Lorraine Talbot
Capitalism is the organization of production around the systematic extraction of value from labor. Unlike other economic systems it does so through market exchange rather than overt coercion and it relies upon the illusion of free and equal exchange. In the exchange between labor and capital, labor power becomes a property form that is exchanged for a wage. As a Marxian legal theorist Pashukanis notes, social relations of production “assume a reified form in that the products of labor are related to each other as values” (Pashukanis [1929] 1987: 111). In the exchange of values—wage for labor—labor power is not fully compensated and the uncompensated part is captured by capital as profit.
Legally, the relationship between capital and labor is encapsulated in the employment contract. The emergence of the bilateral contract as ubiquitous to the market is important because it obfuscates the inequality between labor and capital. The contract form constructs both parties as the market actors of neoclassical theory. In entering the labor contract, the worker becomes a self-serving market actor making free use of his or her property—not an exploited worker.
The labor contract is, therefore, the primary legal institution of capitalism. It is necessary for market exchange but additionally it constructs labor as a legal subject, possessing legal rights, legal equality and capable of entering into legally binding arrangements for the exchange of values. As the bearer of labor power, the worker acquires the “capacity to become a legal subject and a bearer of rights” (Pashukanis [1929] 1987: 112). Indeed, for exchange to take place, the worker must be able to exercise rights as an autonomous legal subject. So contract law, and specifically the labor contract, encompasses the myth and fetishization of equivalent exchange that underpins the relationship between labor and capital and the exchange of labor for wage.
The relationship between labor and capital is exercised within legal organizations in which production takes place. The dominant organizational forms have changed in accordance with developments in capitalism itself. In the UK, from the late eighteenth century and well into the nineteenth century, capitalism in its early entrepreneurial period existed mainly in the legal form of the partnership. The partnership, whose legal norms were later codified in the Partnership Act 1890, made partners prima facie equals in respect of managing, owning, and extracting profits from the business. It also made them equally and personally liable for the debts of the business. Any recourse to investment outside the individual partners was treated as debts, which prima facie gave no legal claims on the business. However, outside investment was rarely required as the surpluses captured from its workers were so high in this period that much could be ploughed back into the business. The early decades of capitalist production were labor intensive with low fixed capital requirements and so business had little recourse to outside investors. The high proportion of labor to fixed capital expenditure, goes some way to explaining the average real rate of return on fixed capital in this period calculated as 39.8 percent in the period of 1855–1874 (Maito 2014: 5). The Marxian theorization of this outcome is discussed in the first and second sections.
As high profits were generally assured in early capitalism, the risk of unlimited liability was minimal. Thus, although limited liability was available to businesses from 1855, if registered as limited liability companies, few established business chose to do so (Shannon 1932). The partnership provided all the legal structures necessary to enable distribution of profit, entitlement to manage and allocation of liabilities. The business was owned and controlled by the same people, a small group of insiders profiting from high levels of labor exploitation. High profits were not hampered by state policy as the state did little to moderate the exploitation of labor. No legislation existed to protect the safety, working hours, pay, or liberty of labor. In response, many groups of workers set up their own legal institutions. Friendly societies were established at the end of the eighteenth century followed by mutual building societies. These organizations were funded by contributions from small groups of workers. Friendly societies provided funds for members injured at work or for members’ bereaved families. Building societies enabled members to buy land or property in which to live and to escape the tyranny of landlords. Through building societies, workers claimed some personal independence through private property ownership (Talbot 2010). These two (social or hybrid) institutional forms arose as a direct result of the economic imperatives of the time. Labor-intensive production depended on landless wage labor working for as long as possible for as little as possible.
The emergence of these hybrid forms is an example of Polanyi’s ‘double movement’ (Polanyi [1944] 2001). According to Polanyi, the expansion of the capitalist market disembeds labor from the prevailing social context. In Britain’s case, capitalism disembeds a previously agricultural labor force from its long-standing social systems of support (and oppression). Labor becomes individual vendors of their own labor power in a newly industrializing economy. As Polanyi showed, the disembedding effect of the market results in a ‘double movement.’ Society reacts against the market’s conflict with understood social and cultural norms. The double movement is an attempt to re-embed the market within activities and institutions, which reflect and reassert long-standing social and cultural norms. Thus, the exploitation of labor by capital through one legal form is countered by others designed to increase labor independence from capital and recreate social relations of support. The dehumanizing effect of capitalist work conditions are met by the humanizing intention of the worker-led social institutions.
