Talking about revolution: an interview with John Micklethwait

About the authors
Iain Ferguson started working for OpenDemocracy as a commissioning editor in 2002 and left at the end of 2005 to work for ACTED, a development NGO in central Asia.
John Micklethwait is US editor of The Economist. He has co-authored three books with Adrian Woolridge, the previous A Future Perfect was a best-selling defence of globalisation. The Company: A Short History of a Revolutionary Idea was recently released in America and will be published in the UK in September 2003.

To John Micklethwait the evidence from history is clear. “The company has been an institution that has changed the world enormously for the better.”

His book The Company: A Short History of a Revolutionary Idea is both a rich historical story for the general reader, and a robust defence of its subject. But what, I ask him, is so revolutionary about the company?

“The Victorian politician Robert Lowe, the man who probably did more than anybody else to create the modern company, called his creation ‘these little republics’, and this is actually what they are. With the obvious exception of the Church, the company was arguably the first autonomous institution that could mostly evolve on its own, outside the state.

The Companies Acts, pushed through by Lowe and others in the mid 19th century, made it possible for people to set up limited-liability firms without having to go through the rigmarole of persuading parliament to give them permission. This meant power was pushed down to entrepreneurs and investors. Rather than being trapped in government monopolies such as the East India Company, or family partnerships, such as Dickens’ doomed Dombey & Son, capital began to search for the most efficient enterprises.

Other countries soon copied Britain. And these various ‘Ltds’, ‘Incs’, ‘SAs’, ‘AGs’ and so on drew capital from around the globe, ushering in a stream of inventions that created the modern world. Companies lured millions off the land, changed the way people ate, worked and played. The ‘little republics’ brought us the first great age of globalisation, unsettling the state that spawned them.”

Cycles of history

Many people have lost their trust in companies. Corporate capitalism is reeling from accounting scandals and worsening market conditions, admits Micklethwait, but he insists the accompanying “wave of anger against companies” is “completely normal – even a healthy thing”.

“The history of companies is one of cycles. During stockmarket booms, such as the one in the 1990s, they become somewhat sexy – if I can use that rather stupid word. In the 1990s, companies both paid most people reasonably well and also offered most of us an opportunity to invest in shares, which kept rising. Companies seemed better than they actually were.

But during the downturns this exaggerated admiration in companies turns to savage criticism. Perennial critics – such as the anti-global crew – are joined by the newly disaffected, deeply disheartened former employees, shareholders and pension fund holders.”

Crooked capitalism and good government

John Micklethwait decries the crooked capitalism of Enron, but he also thinks that it can be twisted to help companies.

“An Enronesque scandal also happened in the 1920s. Samuel Insull was a bull market entrepreneur who built up a huge pyramid of companies, also in the energy industry. After the Wall Street crash in 1929, the pyramid came crashing to the floor. Insull fled to Paris, but was hauled back to America. In the end he got off most of the charges, but he still died a broken man.

No one should downplay corporate abuses. But what usually matters more is the nature of the reforms that governments impose during periods of recrimination. In the 1930s depression, society demanded change, prompted by people like Insull, but also by a more general fury against the faceless types who ran companies in the name of their shareholders yet seemed answerable to no one.

In this spirit, Franklin Roosevelt created a series of regulatory organisations, including the Securities and Exchange Commission. For the first time, the New York Stock Exchange demanded proper accounts for listed companies. These were good things – just like the Sarbanes Oxley Act that Congress passed last year that forces auditors to be more independent.”

I asked him if he thought there was a tendency for corporations to get into bed with governments and elites, that to overstep the mark in pursuit of power was something ingrained in corporate capitalism?

“Yes there is that tendency. Go back to Adam Smith. He recognised a businessmen’s desire, where possible, to try and build monopolies and extract favours from government. That craving runs in commerce as naturally as anywhere. Hence the need for antitrust laws and for other regulations. And where a business oversteps those lines – fine it, regulate it, even imprison its directors if necessary.

From a free market perspective it is crucial to point out that government really does matter. Government is not some little extra thing which gets in the way of commerce. Without proper rules companies don’t work. You see that time and time again.”

Too big for their boots?

Like Diane Coyle, Micklethwait is incensed by claims that corporations are taking over the world.

“The idea that companies are getting too big is a gross abuse of statistics. Far from gaining economic clout, the biggest multinationals have been losing it. Over the past twenty years, the world’s biggest fifty firms have grown more slowly than the world economy as a whole. In most countries the average size of companies is going down not up.

