Life Inc: Chapter One, part one


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Douglas Rushkoff - author of the book Life Inc: How the world became a corporation and how to take it back - is a guest blogger.

I'll be posting an excerpt from my upcoming book, Life Inc., every Monday morning until the book publishes on June 2. Last week, I published the introduction. Today, the first half of Chapter One. I'll also be keeping the excerpts up as PDFs at LifeIncorporated.net.

CHAPTER ONE
ONCE REMOVED: THE CORPORATE LIFE- FORM

Charters and the Disconnect from Commerce

If You Can't Beat Them...

Commerce is good. It's the way people create and exchange value.

Corporatism is something else entirely. Though not completely distinct from commerce or the free market, the corporation is a very specific entity, first chartered by monarchs for reasons that have very little to do with helping people carry out transactions with one another. Its purpose, from the beginning, was to suppress lateral interactions between people or small companies and instead redirect any and all value they created to a select group of investors.

This agenda was so well embedded into the philosophy, structure, and practice of the earliest chartered corporations that it still characterizes the activity of both corporations and real people today. The only difference today is that most of us, corporate chiefs included, have no idea of these underlying biases, or how automatically we are compelled by them. That's why we have to go back to the birth of the corporation itself to understand how the tenets of corporatism established themselves as the default social principles of our age.

There were three main stages in the evolution of the corporation, and each one further imprinted corporatism on the collective human psyche. The corporation was born in the Renaissance, granted personhood in post-Civil War America, and then, in the twentieth century, branded as the benevolent guardian and savior of humankind.

Most history books recount the development of the corporate charter as a natural, almost evolutionary step in the advancement of commerce. To a certain extent, this is true. After the fall of the Roman Empire, early Middle Ages Europe fell into disarray. Europeans lived in isolation from one another, dominated by self- sufficient and self-governing rural manors. Feudalism, as the prevailing political system came to be called, wasn't a particularly fun way to live--certainly not for the peasants who made up a majority of the continent's population. Landowning lords gave tracts of land to vassals in return for military allegiance. Vassals, in turn, ruled the peasant farmers, who were usually permitted to subsist on the remnants of their crops. Unlike in the Roman Empire, laws varied widely from place to place.

The lack of an overriding system of commerce left the lords out of a significant but growing business sector: the activity occurring between the people of different manors and beyond. By the 1200s, technological developments such as water mills and windmills as well as increased travel and commerce led to the resurgence of towns and cities outside the lord's direct control. Towns became centers for the manufacturing, exchange, and circulation of goods, and provided a stark contrast to the to-each- his- own way of life in the manors and villages. In their new urban setting serfs found legal freedom, opportunities for work, and a place to start afresh. Citizens of cities became known as "burghers," a term that spread throughout medieval Western Europe and provided the basis for the later word "bourgeoisie."

It was only a matter of time before the burghers would grow wealthier and potentially even more powerful than the aristocracy. Instead of depending on the ownership of a fixed tract of land farmed by peasants and protected by an expensive army of vassals, this new class of merchants and manufacturers could increase production, commerce, and acquisition almost infinitely. The marketplace where they transacted could grow as large as it needed to accommodate more and more trade, simply by spilling outside the city center. The town then naturally expanded around the new location, and this cycle would continue until the town would eventually blossom into a full- fledged city, which would in turn require more goods and commerce, and so on. Lords attempted to regulate all this trade and growth by controlling and taxing local markets, but people always found ways around these boundaries and restrictions.

One such boundary crosser was the merchant, who resurged in about the thirteenth century to serve as an intermediary between town and country, providing the first links in the chain connecting the movement of goods between producer, merchant, and retailer. On non- market days, cobblers, blacksmiths, and artisans were accustomed to selling their wares through the windows of their workshops. By allowing merchants to set up their own shops and sell these items for them, the artisans got more time to do what they did best. Shop owners did not specialize in actually making anything, but in generating profit through selling. Business for business's sake was born. Over the next few generations, along with the traders, moneylenders, and investors who backed them, these retailers would become the core of the urban bourgeoisie. While the nobility declined in land ownership, finances, and power--as well as numbers--this new class of pure merchants had access to international trade, investment, and an alternative economy.