These hybrid forms and their contemporary counterparts are of great interest to modern progressives. However, for brevity and focus they will not be further examined in this chapter. The remainder of the chapter will consider capitalism from the late nineteenth century onwards. Stated briefly, this period was characterized by the rise of joint stock limited liability companies and reduced profit rates. This combination occurred because the ‘organic composition of capital’ has changed during this period, reducing that element which creates value, labor (Marx [1867] 1954: 623). Joint stock companies were already available with unlimited liability from 1844,1 and with limited liability from 1855 in the UK, but, as noted above this particular institutional form only became popular with industrial capitalists at the end of the nineteenth century when the return on capital investment dropped sharply. The company form provides huge advantages for its investors as shareholders. Their returns can be maximized while their liability for the company’s debts is limited to the unpaid portion of their shares, or if fully paid up, as was the norm by the end of the nineteenth century, no liability at all. Shareholders enjoy profits for the full duration of the company’s existence without any participation in its day-to-day management. The attributes of the company have made it the legal institution par excellence for the delivery of value to capital in the modern period of capitalism, characterized by reduced profit rates and frequent crises.
From the twentieth century and particularly since globalization, the separate corporate personality possessed by a company2 has allowed capital to increase value extraction and to further reduce shareholders exposure to risk. For example, because companies are able to own shares and to claim the protections available to shareholders, they can form vast national and global corporate networks by forming new companies and owning the shares (and thus the control rights) in them. These ‘subsidiary’ companies can then perform activities required by the group, which are more likely to harm the environment or people, than the activities undertaken by the well-capitalized parent company. Any liabilities that arise as a result of this are the responsibility of the subsidiaries because the parent is protected by the limited liability enjoyed by all shareholders.
Separate corporate personality has also enabled companies to transfer valuable properties to subsidiaries based in low tax areas so to reduce the overall tax paid by the group. Today, companies are legally allowed to repurchase their own shares with retained profits or borrowed money so as to enhance the value of the remaining shares. This use of company funds entirely bypasses the productive entity itself, avoiding investments in production, research, and development, or efforts to train and retain employees. How and why the company is driven to behave in this ‘psychopathic’ way is examined in the proceeding section using Marx’s theories of value, profit rates falls, credit, and the joint stock company.
In developing a theory on the origins of value, Marx asks why commodities sold at the end of the production process command a greater value than the sum of their inputs if those inputs have been purchased at market value. Marx identifies labor as the input that produces more value than it is paid because unlike other elements in the production process, which are bought at market price, labor’s ultimate value is not yet complete or realized. Labor is bought for a period of time to be utilized in the production process as the employer requires. Labor is a living thing, flexible and bound only by the hours worked each day. The amount of unpaid labor-time that may be extracted, and thus the amount of the surplus that is available for distribution, depends on levels of industrial organization, technical development, the ability of management to organize labor, and labor’s own competency.
Marx ([1867] 1954: 623) further argues that the value of a commodity derives from the labor embodied in it so that commodities exchange according to the average ‘socially necessary’ labor-time used to produce them. That average will change over time as capitalists strive to make labor more productive. Businesses that produce commodities with more labor-time than the average will fail whereas those who produce with less labor-time will enjoy high profits. At every particular stage of capitalist development, there is a level of labor-time required to reproduce labor’s own existence; this is affected by such issues as the level of labor rights and the cost of the commodities which labor requires to reproduce its own existence. Labor then works beyond those hours.
Because of the flexible and uncertain nature of the values labor can produce in a working day, Marx identifies labor in the productive process as ‘variable capital.’ As the values of other elements of the productive process are complete, Marx refers to them as ‘constant capital.’ The combination of variable and constant capital Marx terms the ‘organic composition of capital.’ As production develops, labor uses more constant capital in a working day. This leads to either a reduction in the labor force or a general increase in the size and output of the productive organization. Either way, “the proportion of variable capital decreases in relation to constant capital” (Marx [1867] 1954: 623). Marx estimates that in the eighteenth century the organic composition of capital in the spinning industry was about 50 percent constant capital to 50 percent variable capital, but at the time of writing Capital I in 1867, the composition was 87.5 percent constant capital and 12.5 percent variable capital (Marx [1867] 1954: 623). Competition in capitalism pushes productive organizations to make labor more productive thereby reducing, as a proportion of total capital, the element of production that produces value, variable capital. (Marx [1867] 1954: 623). This means that the average amount of labor-time required to make a particular commodity decreases. With it the proportion of surplus value to investment decreases. Although the amount of products produced increases, ultimately their price falls.
