Are Corporations Necessary?

Division of labor results in specialization. This was clearly established by Adam Smith more than 200 years ago and has been a central tenet of the modern capitalist economic system. We are all specialists. We depend on others for most of the goods and services that we need. For over a 150 years now, corporations have been the primary mechanism by which we have had access to these. Corporations made sense in the past. By pooling together large sums of money and bringing together people working towards a common purpose, corporations could lower the cost of providing us with what we (think we) need. Changes resulting from industrialization helped this process along. National markets became possible and cost effective to serve. International trade progressively became easier as international linkages increased and strengthened and the cost of transportation and communication steadily fell. Firms could become larger and larger in size and thus service their customers with ever greater cost effectiveness.

However, a funny thing has happened. The same factors which helped spur the rise of corporations kept developing and today increasingly favor alternative forms of business association. Transportation and communication links steadily strengthened, became cheaper and more importantly became more personal. National markets were woven more tightly together as internal trade barriers were eliminated. WTO was envisioned as a means of lowering barriers for corporations. It has had the effect of also doing the same for looser associations and individuals.

However, it is still difficult to answer whether corporations can be done away with entirely. It is now certainly possible to for smaller firms to compete successfully against larger ones in many areas of the economy. Many but not all. In some areas (like petrochemicals) size definitely matters and here larger corporations have a definite advantage. Even in these areas, there are niches where further development is possible and smaller, looser organizations are often better equipped to tackle such areas. Certainly, corporations as they have evolved have imposed liabilities on societies and individuals which are only now becoming apparent. But if corporations are to be done away with, what can replace them. To that, there is no easy answer.

Related articles

• Continuing the Conversation on Free Trade (economix.blogs.nytimes.com)
• "Was Adam Smith Wrong on Rising Real Wages And the Spread of Opulence?" (economistsview.typepad.com)
• Why corporations are psychotic (psychologytoday.com)