The Attack on Corporate America

The Attack on Corporate America, edited by M. Bruce Johnson, New York: McGraw-Hill, and Coral Gables, Fla.: Law and Economics Center, University of Miami School of Law. 1978. 348 pp. $14.95.

"Of business she had no conception: and therefore her discourse was composed only of complaint, fear, and suspicion." That was the way Sam Johnson reluctantly described his mother's opinion on commerce. What is remarkable is that such a description also fits an astonishingly large number of contemporary figures who feel called upon to shape popular opinion on this subject.

Sarah Johnson may perhaps be pardoned, but the fretting and nail-biting that goes on about so much of economic life today is usually done by people who should know better. Entertaining and informative, if not quite painless, introductions to the subject, such as Armen Alchian and William Allen's University Economics, are available for the curious. One can only wonder where the thoughtful folks who clutter the offices of the Nation or who staff your local consumer activist brigade picked up their sorry notions about the process by which sweat and toil are turned into bread. (A major exception to the "know-nothing" behavior common among consumer activists is Consumer Alert, Box 981, Stamford, CT 06904). Of course, the market for fiction has always been much larger than that for nonfiction. Tales unconstrained by fact or accurate analysis can be much more exciting and entertaining than an account of mundane work.

All too often, in fact, the study of mankind in the business of everyday life has been abandoned for something else. One would think that only a madman could do so, but a mythology exists that allows a normal individual to interpret a rise in the prime rate, the decision of a company to relocate in Tuscaloosa, and an advertisement that says "Coca-Cola refreshes" as proof positive that the "economic system" is out to get him. Why fear and loathing should characterize popular discussion of such very mundane matters is puzzling and no doubt deserves some scholarly investigation in its own right. While ignorance may explain part of it, the deeper mystery is why the ignorance is so willful. Politicians, of course, have a vested interest in finding scapegoats for the damage they do, but why are there so many willing allies and easy dupes?

For the moment I will content myself with the observation that much of what old-fashioned economics has to offer is unexciting. Quite all right, of course, for the likes of those who enjoy an evening curled up with the national income accounts or those who've caught themselves wondering why we do things in big chunks and don't instead eat a minute, sleep a minute, and work a minute. But for the great mass of mankind that takes its pleasures seriously, enlightenment on these matters is not worth the effort. How much more comfortable, if economic topics must be discussed at all, to moralize, to intone half-truths, and to assert as fact whatever merely comes to mind. And there are those—Ralph Nader, Michael Harrington, and John Kenneth Galbraith, to name only a few—who are willing to cater to these natural tendencies.

Unfortunately, some of this made-to-order analysis has become received wisdom and the basis of policy. It has been apparent for some time that informed rebuttal is required. The corporation in particular has been the target of the latter-day Luddites, who depict it as one of capitalism's run-amok monsters. The Attack on Corporate America, a publication from the University of Miami's Law and Economics Center, cuts this nonsense short. In question-and-answer format, such respected authorities as Harold Demsetz, Arleen Leibowitz, and Arthur Laffer present the best thinking on the corporation in a clear, concise, and nontechnical fashion.

Now to come to the defense of the corporation is not necessarily to profess one's love for $40 billion in assets all under one roof or managed from one corporate headquarters. The authors carefully explain how the corporation, like other aspects of the economic life, has evolved as a way of shuffling our resources to productive uses. It is not a means by which wealthy and powerful old codgers squeeze more blood from a helpless and uncomprehending populace.

The most important function of the corporation is to allow people to bear risks and to do it in an efficient way—no small matter, since all economic enterprise is inherently risky. The return to the owners of a firm will fluctuate, and it is the stockholders' function as owners to bear such changes, either in the form of fluctuating dividend payments or in changes in the value of the stock. The nice thing is that they don't have to tie all their savings to the fate of one firm. The average small investor can buy a share in each of a hundred randomly chosen firms (or in a few mutual funds to reduce transaction costs) and be reasonably assured that the return to him will not be as volatile as the return from a holding in a single firm. The usefulness of such a policy has been known since people first learned not to put all their eggs in one basket.

This is also a good solution from the firm's point of view, or rather, from the point of view that considers the allocation of resources. Taking the case of a particularly risky enterprise that has a good chance of being either terribly profitable or abysmally unprofitable, an investor faced with the prospect of investing all his resources in that firm or not investing anywhere would ask for a very high return. But since he can make his holdings there a small fraction of his total, he will offer some of his capital with the prospect of a much lower expected return. As a result, risky activities are carried out to a greater extent than they would be if each person's investment were tied to a single firm.

This state of affairs—namely, diffused corporate ownership—has given rise to some ill-informed criticism. Corporate managers, it is asserted, are not responsible to anyone. Although corporations are supposed to be democracies with everyone exercising voting rights, few shareholders bother.

What this view ignores is that there are people who make it their business to watch what corporations do. Some own rather large fractions of any single firm. Others, who specialize in finding poorly managed firms, do not. Is a firm being mismanaged? Are the officers taking earnings in the form of fringes? If so, the firm's stock price will reflect these factors as it is bid down by knowledgeable traders. With the firm trading for less than its assets would be worth under good management, someone stands to gain by buying a controlling share and doing things right. (It is too bad that the US Postal Service is not a publicly held corporation.)

What keeps this from being a common occurrence is the value that present managers place on their reputations. To be canned in such an ignominious fashion more than once or twice puts an end to a corporate career.

This conception of the corporation as a device that allows scarce productive capital to be put to highly valued uses forms the basis for the subsidiary points the authors take up. Their answers to questions about foreign investment, worker alienation, and the size of corporations, for example, likewise provide a distillation of the best analysis and most penetrating insight that contemporary scholarship offers.

Although not all the issues treated have been settled once and for all, familiarity with the arguments presented in this book should provide defense against the most clever of sophists as they ply their trade.

Yale Brozen is a professor of business economics at the University of Chicago.