This is counteracted by the reduction in labor-time required to produce other elements of the productive process, such as tools. It may also be adjusted by the lower wages capital is able to pay once labor is reduced in the workplace and an impoverished ‘reserve army of labor’ is created and “kept in misery in order to be always at the disposal of capital” (Marx [1894] 1962: 486). One of the paradoxes of capitalism is that the more successful it becomes at social production the more it negatively impacts on the social world of the non-capitalist class. Capitalism “turns every economical progress into a social calamity” (Marx [1894] 1962: 486–487).
The drive to make labor more productive eventually changes the legal institutions that capitalists adopt. Competition leads to many smaller capitalists being put out of business by the larger, who ultimately come to operate under the legal framework of the (joint stock) company. Moreover, the high constant capital levels of the remaining industries create a barrier against new competitors. In Marx’s ([1867] 1954: 626) words:
The battle of competition is fought by cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore the larger capitals beat the smaller.
The competition to make labor more productive draws individual competing capitals ever more to a single capital. The strongest capitals can, for a time, counter the falling rate of profit with volume of profit. Eventually the proportion of variable capital will fall so low that profits cannot be realized and economic crisis unfolds.
The company is the central organizational form for mature capitalism. It encompasses the same exploitative relationship between labor and capital except that the surplus from unpaid labor power is claimed by the company and ultimately returns to equity capital and to borrowed capital. Additionally, the corporate form allows capital to be fungible and transferrable, both as shares and as securities. Corporate capitalism encompasses a market in labor interacting with a market in capital, where capital has almost unimpeded freedom of movement.
In the UK, it was crises that heralded the dominant use of the company form. This transition was also facilitated by the rise of credit. Marx ([1867] 1954: 626) analyzes the credit system in Capital I:
the credit system which in its first stages furtively creeps in as the humble assistant of accumulation, drawing in to the hands of individual or associated capitalist, by invisible threads, the money resources which lie scattered over the surface of society, in larger or smaller amounts; but it soon becomes a new and terrible weapon in the battle of competition and is finally transformed into an enormous social mechanism for the centralisation of capitals.
The credit system, which first functions as a way for business owners to invest in production and is repaid on an agreed interest rate once surplus value is realized, becomes a mechanism to centralize control as never before and to advance finance over industry. Credit enables the dominance of joint stock companies and increasing scales of production well above the level achievable for privately owned capitals. Investment in joint stock companies is drawn from capitalists who expand their interest by using both their own funds and credit. “It is the abolition of capital as private property within the framework of capitalist production itself” (Marx [1894] 1962: 427). In this way private capital is in large part replaced by social capital—social, in that credit derives from the pooled resources of many persons.
The destruction and replacement of private capital with social capital aligns it with the social nature of production. Capital derived from social funds combine with collective labor in the ‘social production’ of commodities. Marx sees the rise of social capital as a transitional phase before the production process, divorced from private ownership, becomes social property. For Marx, this is because labor in part owns its own appropriated surplus value. The pooled funds of workers put other and/or the same workers into the production process. The cooperative is an example of this transitional phase—workers are joint capital holders and workers hold a joint claim to the fruits of their labor.3
However, as Marx ([1894] 1962: 431) is quick to point out, this transitional moment, though realized in legal institutions like the cooperative, is distorted by credit and the joint stock company, which enable social capital and the gains accruing to social capital, to be appropriated by those capitalists who wield financial power. This is a smaller and more powerful group of capitalists who use finance and credit to purchase entitlements to surplus value in the form of shares, across many different companies.
A further degenerative effect of credit and the joint stock company is that the owners of capital become concerned not with the activities of the company in which they have shares, but with the values and transfers of other shares. In the joint stock company, social capital “exists in the form of stock, [and] its movement and transfer become purely a result of gambling on the stock exchange, where the little fish are swallowed by the sharks and the lambs by the stock exchange wolves” (Marx [1894] 1962: 430). Capital becomes speculative under the joint stock company in which a recklessness in pursuit of profit accelerates crises (Marx [1894] 1962: 432). This is because a “large part of the social capital is employed by people that do not own it and therefore tackle things quite differently than the owner, who anxiously weighs the limitations of his private capital in so far as he handles it himself” (Marx [1894] 1962: 431). The non-owning management, the “administrator of other people’s capital” (Marx [1894] 1962: 427), is subject to the demands of the shareholder “money capitalist” who receive a form of interest “as mere compensation for owning capital” (Marx [1894] 1962: 427). The private entrepreneur capitalist managing his own business, will be concerned to protect that business (in order to protect returns). In contrast, the money capitalist is “entirely divorced from the function in the actual process of reproduction” and interested only in the returns on capital (Marx [1894] 1962: 427). They can remove their investment at any time and invest elsewhere. For Marx, capitalism under the joint stock company becomes “the most colossal form of gambling and swindling” (Marx [1894] 1962: 432).
