The American Journal of Sociology/Volume 01/Number 4/The State and Semi-public Corporations

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The problem indicated by the subject of this paper may be formulated as follows: What have been and what should be the relations of a given society—i. e., of the organized people, represented by government, municipal, state or national—to corporations carrying on semi-public functions? This form of the problem emphasizes the necessary distinction between the people, on the one hand, and government, or the people's most prominent agency for social control, on the other hand. This distinction leads to the preliminary suggestion that the government is supposed to represent the whole people, whereas corporations are at best segregated parties, and as such their immediate interests appear antagonistic to those of the whole. Hence, the obvious task of government is to promote the establishment of a properly balanced coördination not only between the incorporated and the employed parties on the one hand, but also between these and the other members of the state.

What, then, are semi-public corporations? There is general agreement in the use of C. J. Marshall's description of a corporation, viz.: "An artificial being, invisible, intangible, and existing only in contemplation of law." We are also generally agreed in taking for granted the doctrine of public corporations, familiar since the Dartmouth College case, viz., that a public corporation is the legally recognized body of people in a given area; the body so constituted existing for the benefit of all its constituents; the constituents meanwhile, so long as they reside within the area, having no choice about membership of the corporation.

The most definite and workable definition of a semi-public corporation that I can propose or discover is that it is every corporation which is not public. The public corporation is distinguished in kind from other corporations by the fact that it is inclusive and involuntary. All other corporations are exclusive, but at the same time they are related to the members of the body politic, because whatever they do sooner or later in some measure affects these fellow-citizens. Whether we speak of private corporations or semi-public corporations, we are in reality using varied terms for what is essentially the same thing. The parish, the school district, the village, the county are public corporations. The legal persons not falling in this class are bodies that move and have their being within the societies making up the public corporations, and are properly distinguishable from each other only by the difference of degree in which their corporate conduct affects the public.

This view corresponds rather with the traditions of the common law than with recent attempts of economic theorists to discover a principle of distinction between semi-public and private corporations. Thus the position just taken is implicitly in the opinion rendered more than three hundred years ago by Lord Chief Justice Hale, that when private property is "affected with a public interest it ceases to be juris privatis only." Beach on corporations (Vol. I., ch. 3, § 30) says: "Property does become clothed with a public interest when used in a manner to make it of public consequence and affect the community at large." Reaffirmatives of this doctrine are numerous enough in American decisions (e. g., Munn vs. People of Ill.; 94 U. S., 115. 26).

Field on corporations asserts (Ch. 3, § 35): "All private corporations, however, are in a certain sense of public interest. In fact, the conferring of . . . . . . powers and functions upon a society of persons, and giving them privileges not commonly enjoyed without such grant, and thereby surrendering to the corporate body authority which otherwise must remain in the sovereignty of the state, can only be justified on the ground of the public benefit to be derived from the grant, and that the state in this way will be fully indemnified for the surrender or transfer of the supreme rights in respect to the authority conferred."

Thus the growing legal usage bases distinctions between private and semi-public corporations on their relation to public interest. This view practically assumes that the difference between private business and public business is only one of degree. All private business affects the public, and the question involved under our present subject is: What is the status of private business, especially in corporate form, when a general interest in it becomes evident to the public?

I will subdivide the question and ask first:

What is the functional relation of corporations to the state?

The answer is already implied. In a word, I regard the corporation, the syndicate, the trust, the capitalistic monopoly as pioneers of a better era of industrial gain and of social growth.

The first colonial charter of South Carolina reflected a phase of doctrine affecting a few at the time in England, by incorporating a clause which made it a punishable offense for anyone less closely related than a cousin german to plead a cause for another in court, or for anyone to accept pay for such service. It has become the fashion during the last three decades for states in adopting revised constitutions to reiterate in them words which had different associations from those which led to their formulation in protest against Elizabethan grants. Thus: "Monopolies are odious, contrary to the spirit of a free government and the principles of commerce, and ought not to be suffered." I venture the prediction that the time will come when the citizens of industrially freer America will regard these omnibus denunciations of monopolies as equally naïve with the colonial proscription of attorneys at law. We shall learn that monopoly is like fire—a good servant but a bad master. When we are ready to rewrite history upon the hypothesis that the discoverers, the inventors, the leaders of previous generations, have been so many retarders of civilization, we shall be prepared to continue autobiography of our own period in terms of the abuse which restless men are heaping upon organizations of capital without discrimination.

