The corporate scandals of the past year have raised profound questions regarding corporations and the public interest. As Thorstein Veblen observed, in a society dominated by pecuniary interests corporations are presumed to be operating in the public interest unless proven otherwise (1988). However, accounting records rigged to inflate profits, insider deals to promote stock sales, and excessive executive compensation in companies in or near bankruptcy are actions that cannot be construed as being in the public interest by anyone's standard. In his classic article on corporate responsibility, Milton Friedman opposed enforcing standards of socially responsible behavior on corporations because it would constitute "doing good with someone else's money" (1970). According to Friedman, businesses have a fiduciary responsibility to their stockholders to maximize profits. Seen in that context, the actions of corporations such as Enron, WorldCom, Tyco, and others disclosed over this past year are noteworthy not becaus e they represent cases of corporate misdeeds but because they violate even the most minimal standard of responsible behavior--the protection of stockholder interests.
In this paper, we examine the role of the legal system in erasing the "public interest" from official corporate duties and in relieving corporations of any responsibility to their own workers. In the first section we discuss the importance of the public interest in the early history of corporation law. We then examine the question that preoccupied John R. Commons and other progressives in the early twentieth century, namely, what is the public interest duty of corporations and government in regard to labor? More specifically, we ask, just who is included in the public interest? Recent corporate scandals have included actions that were clearly harmful to workers, including layoffs, reductions in wages and benefits, and the collapse of retirement savings held in 401(k) plans invested in worthless corporate stock. However, it is primarily activities in the latter category that have been regarded as being outside of socially accepted business practices. In other words, it is not harm to workers as employees that has provoked the outrage but, rather, harm to workers as investors. We argue in this paper that the disparate treatment of workers in regard to the public interest has its roots in the nineteenth and early years of the twentieth centuries. (1)
Corporations and the Public Interest
Unlike modern interpreters of his ideas, Adam Smith was not an ardent proponent of corporations. Given the great legal privileges extended to the joint stock companies of his day, Smith argued that the corporate form was, at best, suited only to such industries as banking, insurance, canal transportation, and public utilities and, at worst, intended to suppress competition (Smith 1937; Baldwin 1987; Korten 1995). Smith's view became the accepted view in the early United States: business enterprises could not incorporate without receiving a special charter from their state legislatures. Moreover, the public interest had to be given explicit attention: during the late eighteenth and first half of the nineteenth century, state legislatures typically held to the view that the corporate form "should not be resorted to unless the public interest was involved" (Evans 1941, 21).
Under that standard, relatively few charters were granted, with the charters typically listing the public benefits to result from the activities of a given corporation. Moreover, the corporations that received charters were kept on a tight leash: corporate charters were limited in duration, often with automatic sunset dates of twenty-five or fifty years; all investors had equal voting rights and in some cases were required to be local residents; corporations were not permitted to own other businesses; and corporations were restricted to engaging in the business activities specifically authorized in their charters (Hightower 1997; Korten 1995). Corporations that failed to serve the public interest in the view of state legislatures could be, and often were, dissolved (ibid.). As Adolf Berle and Gardiner Means explained, in the negotiation between a group of proponents for the charter and a legislative body, the proponents "were required to justify every clause of it to outsiders; they were thus checked at every point and the resulting document had some semblance of having been examined with a view to protecting all of the interests involved" (1991, 127).
Business enterprise began to chafe at these carefully constructed restrictions on incorporation and corporate activities by the middle of the eighteenth century. The weakening of the earlier system of special charters by the states began with the "disarray" in the United States after the Civil War, which industrial capitalists exploited to their economic advantage. The noted reporter on the robber barons, Matthew Josephson, described how "the halls of legislation were transformed into a mart where the price of votes was haggled over, and laws, made to order, were bought and sold" (quoted in Korten 1995, 58). (2) As corporate concentration became a feature of the post-bellum U.S. economy, the earlier restrictions were loosened by permitting more discretion in "what economic pursuits corporations could follow and what were the responsibilities of company officers and boards of directors" (Nader 2000, 101). By the end of the nineteenth century, the instrument of corporate charters was transformed from a check on the activities of corporations into a device for raising revenues for the various states (Baldwin 1987), who competed with each other to pass less and less restrictive general incorporation laws. As Jim Hightower explained, "today the corporate chartering process is so perfunctory it can be handled by a phone call" (1997, 33).
