Legislating mandatory corporate death

I didn’t really expect that my recent posts about the somewhat indeterminate aims of the “Occupy …” protest movement would result in a lively discussion thread about what I imagined was the entirely uncontroversial proposition that the limited liability corporation is by and large not only a positive thing but a key element of the modern capitalist economy. For Socialist Alliance types and at least one ultra-libertarian, it isn’t uncontroversial at all (though for almost diametrically opposing reasons).

I was discussing this with my CDU Law School colleague Geoff James over lunch a couple of days ago when he mentioned a corporate regulatory policy idea that I hadn’t heard before. Given that the corporation is a “fictitious legal person”, Geoff said, why not take the analogy to its logical conclusion and legislate a mandatory corporate lifespan? After (say) three score years and ten all corporations would be compulsorily liquidated and their assets and business undertaking sold.

Apparently this was a policy of the old Australia Party founded in the 1970s by eccentric transport tycoon Gordon Barton. Be that as it may, it’s an interesting if fairly radical idea. I’d be interested in the reactions of readers, especially any economists among us.

In a sense, it would bring the corporate structure more in line with that of trusts, which once had a maximum life span (perpetuity period aka rule against remoteness of vesting) delightfully defined as a “life in being and twenty one years”. That equitable description gave rise to the equally quaint drafting convention of maximising the duration of any trust instrument by providing for vesting on the death of the “last currently living heir of Her Majesty Queen Elizabeth II”. Sadly, most states and territories have now legislated for a more prosaic perpetuity period of 80 years or thereabouts.

Legislating for a maximum corporate life span might also be argued to enhance the prospects for business growth and productivity through harnessing Schumpeter’s notion of “creative destruction” as the principal engine of capitalist growth and renewal. However it may be a bit more complex than that, as Arthur Diamond discusses.

Schumpeter’s central message is that the process of creative destruction describes the form of competition in capitalism that is capable of dramatic improvements in the quantity and quality of our lives (Diamond, 2004). …

In Capitalism, Socialism, and Democracy, Schumpeter had a lot to say about his process of “creative destruction,” not all of which is given equal emphasis by those using the phrase today. Here, I will distinguish two accounts of the process of creative destruction: Schumpeter’s original ‘big-is-better’ account, and a more recent ‘small-is-better’ account. The process of creative destruction, in both Schumpeter’s original, and in the more recent account, is a process in which technological advance is the main source of economic growth and improvements in the quality of life. In both accounts, a significant part of the incentive to produce leapfrogging innovations is the prospect of achieving monopoly profits. Traditionally the main source of monopoly profits would have been through patent rights. But currently a full account of monopoly profits would also include network externalities as a source (as with eBay and Microsoft).

Beyond what the two accounts share, Schumpeter’s original ‘big-is-better’ account also claimed that large, monopoly firms are the most able and the most likely to produce new, leapfrogging innovations. This version is the one usually, but not always1, associated with Schumpeter’s own views. The ‘small-is-better’ account identifies smaller, often start-up, firms as the most likely source of new leapfrog innovation. I argue elsewhere (2004) that the ‘small-is-better’ account is what the vast majority of authors have in mind when they apply the phrase “creative destruction” to competition among computer and internet related firms.

Schumpeter’s claim was that the new process or product that results from a dynamic leapfrogging innovative competition, is more important in understanding capitalism, than the static standard model of price competition that emphasizes unconcentrated markets as the means to lowering prices, where the goods and the technologies are assumed constant. If one set of rules (standard price competition) maximized one good result (lower prices for consumers); and another set of rules (creative destruction) maximized another good result (new products), then we would have to measure the utility produced by each of the good results, which is very hard to do. What if the creative destruction is not only best at producing new products, but also, in creating new processes, is also best at lowering prices for consumers? Then we would know the essential fact about capitalism, without having to decide whether consumers benefit more from lower prices for a constant set of goods, or from a set of goods of higher price, but of increasing variety and quality.

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One thought on “Legislating mandatory corporate death”

  1. Hi ken,
    Thats a good way, but what if the corporate does not want to go easily, can we euthanise a corporate body against its will or can the the shareholder euthanise it, better corporate governance can weed out brats. Can we do that with regards to good business practices, is good profits bad or do we need an ethically good company doing bad with the numbers, depends on which side of the line we stand, shareholders or consumers.

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