For nineteen centuries Christians have been preaching and trying to believe that we are members one of another; that we must work together in order to live ourselves out. We are just beginning to realize this conception intimately in devices by which many scattered financial interests are bound into a closely knitted whole. And now we turn upon these unperfected devices, upon which men with all their hereditary and acquired selfishness have begun to experiment—these prophecies of balanced and adjusted and justified cooperation—and we charge them with all that is unregenerate in the people who make them their tools!

A railroad syndicate or a gas trust may be quite as innocent and quite as useful as a ward caucus or a Christian Endeavor convention. In other instances it may be simply a softer sandbag than ordinary footpads use. Both patriots and traitors use firearms, and they both use public franchises. They alike choose these latter means because they are economically effective. If we have the purest zeal for the common good that has ever fired the soul of ancient or modern reformers, we cannot apply that zeal to best purpose among our industrial problems without setting it to the task of perfecting the checks and balances of industrial combination, which corporations of all kinds have begun to apply. The correct view of the situation is this: The evolution of demand for particular kinds and quantities of work has been accompanied by the evolution of a peculiar industrial organization, having certain obvious adaptations to the tasks to be performed. This organization affords a unique medium for exhibition of new variations of human ingenuity and efficiency as well as perversity. These opportunities are embraced both by aggregations of capital on the one hand and by aggregations of labor on the other hand. These complementary factors are at once and perhaps equally the security and the menace of modern industry.

My answer to the question what is the functional relation between the state and corporation is, therefore, that the corporation has a tributary and subordinate function within the state as truly as the government. It is a specific function, discharging specified tasks. The corporation sustains a part of the necessary economic activity of society, over the whole of which the government exercises general supervision. Up to date we have no more expedient means at hand than the corporation on the one side and government on the other to provide for their respective shares of divided social labor. Neither of these parts of social machinery is to be considered unalterable, any more than present models of battle ships or communion cups. Each is the means at present most available for discharging its respective kind of function. With reference to the corporation our problem is, how may we secure just that function without defect or excess, and without disturbance of the other functions of society? We have to learn how to secure for the public the advantages of monopoly, administered in the anti-monopolistic spirit.

No student of political history doubts that Prussia is deeply indebted to Frederick the Great for his application of the theory of "benevolent despotism." We are passing through the benevolent despot stage of corporate development—that is, so far as the despots are benevolent. The imminent social task in this connection is to convert corporate power to the service of benevolent democracy.

I turn to the question: What is the ethical relation between corporations and the state?

This question exposes these economic devices from another angle. In this light they are seen to be properly inventions that deserve social endorsement, in so far as they promote the public weal. There is no more sacredness about a corporation in itself, apart from its service to society, than there is about an ox-yoke or a tide-mill. Charter privileges imply corresponding corporate services; they imply that the party making the grant, as well as the party accepting it, is better off because of the arrangement than before. They imply further, that when the advantage ceases to be reciprocal, the privilege may be withdrawn from the non-reciprocating party by the party from which it was derived. In other words, a corporate franchise has no reason for being, except as it is in effect a pledge on the part of the corporation to do a public service to the greater advantage of the public than could otherwise be secured. Any theory of corporations, or of contracts smuggled into the doctrine of corporations, which denies to the public the right to get itself better served by adjustment of claims and termination of contract and franchise, is fiction for the gullible. There is a very general superstition that the legal person known as a corporation may dawdle, and waste, and neglect and destroy, but that the party paying for its presumed services may not discharge the unprofitable servant. The superstition goes further, and believes that for a moderate Wehrgeld a corporation may rob, maim, oppress, banish, kill, but that it may neither be executed nor disfranchised for its felony.

