On Capitalism, Europe, and the World Bank

On Capitalism, Europe, and the World Bank

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John Ahni Schertow
April 11, 2007

Dennis Ott recently interviewed Noam Chomsky — during which, several “unpopular” but extremely important points were raised about the legal mandate and equally unfounded role of corporations in modern society. Here’s the first bit…

On Capitalism, Europe, and the World Bank

Dennis Ott: In a recent interview you quoted Thorstein Veblen, who contrasted “substantial people” and “underlying population.”[1] At a shareholder’s meeting of Allianz AG, major shareholder Hans-Martin Buhlmannn expressed the view that there is only one limit to the increase of the dividend: “The inferiors must not be bled so much that they can no longer consume. They must survive as consumers.”[2] Is this the guiding principle of our economic system? And if so, is there any substance to the notion of a “social market economy”?

Noam Chomsky: Those are traditional questions in economics. It’s part of Marx’s reasoning about why there’s going to be a continuing crisis of capitalism: that owners are going to try to squeeze the work force as much as possible, but they can’t go too far, it’ll be nobody to purchase what they buy. And it’s been dealt with over and over again in one or another way during the history of capitalism; there’s an inherent problem.

So for example, Henry Ford famously tried to pay his workers a higher wage than the going wage, because partly on this reasoning – he was not a theoretical economist, but partly on the grounds that if he doesn’t pay his workers enough and other people won’t pay their workers enough, there’s going to be nobody around to buy his model-T Fords. Actually that issue came to court in the United States, around 1916 or so, and led to a fundamental principle of Anglo-American corporate law, which is part of the reason why the Anglo-American system is slightly different from the European social market system. There was a famous case called “Dodge v. Ford.” Some of the stockholders of the Ford motor company, the Dodge brothers, brought Henry Ford to court, claiming that by paying the workers a higher wage, and by making cars better than they had to be made, he was depriving them of their profits – because it’s true: dividends would be lower. They went to the courts, and they won.

The courts decided that the management of the corporation has the legal responsibility to maximize the yield of the profit to its stockholders, that’s its job. The corporations had already been granted the right of persons, and this basically says they have to be a certain type of pathological person, a person that does nothing except try to maximize his own gain – that’s the legal requirement on a corporation, and that’s a core principle of Anglo-American corporate law. So when, say, Milton Friedman points out that corporations just have to have one interest in life, maximizing profit and market share, he is legally correct, that is what the law says. The reason the Dodge brothers wanted it was because they wanted to start their own car company, and that ended up being Dodge, Chrysler, Daimler-Chrysler and so on. And that remains a core principle of corporate law.

Now, there were modifying traditional decisions, which said that a corporation is permitted legally – that means, the management is permitted legally – to carry out benevolent activities, like to join the Millennium Fund or something, but only if it improves their humanitarian image and therefore increases their profit. So a drug company can give away cheap drugs to the poor, but as long as the television cameras are on; then it’s still legal. And in fact, there’s an important decision by an American court, which is quite intriguing. It urges corporations to carry out benevolent activities; it says – and I’m quoting it now – or else “an aroused public” may figure out what corporations are up to, and take away their privileges – because after all, they’re just granted by the government, there’s nothing in the constitution, there’s no legal basis for them, it’s a radical violation of classical liberal principles and free market principles. They’re just granted by powerful institutions, and “an aroused public” might see through it and take it away. So you should have things like the Gleneagles conference once in a while, which is mostly fake, but looks good, and this is basically the court decision.

How does the social market system differ? There’s no principle of economics or anything else that says – first of all that even says that corporations should exist, but granting that they exist – that they should be concerned only with the maximization of gain for their stockholders instead of what’s sometimes called “stakeholders”: the community, the work force, everything else. As far as economics is concerned, it’s just another way of running things. And the European system to an extent has stakeholder interest. So, say, Germany has a theoretical form of co-determination – mostly theoretical, but some degree of worker participation in management, acceptance of unions, that’s been a partial move towards stakeholder interest. And the governmental social democratic programs are other examples of it.

The United States happens to be pretty much at the extreme of keeping to the principle that the corporate system must be pathological, and that the government is allowed to and glad to intervene to uphold that principle. The European system is somewhat different, the British system is somewhat in between, and they all vary.

read the full interview here

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