Social Justice and the Corporate Form

The other day I was having lunch with my good friend Seth Rosenblatt, whom I met years ago when we both served on the San Carlos Elementary School Board. Among many other things, Seth is my go-to guy on economics.

At one point during lunch we ended up talking about how each of us thinks allowing corporations to play a role in politics causes significant distortions of our society. That’s been a difficult problem for lawmakers to address, even though it’s a widely understood problem. Why? Because of the choice we made as a society to grant corporations many of the legal rights associated with flesh-and-blood individuals.

But why was such a choice made? It’s certainly not an obvious one. Whatever else it might be, a corporation is clearly not a living, breathing entity.

The answer lies in an aspect of human nature often overlooked in discussions of economics by lay people: humans are risk averse. We will reject, say, a $1 dollar bet that gives us a 50% chance of winning $2…even though, arguably, we are, on average, no better or worse off by placing the bet, and so shouldn’t care one way or the other. In fact, we instinctively demand much more than a better-than-breakeven return before we’ll place any bet.

Overcoming risk aversion is precisely the reason the corporate form was developed centuries ago. By law, a corporation shields its investors from bad economic bets: they can lose their investment, but irate customers, victims, etc., cannot come after the investors’ wealth or income that has not been invested in the corporation.

But why did we put that risk shielding in place? It clearly isn’t in the interest of people whose interests are, or could be, harmed by corporate failures.

The answer is simple: because it made us, individually and collectively, enormously wealthier than we used to be. Whatever problems they cause, there’s no denying corporations have dramatically increased collective and individual wealth and income. That’s why every human culture I’m familiar with has allowed the use of some kind of corporate form.

Risk aversion, by keeping us from placing reasonable bets, denies us the benefits reasonable bets produce. Those tantalizing benefits encouraged us to figure out a workaround for the limitations of our nature. If we had to squint past treating an artificial construct as a something similar to a living, breathing entity…well, humans are very pragmatic. We don’t argue with success, however much rationalization we need to do to justify it.

Besides, it was an easy step to take. Most people would reject as immoral and unethical punishing someone because their friend, without their knowledge or consent, injured someone economically. Once you accept a corporation as an entity in its own right, granting investors a risk shield follows naturally from that same perspective*.

But here’s the thing: despite how it’s sometimes described by business people lost in rapture, the corporate form is really just a dodge, a convenient fiction. It’s purpose is to let us, collectively and individually, create wealth and income that would otherwise be unavailable because of the limitations imposed by human risk aversion.

Why haven’t we thought about using the exact same logic in the realm of healthcare? Or having a decent place to live?

We all know talented and capable people who are kept from living up to their potential — and thereby benefiting all of us, not just themselves — because of the accidents of fate. A seriously ill family member, preventing someone from using their talents and abilities in a new, more demanding role at a different company, when pre-existing conditions keep people from getting health insurance. A child who has to “play it safe”, or drop out of school, because of the loss of a family member, or because he or she is an orphan.

People who worry about having a roof over the heads of their family rarely have the bandwidth to launch new economic enterprises, no matter how smart or talented they are. If you have to worry about starving, you’re not going to be able to use whatever creative talents and abilities you have, except in the pursuit of food.

These kinds of risks clearly limit what we are willing and able to do as individuals. Even more so than how the risk of losing one’s wealth limits one’s interest in investing it in new, valuable ventures.

So it’s not surprising that most advanced societies have taken some steps to mitigate the impact of such risks. Things like Social Security and Medicare were enacted, at least in part, to do so. Another example is public education. In addition to everything else it does, being better educated makes you better able to assess and manage risk.

Let me close with the following question: if giving people more peace of mind, and some kind of backstop to life’s vagaries, frees them to be more creative and economically active — which benefits all of us — why aren’t we doing more to insure against such risks? After all, based on the wealth (pun intended) of experience we have with the corporate form, we already know the payoff is there!

Something to think about.

* To keep things simple, I’m ignoring cases where investors knowingly participate in causing economic harm through a corporation. The law contains provisions for “piercing the corporate veil” for that, and other situations, when the facts justify it.