This ‘gambling,’ however, is dependent on capital becoming transferable and fungible without losing the entitlements of capital. It must become ‘money capital.’ In early capitalism, capital does not have that fluidity and the legal institutions which contain capital, such as the partnership, do not allow fluidity. The circuit of capital, M – C . . . P . . . C′ – M′, involves a period when capital is bound to the production process, designated in this formula by the dots which “indicate that the circulation process is interrupted” (Marx [1894] 1962: 109). Money is the most mobile of all the elements of the circuit, but when invested in production it becomes capital and loses its fluidity. By transforming their money into capital, investors may claim entitlement to surplus value, but capital will not regain its fluidity until transformed into money again through the realization of surplus value in the market, the M′ stage. Capital constantly strives for fluidity in order to reduce the risk of being bound to a particular production process. It tolerates being bound to production while profits are high but as the rewards at the M′ stage diminish, it seeks more fluidity to seek out new value and reduce the risk of committed investment.
The legal facility to enable investment in shares as a form of money capital was developed in the nineteenth century. Legislative intervention and to a lesser degree judicial innovation enabled industrial capitalists to become money capitalists as the legal constraints to the movement of capital invested in companies were gradually removed. The UK’s Bubble Act 1720, which prohibited the free transferability of shares without a corporate charter, thus rendering money invested in an unincorporated association bound to the original purchaser, was repealed in 1825. In 1844 the Joint Stock Companies Act allowed incorporation through registration. These two reforms legalized the free transferability of investments in companies. However, another constraint upon a share’s transferability was the large size of shares, which made them difficult to sell. This was compounded by companies’ tendency to issue shares with large uncalled capital, in effect de facto unlimited liability (Jeffrey 1946). The legal facility to break up shares into small denominations and to cancel uncalled capital was introduced in the Companies Act 1867.
Yet another innovation was the court’s reformulation of the share as a claim to the surplus value alone, rather than an interest in the means of production. Until the early part of the nineteenth century the company share was treated in law as an equitable claim to the company’s property and thus shareholders were co-owners in equity (Williston 1888). Their investment was bound to the production process. However, in the 1837 case Bligh v Brent4 the share was held to be a claim to the surplus created by the productive assets and not a claim to the assets themselves. The company share, at least in larger companies, thereon ceased to be a portion of the equitable interest in the company as a whole. Instead the share became a legal and equitable interest in the surplus value alone. Legally severed from the company assets the share became a transferable property form (Ireland et al. 1987). Thus, the circuit of capital in the company was enabled through the transformation of shares into a transferable money form, with much of money’s fluidity. Entitlements to surplus value can be sold at any point in the productive cycle, in markets that are legally, culturally, and geographically distinct from the markets in which the tangible products of the company are sold.
When profit rates were high and surplus value was best claimed by being bound to a particular business this liquidity was not sought. However, once profit rates fell, capital availed itself of this legal regime and enjoyed the fluidity offered by the joint stock company. In this way capitalists became uninterested and disassociated from the process of making labor more productive. They merely seek out profitable shares in order to access the surplus created through making labor more productive—a task undertaken by someone else. Thus, the joint stock company facilitates a whole range of mechanisms to extract value without direct involvement in making that value. In this way it
reproduces a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation. It is private production without the control of private property.
Marx [1894] 1962: 429
The 2007 crisis and the resulting Great Recession are characterized by falls in the rate of profit, a massive extension of credit, and an explosion in new financial property forms tenuously linked to commodified claims to surplus value. The UK was at the center of the global financial crisis because it is predominantly a rentier economy, reliant on its role in international finance, credit, and a rising housing market. Like other governments, the UK governments’ response to the crisis has aimed to protect capital at the expense of labor, resulting in an entrenched recession that has undermined the global economy. The company form has enabled this political policy through its capacity to sever interests within the organization (discussed above) so that polices can be directed to the protection and enhancement of capital alone.