Worse yet for the aristocracy, as merchants set sail they were to benefit from the vast resources of other territories. While the new bourgeoisie were becoming members of the fledgling global marketplace, the traditional aristocracy was essentially landlocked. What official authority they had left to offer their subjects was diminishing as rapidly as their wealth, influence, and numbers.

The aristocracy longed for a way to participate in the new economy--a way to invest that didn't put them or their good names at any risk. For their part, the new merchant class had certainly increased the speed and breadth of wealth creation--but this also made for a highly competitive and fluid business environment. Sudden wealth could be followed by a sudden wipeout if a single ship got lost at sea or a fire took down an entire workshop. Merchant businesses were still mostly family run, and rarely operated more than a few voyages before a shipwreck or other calamity took them down. They needed a way to institutionalize their success while they were on top, right after their ship had come in.

This is the landscape on which the Renaissance was to take place and a new way of conducting business was to emerge. The overriding priority was not to promote economic activity, global cooperation, or colonial expansion, but rather to freeze all this development in a particular position, and prevent the cast of characters at the top from changing too much over time. But locking down wealth was a lot harder for everyone now that so much innovation was going on-- especially when success tended to come with a loss in competence. In fact, while the Renaissance is often celebrated for its emphasis on specialization and expertise, nothing could be further from the truth.

The division of labor is not the same thing as the specialization of labor. On the surface, it may appear that a society of merchants, managers, and various levels of laborers is more specialized than one of shopkeepers and artisans. But it was not to the manager's advantage to hire highly specialized laborers who could demand higher wages. Instead, managers standardized processes in order to hire the least qualified and most replaceable laborers around. Far from encouraging specialization, competence, or innovation, all this mercantile and industrial activity actually favored generalization.

As the population grew and the demands for goods increased, open land became privatized. This uprooted rural peasants, forcing them into the generic labor market. Previously, the life of a rural peasant had been below or altogether removed from money and the market found in urban centers. Peasants made do with what they could produce with their own hands and barter locally. It was a life of great limitation, but also of self- sufficiency. As the commercial economy spread, the peasant had to turn the only marketable skill he had-- physical labor--into his means of survival. Evidence of this sort of wage labor can be traced all the way back to Portugal in 1253. Just like the Home Depot parking lot where Mexican immigrant laborers gather today, there were designated meeting places, usually a square at sunrise, where a foreman representing an employer would meet with day laborers and hire them right off the street.

Meanwhile, the managerial class sought to diversify itself as quickly as possible, undermining any specialization of its own. Once a low-level shopkeeper or wage earner had saved enough money to make the first step into more advanced levels of commerce, his first move was to commission the very work he used to perform. Then he began diversifying his wares and financial activities. The higher the capitalist was on the economic ladder, the broader and more varied were his investments and enterprises--and the more disconnected he was from his business's skills and the people performing them.

So both the aristocracy and the most successful of the mercantile class required a new mechanism through which they could invest their almost "generic" capital in the form of pure financial and legal power. This mechanism had to offer the ability to invest in a business with total discretion, anonymity, limited liability, passive participation, and little or no expertise.

Traditional family businesses, which shared labor, risk, and capital by blood ties, were no longer sufficient to the task. New kinds of laws, contracts, and standardized currencies would be required to extend these agreements to people of different families and regions. Florence, with its key location on the Mediterranean (as well as its widely accepted currency, the gold florin), became the birthplace of the first "limited partnership" firms. The precursors to full- fledged corporations, they distinguished between the liability of the firm's directors and of those who merely contributed capital, who would only be responsible for the amount of their contribution. Furthermore, contributors were not subject to being listed among the business partners, allowing noblemen, and even monarchs, to hide their commercial interests. The concept of the limited partnership quickly spread throughout Europe, funding daring investments from mines and plantations to colonialist adventures. Through this new opportunity for quiet and passive participation, the nobility became mad for investing.

