The Pequod Review:
William Magnuson takes a nuanced approach to corporations in his broad historical survey For Profit:
It is only natural that corporations are powerful political actors. Democratic governments are supposed to reflect the societies they represent — their interests, their preferences, their ambitions. As corporations have become increasingly integral parts of society, their interests have inevitably gained greater sway in the political arena. If anything, it would have been more shocking if governments had not shifted their policies to respond to the interests of the mammoth corporations within their borders. But the pressing question today is not if corporations have changed democracy — they surely have — but how much they have done so and in what ways. And to many observers, including a surprising number of corporate insiders who have witnessed firsthand the relentless power of the entities they run, the answers are decidedly negative. What was once created to expand and enrich the republic has instead come to command and impoverish it.
A cynic might look at this situation and shrug. “Of course corporations have grown rich off the suffering of others, and bribed politicians, and corrupted democracy,” the cynic might say. “What else would you expect?” But the history of corporations suggests that we should not be so quick to rush to judgment. Time and again, after some new corporate scandal or some new abuse has come to light, society has risen to the challenge and fashioned solutions. After capitalists were found to be oppressing the Roman provinces in collecting taxes for the government, the emperor Augustus shifted tax-collection duties to his own imperial agents. After the East India Company realized that its share structure incentivized infighting among its employees, it created a permanent stock that aligned their incentives better. After the stock market crash of 1929 exposed widespread fraud in the sale of shares to the public, Congress enacted the Securities Act and the Securities Exchange Act to hold capitalists liable for misleading the public. These are astounding changes in the world of capital, and yet we often overlook them. Today, we take for granted that the government, not a corporation, collects our taxes. We take for granted that most corporations have permanent shares, not profits interests based on individual projects. We take for granted that corporations must provide information to their shareholders. But it was not always so.
At the core of this book lies a simple argument. Many believe that corporations are soulless entities devoted single-mindedly to the pursuit of profit above all else. Some go even further, arguing not only that corporations elevate profits above all other considerations but that it is their duty to do so. Both of these groups are wrong. From their very beginnings, corporations have been institutions designed to promote the common good. From ancient Rome to Renaissance Florence to Elizabethan England, corporations have been the workhorses of the republic, tasked with building and maintaining a thriving society. Corporations are public entities with a public purpose, given special rights and privileges precisely because governments believe they will contribute to the greatness of their nations. While they sometimes — perhaps even often — stray from this purpose, their original and abiding justification has always been their ability to promote the good of all.
Adam Smith, the father of capitalism, understood this. In the seldom-read passage of The Wealth of Nations in which he articulated his vision of the invisible hand, he was careful to provide an important caveat about capitalism as a cure-all. The invisible hand is not infallible. “By directing [his] industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention,” Smith wrote. “Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.” The section is remarkable for what it does not say. Smith does not say that profit-seeking individuals always promote the greater good. He says only that they frequently do. More importantly, he is clear that the profit motive is simply a means to an end, not an end in itself. We allow firms to profit from their efforts because we believe that it will ultimately benefit us all. Firms have a public purpose, in Smith’s view, and that is to promote the public good.
The connection between corporations and the public good has historically been much clearer than it is today. In the beginning, corporations had to petition the monarch or the government for a charter. To be granted one, they had to convince the state that their businesses were not just profitable but also of benefit to the state itself. The East India Company promised Queen Elizabeth I in 1600 that it would act “for the honour of this our realm of England, as for the increase of our navigation.” The Union Pacific Railroad’s charter was granted by Congress in the middle of the Civil War. A transcontinental railroad, the company’s backers argued, would bind together a riven nation.
The rest of Magnuson's book is structured as a review of eight different examples of corporations throughout history — from ancient Roman cooperatives to Ford Motor Company to modern tech start-ups. While many of these are perfunctory and sometimes lacking in detailed financial understanding (e.g., "KKR’s basic strategy relied on the 'leveraged buyout,' sometimes referred to as a management buyout."), this is still useful and even-handed history of a legal structure that has proven essential to modern economic development.