The current crisis is the outcome of decades of strategies to redress the low profit rates, which became largely terminal from the 1970s, after years of post-war growth. From the 1980s onwards, governments in the UK and US responded to low returns on investment by rebalancing the power between labor and capital in favor of capital, enabling business to reduce the cost of wages, introduce flexible working practices, and suppress industrial action. Both governments reduced the legal rights labor had enjoyed in the post-war period through sustained attacks on the unions, including the passing of legislation that radically curtailed their powers. In the UK by the mid-1980s, this had enabled the government to break up labor-oriented manufacturing and mining industries that had become uncompetitive in the global economy. This lack of competitiveness was largely because the many nationalized industries in the UK had not sought to increase the productivity of labor, but rather to protect employment and employees (Lazonick [1991] 1993: 59). This would have been sustainable, had government policy supported labor as a social good, or, made labor-intensive industries globally competitive by investing in productivity. Thatcher’s neoliberal government pursued neither of these policies, and effectively replaced those industries with the capital-oriented financial industry. This industry relied on the extraction of global values through its role as financier. In the remaining labor-oriented industries there was a partial recovery in the rate of profit because of the cheaper price of constant capital and given the depressed wages in the UK (Maito 2014: 5).
Governments in the UK and US bolstered capital by removing barriers to the creation and liquidity of fictitious commodities. In the US, prohibitions on the creation and trade of financial derivatives were removed (MacKenzie & Millo 2003). In the UK, financial interests were bolstered by years of lucrative purchases of the country’s undervalued national industries, which were rapidly privatized (Talbot 2015). Mutual building societies were allowed to demutualize and become companies, enabling the distribution of their retained earnings to their new shareholders and freeing the societies from the tight controls on borrowing and lending applicable to mutuals (Talbot 2010). The newly liberated financial sector began to generate huge profits where it had previously made very modest returns (Duménil & Lévy 2005). Consequently investment shifted to finance rather than production, even for non-financial companies who began to engage in their own financial services and to invest in financial companies.
The move away from investing in production was no doubt exacerbated by a neoliberal ideology promoted in law and in corporate governance (and present in the UK Corporate Governance Codes since 1992) that promoted shareholder returns as the primary corporate goal. Managerial enthusiasm for high returns was undoubtedly spurred by the fact that the executives’ remuneration was bound to share performance, a governance strategy to reduce agency costs (Jensen & Meckling 1976). However, the primary driver of this shift was the reduced return on investments in production. Investing in finance seemed like the cure to this terminal weakness. However, money does not create value, only labor creates value. The pre-crisis M – M′ illusion, which seemed to magically bypass the C . . . P . . . C′ process, was nothing more than a financial bubble destined to burst. The fictitious commodities it generated were increasingly difficult to value and were often over-valued. The profits made by global banks in the five years before the crash, estimated to be around US$855 billion, were slightly less than the amount paid by the public to bail them out, estimated at around US$1 trillion (Haldane & Madouros 2011). The public paid for these illusory profits while shareholders and directors have been allowed to hold on to their gains.
Most governments’ response to the crisis has been to protect capital through mechanism such as quantitative easing (QE) and through lower corporate tax. This has amounted to a transfer from the general public to the wealthy. In the UK, QE benefited the richest 5 percent of UK households who gained around 40 percent of the resulting £600 billion increase in value on bonds and equities (Joyce et al. 2012). The QE supercharged equity purchases led to a rise in equity prices that had no relationship with the underlying performance of the productive assets. The result was that all the losses to the equity market in 2008 as the real value of investments became clearer, amounting to 28.4 percent for Financial Times Stock Exchange (FTSE) 100 companies, were replaced by a rise of 27.3 percent following the first injection of QE and continued to increase with each subsequent injection (FTSE 2015).
While the UK government removed tax support previously claimable by the many people working for inadequate wages, it reduced corporate tax to 18 percent. One study showed that in “the financial year 2012–13, the government spent £58.2bn on subsidies, grants and corporate tax benefits. It took just £41.3bn in corporation tax receipts” (Farnsworth 2015). The government subsidizes companies far in excess of the amount it garners from corporate tax. In contrast, the ‘flexible labor market’ has witnessed the rise of zero hour contracts (ONS 2015) and an average decline of 7.5 percent in real wages between 2009 and 2013 (ONS 2014).