No legislative franchise has any more of the attributes of divinity than the law of entail or of primogeniture. Corporations are presumptively servants, not masters, of the public. They are to be judged by their performances, and should be treated accordingly. A corporation which is deficient in the discharge of its delegated function should be restored to usefulness by vigorous measures, if necessary, just as the proper public authority should repair a bad road. This principle was assumed by congress, when it passed the interstate commerce bill in 1886, in view of the eighteen distinct classes of delinquencies on the part of the railroads, recited by the Cullom committee of the senate. A corporation that has turned its social office into a personal "snap" should be abated like any other nuisance.

These opinions are sustained by the law of the land, as interpreted by our courts. At the same time, it must be confessed that the complexity of our administrative and judicial system has been a stumbling block to many persons of large intelligence who have not been specially instructed in constitutional law. The interlocking state and federal jurisdictions, the curiously distributed powers of regulating commerce, of enforcing police regulations, of sanctioning and interpreting and enforcing contracts, etc., seem to the uninitiated to furnish easy means of nullifying the popular will as expressed in the laws. It is hard for the ordinary man to understand that a railroad corporation is not held to be above the law-making power, when a state law regulating railroads within the state is declared unconstitutional by a United States court, on the ground that the law is a regulation of commerce. Yet, in spite of such afflictions to the lay mind, the accepted rules of law are sufficiently explicit to leave no proper doubt that in theory corporations are held to be accountable to the people for their stewardship of public trusts.

For example: It has been held (Ohio and Miss. R. R. Co. vs. McClelland, 25 Ill., 140) that a "corporate charter, though a contract, is subject to the power of the state to regulate the action of the corporation as it would that of a natural person by proper police regulations."[2]

In the case: Peoria and Rock Island R. R. Co. vs. Cool Valley Mining Co. (68 Ill., 489) the doctrine was announced that the primary object of such corporation was the public accommodation, and promotion of public interests; that the dividends of stockholders are incidental.[3]

A single reference may be made to the claim that a charter, being a contract, may defy legislation. Judge Cooley has written as follows:[4]

"But even the agreement of a state that the grant shall be exclusive cannot prevent the making of another, subject to the obligation to provide compensation, under the principles governing the law of eminent domain. An exclusive privilege only gives to the franchise additional value as property, and all property is subject to be taken and appropriated to public uses on making payment therefor. Therefore, notwithstanding the existence of an exclusive grant to construct a railroad between two named places, or a bridge over a river at a certain locality, the state has, and must have, the power to make conflicting grants when the public needs seem to require them; and the progress of the state might be embarrassed or stayed by improvident or dishonest concessions if this were otherwise. The new grant in such case does not impair the obligation of the other, but the obligation is recognized in giving compensation for exclusive privilege."[5]

But we must turn to a third question: What is the present operative or practical relation between corporations and the state? The facts are, first, that there is no authoritative code of corporation ethics to which the public can appeal in judgment of corporations; and, on the other hand, corporation managers have evidently very vague conceptions of their functional and ethical relations to the public. There was a notable struggle in Chicago recently over a certain franchise, involving the use of streets in the vicinity of its plant by one of our largest manufacturing corporations. The president of one of the most important commercial organizations in the city told the writer, while the contest was going on, that he had just discussed the points in controversy with a high officer of the encroaching company, and that official seemed utterly incapable of entertaining the idea that the citizens in general had any proper rights in the public streets which the corporation was bound to respect.

It would be trite and commonplace to multiply illustrations of the reversal by corporation managers of the functional and ethical relation upon which society predicates corporate privileges. The morbid and extreme suspicion of corporations, and especially of trusts as such, to which reference was made at the outset, is the natural consequence of corporate defiance of obligation to the sanctioning and sustaining public. The popular mind is at present tending to the view that capitalistic organizations are inherently and necessarily evil. Innumerable corporations are acting on the presumption that the public is a mine, to be worked for all it is worth till the lead runs out. A change of public opinion is unlikely, therefore, until there is an evident change of front in corporate management.

