Thursday, April 5, 2012

"Corporations Are People"

The above comment by Mitt Romney has been considered one of his major gaffes on the campaign trail. For some, it was more evidence that Romney is too rich and too out-of-touch with the average American. To his critics, the former governor's thought-process on this issue demonstrates the corrupting influence of capitalism. Both the left and the right have been outraged by his corporate raiding and "vulture capitalism" (prompting the pro-Gingrich, anti-Romney film "King of Bain"). One could almost hear Romney explaining to the crowd, " good. Greed is right. Greed works."

However, I am of the view that Romney's remark does not qualify as a gaffe. Quite the opposite, in fact. This strikes me as a opportunity for the Romney campaign.[1] What this brief, somewhat heated exchange revealed is Romney's basic outlook on business and the economy in general. Economist Thomas Sowell has often commented about the consistent "confusion between abstract categories and flesh-and-blood human beings."[2] Explaining the fallacious nature of this thinking, Sowell writes,

Abstract people can be aggregated into statistical categories such as households, families, and income brackets, without the slightest concern for whether those statistical categories contain similar people, or even the same number of people, or people who differ substantially in age, much less in such finer distinctions as whether or not they are working or whether they are the same people in the same categories over time. Abstract people have an immortality which flesh-and-blood people have yet to achieve.[3]

What Romney's hecklers (affiliates of Iowa Citizens for Community Improvement) and critics seem to miss is the abstract nature of "greedy corporations." The rhetoric invoked by these individuals often describes corporations as quasi-personal, transcendent entities that exist above and beyond flesh-and-blood people. As one writer notes, "Romney doesn't mean that corporations are entitled to some of the legal rights of people in the Citizens United sense. He means it in the sense that the money made by corporations flows in and out of human hands—or pockets, in the language of the heckler who hoisted himself on his own metaphorical petard."[4] Many, including Nobel laureate Paul Krugman, think corporate taxes apply to "the share of [the organization's] income that does NOT go to workers and suppliers. Now, stockholders are people too — but they are, on average, quite rich people, who are doing very well as most Americans suffer." The abstractions of "corporations" and "the rich" are frequently linked, if not synonymous. Yet, there is evidence that high corporate taxes do negatively impact worker wages. One study by economist Robert Carroll found that across state lines "a one percent drop in the average tax rate leads to a 0.014 percent rise in real wages five years later." In other words, wages rise $2.50 for every dollar reduction in the state-local corporate income taxes. The opposite also occurs: every dollar increase in tax rates leads to a $2.50 loss in wages. Drawing on recent research, Carroll suggests that "the least mobile factor of production is likely to bear the burden of a tax. In an increasingly global economy, labor is the least mobile because capital can flow freely across borders...When workers have more capital to work with, their labor productivity and wages will rise."

An abstraction is unable to pay its demanded "fair share" and instead places the economic burden on individuals. "After all, businesses are merely convenient ways of organizing economic activity," writes Carroll, "so while businesses write checks to pay the corporate tax (and other taxes), the burden of those taxes falls ultimately on the individuals who depend on the corporations, in their roles as investors, workers, or consumers." A similar study lists ten benefits to cutting corporate taxes, which include higher long-term growth, higher wages and living standards, lowered tax burdens on low-income taxpayers and seniors, and boosted entrepreneurship, investment, and productivity. Another study by AEI's Kevin Hassett and Aparna Mathur extended beyond the United States into differing countries. Their findings suggest that "a 1 percent increase in corporate tax rates lead to a 0.5-0.6 percent decrease in wage rates. These results also hold for effective marginal and average tax rates."[5]

Romney's breakdown of corporations into human beings parallels a particular Hayek verse from the popular "Fight of the Century: Keynes vs. Hayek Round Two" at EconStories:

The economy's not a car
There's no engine to stall
No expert can fix it
There's no 'it' at all
The economy's us
We don't need a mechanic
Put away the wrenches
The economy's organic.[6]

With the U.S. officially bearing the world's highest corporate tax rate, Romney's understanding of organizations is a much-needed example of what Chicago economist Deirdre McCloskey calls "humanomics."[7] Far from being evidence of corporatism, Romney's comments clearly define his primary concern: human beings.[8] While Krugman may be technically correct that America is not a corporation, countries and corporations are both mass organizations of people. Organizational structures influence human behavior, both positively and negatively. As a business undergraduate studying organizational behavior, I was struck by the similarities between 20th-century business models and progressive economic designs: centralized authority, top-down implementation via expert planners, and a near mechanical view of human nature. My suspicions were confirmed when I began to review the work of Princeton economist Thomas C. Leonard, whose extensive research covers the Progressive Era and its eugenics-based economic reforms. According to Leonard's 2009 article in History of Political Economy, Frederick Taylor’s scientific management was an ideological darling of his progressive contemporaries. In their view, Taylorism brought a scientific sophistication to the unruly and chaotic practice of business management. By shifting authority to the planning department, progressives believed they could design the workplace to produce more efficiently. The erosion of workforce autonomy began as Taylor applied his time and motion studies to various work activities, including the "science of shoveling." This technocratic outlook reduced workers to nothing more than cogs in a well-oiled machine. "In the past, the man has been first," declared Taylor , "in the future, the system must be first."

