If there is one bugbear that stands as paramount for the American progressive, it is the corporation. Corporations are viewed as amoral at best, immoral at worst, exploitative of their workers, dismissive of environmental or social concerns, and existing purely in the name of profit. They are routinely blamed for the great recession, global warming, and income inequality. So why are progressives and Obama’s Department of Labor pursuing policies that will lead to the creation of more and bigger corporations? Because the political Left’s paymaster, organized labor, needs corporations to exist and thrive.
Corporations grew up because entrepreneurs need to find investors to help finance their businesses. That in turn, requires them to keep transaction costs low, which requires them to hire employees rather than contract for each individual routine transaction. That’s the foundation of the corporate structure of owners, management, and workers.
For the past century, this structure has been under attack by progressive activists, who have long viewed corporations as ideological battlegrounds, with management arrayed against workers. In fact, much of the Naderite attack on corporations was based on the idea that management did not act in the owners’ interest.
Ironically, however, the National Labor Relations Act and similar Depression-era laws supported by progressives set this structure in stone, in the name of “protecting” workers against management. Certain aspects of the employment relationship were guaranteed by government enforcement — including overtime, unemployment insurance, paid time off, opportunity for union representation, and other requirements on employers.
Before the modern corporation, economies were characterized by what Adam Smith called “the system of natural liberty,” where businesses were small in scale and owners invested their personal assets into the venture and freely contracted with other businesses and individuals for services. This model lost out to the corporation because of the transaction costs related to identifying and contracting with other businesses to perform a service for you. It was far easier, and more reliable, to directly employ someone to do the job, even when required to offer the protections imposed by law. That’s why the corporation survived for most of the last century despite the increased costs of hiring.
Corporations also reduced transaction costs within their own organizations — and the prospect of internal strife among workers — by devising innovative new business arrangements. The franchising business model turned many workers into potential owners. New management models turned other workers into junior managers. The “us versus them” model that created labor strife broke down, and union representation in the private sector plummeted.
However, in recent years the costs of contracting with another party have been coming down. Corporations are being replaced by networks or platforms that enable two-sided markets, where the purchaser of a service can buy it from a small-scale supplier rather than a large corporation. The most famous example is Uber, which provides a network matching riders to drivers, without having to go through a taxicab firm. That’s why Uber, despite having some corporate features, is a very different animal from a taxicab company.
One might think that given the Left’s hatred of corporations, progressives would cheer this development. Not so. Instead, many view Uber as exploitative, perhaps even more so than a 1930s-era corporation, because it deprives workers of New Deal–era legal protections.
The Obama administration agrees. In response, it is quietly working to replace the long-established legal definition of what makes an independent contractor with a new one, announced by blog post over the summer.
Obama’s administration is also bent on reinforcing the old management–worker divide. New overtime rules are likely to eliminate huge swathes of junior management positions.
Previously, workers who set their own hours and had significant control over the way they worked were regarded as independent contractors, free from the requirements of much employment law. Now, however, the Department of Labor (DOL) has lowered the bar for a test of employment to simply getting a majority of your income from one source. So the woman who drives passengers through a ride-sharing app to earn some extra income while caring for a sick relative is arguably no longer a contractor, but an employee of the app firm.
Meanwhile, the administration is also bent on reinforcing the old management–worker divide. New DOL overtime rules are likely to eliminate huge swathes of junior-management positions, harming aspirational young workers, as employers cut back on or even eliminate overtime opportunities. The National Labor Relations Board likely will rule soon that franchisor companies are “joint employers” of their franchisees’ workers, making them responsible for day-to-day matters like individual workplace conditions and working hours, a burden that would make franchising a much less attractive business model for companies seeking to expand.
In the end, this suite of regulatory actions actually reinforces the old corporate structure that was set in place in the 1930s. The result is more large corporations based on an “us versus them” paradigm that pits management against workers — in other words, exactly the corporate structure the Left claims to hate.
There are two reasons why the Left wants to see this structure continue. First, it gives government agencies immense power over employment conditions. Second, large corporations are easier to unionize than smaller companies. And the dues paid by employees for union representation — which they may not even want — makes large corporations a huge source of funds for political campaigns.
It is the small company and the aspiring entrepreneur who will be most hurt the most by the administration’s actions. If the administration persists, it will end some magnificent opportunities for innovation, cost reduction, and consumer protection in the American economy (such as network apps’ feedback mechanisms). And it will do so by propping up its supposed biggest enemy, the 1930s-style corporation.
— Iain Murray is vice president for strategy at the Competitive Enterprise Institute in Washington, D.C.