisions made by the corporate directors in that case. I could go on.

Tens of thousands of people are on strike right now, and have been, as we go to press, at the General Motors Corporation. That strike is the result of, among other things, decisions made by the corporation we call General Motors.

The Sackler family set up the Purdue pharmaceuticals company, and the Board of Directors there made the decisions that made opioids available on a mass scale in the United States, accounting for hundreds of thousands of, basically, suicides in the United States in recent years. The Koch brothers were able to change the discourse in the United States over recent years from concern over climate change to confusion over climate change. Amazon is another corporation whose Board of Directors gives their CEO an amount of money that makes him the wealthiest person on earth, disposing of $135 billion, which is more money than many countries have. I could go on, but you get the point.

What is a corporation? It's very important to understand that a corporation, otherwise known as a public company, because corporations, to be corporations, have to go through a public process. They have to inform the government of what they're doing. They have to file regular reports. They depend on a charter issued by a state, etc.

Let's start at the top. Corporations are owned by shareholders. The way you become a corporate owner is you go into the stock market and you buy shares. If you have shares, you get to do something, namely, to vote. Every year, you get to vote on who will be on the Board of Directors. I'll get to them in a minute, they're the key decision-making body.

Okay, how does it work? You get as many votes as you have shares. If you're not wealthy enough to buy any shares, you get no votes on what the corporation does. If you get six shares, say from your grandmother, you get six votes. If you're a banker in whom we entrust millions of shares, yes, that banker votes millions of times. Together the shareholders, and let's remember 10% of shareholders in America own 80% of the shares, so a tiny number of people have the dominant say on who gets to be on each corporation’s Board of Directors.

Okay, let's turn then to the Board. Why? They're the key people. They're the ones who make all the basic decisions about the corporation. They may consult with the shareholders, the major ones, the big ones, who voted them in and can vote them out each year, or they may not, that'll depend on the relationships between the shareholders and the members of the Board of Directors. But that Board, usually numbering between 15 and 20 people, they make all the decisions. They decide what the corporation produces. They decide what technology is used. They decide where the production will take place. And finally, they decide what to do with the profits that the enterprise earns.

They exclude from all of those decisions the vast majority of people in the business who are, of course, the employees. This is crucial for everyone to understand. There is an exception. The top two or three officers of the corporation are chosen by the Board of Directors. And then something magical happens, they are also put on the Board of Directors so that the Directors have, in addition to the independent directors, those from outside, the two or three folks at the top, typically the CEO, and so on.

Now, let's take a look at how this has been going. 20 years ago, there were approximately 7,000 or 8,000 corporations, public companies, in the United States. Today, there's half that number. Why? Because they have concentrated. Many have become fewer. The typical corporation is, therefore, much larger. The Board of Directors hasn't changed. That's still 15 to 20 people. And the major shareholders haven't changed much in number either. What has changed is the size of the employees, more and more of them relative to the Board of Directors that runs the business.

Let me drive home what this means in economic language. Companies merge. Many become fewer. Bigger companies buy smaller ones. They get together. They do that in two ways. Sometimes a company buys other companies like itself. So, many cigarette companies become three or four. Many car companies become three or four. That's called “horizontal integration,” the same company doing the same kind of thing, instead of competing with one another, they become parts of one another.

The other kind of concentration is called “vertical integration.” That's when a company doesn't buy another one like itself, instead, it buys either a company from whom it used to buy inputs. For example, a car company buys a steel company. That's a company buying something that is different from itself, something that provides an input to itself. Sometimes companies buy the thing they sell to. For example, car companies, again, selling to an independent dealer can decide instead to buy that dealer, then they own both the producer of the car and the seller of the car.

We've had both horizontal and vertical integration. Let me give you an idea of what that has meant in terms of size. Back in 1975, the 109 biggest corporations, out of the 7,000 - 8,000 there were, got half of the profits. 109, out of thousands, accounted for half the profits. In 2016, this had been reduced to the following stunning number: the 30 largest corporations together in this country, out of 3,500, have half the profits. That's called a highly concentrated system.

Very few corporations have enormous wealth, and enormous power that derives from that wealth, at their disposal. And we all know how they use it. Which makes sense once you understand this structure. If you're super concentrated, and super rich, there's always a danger that the mass of your employees, and even the mass of other smaller companies, will resent your power and your wealth, will feel abused by it, will know that in any dealings with you, you have the upper hand, because you've got the enormous wealth. And so, there is danger that your situation will be attacked.

One of the things these big corporations can do, and do do, is try to control all that. They set up associations with other companies so that they have an ongoing relationship and can stave off criticism and attack. They spend a lot of money on public relations, so if I gave you the names of these companies, you're already familiar with them. You know those names because you've dealt with them in your life, and there's a lot of advertising out there to make sure you never forget them.

And they also buy the politicians. They provide the experts that give the politicians their information. They buy the lobbyists who spend time taking the politicians out to fancy dinners, and to explain what is wanted of them. They give the big bucks donations to the political campaigns to keep those politicians in office, and they have all the wealth and all the connections needed to do that. They will pay for publicity that makes the politician look good, or, if the politician doesn't cooperate, they'll pay for the publicity that makes him or her look bad. You get the picture.

