Considering the increasing popularity of “Business” as an undergraduate major (to the detriment of “French” and “I dunno”), is society doomed to become a corporatocracy? Not necessarily. (More)

Last week in Morning Feature, NCrissieB reprised a provocative essay from March 2009 about the dangers of mega-corporations that fail to pay for their full share of the costs that their business operations impose on society: environmental, human, infrastructure, consumption of public goods and resources, etc.

We call those costs negative externalities, and that is the topic of the first major business school paper that we ask all first-year undergraduate business students to write at my university.

We take in 600 + students every year, and over 70% of them go into finance. Even before they graduate they are clamoring for internships at nearby Wall Street financial firms. So I endearingly call these Wall Street wanna-bes the future Masters of the Universe.

The good news is that our required curriculum exposes them to a broad number of voices for corporate social responsibility throughout their undergraduate years. The freshman course is called “Business and its Publics” (BiP), and culminates in a final research paper where they advocate for a specific social action program a corporation can implement to make the world a better place.

And even better: for the externalities paper I described above, all 600 student are required to read and consider the essay NCrissieB (aka “NCB”) wrote on “Corporate Personhood,” starring E. Rex, the terrible mega-corporation

Being business students, and still figuring out many basic concepts about corporations, economics, and markets, they tend to come in with fairly conservative ideas. Some disagree with NCB quickly, others try to figure out how to integrate her thinking with their own.

I’ve excerpted below ten typical responses students had to NCB’s piece. Read, consider the sources, and let us know what you think about what they think about NCrissieB’s thoughts about mega corporations.

1. One such proponent, NCB, … proposes the imposition of corporate taxes on the basis of negative societal impact, effectively isolating larger companies with higher levels of production. She fails to recognize that by making it impossible for firms to establish economies of scale, costs of production will rise exponentially and will inevitably be pushed onto consumers. … NCB’s proposition makes no distinction between innovative companies that work toward the consumer’s benefit and those that do not, save the article’s unexplained reference to “exceptions.”

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2. NCB [takes] a harsh approach that denies any of the positive effects society gains from corporations. If the process for manufacturing cars, one of the most essential consumer goods in modernity, creates pollution, is it not reasonable for the consumer to pay part of the cost for dealing with that pollution? If society took on none of the costs of that pollution, it would also be absolving itself of any responsibility.

NCB repeatedly using the phrase “We the People”… She is correct that the Constitution is made to protect the people, not the corporation. After all, the corporation goes unmentioned in the Constitution. However, without exception, states have passed laws governing and permitting incorporation. The reason states passed such laws is because they want corporations and their business.

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3. Shifting all the responsibility to only producers as NCB recommends would only create massive unemployment, decrease in consumer consumption, general inflation, and outsourcing of American manufacturing.

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4. Critics harp on large corporations and portray them in a highly negative light (NCB 2). Some view them as highly unaccountable for their actions and assumes they do not care about their relation to other social institutions, which I find completely untrue. Corporations have to be aware of their effects on other societal institutions as these actions ultimately affect their business, and thus profits.

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5. NCB, like other advocates of bigger government, writes that the metaphor which compares corporations to persons is inherently unfounded since corporations behave, on a large scale, in ways that individuals cannot. This behavioral difference is what allows for externalities to exist and to go unchecked. And so, the argument jumps, governmental regulation is the necessary prerequisite to a more balanced market system. But that’s the key word: jumps.

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6. A primary flaw of the solutions involving government involvement is that oftentimes, there is an underlying assumption that the issue of paying the cost of negative externalities is a game of tug-of-war between taxpayers or the public, and businesses. For example, NCB argues that “We the People” should not be paying for “corporate T-rexes” that are to blame for the public’s problems. This business versus the public attitude is an unfair and regressive dichotomy that creates a false debate about who should pay the cost of externalities. Both are interdependent within a dynamic market system where civil society and businesses respond to each others’ needs. It is impossible for a business to survive without a consumer demand for its good or service. At the same time, the quality of life for a consumer is greatly increased by the ability to choose between readily available, inexpensive products. Therefore, if the public demands more social responsibility when making their consumer choices, it is logical that corporations will follow suit and respond to such a demand, in order to continue to make profits.

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7. To change the ethics of the stockholders is to make them care about the concerns of the community. Stockholders are people too, are they not? Do they not want to better the society they live in? In NCB’s article, she states that a business should be “noble” first and foremost. NCB believes that the responsibility for negative externalities lies with a corporation. Yet, how can the corporation act as a “noble” person, when all their financiers want, and are entitled to receive, are results? I once again state that because of the spidery legal web we as a nation are trapped in, the wings of the corporation are stuck against the adhesive of the law. Therefore, these changes must come from the within the depths of the stockholders while still following the law.

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8. Compelling corporations to pay for the social costs of their negative externalities can also decrease business growth. These costs – the full cost of doing business- NCB argues, will increase faster than the cost savings of economies of scale. As a result, corporations would remain small in order to remain profitable. Underneath NCB’s assertions however, is the implication that businesses than can successfully shoulder the full cost of doing business, of its negative externalities, can survive and grow. Businesses which fail to shoulder the costs of their negative externalities would lose their place in the market. Businesses which succeed in absorbing the costs of their negative externalities can gain a dominant share of the market.

Corporations benefit from shouldering the social costs of their negative externalities. Paradoxically, by absorbing these costs, businesses can become more successful in the market and increase their profit margins. Businesses have more than a moral obligation for shouldering the social costs of negative externalities – businesses have an intense economic incentive for addressing these costs.

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9. Corporations have repeatedly ignored many of their external costs and as NCB suggests, that may have played a large role in their rise to power. The reason the economies of scale principle works so well for corporations is because a large portion of a corporation’s operating costs go overlooked (NCB p1). Thus the per-unit operating costs are often understated due to the fact that corporations only account for costs directly related to producing and selling their good or service. Other costs, including the environmental impact or costs to surrounding communities are shifted to the shoulders of John Q. Taxpayer. This all seems a bit unfair….

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10. NCB would suggest that the system is on an inevitable path to the creation of hyper-corporations (or E-Rex as NCB would say), where one dominant corporation would eventually take over an entire industry. Because the corporations that pay the least for negative externalities would gain the most extra profit, and at the same time be most supported by the public, they would eventually drive out their competition. She suggests that economies of scale only exist because corporations can externalize social costs. But how would she explain a situation where a corporation succeeds because they reduce social costs – that they innovate and use economies of scale to find more efficient ways to operate that pollute less?