April 10, 2017    7 minute read

Why Corporations Are Essential to Society

Complementary Capitalism    April 10, 2017    7 minute read

Why Corporations Are Essential to Society

Corporations, over the years, have become central to the social, political and economic sphere. The corporations of today have grown significantly different in design and scope compared to their early counterparts. The first companies (akin to a modern corporation, that is) were born in the early 1600s. The British East India Company is one such example, and its structure and strategy were starkly different from the Walmarts and Shells of today.

The corporations of today have become financially enormous and politically powerful. They transcend global boundaries and have a diverse workforce across diverse locations and time zones. They are governed by policies that guarantee relatively high levels of stability, and are kept under close scrutiny by an active civil society (at least in developed and developing economies).

A Growing Role

However, a larger negative externality has arisen from the growing importance and influence of the corporations. They are accused of being harbingers of unfettered capitalism. True, crony capitalism has accompanied the socio-economic growth the world has witnessed since the Industrial Revolution. Corporate governance failures, such as Volkswagen, do not shatter the public as much as a similar thing with, say, General Motors would have done back in the 70s.

But are those critics not too harsh on the makers of the world’s food, clothes, watches and accessories? Life is interlinked with corporations, which many have started to deem as merely supplementary to modern society, rather than indispensable.

Take, for example, a typical day in a developed economy such as the US. It starts with cereals, such as Kellogg’s. While on the way to the office, one picks up some coffee, probably from Starbucks. One elegantly wears their wristwatch, probably a Seiko. The car for the commute is probably a Toyota or Chevy. Even if one takes the subway, the coaches are from Alstom or Kawasaki. The air conditioner in one’s office is probably a Hitachi. To beat hunger quickly, one goes to a McDonald’s or a Taco Bell. One catches up with friends in the evening, probably over a Budweiser.

Scrutiny or Superficiality?

Civil society is an important pillar of the modern democratic world. The world needs checks and balances and they ought to provide that to minimise corruption and other societal evils. Civil society organisations now have taken a great interest in the work of corporations, and that is vital.

However, reports and white papers do not feed or provide a service to the world. Corporations do. They engage in market research, predict demand, align supply and fulfil the needs of the consumers. Therefore, civil society and activists need to balance their dystopian pessimism towards corporations with a reasonable sense of reality.

The majority of the world’s population want cheaper goods. Low priced stores like Walmart and supermarkets are a craze. It is a natural behaviour of humans to maximise their self-interest, something similar to what the game theory proposes. However, once the goods are sat on the shelves of people’s houses, many seem bizarrely comfortable questioning their source.

The Bigger Picture

Many complain about unfair labour practices and the unfair trade policies, for example. But in doing so, many forget that it is these policies and practices that keep the weight of our wallets intact. Apart from just that, they (the corporations who manufacture our essentials) also provide employment opportunities in large belts of countries like India and Bangladesh.

The writer belongs to a middle-class Indian family. While literacy and awareness have spread, this is only a certain small section of India. For the average Indian, what is the relevance of the country’s sweat shops? Does he or she have awareness of the issue? How do environmentalism and climate change impact him or her?

This point can be proved with the example of cars. Many cars on India’s streets are unsafe, as has been proved by various reports of the Euro NCAP. But at the end, they give the average middle-class Indian the pleasure and heightened social status that comes with owning a car, probably fulfilling a higher level of Maslow’s needs. Who makes that car for the average middle class Indian? How many people are employed in that process?

How do one explain the fairness of a sourcing or supply chain strategy, when all that the consumer wants is to get the maximum benefit at minimum cost? Sitting on their high horses, some global elites can think of environmental and social costs; that is after benefiting and having the luxury of everything. What about the poor kid from India who wants to grows up to be a software engineer against all odds? Why should he lose out on experiencing things because someone far away has reached a level of ‘enlightenment’, while for many years not even being bothered about his dilapidated house? A corporation can give him the perks that weren’t available to previous generations.

The Need for Growth

Economic growth is vital for both firms and societies. It improves the standard of living for the common populace. It funds the welfare programs that again improve the lives of the people living in sub-par standards. But where does this growth come from? Joseph Schumpeter posed an early challenge to the traditional view that growth came strictly from the accumulation of capital, labour productivity, or a more effective macroeconomic management of business cycles.

Rather, he maintained, the work in firms’ labs and by entrepreneurs led to creative destruction and renewal. Schumpeter argued that the development of new “combinations” by entrepreneurs, rather than the steady accumulation of capital, was the major factor behind long-term economic growth.

It needs to be understood that the world economy is a system. with both internal and external factors impacting its overall functioning. For the system to function effectively, all the parts should perform effectively. Corporations are essential to this system and restricting them will lead to a systematic imbalance. This imbalance may run steadily for quite some time, but will not be sustainable in the long run. If firms are imposed with draconian laws or are restricted from generating capital, that bubble will burst. India learnt it the hard way before it ultimately liberalised its markets in 1991.

An Indian Example

Prior to that, there was one such draconian law in place, called the Monopolies and Restrictive Trade Practices Act, as well as many other statutes that put caps on how much machinery private firms could use, and other limitations. Ultimately, the shackles had to be broken, as the system became too inefficient. Even the Public Sector Undertakings (PSU) were built on socialistic principles put forth by Jawaharlal Nehru, the first Prime Minister of India. They practically monopolised the market and were the largest employers before the LPG reforms boomed in India.

The result is that most of these PSUs are now bleeding the government’s coffers. They are largely loss-making and are a huge burden to the public exchequer and the taxpayer. The government has started selling its stake in many of these PSUs. This further illustrates the point that firms are not the forefront of government’s social programs. They are meant to generate profit, which is complementary society.

Hence, it is essential that the excessively negative view of corporations, seeing them as supplementary, be challenged. Corporations are essential to society’s functioning, and should be viewed as such. They are the sources of growth, employment and material fulfilment. To err is human, and so are corporations. Generalising the actions of certain individuals as the identifying elements or indicators of their larger group is certainly foolish, and the same goes when it comes to interpreting the misdeeds of some corporations.

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