Not so very long ago two of The Economist's greatest writers -- John Micklethwait and Adrian Wooldridge -- were calling the corporation "the basis of the prosperity of the west and the best hope for the future of the rest of the world." Of course, not so long ago, The Economist was a reliable defender of free markets and classical liberalism. But things have changed.
Apropos of which, in the latest issue of the Economist, the usually reliable Schumpeter column (is Wooldridge still writing it?) opines that:
The golden age of the Western corporation ... was the product of two benign developments: the globalisation of markets and, as a result, the reduction of costs. The global labour force has expanded by some 1.2 billion since 1980, with the new workers largely coming from emerging economies. Corporate-tax rates across the OECD, a club of mostly rich countries, have fallen by as much as half in that period. And the price of most commodities is down in real terms.
Now a more difficult era is beginning. More than twice as many multinationals are operating today as in 1990, making or more competition. Margins are being squeezed and the volatility of profits is growing. The average variance in returns to capital for North American firms is more than 60% higher today than it was in 1965-1980.
If The Economist had said the Western corporation is in trouble because of over-regulation, I would have agreed. But that's not what they're saying (admittedly, it's a little hard to figure out what is the precise thesis of the article). They seem to be saying that the Western corporation as an institutional form is in decline.
If so, I have problems with that claim. First, as noted, the Economist fails to differentiate between public and private corporations. To be sure, the article notes that "in America the number of firms listed on stock exchanges has fallen from 8,025 in 1996 to about half that number now." But only a tiny fraction of those firms entirely ceased to exist. Many were acquired by other firms, which hardly suggests an institution in decline. Many more went dark, which, again, is hardly indicative of a failed institutional form. Indeed, many of those formerly public corporations are doing well. So Western corporations--writ large--are hardly in decline.
Second, and related, while The Economist opines that "With luck, the tale of the relative decline of the Western corporation will also be a tale of the reinvention of capitalism as new forms of companies arise to seize opportunities from the old," it overlooks the fact that that is already happening as private equity firms continue to rise in importance. Critically, however, most private equity portfolio companies are--you will have guessed--Western corporations. So not a demise, not an end of an epoch, just a change from public to private ownership.
Third, The Economist could have said more about the reasons for the purported decline. The going dark phenomenon, as I have demonstrated elsewhere, is not due to any institutional failings on the part of the corporate form but is mainly due to the rapidly rising regulatory burdens the US and other Western governments have been placing on their public companies. So if The Economist is right about public corporations being in decline, we could get a huge jump on reversing that phenomenon by slashing the regulatory burdens created by quack laws like Sarbanes-Oxley and Dodd-Frank.
Finally, The Economist tells us that Western corporations are facing "the rise of emerging-market competitors. The share of Fortune 500 companies based in emerging markets has increased from 5% in 1980-2000 to 26% today. These firms are expanding globally in much the same way as their predecessors from Japan and South Korea did before them." How many of these competitors are corporations based on the Western model, one wonders? In any case, we've heard this story before. Go back to the 1980s, for example. Remember Japan Inc.? Remember how the Japanese were going to end up owning everything? Remember "The Japan that Can Say No?" Western corporations saw off that challenge. Given the trouble China is already having, plus their demographic problems, there's no reason to think Western corporations cannot meet this challenge.
I don't know if the estimable Adrian Wooldridge wrote this column, but if so I'd like to see him address at more length the disparity between the pessimism and lack of clarity of this column and the optimism and clarity of The Company: A Short History of a Revolutionary Idea
