As hierarchical bureaucratic organizations, corporations conform neither to the individualism of the market nor to the egalitarianism of democratic politics. Yet they have been somewhat neglected by normative theory. Political philosophy has tended to focus on basic social institutions, and business ethics on the conduct of individual economic agents. Abraham Singer’s The Form of the Firm aims to fill this lacuna. The book’s method is immanent rather than foundational. Instead of assessing the corporation on the basis of a prior theory of justice, Singer first tries to understand why firms exist, charitably assuming that they serve some legitimate social purpose, so as to then ask whether the modern corporation lives up to this rationale, and how this rationale fits with the norms and principles implicit in other institutions.
The first part of the book provides a fascinating history of the economic theory of the firm. Markets promote the efficient use of resources because the price mechanism aggregates dispersed information about preferences, capabilities, and resources in a way that no centralized administrative process could. A corporation is not a market, however, even if it is created in part by voluntary agreements. It is puzzling that these islands of centralized conscious authority exist in economies otherwise regulated by the automatic forces of supply and demand. Singer shows that Chicago School economists influenced by Ronald Coase’s “The Problem of Social Cost” (1960) tried to solve this problem by arguing that firms were simply bundles of contractual relationships. If property rights are clearly defined and if there are no transaction costs (if reaching agreements is free), then the way in which property rights are assigned does not matter to the achievement of efficiency. In the hands of the second generation of Chicago School theorists, this “theorem” was used to show “how superfluous nonmarket mechanisms are” (p. 87).
Singer notes that in an earlier work, however, Coase had argued that transaction costs explain why firms exist. It takes time and effort to agree on the terms of a contract. The smaller the transaction, the greater these costs will tend to be as a proportion of the transaction’s value. Instead of contracting for a meeting Monday morning, for a draft budget Tuesday, for a conference call Wednesday, and so on, the entrepreneur enters open-ended contracts with employees who agree to submit to the entrepreneur’s authority (pp. 56–57). Oliver Williamson extended Coase’s approach. When agents have limited understanding, they will tend to be strategic in the information they disclose to others. Some transactions require investment in assets that can only be used to produce a limited range of goods. This need for “asset-specific” investments creates a problem of trust (p. 64). I may give you the impression that I will keep purchasing the good in the future, but then threaten not to do so after you have locked up your capital in a specific production process. The firm solves this problem by creating ongoing relationships that are structured by social norms rather than merely outcome-based reasoning. What explains the firm’s presence in a market economy, Singer argues, is that it involves “norm-governed productivity” (p. 132). The contracts that constitute the firm are those that partially transcend the standpoint of contract, we might say.
If firms are already taking advantage of norm-based coordination of activity, why not make these norms democratic? Singer’s response is that firms need to be able to compete against other firms and against the market itself. Firms tend to be owned by providers of capital because decision making is costlier the greater the diversity of interests within the group. Investors generally want to maximize profits, but workers will also be concerned with pay and working conditions, which will vary for different kinds of employees. Singer argues that the norms on which firms rely must fall within a range of “viability” (p. 156). At the low end, norms must be “thick” enough that they reduce opportunism and other transaction costs. At the top end, they must not be so thick (e.g., so democratic) that the firm gets outcompeted by firms whose culture is more efficient or by individuals coordinating their activities via the price mechanism.
Defenders of the “concession” theory of the firm would argue that the legal powers of the corporation are granted by the state (pp. 170–71). If citizens want to make this concession of power conditional on democratic structure, they can. Singer grants that corporations could not be created solely by voluntary agreements; limited liability for harm to third parties could only be created by the state (p. 183). Any given corporation is created by agreements among individuals for specific purposes, however, chief among them the generation of income. Singer maintains that a concern for efficiency and the need to respect the partly voluntary and contractual nature of the corporation should lead us to reject proposals to legally mandate workplace democracy (p. 188). States may nonetheless encourage the formation and persistence of worker-cooperatives, Singer argues, by introducing policies that address the sources of inefficiency such firms face. For example, because workers cannot pledge themselves as collateral, it is harder for their cooperatives to borrow; the solution is a cooperative bank (p. 208).
The final element of Singer’s theory of the firm is an account of the ethical responsibilities of individual economic agents. Profit-seeking competition is justified on grounds of efficiency. Markets predictably fail, however, in the face of conditions such as externalities and asymmetric information. The ethical duty of economic agents is not to create or take advantage of such failures, even when doing so is permitted by current legislation or when detection and punishment are unlikely. On this view, managers have responsibilities other than maximizing profits, but they do not necessarily have moral obligations to all of the firm’s stakeholders (p. 234). Singer extends the market failures approach by arguing that managers and shareholders also bear some responsibility for correcting “justice failures,” including violations not only of political equality but also of “material equality” (p. 249). For example, firms might have a duty to pay above-market wages if wages fall below the level of a living wage (p. 251). Singer is aware that such rules are “aspirational.” Business ethics cannot demand too much; otherwise ethical businesses will go out of business. And such ethics should rest on principles that are broadly shared; otherwise agents whose motivation is conditional on the expectation of reciprocity will not comply. Singer responds that we can interpret the justice obligations of firms as duties to help create the appropriate regulatory framework, rather than duties that constrain legally permissible economic choices (p. 252), and that we can restrict this aspect of business ethics to “the most basic, most egregious” forms of injustice (p. 256).
The Form of the Firm is a rich work. It connects intellectual history, economic theory, and corporate and political philosophy in a way that is sophisticated yet accessible. Its success is due in no small part to its method, which involves starting from what a firm is and why firms exist. This approach, however, does limit the book’s normative ambitions in certain respects. It is not really clear, for example, how we should trade off efficiency against workplace democracy. The answer might be that individuals should be free to assess this trade-off for themselves. However, to make that answer persuasive, we would need an account of freedom of economic association. The definition and distribution of property rights, as well as the structure of social policies, presumably affect the extent to which employment contracts count as voluntary. It is hard to assess calls for workplace democracy without a broader theory of social justice. As Singer points out, however, existing theories of justice have said little about the firm. Developing a better theory will require the kind of empirically informed normative analysis that Singer’s book provides.