Std Dev X * Std Dev P >= h / 2

Today, in Gregory Benford’s book The Berlin Project, I came across the first quantum mechanical dirty joke I’ve ever seen (it’s no doubt an oldie, but, hey, I never actually studied quantum mechanics).

It’s attributed to Enrico Fermi:

Poor Werner Heisenberg! When he finds the right position, he loses his momentum. And when he has the energy, he doesn’t have the time.

I find it a grand commentary on the human condition that one of the most profound and subtle products of the human mind — quantum mechanics — can be the basis of dirty jokes :).

Sacramento, Here I Come!

This is admittedly a shameless piece of self-promotion. OTOH… it’s way cool, and I’m both excited and proud to have been chosen for this role (thanx, Congresswoman Speier!). I only wish my vote would have been part of electing the first woman President of these United States.

Electoral College Daily Post

Follow-up Daily Post Article

Are They Trying to Torture Us?

Okay, I confess up front this is a bit of a rant. And I’m sure there are logical explanations for what we ran into today…but they sure escape me at the moment.

Yesterday we bought a house that we’re going to remodel and make our primary residence. We’d been working for about a week with a mortgage specialist at a large, well-known bank on funding it. We thought we were pretty much done with arranging the financing.

Boy were we wrong!

Continue reading »

An Historic Election

All Presidential elections are at least potentially historic. But I’ve been looking forward to the 2012 election for many, many years. If you’re curious as to why, read on.

Continue reading »

I Finally Understand Money!

That probably sounds like an odd comment from someone who spent his life in finance, but bear with me.

Being of a scientific bent, and having worked in a number of small companies and start-ups, I’ve found the process of wealth creation to be more than a little odd. Think about it for a second: a bunch of folks have an idea, they get together with some other folks who have a credit surplus (i.e., arbitrary markers on file at a bank), an abstract entity (money) that is more of a promise than a real thing is exchanged, and, voila, work is performed and wealth is generated! It always struck me as akin to the old physics cartoon showing an Einstein-like character at a blackboard. In the midst of a long series of equations are the words “…and then a miracle occurs” :).

Continue reading »

That’s My Boy!

Well, actually, he’s a young man of 19 years, and would have every right to be annoyed at being referred to as a juvenile. But hopefully he’ll cut me some slack on this, since “That’s My Young Man!” just doesn’t have quite the right ring to it… 🙂

Our son and a bunch of his mates decided they’d rather hike than snowboard over the MLK weekend up in Washington State. So they hightailed it out to Orcas Island via ferry for a little backpacking excursion.

In the rain.

And the cold.

But — and this is the important part — they had a marvelous time. Plus, they managed to avoid getting eaten by bears, which is always a good thing on a backpacking trip.

I would never in a million years volunteer to go hike and sleep in the rain. Which is why I’m proud of him for doing it. I’m glad at least one of the men in this family isn’t put off by little things like wet clothes, a wet tent and a wet sleeping bag!

No Impediment to Enjoyment

We saw The King’s Speech last night, and boy was it a wonderful movie! I didn’t know that George VI had a lifelong stuttering problem, which he fought to overcome when he unexpectedly became king.

The screenplay was excellent and the performances were marvelous, Colin Firth’s in particular.

There’s a particularly funny scene where the Archbishop of Canterbury realizes His Majesty is being treated by <gasp> a commoner. Only to find out to his horror that the situation is in fact much, much worse, because the person is not just a commoner, but an Australian commoner.

Apparently Aussies were not held in high regard in Merry Old back then. Maybe not now, either, for all I know :).

Almost There!

About a year ago I started a new exercise regime which is based on using an elliptical machine as many days a week as I can tolerate (currently I do three on, one off). Shortly afterwards, I set myself a goal of burning 1,000 calories in 40 minutes.

Why 40 minutes? Because my gym limits machine time to 20 minutes “when all the machines are busy”…and I figured 40 minutes was about as far as I could push the limit :). The 1,000 calorie goal was set very scientifically: it’s a Big Round Number. Besides, when I started out it was pretty far away from what I was doing.

Today I managed to do 990 calories in 40 minutes. Couldn’t quite hit the goal, despite a big effort. But the “end” is clearly in sight, and it’ll come one of these days.

And that’s today’s narcissistic update :).