This race to the bottom was led by New Jersey and Delaware, which weakened the rights of citizens while giving corporations the right to "operate in any fashion not explicitly prohibited by law" (Korten 1995, 58). In the words of Ralph Nader, "[T]he Delaware corporation syndrome... represented a major victory for corporate power in America. No longer would the corporate charter constitute even a pretense of being a corporate governance mechanism providing accountability to the shareholders and other affected corporate constituencies.... By conscious lobbying, corporations turned restrictive charter laws into instruments for further concentration of power in the hands of management. A constitutional structure for accountability rights by people inside as well as outside the corporate structure passed into history" (2000, 102). The earlier expectation--that the quid pro quo for a corporate charter was a specific obligation by business enterprise to serve the public interest--also became a historical artifact.
Free Labor and the Public Interest
Corporations also gained a virtual free hand over workers during this same period. Early institutionalists recognized that the status of labor in the United States was primarily a product of the legal system. Edwin Witte, a prominent labor economist of the 1930s and 1940s, summarized the institutionalist view: "[G]overnment is the rule maker and the umpire in the American system of free enterprise. Property, contract, bankruptcy--in fact, all existing economic institutions--are defined by law" (1957, 6). According to John Dennis Chasse, Richard Ely and the other "new economists" writing in the late nineteenth century believed that "the root of the labor problem" lay in the legal form of the wage contract and the type of freedom enforced by the courts (1991, 803). Building on this insight, we argue that the wage contract and the laissez-faire interpretation of freedom supported by the courts also determined the place of labor in the public interest. Specifically, we argue that the public interest came to be de fined in a way that was often antithetical to the interests of workers or even excluded them altogether.
In the twentieth century, the "labor problem" was usually viewed as the "wage problem." (3) However, institutional labor economists such as Ely and Commons used the term "labor problems" to refer to a whole host of difficulties that plagued workers in the late nineteenth century such as long hours, industrial accidents, and working conditions as well as low incomes (Barbash 1976; Chasse 1991). Primary among these "problems" was the labor contract itself. These early institutionalists recognized that while price is important, it is equally important to clarify just what is being exchanged. The prevailing view is that the wage bargain consists of the sale of a commodity called "labor" for a mutually agreed upon price. For institutionalists, the wage bargain is an institution that developed historically and culturally, and what is being exchanged is not a commodity but a set of rights (Commons 1909-1910). Thus, understanding the wage bargain as an institution rather than as a commodity exchange is crucial for un derstanding the relative status of workers and corporations. We argue that the applicability of the concept of the public interest to labor is derived from the way the wage contract developed as an institution and how it was codified in labor law.
Barbara Fried (2001) stated that the "essential question for progressive reformers" was "how to dismantle the constitutional laissez-faire," which consisted of two main aspects: (1) protection of private property from government interference and (2) protection of individual freedom as embodied in freedom of contract. These two ideas shaped court philosophy from the mid 1880s until the late 1930s. This same period coincides with the rise of the factory system and the vast expansion of industrial wage labor. Thus, it is not surprising that constitutional laissez-faire strongly influenced the institutional development of the wage contract.
While economic freedom in the late nineteenth century was strongly associated with the political doctrine of laissez-faire, in antebellum America the meaning of economic freedom as it applied to labor was strongly conditioned by the institution of slavery (Roediger 1991; Bridges 1986). According to Charles McCurdy (1984), wage slavery and its antithesis, free labor, were important concepts in distinguishing the social and economic system of the North from that of the South. Historian Eric Foner wrote that Northerners considered those "who worked at the will and profit of others" to be slaves (quoted in McCurdy 1984, 27), and this category included slaves, indentured servants, and those who worked for hire. In contrast, free labor referred to those who owned the product of their labor (McCurdy 1984). The dichotomy between wage slavery and free labor allowed individual workers to distance themselves from any association with slavery (McCurdy 1984; Laurie 1989). However, the free labor-wage slavery distinction l ater proved to be incompatible with the laissez-faire interpretation of economic freedom, Laissez-faire is based on "freedom from coercion" and on private property rights. Both principles were not applicable to the early meanings of "free labor" and "wage slavery," and the definitions of these terms subsequently changed to conform more closely to the prevailing economic philosophy of the courts. (4)
In the early nineteenth century, "free labor" meant lack of dependence on another for one's livelihood. This independence was assured by ownership of land that allowed the production of one's subsistence or by the ability to sell the fruits of one's labor in the market. Both types of economic arrangements characterized the household economy of the eighteenth century and early craft labor (Laurie 1989). Laissez-faire relies on the traditional economic liberal emphasis on freedom from constraint. How does this work for "free labor"? The "lack of coercion" that defined "free labor" in antebellum America came primarily from but two sources: the institution of slavery and the condition of poverty. After the Civil War, the coercive force of slavery lessened as an issue for "free labor." However, the coercive force of poverty increased in the late nineteenth century along with the growing industrialization of the U.S. economy. The early instirutionalists, reformers in the progressive era, and Marxists saw coercion c oming from a private sector that presented limited choices to individual workers (Fried 2001; Wunderlin 1992; Friedman 1998). Polanyi (1957) put it bluntly as the choice to "work, starve, or go to the workhouse."
