Tuesday, July 17, 2007

Ignorance Leads Leaders into Error

Douglass Carmichael posts in the ILF (International Leadership Forum) an article: ‘Smith and Locke –some surprises, part 1’ (here):

Part of the reason that capitalism is so powerful as a control mechanism is because of its ability to use corporations. I wanted to see what, for example, Adam Smith in the Wealth Of Nations might have to say about capitalism. I ran a search on the text version and found 12 references. To my surprise every one of them was critical of the corporate idea. Here are some examples’...

There follows the usual misattributed references of ‘capitalism’ to the 16th to 18th century Chartered Trading Companies set up by either Royal Charter from the King or by Act of Parliament, which awarded exclusive legal territorial monopolies. They had nothing to do with 19th to 21st century corporations.

Moreover, Adam Smith died in 1790 and the word ‘capitalism’ was first used in 1854 William Makepeace Thackeray (1811-1863: today’s his birthday, incidentally!) in his novel The Newcomes. Second incidentally: his father was an official in the East India Company, the villain of the peace, which Smith bitterly criticizes, with good reason in Wealth Of Nations.

Douglass Carmichael then works up to his final, surpirsing and amazing conclusion in his penultimate sentence:

It is amazing to me that while it’s obvious why those people dependent upon this economy don’t look for this kind of criticism from Smith as their ideological father, those who are critical have not made more of what Smith actually says. The point for us it is that the corporations actually undermine markets. Corporations were created by the state through a chartering system that gave privilege in exchange for responsibility for a limited time period of, say 20 years. The undermining of this social contract, the abandoning of the corporate charter reciprocity, will turn out to be seen, I think, as one of the great mistakes of the 19th and 20th centuries. It is like a cancer in the DNA of the Constitution. In my ne[x]t post I’ll turn to John Locke and the strange origins of the idea of private property.

Comment
This has to be the most ridiculous statement I have seen in respect of this subject:

The undermining of this social contract, the abandoning of the corporate charter reciprocity, will turn out to be seen, I think, as one of the great mistakes of the 19th and 20th centuries.”

As Mr McEnroe would put it: 'you can't be serious!'

Douglass Carmichael turns history on its head. Having quoted Adam Smith he has not done him the courtesy of reading the chapter from which he has quoted. Did he not have Smith’s Wealth Of Nations to hand? Was he merely cribbing from a book of quotations?

It was allowing these corporations to continue under Royal protection that was the cause of the misery they created, not the ending of them.

The source of Douglass Carmichael's error lies in the immediately preceding sentence:

Corporations were created by the state through a chartering system that gave privilege in exchange for responsibility for a limited time period of, say 20 years.”

Does Douglass Carmichael not realise, which Adam Smith points out, that it was the state-backed (and enforced) exclusive monopoly status that was the cause of the evils committed by the East India Company and the sorry distress and cruelty suffered by the Indian population? Smith favoured competition, not monopolies, whether private or state-backed.

The Chartered Companies operated at long distances from the UK – it could take about a year or so for messages from London to reach the local Company officials and for their replies to be returned - and effective supervision was impossible from 10,000 miles distance. The exclusive monopoly powers, no competition, even from individual traders, large fortunes swishing about to bribe ‘inspectors’ and ensure safety from too close a parliamentary scrutiny, and a management structure unsuited to probity and good behaviour that were the causes of the problem.

The only Chartered Trading Company that Smith felt was (relatively) ‘clean’ was the Hudson Bay Company, but this was due to the frozen environment it operated in and the very narrow weather window in which the Company ship could reach the company depots in North Canada, thus deterring interlopers and keeping the Company's haul in produce down to what a ship could bring home annually.

It is usual in articles dropping in on this 18th-century debate to associate the joint-stock company structure of the Chartered Companies to modern shareholder, joint-stock, corporations. These were created in the 1870s in Britain (and copied elsewhere) in which their legal structures were policed, such that today they are fully subject to the laws of contract, to legal responsibility and to the full weight of legal redress should their officers misbehave. Recent court cases should be a comfort to all of us.

Smith approved of joint-stock companies where the capital requirements were too high for an individual or small group of individuals, where no monopoly privileges were granted, where the work process was routine (i.e., definable, not universal) and where the fate of the company was closely dependent on the probity of its officers. That is why he approved of joint-stock corporations such as the Bank of England, the Bank of Scotland, the Royal Bank of Scotland, the insurance companies and such like.

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