The power of these corporations cannot be exaggerated. When I looked into my own understanding of the world to give you a metaphor, a parallel, the largest corporations in America, the top 200 - 300 is really all we need to talk about, are like the kings of old and the court. A handful of people, very small, gathered around the big one at the top, together make all the decisions, formally and informally, on the golf course, at the restaurant, at the resort, or in the boardroom, it doesn't really matter. They run the economic system because they have the dominant wealth and power to do so.

I'm going to go, in the second half of today's program, into some of the ways they work. But I first wanted to establish that we don't live in anything like the textbook conversations about capitalism. We don't have a lot of employees working for a lot of different employers. We have a very large number of employees working for a stunningly small number of employers because of what has happened: a tiny number of corporations assemble vast wealth. That's why the richest people in the in the world right now are people who run Amazon, Apple, Microsoft, among the biggest corporations in the world. That's how this system works. They're the top, the way the kings and their courtiers were at an earlier time. And the same logic applies to them. And I want to be real clear about that.

Before we go to the second half, where we will explore how corporations work and the justifications they offer for the role they play, I want to remind you, please, to make sure of our connection on youtube. It is an important step that you can do to support us. Youtube is a way for us to reach a larger audience. You can simply click on there and become a follower of ours, it costs you nothing. It's a big help, and I would urge you to do it.

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Welcome back to the second half of Economic Update.

Before jumping into our conversation about the corporation and its role in the modern capitalist economy, I wanted to let you know that Economic Update is supported by the New School in New York City, where I myself am a visiting professor of International Affairs. The New School offers master's degree programs in International Affairs that are rooted in progressive scholarship, and prepare engaged, global citizens to build a more just and sustainable world. The New School students focus on challenges such as the rise of authoritarian regimes, refugee crises, jobless youth, and climate change. Students have unique learning opportunities at the United Nations and at field research locations around the world. To learn more visit: www.newschool.edu/ia.

One of the rationales, or justifications, for the modern, large, powerful corporation that dominates capitalist economies, is the idea of risk. The argument goes something like this: investors risk putting their money into buying shares of a corporation, so they end up having all the power and control to elect the Board of Directors, and ultimately, to control what happens in the corporation, what decisions it finally makes. And the notion is that’s somehow reasonable or fair because they have put their money at risk.

I always found this argument somewhere between outrageous and insulting, and let me explain. What do the workers do when they go to work at a corporation? Well, we know part of the answer: they do work. They use their brains and muscles to transform raw materials into finished goods and services. That's what they're paid to do. But they also take risks, and indeed, their entire families do. Here are some of their risks. The environment where the worker works. That's not a decision the worker makes. It's a decision the employer makes. Is the air good? Is the water good? Is the sound at a reasonable level? Is it polluted? All of those questions will shape the health of the worker and the kind of health he or she takes home at the end of the day. Workers take a risk when they work in the environment that's controlled by the employer.

Let me give you another example. If the employer, the Board of Directors, make a mistake and produce something for which there's no market, the workers will be fired. They take a risk when they go to work, for any company, that their job will be lost, their income will be lost, because of decisions over which they have absolutely no power, made by the Board of Directors, other people.

And, of course, they're taking a risk: they're taking a risk that production will be moved overseas. They're taking a risk that the company will be unable or unwilling to pay taxes. And here they are, having moved to the community where they have a job, only to discover that the community can't survive because the companies aren't paying taxes.

Come on, folks. When you choose a job, you're choosing a life, a community, a place for your home, a place for your family, all of those things are not what you're paid for. You're paid for your labor, but you're not paid for your risk. Well, why then, if you're not paid for the risk you take as a worker, would you want to believe that employers ought to be paid for the risk they're taking?

Let me give you another example. The customer takes a risk. When I buy something, here's my risk: the thing I buy, for which I've paid, may not be what the seller claimed it would be. The courts in the United States are full of cases where exactly that has happened. We know the risk, and it's not much of a comfort to say, “Well, you can get a lawyer.” That's expensive. “You can take time to file a claim.” That's a problem.

There are all kinds of risks, but we don't ask corporations to compensate us for the risk. We are told, “You take the risk when you buy the commodity.” Yeah, and we could tell the corporate investor, “You take the risk when you invest.” Don't give us arguments about being paid for a risk if you're not willing to pay the customer or the worker for the risks they have to take, as well.

Then there's another argument to justify corporations and the monies they accumulate in the hands of shareholders and Boards of Directors. The argument goes around a wonderful word that economists love, entrepreneurship, business skill, the capacity to organize a business. I love this one. I see that the argument is that the business owner, the business director - by the way, in most corporations, the man or woman who started them years ago is long out of the picture, if they're even alive. Most corporations are run by Boards of Directors, and major shareholders, who had nothing whatever to do, personally, with inventing what started the company, or building it from a small to a larger company, etc.

