Personhood

Critics of large corporations very often center their anger on the notion of “personhood”.  The concept gained much more notoriety after the terrible Citizen’s United case a few years back.  On the left the idea that a corporation should be a legal person has become an anathema.

They are wrong.  Personhood is a valuable concept that needs to be preserved.  Our criticism ought not be about the legal nature of a corporation, it ought to be about the lack of regulatory enforcement of the contract with society that is a function of our giving corporations that privileged status.  In a nutshell: we have forgotten that the state is the creator of corporations.

There are very few economists who grasp the difference between a firm and a corporation.  I have attempted to describe that difference on more than one occasion and feel I haven’t made much progress!  Personhood is an aspect of the difference and is, in fact, central to it.

We use the word “firm” to describe an economic entity.  A firm is a cooperative structure created to oversee the complicated production processes demand by our increasingly complex economy.  It occupies a space in the economy that opens up because the market can only mediate simple transactions.  As the information content of transactions rises we need to create new institutions to mediate them — institutions that can marshal and channel the information appropriately.  Markets cannot do that without incurring prohibitive transaction costs.  Besides, and beyond transaction costs, the very act of cooperative production implies the need to assemble capital, people, machinery, and expertise of various kinds through time.  That is an order of complication that a market just cannot sustain.

That, of course, is just my version of it, but the general idea is constant.  A firm is an economic concept.

But, during the early years of industrialization, when the need to put economic activity outside the marketplace in order that it could be realized became obvious, early firms looked around for a method to mitigate the risks inherent with that assemblage of assets and, especially, with the problem of time.  Fortunately for those early pioneers there was an existing legal form they could place the firm within.  That form was the legal person known as a corporation.  Being a legal person bestowed on a firm all sorts of vital privileges that went a long way towards solving the business risks that were beginning to pop up in the early industrial era.

Corporations had been around for millennia.  The Romans had their own version.  The Catholic Church had become particularly attached to the idea of legal personhood.  The attraction was, in particular, the longevity of a legal person: it doesn’t die.  So assets owned by a legal person can continue to be in use long after a generation of custodians of those assets has passed away.  The disruption caused by having to dissolve the association and dispose of the assets at the death of a partner, or other custodian, is obviated if the person owning those assets has an infinite life!

Similarly, a legal person is an entity that can appear in court, it can enter into contracts in its town name, it can be sued and it can sue.  These rights massively simplify the social impact of the entity housed within the corporate shell.  Outsiders can easily identify who to sue.  They don’t have to go to the expense of chasing down a whole bevy of miscellaneous actors, they can target just one.  And so on.

Then there is the limited liability of the contributions to the assets housed within the legal person.  Since those assets are not owned by any one individual, but are owned by the corporate person, the financial contributors to the cost of those assets and, crucially, to any liabilities that accrue to the activity of those assets, are shielded from direct personal responsibility for those liabilities.  This is a huge advantage and makes it much more easy to raise sufficient funds to procure the assets needed to undertake large-scale industrial activity.  It also insures against the specificity of those assets: since many industrial assets have only one use, it is a very high risk to fund them.  Limited liability was a significant risk reducer and thus encouraged development that might not otherwise have happened.

So legal personhood was neither a modern notion, nor a creation oof capitalism.  It was a pre-existing notion, much used by medieval and earlier institutions, precisely because it solved major management problems that are not specific to industry.  In the words of Pope Innocent IV during the thirteenth century:

“Cum collegium in causa universitatis fingatur una persona”  The entity is in corporate matters figured as a person

Personhood is a vital piece of legal technology that allows much of modern business to exist.  We ought not decry it.

What we need to do is to focus, instead, on enforcing the state’s supervision of corporations because their ability to use personhood is a gift from the state.  They all exist because they have a state charter allowing them to exist. Society has, therefore, a right to ensure that corporations fulfill their side of the bargain.  They need to behave in a socially responsible manner or risk losing their charter and the benefits that come along with it.

Oh, and that charter creates the corporation.  Which, much to the annoyance of mainstream economists, means that the corporation exists prior to receiving any funding.  Thus the contributors of funds, we often call them shareholders, cannot own the corporation.  It existed before they showed up.  They simply contributed funding to a pre-existing entity.  Corporations, being legal persons, own themselves, they are not owned by outsiders no matter how much funding those outsiders may have contributed.

Which kind of blows up the entire body of thought known as “shareholder value”.  Milton Friedman was in this, as in so many other things, an ideologue and not a very good analyst.

But that’s another story.