We have to ask then what shall we do about it?

I answer: First and foremost, the thing at which the "practical" men smile, which professional "reformers" sneer at as an evasion of the issue, viz., teach the fundamental principles of corporate and state relationship to all sorts and conditions of men. Whatever more direct measures we may hereafter devise, to reduce the evils of corporate selfishness and to harness capitalistic organization to public tasks, society cannot afford to persist in rule-of-thumb policies toward agencies with such enormous capacity to promote or to endanger the public good. It is as reactionary for us to treat capitalistic organizations indiscriminately and on principle as beasts of prey, to be baited at will whenever we can catch them at disadvantage, as it was for the English peasantry to resist the building of railroads, or for the Russians, of whom Wallace and Tolstoi tell, to demolish improved farm implements. On the other hand, the day is past in which men can be awed into acquiescence in the divine right of corporations. But if we cease to venerate without learning to appreciate, we may harm ourselves worse in the first instance than by retaining the dominant superstition. Between ceasing to pray to idols and beginning to smash them is a shorter step than to the intelligent use of them as monuments of art and indexes of culture. Corporations, trusts, monopolies are here. They have begun to reveal their incalculable potencies for social service. Men must be taught to distinguish between these devices, as controllable social agencies, and on the other hand the unsocial personal volition, which at present often acts the rôle of a possessing devil perverting the agency. Men must be taught to study the social adaptabilities of capitalistic organization as expectantly as we study the applications of electrical energy. Everybody except the anarchist anticipates the next grand social gain through some manner of extension of the principles of industrial organization. Let us promote this gain by spreading intelligence about actual and possible economy of effort through organization of organizations.

In the second place, let us encourage legislation that shall prescribe the lines within which corporate action must recognize public interest. I admit that this is only another way of saying: Let us face the necessity of evolving superior citizens in order that there may be superior legislators. In other words let public opinion register itself in authoritative public standards as rapidly as the social consciousness becomes intelligent. Let there be careful study of the developing needs and opportunities of society, and let the results of study declare themselves in developing legal principles of social self-control. I am not now referring to any particular measures, but to the principle that legislation which creates corporations without corresponding regulation is as anomalous and socially dangerous as a regime of domestic relations ruled solely by the instinct of propagation, without responsibilty for the training of children.

The laissez faire doctrine is today as fast in the limbo of political impotence as is the Queen of the Sandwich Islands. The high priests of this doctrine—Herbert Spencer in England, and Professor Sumner in this country—never meant what they have been supposed to teach. They have not said "legislatures should do nothing," but "legislatures should not do the wrong thing, and they will do the wrong thing till men put more brains and fairness and knowledge of affairs into legislation." It would be as rational to set about improving the type of human beings by attempting to breed the nervous system out of our bodies, as to calculate upon social progress without development of the coordinating agency of legislation. So long as there is society there must be social volition correlating parts of society to the whole. Corporate hands are wont to act as though they would say, "I am the body!" There will be no more important and complicated legislative tasks in the epoch on which we have entered, than those which are already upon us in the necessity of reducing these usurping organs to normal vicarious agency within the social body.

Third, let us by all means fit ourselves to assume direct public control of many properties which belong by nature to the public; properties which we have hitherto farmed out at enormous public sacrifice. I do not fix a limit to the number of these properties, for I do not know where the limit will be found, and so far as any fears are concerned about consequences of public proprietorship as authorized by the principles cited, I do not care. I am sure of this, that so long as men agree to maintain society, they will more and more agree that the question of private or corporate or public control of the industrial opportunities upon which the good of all depends is in the last resort a question of administration. Is the public welfare most likely to be subserved by public or by proxy management?

Readers may be inclined to decide at this point that the argument is a total surrender to socialism. On the contrary, I am neither a socialist, nor a consorter with socialists. But supposing the inference were correct, candid men have no business to ask whether a thing is socialistic, but only whether it is true. Let others retain the practice of damnation by label. There is no room for it with enlightened thinkers. It should be no secret, among men capable of considering the interests involved in contemporary social conditions, that no man is likely to have his mental vision accurately focused upon the present situation unless he has learned to look occasionally upon our institutions through the lenses of socialism. It does not follow that we must adopt the philosophy or the programs of socialism, neither does it follow that we must repudiate the consequences of rational social analysis because they correspond with certain elements of socialistic opinion.

