The social contract

There is only one economic system in the world, and that is capitalism,” said Margaret Thatcher. “The difference lies in whether the capital is in the hands of the State or whether the greater part of it is in the hands of people outside of State control.”

Like much else, that statement is pregnant with its contrary: at the heart of capitalism are thousands of mini-states, which direct capital according to the decisions of a powerful central cadre — if communism is a kind of state capitalism then maybe capitalism contains a sort of private communism.

These mini-states are corporations, whose name comes from the latin corpus meaning body — a corporation is an artificial person. This legal fiction allows companies to do many of the things that humans can do: they can own property; they can be sued and can make contracts; they can own assets and owe people money; they can be hired and they can employ people.

As an artificial person they resemble the sovereign from Thomas Hobbes’ book Leviathan. You may have seen the cover of this, a king wearing a crown rising up from behind a hill with the king’s body is composed of many other tiny bodies. He holds a sword in his right hand and a town is spread out below him in the valley, which he presumably defends and governs.

This comes from the central and most famous idea in Leviathan: that the people, fearing the violence that Hobbes believes would accompany the absence of government, would bind together and make a social contract to form an artificial person known as the commonwealth. This artificial person, this corporation, has unlimited and rightful power over us even unto our execution.

Many organisations have been corporations over the years, including universities, churches and famously the government of The City of London: all were established as artificial people and governed by charters. But the heyday of the corporation began with the creation of the Dutch East India Company in Amsterdam in 1602, about 50 years before Hobbes wrote Leviathan. This was not the first corporation but was definitely the first multinational, and the first one to list shares on an exchange.

Now there are ten listed corporations for every million people in the world, according to World Bank data. This means there are about 70,000 listed companies as well as an untold number of unlisted ones. Other than governments and families, they have become the dominant means of producing and distributing resources.

For economists this presents a puzzle, why do they exist?

The answer given by the nobel-prize winning economist Ronald Coase is that they exist because of transaction costs. As Ronald Coase put it, these “islands of conscious power” manage to survive because there is a cost to using the price mechanism. In other words, non-market methods of producing and distributing are often preferable to the market.

For example, it is more sensible for a company to employ a lawyer than it is to go out and hire a new one every time it has some dealing with the law; the lawyer would likely prefer the stability of this arrangement as well. After a contract is drawn up the price mechanism is replaced by command.

Externally they deal with a capitalist market but internally corporations are hierarchical structures which operate using central planning, high rises of vertical coordination with the c-suite at the top like some kind of pinstriped gosplan. Entrepreneurs, as Coase calls them, direct its resources as they see fit.

This is a bit flattering to management’s power. Companies are more like mixed economies: as well as the grand corporate strategy, there is a febrile undergrowth of favour trading, bargaining and status games as well as institutional norms and habits.

But, still, they are similar to Hobbes’ vision of the sovereign, artificial autocratic people governed by a contract.

And like all analogies there are differences as well as similarities: it is a lot easier to change your employer than your government, for example. Plus when the state commands we obey because of the threat of violence, we obey those above us in the corporate hierarchy because of the threat of unemployment or, for some, the desire for promotion. Economic deprivation — poverty, homelessness and hunger — fulfil the role of Hobbes’ state of nature in this metaphor.

Companies like Uber and TaskRabbit, as well as changing contractual arrangements — the self-employed setting themselves up as a holding company, for example — are starting to blur these lines by reducing transaction costs and turning the vertical corporation into more of a horizontal platform: the internet makes it a lot easier to find yourself an ad hoc employee.

This is a problem because, as well as providing some degree of stability, in many countries corporations have come to fulfil many of the functions of the cradle-to-grave welfare state, providing pensions, healthcare, childcare and education.

While for some workers the libertarian freedom of the gig economy is no doubt a welcome respite from the commands of their corporate masters, for others, such as the Uber drivers launching a class action suit against their ‘employer’, that freedom comes at too high a cost.