Nature and the Corporation

Douglass North on the role of institutions in our society, part 1. "Understanding the process of economic change"

Institutions, in the thinking of this book and its general field of institutional economics, are the rules of the game of life, while people and their organizations are the players. The practice of going to workplaces and being forced to work there for eight hours, and then going home.. that is an institution of modern societies, based partly on unwritten traditions, and partly on explicit rules written in laws, regulations, organizational guidelines, etc.  The fabric of our lives, and particularly the efficiency and success of our economies, depend on the details and quality of institutions, which set the parameters and incentives throughout the system, which the actors then grapple with, trying to either to satisfy them in competition against other actors, or to evade them, or to alter them through legal, polical, or social means. 

For example, North cites other writers who have concluded that one of the fundamental defects of the Muslim world, as it fell behind the Northern Europeans in economic and cultural terms through the Middle Ages, was the complete lack of the cultural institution of the corporation. Muslim commercial law centers around partnerships, typically very small partnerships between an investor and a merchant, which form anew for each trade mission. But until modern times and reforms inspired by the West, there was no legal form for corporations, which are so fundamental to the Western economic model, providing durable legally and financially independent homes for entrepreneurial teamwork and innovation. Corporations obviously tap into natural human tribalism, offering the familiar setting of small group cohesion and competition, and helpfully cross-cutting against other cultural organizations and power centers such as actual clans, tribes, nations, and religious groupings.

This is a very powerful view of how culture and economics interact. Are corporations all good? Obviously not. They are given rules by the culture at large, though traditional practices and by legal structures when those unwritten rules prove insufficient. Child labor, fraud, tax evasion, family-destroying work schedules... the ways corporations have to make money in socially destructive ways, and thus the ways in which they need to be regulated, are endless. And it is our collective view of these harms and our capacity through social and legal structures / sanctions to address them that manifest in the strength and quality of our institutions.

And here is where one looks back in horror at what has happened to our institutional structures over the last few decades. Donald Trump was merely the apotheosis of lawlessness and institutional destruction that has been the program of the Right for decades. It was enunciated most charmingly by Ronald Reagan, (earning him high grades from historians), but he was only repeating the thoughts of intellectuals like Friedrich Hayek and Milton Friedman who made such persuasive cases for the "freedom" part of free enterprise. I recall especially the spellbinding nature of Friedman's narratives, which contrasted the sclerosis of communist economies with the vibrancy of free markets. Friedman was a hedgehog, advocating one big idea and bulldozing through any nuance or complication. And I regard him as the most influential cultural figure responsible for the general inequality and institutional weakness we find ourselves facing today.

A typical nostrum from Milton Friedman. As though "freedom" was self-explanatory and absolute. Rich people take it to mean something quite different from how others take it, and therein lies the destructive magic of this ideology. 

For he was spinning fairy tales, quite simply. The free market was always good, the government was always bad in his telling. Ham fisted regulation and intrusive economic policy were only one target of attack. Money and inflation was another, and one of the most damaging wedges of this argument. The government is necessarily in charge of the money, by printing it and managing its value through the interest rate, banking regulation, and other mechanisms. But the private sector and general economic conditions are obviously enormous factors as well, creating a complex system of feedbacks and unanticipated events. But Friedman gleefully pinned all the blame for inflation on the government, pronounced a false simplicity in his monetarist program, and used it to further bludgeon the state to get out of the regulatory business. If the government couldn't even get something as simple as the money supply right, how could it possibly have the intellectual wherewithal to regulate the internet, or corporate mergers and concentration, or industrial policy vs other countries? This was the kind of thinking that led to people buying gold, and eventually to the thought that we should get back on the gold standard, one of the greatest lunacies of right-wing politics. (Which Friedman would never have subscribed to, incidentally.)

This intellectual and rhetorical attack, so richly supported and cheered by business interests and the rich, led to the following decades of revolt by the Right against all forms of regulation and enfetterment by the government, to the point now that Republicans speak blithely of defunding the IRS, as if defunding the government and enabling vast tax avoidance consitutes the most natural and virtuous motivation that anyone could imagine. And the gross over-simplifications that Friedman engaged in, his rhetorical excesses, are reflected in more general anti-intellectual trends like the denialism and warfare waged by the right against climate change, among many other topics of urgent and common interest. He, Nobel Prize winner that he was, disastrously debased our intellectual debates on politics and economics. His narrative framing (and that of the whole Chicago school) shaped a generation and more, misleading us into false certainties and terrible policies.

Now, our institutions are in tatters, given that half of our political system is in open warfare against the very idea of productive regulation of economic affairs and a positive role for the state in managing elementary unfairnesses and corruptions that are mounting across our political and economic systems. No wonder that on the world stage, our system is no longer in the vanguard, but is faced with a fundamental challenge coming from states (principally China) whose political systems remain in the driver's seat in managing social institutions, including economic institutions of all kinds, even while harnessing markets in extremely successful ways. 

The question is not whether the government is good or bad, or whether corporations are good or bad. Both institutions have critical and positive roles to play in our prosperity. Both are tools, not ends in themselves. Both need rules to operate effectively- government to be refreshed (via elections, education, research, and new talent) by ever-expanding public perspectives on how society can be improved, and business by an active set of institutions and rules set down by the government to channel all that greed to productive directions instead of the socially destructive directions it inevitably takes when rules are absent. (See Haiti, post-war Iraq, and Afghanistan for examples.) Indeed, it is not going out on a limb to state that business people who spend their time railing against regulations, legal strictures and other institutions designed to make economic markets fair, socially responsible, and productive are not really interested in business at all, but in plunder.

"Because there is a widespread prejudice among many neo-classical economists that simply an absence of government intervention is a sufficient condition for good economic performance in a particular market, it is important to stress that the performance characteristics of any market are a function of the set of constraints imposed by institutions (formal rules- including those by government- informal norms, and the enforcement characteristics) that determine the incentive structure in that market. As noted in the discussion of institutional change in chapter 5, if the incentives reward piracy then that will be the outcome. Any economist who doubts the importance of this observation has only to examine the characteristics of various factor and product markets in Russia in the 1990s to be convinced that it is the incentive structure derived from the institutional framework that is decisive. The rash of entrepreneurial malfeasance in large U.S. corporations in 2001-2 has reflected the evolution of the institutional framework that has altered relative prices to provide incentives for such anti-social behavior."  p.77

 

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