In contrast, economic liberalism does not recognize poverty or economic privation as a source of coercion. For economic liberals, the presumption is that because a private transaction is voluntary, it is therefore free of coercion, That is, the wage contract is "free" in the laissez-faire sense if there is no government interference, regardless of the actual terms agreed to by the parties involved. Institutionalists like Commons and Robert Hale disagreed and argued that the coercive power of the state not only was felt in government action but permeated the private sector as well. That is, coercion in the private sector derives from power that has been delegated to it by the state through the laws of property and contract (Fried 2001). The notion that coercive force comes from many sources is also central to the writings of Commons. In his 1931 article, he defined an institution as "collective action in control, liberation and expansion of individual action," and said that all "collective actions establish re lations of rights, duties" and working rules (Commons 1931). According to Chasse, Commons defined a "right as the power to command state officials to enforce one's will on others. This makes the state a party to every transaction" (Chasse 1986, 767).
As discussed above, the laissez-faire interpretation of economic freedom fundamentally transformed the concept of "free labor" and strongly influenced the development 'of the wage contract. The ideal of economic independence contained in the term "free labor" was replaced by the ideal of laissez-faire, which serves the public interest by promoting economic efficiency and mutually beneficial outcomes. However, as institurionalists and progressives were at pains to point out, the proponents of laissez-faire in the labor market overlooked the problem of property rights. That is, just how does the notion of private property apply to labor?
The term "free labor" originally meant those who "owned their own toil" (McCurdy 1984, 27). However, according to Commons, with the rise of the factory system, workers lost these ownership rights to the banker capitalists (Gruchy 1947). As a consequence, the term "free labor" lost its original meaning. Freedom for workers in regard to the labor contract was reduced to only one dimension of economic liberalism-freedom from coercion by government. Workers were "free" to enter into a labor contract-free from interference (or protection) by government. However, this so-called freedom was essentially meaningless without the associated rights of property.
Working for a wage means that the ownership rights to one's labor belong to the employer. Thus, "owning one's own toil" no longer meant owning the right to the product but ownership of an abstraction called labor. This abstraction is treated as if it were a simple commodity in economic theory, but it is an uneasy fit. As Jennings (2003) pointed out, it is often unclear just what this commodity is that is being sold in neoclassical labor markets. Employers hire workers, but workers sell time, and the wage is based on the value of effort. Polanyi (1957), of course, called labor a fictitious commodity. More important for our discussion here, ownership of this commodity conveys no rights. As institutionalists such as J. M. Clark, Hale, and Commons pointed out, property rights as defined by the court essentially mean the right to expected future earnings (Commons 1924). For a wageworker, there are no expected earnings from labor outside of the workplace. When the labor contract is signed, no "property" is actually transferred. The loss of property rights in any meaningful sense means that the utilitarian definition of an economy serving the public interest which depends on both economic liberty and property simply does not apply to labor.
Between the 1880s and the 1930s, the courts consistently supported the concept of "freedom of contract," which often denied to workers additional rights they may have gained through political action. The laissez-faire concept of "freedom of contract" was initially applied to labor in an 1886 decision by the Pennsylvania Supreme Court overturning a law against paying wages in scrip (Fried 2001). Decisions by other courts continued to promote the notion of a "constitutional doctrine of liberty of contact culminating in the 1905 Lochner v. New York decision by the Supreme Court (Fried 2001, 32). This decision declared unconstitutional a New York state law setting maximum hours for bakers. Other decisions overturned state minimum wage laws and laws protecting union membership and organizing (McCurdy 1983).
Protective labor legislation was passed during this period. Indeed, the success of legislation protecting some workers and the failure of other reform efforts illustrates the peculiar status of workers in relation to the concept of public interest. Protective labor legislation was justified on the basis of public health. That is, it was deemed to be in the public interest to protect women not because they were workers but because they represented motherhood. Similarly, maximum hour laws for railroad workers were upheld because the public might be affected. In general, laws designed to protect workers from conditions injurious to their health were overturned unless some connection to public health could be established. And it was clear that the "public" in public health did not include workers themselves (McCurdy 1983).
