The horizon is not so far as we can see, but as far as we can imagine

The nature of a corporation and how it changed in the 1980s

By Matt Stoller

Let’s start with Pfizer, which announced the acquisition of generics maker Hospira for $17B this week. Pfizer isn’t a drug company.  Pfizer is a financial company that happens to own some labs and drug factories.  Pfizer’s business model is to acquire small companies who innovate, lay off their scientists, and ride the patent or other monopolies.  Former employees of acquired companies explain this clearly. So does Pfizer itself.

Pfizer is telling Wall Street that the acquisition will be ‘accretive to earnings’ and it will cut $800M in costs. Laying off scientists.  What this means, in reality, is that large pharma companies are actually innovation destroying machines. How did we get here?

Prior to the 1980s, Americans understood that corporations were private governments of resources and people.  Large corporation consolidations in the 1890s were done under the auspices of rationalizing the economy.  Then antitrust from the 1930s to the 1970s was done to force these private governments to act in the public interest. RCA, GE, Alcoa, Dupont, Xerox, etc – all were forced by antitrust actions to put their patents into the public domain.  The US gov’t structured markets as a way of ensuring that these political entities had checks and balances on their activities.

Antitrust was a Madisonian solution to the monopoly problem of the 1890s-1920s, which was understood as political NOT economic.  This had an incredible effect. Large companies, like Dupont, were forced to spend more on R&D instead of acquiring innovation.  Because they had to compete against smaller firms and they couldn’t acquire (due to merger scrutiny).  Pfizer’s business model, in other words, would have been illegal prior to the 1970s.

Most of the laws that forced this state of affairs are still on the books. The were just reinterpreted by Reagan.  Any President can simply go back to the pre-1981 model through executive action. Every merger is still reviewed by DOJ.

In the 1980s, an intellectual revolution took hold. Corporations were no longer private governments. They became property.  They weren’t political entities, but economic entities pursuing ‘efficiency’. Corporations exist only for shareholder benefit.  This idea was radical. Prior to this, few thought large shareholders were the only stakeholders, or even the most important ones.  Eliminating all other interests – workers, managers, customers, communities, national security, small shareholders – was truly radical.

It was a political fight, but the Reagan conservatives along with Wall Street Dems of the early 1980s won.  Liberal Democrats had focused their energies on important social questions, rather than the nature of the corporation.  The result was Wall Street primacy and a massive merger boom in the 1980s. Layoffs, offshoring, globalization, monopolies, etc.

This idea that these private governments – corporations – exist solely for shareholders has led to a dangerous unbalanced politics.  In which the industrial base, worker rights, small businesses, consumers, don’t matter. Even China’s strategic threat is irrelevant.

This is changing. Net neutrality is the first significant antitrust concept to emerge and take hold since the Reagan revolution.  Because tech companies and citizens intuitively understand but can’t articulate that telecoms are private governments, not just property.

Which brings us back to Pfizer. The ability to create/sell medicine is of deep public interest. Pfizer has a state charter to do this.  That Pfizer instead is full of financial engineers who generate cash by destroying access to medicine is increasingly understood.  Same with hospital monopolies. These should not be run to maximize cash generation over patient well-being. This is a consequence of the Reagan revolution in corporate governance. It is unsustainable. And the ideas behind it are stale and bad.

All it will take to reorganize our culture is relearning that corporations are part of our political system and need to be managed through a Madisonian checks and balances system of ensuring competition and the public interest as mattering.

Antitrust is popular, Zephyr Teachout got huge applause lines on it when she ran a shoestring campaign in NYC.  Net neutralit generated 4 million comments to the FCC. People get it. It’s simple stuff. The liberal lawyer elites aren’t there yet.  But we’re beginning to understand the importance of the government protecting private property from corporate predators.  And Citizens United is opening up a new (or rather old) way to understand how political corporations really are.

And that is why these ideas are coming back. And why our political system feels deadened, but is on the verge of renewal.

(And to make the point another way: In 2008, Pfizer/Wyeth spent $13B on R&D. 2009, Pfizer bought Wyeth. In 2013, the combined company spent $6.55B on R&D. Down 50%.)


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  1. Anyone who thinks that executive orders are ineffective, or that they have “only limited impact” should read this piece carefully. Also reading this should be anyone who thinks that Obama is the first president to flout the constitutionsl duty to “assure that the laws are faithfully enforced.”

  2. Paul K

    I would be very interested in a companion analysis of the nature of the corporation in China. Can their recent success be explained in part by their avoidance of this trap?

  3. Keith Werner

    I like the idea of looking at corporations as private governments that need checks and balances placed upon them to steer their towards promoting the common good. It would be rhetorically useful to have some important thinker quotes to support that idea, especially if they were from the ranks of our “Founding Fathers.”

  4. Rostale

    Or we could turn their model around. Instead of “privatizing” Social Security, incorporate it, create a corporation where the american people are the shareholders, and compete in the free market. Buy up a walmart competitor and expand it, have it start sourcing more american made products, as long as prices stay competitive it will be easy to sell americans on the idea of directing their purchases to a company they collectively own. A slogan could be “whose capital are you supporting?” Then you would have a corporation with every incentive to increase US employment and drive up wages, and with an accurate cost of living adjustment for social security payouts, also every incentive to keep prices low. Make the american people into the shareholders and you will find wall street sock puppets (IE economists) singing a completely different tune about shareholder primacy.

  5. Vosasim

    This has been Microsoft’s business model from roughly 1992 onward.

    Basically FOSS was a desperate attempt by software developers to get some sort of technical progress (even if they wouldn’t themselves get much in the way of compensation for it) to happen in spite of it having been effectively abolished by the rise of the Microsoft model.

    Things are different now–the new model is to trickle out miniscule amounts of carefully restricted and tightly circumscribed technical progress to a long-suffering public and use their resulting heart-felt gratitude to neutralize any approbation that might result from your participation in establishing an horrific panopticon state.

    It’s not always easy to get the balance right; Google Glass failed because they got so carried away adding “fetter” functionality to the device they neglected to actually add any “tool” functionality that might encourage people to part with their money in order to have one.

    I guess it’s part and parcel of an awkward transitional era between consumerism/industrialism and neofeudalism that they’d get a bit mixed up at first and try to sell people their own fetters.

  6. Formerly T-Bear

    The corporation does exactly what it was originally designed for. That is if you know what that was. Otherwise be satisfied with being blind, deaf and dumb.

  7. scruff

    I like the way you describe corporations as “private governments”. I have been trying to get people to understand this concept for years; removing official government influence from capitalist enterprises only removes *government* in the conventional sense of the word, it doesn’t remove *governance*. Concentrations of wealth and capital allow individuals to govern the lives of everyone else, so the libertarian solution doesn’t actually sidestep government at all, it just removes accountability.

  8. great post, just one question. was this written by Ian or Matt?

  9. V. Arnold

    @ T-Bear

    I had to puzzle your post at Ian’s; but I think I got it. My experience with (1st hand) corporations is both eye opening and real. Real as in their ruthlessness. I saw that back in 1967 when I was 22 and knew exactly what I saw/experienced on the ass end of betrayal and double cross in a business deal. So, almost 50 years on, what’s changed?
    Nothin, absolutely nothin, huh! (you either get it or you don’t!)

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