The call to “occupy Wall Street” is a call to occupy corporations. But how do we actually do that? Here are three ways.
1. Occupying the Boardroom
The first thing to recognize about our big corporations is that they have thousands and even hundreds of thousands of owners; as a result, there is nobody to mind the store. Nominally, every corporation has an independent board of directors. But as Ross Perot observed long ago, in 1985, “The managers of mature corporations with no concentration of owners have gotten themselves into the position of effectively selecting the board members who will represent the stockholders.” And how does a board that is loyal to the CEO behave? Perot was intimately familiar with the relationship between the board of GM and its CEO at the time, Roger Smith, because he was trying to take over the company. “Is the board a rubber stamp for Roger?” Perot asked. “Hell, no!” he said, answering his own question. “We’d have to upgrade it to be a rubber stamp.”
The victims of these corporate hijackings are everywhere. Executives fleece both shareholders and workers, paying themselves enormous salaries that bear no relationship to the work that they do, and dipping into company funds to finance political candidates who side with them against the interests of both shareholders and workers (many shareholders are of course workers themselves). Germany faced this very problem before the rise of Hitler and has some interesting lessons to offer.
The stock market crash of 1929 had even more dire consequences for Germany than it did for the US. The German government had a budget deficit at the time, and it financed it by short term loans from US banks. After the crash the banks could not renew the loans and the German government wanted to raise taxes. At first, German executives supported the policy because it would have balanced the budget. But when the Nazi executive of Vereinigte Stahlwerke AG (United Steelworks) Fritz Thyssens pointed out that forcing the government to cut its expenses would increase unemployment and weaken unions, they withdrew their support. The government then cut its expenditures and unemployment and suffering soared just as the executives hoped they would. Workers concluded that they had no choice but to vote for pro-labor parties. But they were no match for the executives who used their corporate coffers to finance Hitler who promised to crush the unions.
Whether a similar fate awaits the US is impossible to know, but the horrors of Hitler and his regime convinced even conservative Germans that the unchecked power of executives is incompatible with both prosperity and democracy. The consensus was that corporations should be forced to pay their workers decent wages that would nevertheless not jeopardize their financial health, and that they should also be prevented from meddling in politics.. The solution of the conservative Christian Democratic government was a 1951 law of “co-determination” that required that 50% of the board of directors of any corporation in heavy industry be made of workers and their representatives. In 1976, after 25 years of experience with it, the law was expanded to include all employers with more than 2,000 employees, although with the fading memory of Hitler the power of workers was reduced somewhat. The law decreed that in case of a tie the tie-breaker would be a shareholder and not an employee.
Today, working conditions in Germany are far better than they are in the US, the German economy has avoided the wild inequality the US now has and without executives controlling the politics of the country, the German government is far freer than the government of the US to concern itself with the problems of common people. Germany is Europe’s strongest economy; placing workers in the boardroom hurt neither German workers nor German shareholders.
But while placing workers in the boardroom will alleviate the problem of executive abuse, it would not eliminate it. While the chasm between workers and their representatives in the boardroom would not be as wide as the chasm between shareholders and corporate executives, the workers’ representatives may themselves abuse their power. Therefore a law should be passed that would limit executive compensation directly. It probably should be set well below the salary of the president, because no other executive shoulders responsibilities that are as great or as far reaching as the president; even more importantly, when the person who represents the whole public meets with the executives who represent at best particular corporations (and at worst their own self interests), she should be the highest paid executive in the room.
Executives often do not represent the interests of shareholders and workers when they use corporate money to promote political candidates. Citizens should, of course, be permitted to invest their own money to promote their political interests, but they should not be permitted to use other people’s money for that purpose. The corporation is a fictive individual who represents a very real person—the executive. We need a law that will prohibit “corporations” from making any political contributions whatsoever.
2. Curbing Oligopolies
Until the 1880s, the law regarded corporations as undesirable: Limits were placed on the total value of their assets, they were confined to do business only in the state of incorporation, and unanimous consent of the shareholders was required when important decisions were made. These and similar restrictions were removed first by New Jersey, but soon all other states followed and shed the protections against corporations they had had.
No sooner did corporations come into being than they started monopolizing the economy and in 1890 congress was forced to pass the Sherman Antitrust Act. But the economics profession rushed to justify the monopolies. According the economist and Nobel Prize laureate George Stigler, “They [the professional economists] found no difficulty treating the unregulated corporation as a natural phenomenon…One must regretfully record that in this period Ida Minerva Tarbell [author of “The History of Standard Oil”] and Henry Demarest Lloyd [author of “Wealth Against Commonwealth”] did more than the American Economic Association to foster the policy of competition.”
Under the cover of “expert” opinions by economists judges proceeded to eviscerate the Act. As Stigler explained, “ [T]he Sherman Act as it is sometimes interpreted, is the belief that [unlike monopoly] oligopoly affords a satisfactory form of organization of our economy. This belief … was certainly fostered, by one of the greatest of contemporary judges, Learned Hand, the author of the famous dictum that control by one firm of 64 per cent of an industry may not be monopoly and that 33 per cent surely is not. It is true, no doubt, that oligopoly is a weaker form of monopolization than the single firm, but it is not so weak a form that it can be left to its own devices.”
Yet Stigler’s clear analysis was no match for corporations who were able to poison the minds of economists and judges alike, and the results are all around us. In practically all markets, from computer operating systems and office software to morning cereals, from mobile telephone companies to chewing gum, from professional baseball leagues to pharmacies, just a handful of corporations dominate, yet the government does not step in either to lower the barriers to competition in these markets (advertising is often the main barrier) or to control the prices and marketing policies of these oligopolies (telephone companies charge oligopolistic prices for their services and because calls between customers of the same company are often free, small companies do not have a chance).