The first lesson in political economy of which I have any distinct recollection was to the effect that no government can carry on any industrial enterprise as profitably as it can be managed by individuals. As an abstract proposition this may be true. It cannot at present be proved or disproved. It has been abundantly demonstrated, however, that governments can and do carry on some very important classes of business with financial, political and social advantages to the whole public, incomparably superior to those obtainable previously from private performance of the same service. I say nothing about the ultimate method of managing these and other kinds of business. Until we have developed and applied, much beyond present standards, the policy and practice of social agency on the part of individuals in the conduct of business, direct public control, and even public management of many kinds of business is the dictate of reason, of prudence and of patriotism. The town which does not today own or control its gas, electric lights, water supply and street railway rights, is presumably a town of low grade both in economic intelligence and in civic virtue.

If a man is too lazy to brush his own coat and adjust his own cravat, and if he have money to spare, it is his legal privilege to hire a valet. That functionary is a precious fool if he does not make his master pay roundly for the service. If the citizens of a town are so absorbed in their more particular business, or so unskillful in public combination that they prefer to depend upon private enterprise for the supply of such general wants as those just specified, it is cause for public congratulation if private caterers presently grow so rich that the public at last grows jealous. Enormous private gains from operation of franchises to supply these public needs is, in itself, evidence not so much of the culpability of the corporations as of the unthrift and political inefficiency and supineness of the people.

I venture a single reference to the practicability of improvement in the relations discussed. We are just fairly entering upon the observing and describing and analyzing stage of social relations. Our national and state and municipal governments have already done an enormous amount of necessary preliminary work in gathering and organizing essential information. Popular and systematic thought is asserting its freedom from arbitrary conventional philosophies. A quickened social consciousness is assuming the rigt, the privilege, the duty of life—"life more abundant," in the individual and in society. As never before in the history of society, we are anticipating problems of social order, and proposing solutions, instead of being satisfied to explain solutions after the centuries have worked them out. We are learning to formulate what we want as freely in civics as in mechanics. We are learning to set ourselves in as businesslike fashion in the one field as in the other to the task of getting our wants supplied. Better than all, some of the choice and master spirits of our age are showing by word and deed that in these tasks of peace there is service to be rendered and renown to be won not less splendid than the victories and laurels of war. We are already within the line of operations of a campaign for human improvement. The end will not be till every toiler with hand or brain has secured social guarantee of more secure industrial status. The coming lot of the capable and faithful laborer will be as superior to his present condition of industrial dependence and insecurity as the political status of citizens in a democratic republic is to that of the unprivileged class in ancient oligarchies. I calculate confidently upon progressive public absorption of corporate and monopolistic advantages as a certain incident of this glorious gain.

The University of Chicago.

  1. This paper is a by-product of the seminar in sociology conducted by the author. It has made special use of work done by Messrs. J. D. Forrest, Paul Monroe and H. W. Thurston.
  2. So in Northwestern Fertilizing Co. vs. Hyde Park, 70 Ill., 634; so Galena and Chicago Union R. R., 28 Ill., 283.
  3. So Chicago and Alton vs. People, 67 Ill., 11; also Munn vs. People, 69 Ill., 80.
  4. Constl. Law, 307.
  5. West River Bridge Co. vs. Dix, 6 Hon., 507; Eastern R. R. Co. vs. B. and M. R. R. Co., iii Mass., 125; also Judge Gaynor in re Brooklyn Heights R. R. Co.

This work is in the public domain in the United States because it was published before January 1, 1924.

The author died in 1926, so this work is also in the public domain in countries and areas where the copyright term is the author's life plus 80 years or less. This work may also be in the public domain in countries and areas with longer native copyright terms that apply the rule of the shorter term to foreign works.