Principle 6: Small capitalized companies are better than giant corporations

The empowerment of citizens to perform their desired economic activity will increase the division of labor and the overall value generated by society:

The division of labour..occasions..a proportionable increase of the productive powers of labour. The separation of different trades and employments..seems to have taken place, in consequence of this advantage. This separation..is..carried furthest in..countries which enjoy the highest degree of industry and improvement..In every improved society, the farmer is..nothing but a farmer; the manufacturer, nothing but a manufacturer (WN, Book 1, Chap. 1, Par. 4). Each individual becomes more expert in his own..branch, more work is done upon the whole, and the quantity of science is considerably increased by it. (Par. 9)

Although corporations excel in harnessing and coordinating the division of labor internally, their selfish-interest prevents them from integrating and coordinating with other agents in the market, increasing the possibility of becoming either a monopoly if they succeed or a big loss if they fail. Close cooperation is necessary to ensure economic success:

..if we examine..all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided..the easy and simple manner in which he is commonly accommodated. (Par. 11)

In a truly free society, corporations are actually detrimental to commerce:

The pretence that corporations are necessary for the better government of the trade, is without any foundation. The real and effectual discipline which is exercised over a workman, is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence. An exclusive corporation necessarily weakens the force of this discipline. (Par. 86, emphasis added)

social-networking-va4business

The cooperative model excels at integration but is weak at capitalization (Von Pischke & Rouse, 2004). The solution is to create small social companies that work together in a social consortium network. This consortium will allow both member investments and profit-sharing (like cooperatives), stock ownership by other companies linked to the consortium (like corporations), and external funding from local sources. This will render the unproductive accumulation of wealth detrimental to the network just as an unfairly-cut pie causes friction among people. The vigilance of the network against accumulation and concentration of power will prevent large companies from doing harm to society:

Were it possible..for one great company of merchants to possess..the whole crop of an extensive country, it might..be their interest to..destroy..a considerable part of it in order to keep up the price of the rest (Book 4, Chap. 5, Par. 43). This monopoly has so much increased..that, like an overgrown standing army, they have become formidable to the government, and upon many occasions intimidate the legislature. The Member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire..great popularity and influence with..men whose..wealth render them of great importance. If he opposes them, on the contrary..neither the..highest rank, nor the greatest public services can protect him from the most infamous abuse..personal insults..real danger, arising from the insolent outrage of furious..monopolists. (Chap. 2, Par. 43)

In the initial stage, the microfinance-inspired system of group lending can be implemented with local banks or the government providing the initial funds to the social consortium. As the business grows, profits can be reinvested and additional funds can be sourced from contributions of members and associated businesses, such as supplier and customer companies. The latter stage operates like a cooperative banking system. Having joint liability will ensure group discipline and support and encourage the members to work closely with each other.

Table 1. The similarities and differences between corporations, cooperatives, and social companies

Converting a corporation into a social consortium

Let us say a heavily indebted car maker named Detroit Trucks Inc. is bankrupt. It has 1,000 employees producing two different product lines. Instead of letting it be bought by a rival corporation to gain a monopoly, the government will bring it under a socio-economic restructuring program by assuming its debts and splitting the corporation into two competing consortiums (one for each product line). Each consortium will be made up of social companies organized according to its division of labor and capital.

Each company can sell its dividend-earning shares to its workers through salary deduction or outright purchase, thus giving each worker the right to a share of the profits. As they can now realize the profits of their work, they will be motivated to succeed and the company will gradually use its retained earnings to buy off the government’s stake, similar to how a baker can pay off his debts in subsequent iterations in Figure 3 in a debt scenario.

Detroit Corporation (before socio-economic program)

Cash 0 Debt 20,000,000 Fixed Assets 10,000,000 Private Equity (10,000,000) Total Assets 10,000,000 Total Liabilities 10,000,000

Detroit Consortium (combined) (start of program) Cash 1,000,000 Debt 0 Goodwill 9,000,000 Gov’t Equity 20,000,000 Fixed Assets 10,000,000 Private Equity 0 Total Assets 20,000,000 Total Liabilities 20,000,000

Detroit Consortium (combined) (1st iteration of the program) Cash 1,500,000 Debt 0 Fixed Assets 10,000,000 Employee Equity 500,000 Goodwill (Gov’t) 8,500,000 Gov’t Equity 19,000,000 Supplier’s Equity 250,000 Retailer’s Equity 250,000 Total Assets 20,000,000 Total Liabilities 20,000,000

Tables 1-3. A hypothetical balance sheet of a corporation converted into a social consortium

During periods of low demand, each social company will be free to maximize the use of its capital in its own way in order to avoid the need to lay off workers, allowing the possibility of full employment in a society. As production increases above capacity or as new product lines are demanded, they will spinoff new social companies or independent consortiums, similar to a biological cell splitting or a seed falling off and growing separately from its parent.