Markets have been oligopolistic for so long that we forgot what a competitive market or what effective regulations look like. CVS, Rite Aid, Wal-Mart, and handful of other corporations have destroyed the independent pharmacist, yet unlike in the 19th century, they suffer no stigma. Just this month, caving in to pressure by Nestle and Kellogg, the Federal Trade Commission scaled back its program to ban advertising of sugary foods to children. “As we studied the comments, however, we realized that perhaps we were too ambitious,” the head of the FTC said.
A few simple laws would restrain oligopolies and bring back competition.
Economies of scale are usually not the reason that just a few firms dominate each market; advertising is. Children all over the world demand Kellogg cereals not because they are cheaper but because they are more intensely advertised. To foster competition, advertising for children should be banned altogether; advertising for adults could be curtailed in the way it is done in Europe. In the UK the law limits TV advertising to 8 minutes per hour between 6-11 pm and to no more than 12 minutes per hour at any other time; in the US, on the other hand, the length of TV advertising is not regulated, and it is 18 minutes per hour any time the station broadcasts. But what motivates the UK law is a concern with viewers’ enjoyment, not competition. To foster competition, not only total advertising time but also the advertising time of a single product should be limited. If corporations are not be able to dominate the airtime by bidding up the price of a time slot, competitors will have a chance. And with less advertising, word-of-mouth could play a greater role in the choice that consumers make.
The industry that ought to be most inviting to individual entrepreneurs is retail. But corporations like Wal-Mart have all but eliminated this opportunity because each of their stores replaces several well-paid store owners with low-paid employees. One way to deal with this problem is to limit the footprint of retail stores, closing the door to megastores.
Number of Stores
An individual entrepreneur can easily compete with MacDonald’s in quality and taste but she will never be able to compete in advertising, because as the number of outlets that a restaurant has increases, the cost of advertising per outlet decreases. Limiting the number of outlets that a corporation may have would restore the type of competition that’s beneficial. We need competition about quality, not about advertising.
3. Eliminating Patents
Although with the Sherman Act Congress professed its commitment to free competition, the patent laws it has passed permit the creation the most powerful monopolies possible: monopolies that are protected by the government itself. Corporations argue that without patents there would be no invention, and there are economists who rose to great prominence defending this view. Since patents are obviously the enemy of competition, Harvard economist Joseph Schumpeter declared that competition is… the enemy of invention. “The introduction of new methods of production and new commodities is hardly conceivable with perfect—and perfectly prompt—competition from the start. And this means that the bulk of what we call economic progress is incompatible with it.” But George Stigler showed that this is simply not true, citing numerous examples of new industries that started and thrived without any patents, including the mail order business, automobiles, frozen foods, and aircraft.
Following Stigler, economists Michele Boldrin and David Levine examined many more industries and came to the conclusion that major inventions occur and their use spreads long before there is even the possibility of granting them patents, because in the early stages it is usually not known how to patent them. It is only after some use that patenting of products becomes possible, and then the effect of the patents is to close the door to new entrants and improvements. Boldrin and Levine challenge us: “Can anyone mention even one single case of a new industry emerging as a result of the protection of existing patent laws?”
An examination of the history of DOS, the operating system that made Bill Gates Bill Gates, reveals how true this is. The first version of DOS was developed by Gary Kildall. Kildall developed not only DOS; the very concept of an operating system — the idea that computers should be controlled by instructions that are separate and apart from the computer itself and that the same instructions could therefore serve computers produced by different manufacturers — was his as well. IBM wanted to buy DOS from Kildall but the two sides could not agree on the terms. Bill Gates then offered to sell IBM an operating system that would be an improved version of Kildall’s. Kildall wanted to sue but couldn’t because at the time the patent law for software was so vague, was not enforceable. Gates is the poster child for the billionaire dropout, but Kildall had a Ph.D., and he pointed out: “Well, it seems to me that he did have an education to get there. It happened to be mine.”
As the case of Microsoft and its operating systems illustrates, far from encouraging inventions, patents stifle them and are the source of great inefficiencies in the economy. In 1982, software became truly patentable when Congress created a new court with jurisdiction over patents, and Gates became a billionaire. But individual users and businesses lost millions of hours and trillions of dollars by being forced to use operating systems that were not only far inferior to Apple’s in what they could do, but which were continued to be sold even though they caused frequent computer crashes. What would have happened if software had remained unpatented? Software developers would have done to Microsoft’s operating systems what Bill Gates did to Kildall’s: improve them and then sell them to computer manufacturers. No doubt some would also have developed revolutionary new software as Kildall himself did, also without the protection of the patent law.
The same inefficiency of the patent law can be found in the pharmaceutical industry. Prevented by the patent law from improving upon drugs for which they don’t have the patents, corporations spend about two thirds of all their research money on developing drugs that produce the same results that existing drugs do using slightly different chemistry. The development of new drugs should occur in universities and the results should be placed in the public domain. This would assure that all drugs would become “generic” drugs which, in plain English, means cheap, and researchers would be able to channel their brilliant minds toward the development of new drugs instead of duplicative drugs.
Occupy Wall Street has produced many justified and helpful demands: Tax the rich, convert education loans to grants, reduce the principal of mortgage loans to levels that families can afford, and many others. But the main demand should be a change in the very structure of the economy, ending the reign of corporate executives over society, curbing oligopolies, and freeing us from harmful patents.
Moshe Adler teaches economics at Columbia University and at the Harry Van Arsdale Center for Labor Studies at Empire State College. He is the author of Economics for the Rest of Us: Debunking the Science That Makes Life Dismal (The New Press, 2010), which is available in paperback and as an e-book.