However, this mechanic's vision of the organization has been seriously challenged in numerous studies since the 1930s. Despite its flaws, Elton Mayo’s research influenced the nature of organizational studies for years to come. Over the next several decades, academics began to move away from the mechanistic set-up of Taylorism and toward a more fluid, organic structure. It was discovered that such a model allowed for increased adaptation, creativity, and innovation. This emerging design was characterized by decentralization, employee autonomy and decision-making, minimal regulations, and multidirectional communication. The prevailing theme in this list of characteristics is the respect for the individual and self-direction. After surveying the past forty years of scholarly research, business author Daniel H. Pink found that autonomy is “one of three basic [psychological] needs. And of the three, it’s the most important.” Though Pink contrasts autonomy with “the rugged…individualism of the American cowboy” (an image that, in my view, does injustice to American culture and market economies), he makes a profound point when he describes autonomy as “a human concept rather than a western one. Researchers have found links between autonomy and overall well-being not only in North America and Western Europe, but also in Russia, Turkey, and South Korea. Even in high-poverty non-Western locales like Bangladesh, social scientists have found that autonomy is something that people seek and that improves their lives.”[9] What has been startling to many is that increased autonomy for employees tends to lead to greater productivity and innovation in the workplace. Overbearing external forces such as rules and regulations not only stifle innovation, but can even crowd out ethical behavior as well. Creativity is clouded when coerced, as is the ability to think beyond short-term success. What this material demonstrates is that innovation cannot be forced or artificially stimulated. It must instead be given room to breathe and a chance to grow on its own.[10]

Of course, economists in favor of free enterprise have understood this for some time. In the final days of World War II, Friedrich von Hayek published his brilliant article “The Use of Knowledge in Society,” criticizing centralized planning in government policy. The future Nobel laureate described what he calls the “rational economic order” as being “determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” Hayek defined this as “a problem of the utilization of knowledge not given to anyone in its totality.” His 1945 defense of markets illuminated the key problem plaguing bureaucratic systems: no central authority possesses all knowledge necessary to utilize all available resources in a society. This knowledge is instead widely dispersed among millions of individuals. Taking into consideration the evolving needs and wants of society, “it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them…We need decentralization because only thus can we ensure that the knowledge of the particular circumstances of time and place will be promptly used.” In short, centralized planning fails not only in practice, but in principle. Allowing autonomous decision-making not only dignifies the individual, but benefits the society as a whole.

Organizational behaviorists (both intentionally and unintentionally) have continually used Hayek’s point that dispersed workers with dispersed knowledge must be given the freedom to make decisions regarding their particular circumstances.[11] Autonomy provides workers the freedom to experiment and seek out new ideas and/or solutions without the hindrance of technicalities. It also establishes experimentation as an accepted value within the organization. Organic structures are often informal, with a variety of participation and sharing of ideas. On a macro-level, free-market economies best emulate this organic business structure; a decentralized system with minimal regulations guided by self-direction as well as the communication, cooperation, and, yes, competition between interdependent markets. Freedom (in this case, economic freedom) promotes human flourishing, including increased happiness.[12]

Steven N. Kaplan, professor of entrepreneurship and finance at the University of Chicago, has argued that Romney's skills and experience in private equity would be extremely valuable as President of the United States:

As president, he would need to cut costs, particularly entitlements. When appropriate, PE firms cut costs. He would also need to promote policies that encourage job creation and growth. When appropriate, PE firms invest in and expand their businesses and employment. And the firms make these cuts and investments not for their own sake, but to deliver results for their customers. Similarly, the president’s job isn’t to cut or expand programs for their own sake, but to deliver results to the end customers -- the voters. PE firms in general, and Bain Capital run by Romney in particular, have delivered strong results for their customers. He should argue that the experience, focus and skills that made him successful in private equity are exactly what are needed to help the U.S. economy become more productive and grow.[13]

Kaplan's own research has found that the pioneering efforts of Romney and other venture capitalists in the 1980s and 90s ultimately benefited the corporate sector and contributed to the economic success of the nation. As The Wall Street Journal's Daniel Henninger put it, "Bain Capital saved America...We are of course putting forth "Bain Capital" as not merely the Romney private-equity house but as the stand-in for the period of American economic history that ran from 1980 to 1989...Properly understood, the 1980s, including Bain, were the remarkable years when an ever-resilient America found a way to save itself from becoming what Europe is now—a global has-been."[14] In this context, corporate prosperity was coordinated with economic prosperity. When humanized, a growing economy means improved quality of life for people nationwide.

Perhaps recognizing corporations as people is not as silly as it may sound. Perhaps it reflects a deep understanding of the multiple ways business and economic decisions affect real human beings. Whatever flaws Romney may have (and he certainly possesses a number of them), a working knowledge of how society operates is not one of them.