Companies have taken advantage of historically low interest rates to engage in financial restructuring rather than develop their productive capacity. As the OECD (2015a: 227) notes “the implementation of such very supportive policy stances over a protracted period has not succeeded in reviving capital spending significantly.” Instead, the low cost of debt relative to equity has encouraged companies to borrow to return funds to shareholders, through share repurchases (buybacks) and dividends. For instance, in 2014, US Standard and Poor’s (S&P) 500 corporations bought back just over US$565 billion of their own shares, an amount equivalent to around three-quarters of their total capital expenditures (OECD 2015a).
Share repurchases are driven by the myopic drive for profit maximization demanded by shareholders, the parasitic behavior that Marx saw as inevitable in large companies. Today, shareholder value is created by squandering funds on financial restructuring at precisely the point when the economy needs to develop its productive capacity. However, productive companies are currently considered risky investments. Thus, investors are selling shares in high capital expenditure companies and buying shares in companies with low capital expenditure (OECD 2015a). In Angel Gurría’s words, “stock markets in advanced economies are punishing firms that invest” (cited in OECD 2015b: 1). For most observers this is inexplicable. But for fluid profit-seeking capital it is entirely logical to eschew investment in production when profit rates are at a historic low, and to take advantage of the liberal and protected regime for financial securities.
The enhancement of share values is, of course, good news for investors. However, because profitability is not being achieved through production and through the use of labor, and where corporations are ‘punished’ for investing in their productive capacity, the workforce is excluded from this wealth. Furthermore, labor is on the frontline for any drop in capitalist returns. The downturn in Chinese production has reduced demand for raw materials globally, which has hit the extractive industries in particular. So, for example, when Anglo American’s shares fell by 10 percent its response was to restructure, shedding over two-thirds of its workforce, from 135,000 to 50,000 (BBC 2015).
The responses of governments and corporate management to the Great Recession have been to protect capital at the expense of labor qua labor or labor qua citizens. The corporate form enables this because it legally separates production from title to profits (shares). Monetary and fiscal policies such as QE and cuts to corporate tax rates can directly enhance the value of shares, distinct from elements of production. The cost of the QE is borne by pension holders, the costs of low corporate tax is borne by the public, still subject to austerity measures. Share buybacks enhance the wealth of shareholders and play no role in developing the productive and innovative capacity of the company. Wages are low enough and working practices flexible enough to make increasing the productivity of labor otiose, a mere risky investment.
This has all massively increased levels of inequality between capital and labor. The OECD (2015c: 1) report on social inequality notes that:
income inequality in OECD countries is at its highest level for the past half century. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago.
Inequality is even more pronounced as between the global North and the global South, although the wealthiest continue to prosper in all countries (Lakner & Milanovic 2016).
Problematically, inequality is not being tackled at the nation-state level through progressive taxation or increasing investments in education and other social goods. Instead, the typical response of many governments has been to reduce taxes for the rich, reduce investment in education and to cut benefits. Austerity measures to repay sovereign debts, often accrued during bank bailouts, are aimed at welfare and other measures that disproportionally affect the poorest. Because governments identify capital as the source of value, the wealthy qua investors and property owners, have enjoyed tax and other benefits. Governments are averse to governing, preferring to outsource their public duty to provide services to profit-driven companies who do not owe legal duties to the public. As a weak alternative to this duty, the OECD’s unenforceable Principles of Corporate Governance recommends that where public functions have been “delegated to non-public bodies . . . the governance structure of any such delegated institutions should be transparent and encompass the public interest” (G20/OECD 2015: 15).
The company’s success as a legal institutional form lies in its superior mechanisms for organizing large-scale production and disciplining labor, and its ability to grow quickly through, for example, mergers, making it difficult for new capitals or smaller capitals to compete. This is particularly so in established industries although less so for innovative/disruptive technologies. When large corporations with public stock emerge, they dominate access to credit that enables the centralization of ownership and control. Once capital in the company is able to act as money capital, the corporate form enables capital’s destructive and parasitic tendencies. In so doing, the large corporation transforms production into speculation and heralds a new degenerative period of capitalism.
All capitalist extraction of value is built around the ability of capital to capture value from labor. Company law facilitates this by reifying this exploitative relationship as a transferable, fungible property form, the share—a perpetual title to the portion of labor’s unpaid time. This process obfuscates the conflict between labor and capital. Moreover, capitals’ ownership of shares designates a legal entitlement to have corporate activities and management decision-making oriented around delivering returns on their investment.