According to Bruce Kaufman (1997), institutionalists saw the fundamental problem for labor as inequality of bargaining power. Ely, Commons, and others believed competition between employers coupled with weak bargaining power by workers led to a race to the bottom" in terms of wages and working conditions. Commons asserted that "instead of promoting a harmony of interests, competition with unequal bargaining power degenerates into a cutthroat struggle of 'survival of the fittest' in which more liberal, progressive employers are forced to lower labor standards to the level of their most grasping level" (quoted in Kaufman 1997, 31). Inequality of bargaining power was also a primary concern of Karl Marx, and this issue continues to figure prominently in economic policy debates today. However, prior to the 1930s this inequality was considered less important than the doctrine of freedom of contract. For example, in the Lochner v. New York decision, the Supreme Court based its rejection of the maximum hours law on t he notion that the only issue was bargaining power (McCurdy 1983).
According to McCurdy, "Five Lochner judges said that the bakeshop law was not a police regulation because the proffered health rationale was so unreasonable that it must be a 'mere pretense' for something else. For the majority, the only plausible explanation for the statute was that it had been enacted to improve the bargaining position of the baker-workers union" (1983, 25). That is, the Supreme Court specifically discarded inequality in bargaining power between employer and employees as a legitimate issue of public policy.
In the Adair and Coppae decisions, which overturned state laws protecting employees' right to union membership, the Court also specifically recognized the inequality of bargaining power between workers and employers (McCurdy 1983). The Court argued that this inequality was "the inevitable outcome of the free operation of any scheme of liberty and property interests" (Fried 2001). That is, it was argued that the Court could not redress inequality of bargaining power without interfering with private property rights (Fried 2001). The 1937 passage of the WagnerAct brought to an end the freedom of contract doctrine at least as it applied to labor agreements with unions. Outside of the union context, however, freedom of contract survived in weakened form until only recently in the philosophy of employment-at-will. Even without the claim of constitutionality that gave so much power to the doctrine of freedom of contract, the notion of "employment at will" still held sway over workers' rights until the 1970s and 1980 s. In some states, laws now protect workers in a number of areas such as unjust dismissal, worker health and safety, and worker privacy (Bellam 2000). (5)
In Social Control of Business, Clark argued that economic theories and legal doctrines based on a concept of individualism were inapplicable in an age of corporations and trade unions (1969, 29). Nonetheless, that individualism seems to have mistakenly informed our legal framework, which in turn has lavished privileges and freedoms upon corporations in the hope that they would see fit to serve the community by providing jobs, output, and dividends. At the same time, the legal framework granting the full rights of property to corporations tilted against the worker. Events of the past year suggest that many in corporate America no longer feel a responsibility to endow even incidental benefits to the communities they presumably serve. Because the privileged position of corporations and the limited protections for workers are merely legal constructs and not natural states, we argue that sensible public policy could reverse these tendencies and restore the responsibilities that corporations once bore for the publi c interest.
(1.) We rely on this definition of the public interest that we developed in an earlier paper: "[E]conomic welfare in the public interest turns on the notion of sufficient output for the entire community and on an adequate portion of that output distributed to each member of the community" (Champlin and Knoedler 2002, 878).
(2.) Naomi Lamoreaux observed that by the end of the nineteenth century states were relatively powerless over the corporations that were seeking an end to the restrictions they faced under the old corporate chartering system due to the ease with which nationally based firms could shift their operations out of the states (1985). In that context, it may nor have been a race to the bottom between the states but an "auction" hosted by the large national corporations for the right to issue their charters.
(3.) For example, the most frequently analyzed of any labor policy is the minimum wage (Waltman 2000). Even when the issue appears to be wider in scope, the main focus typically remains on the wage. For example, during the 1980s an intense debate erupted over whether newly created jobs were good jobs or bad ones. In most cases, a good job was simply defined as one with a decent wage (Champlin 1995).
(4.) Lawrence Glickman (1997) linked the change in the meaning of wage slavery to the rise of consumerism in the early twentieth century. Although he made an interesting and valid point, the issue of consumerism is beyond the scope of the current discussion.
(5.) Katherine Stone (1992) argued that these laws expanding individual worker rights have actually worked to undermine unions due to the Preemption Doctrine of Section 301 of the Labor Relations Management Act. This provision forces a union member to follow arbitration procedures to settle grievances. Thus, a union member cannot take violations of state laws to court but rather only to private arbitration hearings. In essence, union members have fewer rights than non-union employees when it comes to enforcement of state labor laws.
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The authors arc Associate Professors at, respectively, Eastern Illinois University, Charleston Illinois, and Bucknell University, Lewisburg, Pennsylvania, USA. This paper was prepared for the annual meeting of the Association for Evolutionary Economies at the Allied Social Science Association meetings in Washington, D.C., January 3-5, 2003.…