1. An opportunity they apparently seized: "...Romney’s own campaign managers did not try to obscure the episode at the state fair, to say he had been misunderstood or to secret it away. Instead they promoted it, as an advertisement of principle, and made the confrontation the centerpiece of a solicitation to supporters. A few days later, Romney’s communication director, Gail Gitcho, told the press that the exchange had raised $25,000 within 24 hours." (Benjamin Wallace-Wells, "The Romney Economy," New York, Oct. 23, 2011).

2. Thomas Sowell, Economic Facts and Fallacies, 2nd ed. (New York: Basic Books, 2011), 153. Sowell provides a brief and concise explanation of this distinction on
Uncommon Knowledge, as does economist Steven Horwitz at LearnLiberty.

3. Thomas Sowell, Intellectuals and Society (New York: Basic Books, 2009). Kindle Edition. Ch. 4: "Abstract People In An Abstract World."

4. For the Citizens United angle, see Jonah Goldberg, "Romney Is Right On Corporations," National Review Online (Jan. 18, 2012). Goldberg quips, "What I find most fascinating about the debate over corporate personhood is the fact that the people who defend corporate personhood don’t anthropomorphize big business nearly as much as those who oppose it."

5. See also Matthew H. Jensen, Aparna Mathur, "Corporate Tax Burden on Labor: Theory and Empirical Evidence," Tax Notes (June 6, 2011); Aparna Mathur, "Corporate Tax Reform: Will the Obama Administration Do the Right Thing?" RealClearMarkets (June 1, 2011). Update: For more data on the effects of corporate taxes, see Wiji Arulampalam, Michael Devereux, Giorgia Maffini, "The Direct Incidence of Corporate Income Tax on Wages," IZA Discussion Paper No. 5293 (Oct. 2010); Kevin Hassett, Aparna Mathur, "Taxes and Wages," AEI Working Paper #126 (June 2006); R. Alison Felix, James R. Hines, Jr., "Corporate Taxes and Union Wages in the United States," NBER Working Paper 15263 (Aug. 2009); Li Liu, Rosanne Altshuler, "Measuring the Burden of the Corporate Income Tax Under Imperfect Competition," National Tax Journal 66:1 (March 2013): 215-238.

6. See GMU economist Russell Roberts' WSJ article on
F.A. Hayek's recent comeback.

7. See her brilliant book Bourgeois Dignity: Why Economics Can't Explain the Modern World (Chicago, IL: University of Chicago Press, 2010) for a more detailed discussion on humanomics and economic rhetoric.

8. For a few select articles on corporatism vs. capitalism, see Ryan McMaken, "
Chamber of Corporatism," Mises Daily (March 15, 2012); Radley Balko, "Corporatism, Not Capitalism," Reason (Sept. 28, 2008); Edmund S. Phelps, Saifedean Ammous, "Blaming Capitalism for Corporatism," Project Syndicate (Jan. 31, 2012); Sheldon Richman, "Adam Smith versus Business," The Freeman (March 9, 2012).

9. Daniel H. Pink, Drive: The Surprising Truth About What Motivates Us (New York: Riverhead Books, 2009), 88.

10. While Pink's conclusions are solid, I think his associating them with socialism (see the TED talk) comes from a misunderstanding of market systems.

11. For example, see Alanson P. Minkler, "The Problem With Dispersed Knowledge: Firms in Theory and Practice," Kyklos 46:4 (1993).

12. Those who favor less government intervention in the economy are reportedly happier than those who favor more. Freer economies also have happier populations: "Looking at thirty-five nations together, we see that a 1 percentage point increase in economic freedom is associated with a 2-point rise in the percentage of the population saying they are completely happy or very happy." (Arthur C. Brooks, Gross National Happiness: Why Happiness Matters for America--and How We Can Get More of It. New York: Basic Books, 2008, 91).

13. See also Larry Kudlow, "Isn't a Bainful Turnaround What America Needs?" National Review Online (Jan. 13, 2012). It might be worth pointing out that PE firms tend to be the most well-managed firms when compared to government-owned, family-owned, and privately-owned firms. See Nicholas Bloom, Raffaella Sadun, John Van Reenen, "Do Private Equity-owned Firms Have Better Management Practices?" in Globalization of Alternative Investments: Working Papers Volume 2 - The Global Economic Impact of Private Equity Report 2009 (New York: World Economic Forum, 2009).

14. For more on Bain, see the following: Mark Maremont, "Romney at Bain: Big Gains, Some Busts," The Wall Street Journal (Jan. 9, 2012); Avik Roy, "Romney Derangement Syndrome," National Review Online (Jan. 9, 2012); Kevin D. Williamson, "No, Bain Did Not Get a 'Bailout'," National Review Online (Jan. 12, 2012); Steven N. Kaplan, "How to Think About Private Equity," The American (Jan. 18, 2012); Steven N. Kaplan, "How Many Jobs Did Romney Create at Bain?" The American (Jan. 19, 2012); Peter Suderman, "The Pain of Bain Falls Mainly on Romney's Campaign? Not Quite," (Jan. 13, 2012). Update: Kimberly A. Strassel, "Vampire Capitalism? Please," The Wall Street Journal (May 17, 2012).

No comments:

Post a Comment