Political polices can provide greater compensation to labor in the form of welfare provisions and in the protection of organized labor groups, as they did to a greater extent in the post-war period. The law can require companies to protect corporate assets. However, in the current neoliberal period these parasitic strategies to counter falling growth and profit rates have been enabled and even encouraged. The result is that the snake is eating its own tail, as companies borrow to pay shareholders through share repurchases.
Reforms that curtail the legal powers of shareholders in the corporation are needed to protect the social production of society now dominated by the corporate form. Currently, company law empowers shareholders to dictate the productive capacity of society. Shareholders can, and do, sell off corporate assets and put labor out of work. Private equity purchases of companies are on the rise as the value of corporate assets exceeds the profit they can generate (Flood 2015). Shareholders can insist on mergers that are lucrative only for themselves and detrimental to employees and the community while the law (in the UK at least) imposes no fiduciary duties on them.
However, radical reform in company law has been dominated by progressive thought rather than a more dynamic and accurate Marxian framework. Beginning with Veblen and centering primarily around Adolf Berle, progressivism is marred by an inaccurate belief that shareholders do not and cannot exercise substantial control in the company. Veblen saw the role of shareholders as exploitative but passive in all but a concern for profit. They were ‘absentee owners’ purchasing shares in institutions purely for financial return (Veblen [1923] 1997: 330). The large public company allowed shareholders to absolve themselves from responsibility or “personal relation with the property which he owns and from which he derives an income” (Veblen [1923] 1997: 330). Problematically, although shareholders may bear little interest or knowledge of the production process from which they derive their income, it is their desire to ‘make money,’ which determines what that productive unit does (Veblen [1923] 1997: 211). Their interests do not necessarily coincide with the provision of useful and efficiently made things to society. This view is, of course, closer to Marx’s own. However, Berle’s (more popular) development on this theme was to view the increased share dispersal in large corporations as creating a new form of organization in which shareholders were entirely passive because they could no longer exercise control over management. Berle was largely concerned that as those who were left in control of the corporation were not property holders, they might have different motivations when governing the corporation. Possession and power, under the corporation, become divorced from ownership “as the corporation now emerges as the owner of the property” and as managers possess and control its activities (Berle 1959: 61). However, in The Modern Corporation and Private Property Berle & Means (1932) examined the socially progressive potential of a company free from shareholder demands and thus capable of exercising corporate decision-making in the interests of the wider community. They saw wider social changes, such as empowered labor unions as providing the necessary bulwark against overly powerful managers. Given the right incentives and controls, corporate managers as trained bureaucrats could guide the economy to a more socialized and egalitarian form.
Progressive thought, therefore, has centered on the issue of management accountability and the promotion of such strategies as improving fiduciary duties so that management makes more socially progressive decisions. Shareholders’ possible malign influence is discounted as they are thought to be dispersed and powerless. Moreover some progressives have argued for more control rights for long-term shareholders who are reconceived as a benign force as against short-term shareholders like hedge funds. However, Marxians have been keen to emphasize that shareholder control is almost always malign. They have shown that increased share dispersal has actually enabled the centralization of capital around a small group of global investors (De Vroey 1975). They have shown that shareholder control, particularly when centralized and represented by finance, operates parasitically, demanding returns regardless of whether this destroys the productive company (Talbot 2013). Shareholders are neither powerless nor benign.
Marx’s analysis provides a sound framework within which to understand the corporate economy and from which to formulate meaningful reform. He provides a theory that is essentially humanist in that it makes human endeavor the source of value. Marx and Marxian theorists have provided illustrations of the socially (and environmentally) regressive nature of shareholder-oriented goals and shareholder control rights. Thus, one of the first steps in making socially progressive reform is to make the early progressives’ (inaccurate) assertion that shareholders are powerless into a legal reality.
1 The Joint Stock Companies Act 1844 enabled companies to be established through registration rather than the more expensive and complex methods of an Act of parliament or a charter granted by the state.
2 Salomon v Salomon [1897] AC 52 .
3 A similar point has been made about pension funds today, which increase their value by investing in the stock market (Minns 1983). Pensioners ultimately benefit from the surplus extracted from unpaid labor-time, which of course includes the previous unpaid labor-time of the pensioners.
4 Bligh v Brent (1837) 2 Y & C 268.
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