Why Corporate Work Looks Bad, Actually Isn’t Bad, But Also Isn’t Best

-- By GregJohnson - 15 May 2009

Why Corporate Work Looks Bad

Big firms support corporations. It’s easy to criticize big firm work and the corporate establishment as impersonally using people as means rather than ends. But this leads to talking past those who think that the classic rational actor model has at least some significant value. I want to criticize big firm corporate work from within the rational actor model.

Individual rational actors act to selfishly maximize value. Risking injury and death to others, damaging the environment, and destabilizing sectors of the economy, are all factors to consider only to the extent they harm the actor. Like individual actors, corporations act to maximize value. But because they are focused on their owners’ value (rather than the value of some sort of self), they’re peculiarly ruthless agents that, put colorfully, have sworn their lives to their owners and don’t fear self destruction. (They’re also essentially regulatory creations, notice: we could have private enterprise that consisted only of sole proprietorships and partnerships, as in fact we did have before corporate charters were invented.)

In particular, a corporation, unlike an individual or partnership, has tremendously skewed risk-taking incentives because its owners are shielded from any downside risks beyond the capital they put up. After funding the up-front costs, the owners can extract profit if the venture succeeds and yet walk away if it fails spectacularly. Say, for example, a risky product can be marketed for $1 million. There’s a 50% chance it will produce $50 million in revenue and a 50% chance it will incur $100 million in personal injury liability. This would not be a rational choice for an individual or for society. Yet it would be a very rational choice to create a corporation for the purpose. On average, the corporation’s owners would make $24 million. Half the time they’ll make $49 million. Half the time they’ll lose $1 million (and leave society to absorb $100 million in damages).

Why Corporate Work Actually Isn’t Bad

Corporations produce a lot of value. Like loans, easy fractional ownership helps to put money toward the best available uses. The ruthless agent downsides are hard to separate from this value.

If there were no legal requirement that directors act in the interest of owners, corporate directors could spend the funds on pet do-gooder projects. If investors could be held liable for unlimited liabilities of the corporation, then buying a single share of stock would risk individual financial ruin. In either case, investment would be dramatically curtailed.

Of course, these “presumable” changes in behavior might not be so dramatic. Lloyd’s of London historically attracted more than enough investors willing to take on unlimited personal liability. Moreover, accepting less investment may well be the best choice if it means preventing enormous harms caused by corporations running amuck. I submit, though, that the success of our society in improving quality of life across the board, more so than before corporations became the predominant form of capitalism in America and throughout the world, suggests that the current system is not too fundamentally amuck.

Moreover, classical rational actor economics acknowledges the excesses of single-minded selfishness and has a solution: regulation and torts. For example, environmental regulation internalizes externalities by imposing fines for inefficient behavior. Regulation also prevents many inefficient risks before they can be taken—through capital requirements for banks, safety laws like pharmaceutical preapproval (without which many corporations would surely take the $1 million bet outlined above), margin requirements, and so forth.

Regulation is a constant battle. Witness the rise of CDOs and other derivatives, blatantly to evade margin requirements. Regulatory mechanisms may at times give rise to venal, lucrative revolving doors. But that’s not cause to scrap the whole system. On the whole, the game of whack-a-mole seems to be working, and there’s every reason to think that with experience it will work even better. In another hundred years, K-rims, Superfund sites, and hedge funds leveraged to more than the country’s GDP will hopefully seem like bizarre outliers from another era, a product of naive initial attempts at regulation.

Supporting the current corporate system by working for a big law firm that supports the system amounts to accepting an imperfect situation, yes, but it would be childish to refuse to take part in a good system merely because it’s not yet perfect.

Why Corporate Work Isn’t Best

Other work is more laudable, though, precisely because it’s value is less obvious. A law reform litigator who increases the opportunity, productivity, and dignity of thousands of people may earn very little. A public defender doesn’t get a bonus for saving a man from spending 10 extra years in jail. A highly-capable government regulatory lawyer earns a standard government salary. But there is tremendous value in doing these things, tremendous value that—unlike the value created by working for a big firm—is likely to be passed over unless bright young people like us go looking for it and bring it about.

But deciding against big firm work needn’t be about altruism. Working independently and public-mindedly can be highly rewarding. As Moglen has stressed, but as often seems to be glossed over, there is tremendous financial opportunity to be had in identifying people who are eager to fund accomplishing something that ought to be accomplished anyway. A huge array of simultaneously profit-making and good-doing opportunities exist apart from those that have been packaged nicely and presented to us at retail prices by law firms.

Moreover, as a psychological matter, if one’s job happens to be to do support the part of a good system that, on a small scale, is bad it’s but small comfort to tell oneself that the system is good on the whole. While supporting a system that’s good on the whole may be justifiable, it’s just plain more fulfilling to try to make it better than to fight to keep it like it is.