As the operators of these huge projects sought to secure even more capital from a wider range of regions and social classes, they formed a more advanced form of limited partnership called the joint stock company, which could generate investment from shareholders on an open market. This broke business open, allowing for the creation of businesses by virtually anyone capable of getting investors. It almost heralded an era of business meritocracy, which would have generated unprecedented churn in the class structure. The wealthiest merchants were now as vulnerable to upstarts as the aristocracy.

Finally, the monarchy had something it could offer the bourgeoisie who threatened to unseat them.


A Child Is Born

Although monarchs might have lacked the vast financial resources of joint stock companies, they still enjoyed a structural advantage over any of them: central legal authority. Taking a cue from the Church, which had a tradition of "incorporating" groups of monks into single entities, royals exercised their authority to sanction a new kind of chartered body: the corporation. It was genius.

The corporation was not a business or a government entity, but a combination of the two. Its government supporters--the monarchs-- had the authority to write the trade laws and grant monopolies; its business participants--the chartered companies--would enjoy the exclusive right to exploit them.

By granting a specific joint stock company a legal charter to do business, monarchs could give it a monopoly control of its business sector. So a shipping company that once competed with others for the resources of a set of islands now enjoyed exclusive, royally mandated control over that domain. No other corporation could do business in that region, and even locals or colonists would be prohibited by law from competing against the corporation extracting their resources or selling them goods. Another corporation would be granted monopoly control over glass production; another would win beer, and so on. By issuing corporate charters, kings could empower those most loyal to them with permanent control over their colonial regions or industries.

The joint stock companies' problem with competition from rising new businesses or local activity was solved. And in return for granting legally enforceable monopolies over particular industries and regions, monarchs got fiscal support and profit participation far exceeding the worth of any cash investment they could have made. As a Dutch lawyer explained in a letter describing the very first charter of this sort, for Holland's East India Company, "The state ought to rejoice at the existence of an association which pays it so much money every year that the country derives three times as much profit from trade and navigation in the Indies as the shareholders."

For merchants whose businesses previously lasted only as long as a single expedition, the arrangement offered a way to earn more permanent status, military protection from the Crown, and the right to exploit new regions and peoples with authority and impunity. Equally important, they could lose no more than their initial investment. The "limited liability" granted in a charter meant that a corporation's debts died with the bankruptcy of the corporation. And bankruptcy protection was granted by the state.

By inventing this virtual entity--the chartered corporation--the aristocracy and the bourgeoisie entered into a mutual codependency that changed the character of both. Through these first great trade monopolies, such as En gland's Muscovy Company of 1555, the British East India Company of 1600, or the Dutch United East India Company of 1602, monarchs found a way to extend their reach without the cost or liability of an official military expedition. Better yet: for the monarchs, the merchants running the corporation would now become loyal subjects, dependent on the Crown for their legitimacy, protection, and escape clauses.

The chartered corporation was a bold grasp for permanent rule and permanent wealth that constituted a stalemate between the two groups. The contracts that monarchs and mercantilists wrote not only stopped their own decline from power; they stopped time, locking in place a set of corporatist priorities that to this day have not significantly changed. Instead, these priorities work to change the world and its people to conform to the rules of corporatism.

People who had always engaged in business with one another would now be required to do so through monopoly powers. All lateral contact between people and businesses would now be mediated through central authorities. Any creation or exchange of value would have to be run through these centrally mandated companies, in a system enforced by law, controlled by currency, and perpetuated through the erosion of all other connections between people and their world. Moreover, the emphasis of business would shift from the creation of value by people to the extraction of value by corporations.