But put that aside. Let's assume that there is some particular, nice quality that gets a business going. If that's true, then we would be just as happy to pay the people who organize a business, if they are also employees of it, as we would be to pay people a reward who are not employees. In other words, if it's entrepreneurship you're paying, why not offer the workers, who are intimately familiar with everything that happens in that workplace, who are more responsible for how efficient the output is than anybody else is, why not ask them to undertake entrepreneurship themselves? Why not have a committee of the workers, and a rotating one at that, so everybody gets a shot at it, to run the company, to design its future, to plan, together with the workers whom they're all friends and co-workers with anyway, how to build the company out?

If entrepreneurship is something you want to reward and encourage, why not have the workers themselves become their own collective entrepreneurs, and reward them for it by saying to the workers, the better you run this company where you're working, the more we will be happy to give you the profits that your work produces, rather than the current corporate system where the workers produce the profits and the corporate Board of Directors takes the profits and uses them for themselves.

And let's be clear that that's what goes on. At the end of every year, most corporations have a Christmas party, or a New Year's party, and it's a wonderful moment to capture something. At the party, where everybody's getting a little juiced, at a certain point, one of the members of the Board of Directors, or maybe the CEO himself or herself, gets up on a wobbly table and thanks all the people assembled at the party.

“You're all a great team,” he or she will say. “And I want to thank each and every one of you for the contribution you made to another successful year here at the XYZ corporation. Thank you so much for the work you have been doing.”

And as soon as that thank you is over, and everybody goes back to drinking, guess what? The very people who were just thanked for all they contributed to the profits the company made, are excluded from having any say whatsoever over the fruits of their labor, of that profit they helped to produce. They are told, “We don't want you in it. You will not go to the meeting. You have no vote about it. You're out of the picture.”

That's the first thing to understand, and here's the second. If all the workers together produce the goods and services, including the profits generated while these goods and services are produced, then why in the world isn't the revenue that is gotten used basically for two purposes: replace the tools, equipment, and raw materials that were used up, so that the company can continue, and pay all the workers whose brains and muscles produced the goods and services that are generating the [revenue].

Why not stop at that? Workers could. Workers probably should. But they can't in capitalism. Why? Because in order for the production to happen, the people who own land, because the factory and the office have to sit on a piece of earth, and the people who own the machines, equipment, raw materials, have the right, as the private owners of those inputs, to say to the workers,

“Yes, yes, you do the work. You use your brains and muscles. But you have to have land to do it on, and you have to have access to capital to be productive. And we have the right to withhold it from you. That's right. We're a tiny minority of the community, but we can withhold from you the land, and we can withhold from you the tools, equipment, and raw materials without which you can't be productive. So, we have you. We can bargain with you. We'll let you produce. We'll give you the land to use and we'll give you the equipment to use. But you’ve got to give us a cut of the output you produce. Our profit is what you produce, but you don't get to keep. You've got to give it to us because we're the private owners of land, tools, and equipment.”

But here's the irony I would like you to think about. Did the people who get the rent, that's the part of the output that the capitalist pays to the landlord, do the people who get the rent, did they put the land there? Did they create the land? Did their labor produce the land? You know the answer: No.

The people who own the land only get a cut because they can take it away from the rest of us. They didn't do anything to put it there, and you know what? Here's an even worse story. The people who own the tools, equipment, and raw materials, did they make them? No. Workers like you and I made them, and then it became the private property of those who have it now, who use the fact that they own it to require the workers who produce the wealth to part with a portion of it to pay them the dividends, the big fat salaries that they command, only because they own.

That's what a corporation is. The concentrated ownership of land, tools, equipment, money, and so on, that forces the working people to part with part of what they produce, or otherwise be denied access to the land they need, and the tools and equipment that workers like them made, but that now can be withheld because of this bizarre institution we call private property in land, and private property in the fruits of workers in the past who made the tools, equipment, and raw materials.

Bottom line, let me go back to what we did at the beginning. Corporations today are like monarchies in the past. The kings of old used to say to their subjects, that's the rest of us, “You need us. You've got to have us. Without us, civilization would crumble. We run everything. We see everything that's going on.” Some of them even went and told us they talk with God two or three times a week, in order to figure out what to do. And millions of people believed it and gave the King the wealth with which the King could continue to sell us that story.

All we're doing today, we got rid of those kings, didn't we? But we established them inside a new institution called the capitalist corporation, where the king and his courtiers tell us the same story: we need them, we have to have them, they're in charge, they know how to do it, they have taken the risk, they have the entrepreneurship, and lots of other similar, empty arguments whose purpose is to keep this way of functioning going.

Well, the kings threatened that if we got rid of them, civilization would fail, and collapse. We got rid of them, it didn't. I have a suggestion. We get rid of the kings inside our businesses. We run them democratically. We will discover that nothing has collapsed, and the world is actually better off.

Thank you for your attention, and I look forward to speaking with you again next week.

Transcript by Scott McCampbell
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