And what exactly do we mean by companies being the same size as states? By some measures, Wal-Mart, the biggest company in 2000, is as rich as Peru. But is it as powerful? Think what the government of Peru can do. It has powers beyond Wal-Mart’s belief. It can coerce you to join the army, force you to pay taxes, arrest and imprison security chiefs and terrorists. Wal-Mart has no equivalent powers. Yes, it makes profits round the world but in many ways it is far more hemmed in than the giants of yesteryear. The East India Company had an army of 200,000 people. Wal-Mart is simply rather good at retailing.

Microsoft provides three lessons about size. First, it shows that globalisation tends to help small companies rather than big ones. When Microsoft was small, open borders helped it enormously – it could export its products all the way round the world as quickly as its larger multinational competitors. Now the open nature of the global economy is rather frightening for Microsoft. It means opponents can spring up from anywhere. Two of Microsoft’s biggest problems come from Finland: Linux and Nokia. Twenty years ago Nokia was making loo paper; now suddenly it’s a major threat to Bill Gates.

The second thing Microsoft shows is how governments often have the last word with these ‘masters of the universe’. The Department of Justice caused Bill Gates far more pain than many competitors have done. It is also important to point out that big companies are not incompatible with the free market, but monopolistic corporations are. Other businesspeople want governments to discipline monopolies wherever they can.

Thirdly, Microsoft shows how the idea of footloose capitalism is overblown. Certainly companies have greater flexibility than before when it comes to seeking out cheaper manufacturing. But they never find it that easy to move. In theory, Bill Gates would have got up and left Seattle, quit America a long time ago; but no, because Microsoft is America.

Geography is more important now than ever, in virtually all the value-added parts of business. Manufacturing costs matters less than finding good ‘human capital’. That’s why Silicon Valley exists. If business was footloose, nobody in their right mind would want to set up a technology business in the most expensive area, but access to people and talent are crucial.”

Doing the right thing

John Micklethwait says it is a myth that companies are becoming less socially responsible; the bar is being raised not lowered.

“Companies are far more strictly policed now than they were in the past – both by the state and by non-governmental organisations. Companies have been at their most barbaric when they have been beyond prying eyes (take a look, for instance, at the famous report by Roger Casement into the abuses of Belgian concessionaire companies in the Congo a century ago) or when they have been placed under the direct control of the state (think of IG Farben and the Nazis).

Now most of the incentives for western companies are for them to behave well. Multinationals pay higher wages in developing countries than local firms do because they want to get the best people and avoid consumer boycotts.”

Many argue that the modern currency of corporate social responsibility, the annual social and environmental report, is nothing more than tokenism. That 19th century companies made greater social provision for local communities, in the form of housing, education and holidays, but when tougher competition came they had to stop giving.

“The Company towns and schools that Rowntree, Eastman Kodak and Cadbury’s once provided are certainly more tangible than mission statements. But that partly reflects the social and political progress in other areas. A century ago, the government didn’t provide much in the way of schools and hospitals. To be frank about it, the reason those companies built the towns and the schools was to ensure they had a well-educated, healthy workforce. Now the state, with admittedly varying degrees of success, does provide most of these things.

Corporate critics also raise a reasonable point, when they claim that today’s much more fragile companies are more likely to look for ways to cut costs. And corporate philanthropy is a target. So competition often makes social responsibility more difficult.

But overall I think there is a misunderstanding at work. Society is loading on to corporations social obligations that should often be taken care of by governments. I don’t think it is a corporation’s job to try and make the world a more socially equal place, I think that’s the government’s responsibility. I don’t think it’s the corporations’ job to try and make us more racially sensitive, I think that’s the government’s job. Any company that discriminates against people should be hammered in the courts. But there is a difference between stopping corporations doing things wrong by law and trying to use corporations as an organ of social policy.

Companies’ main role in society is to make products and to make profits. Henry Ford is sometimes hailed as being an early advocate of corporate social responsibility, because he paid more than his rivals. The $5 a day wage was a good thing. But the great thing Henry Ford did for us all was that he made motoring cheap and affordable. In the end companies’ use to society is to do with products and profits. That is the sole basis by which they should stand or fall, we should stop trying to justify them for other reasons.”

Lost charisma

John Micklethwait concludes with a return to the historical theme with which he started. As the operation of companies has become more routinised, its ability to generate enthusiasm has disappeared.

“In the 19th century companies were rather new and exciting and people weren’t quite sure what to make of them, now they are mundane. The Royal Family refers to itself as ‘The Firm’, McKinsey calls itself ‘The Firm’, you have a John Grisham novel called ‘The Firm’; there are probably another ten examples as well. Companies are seen as part of the fabric of our lives, totally normal, so their true revolutionary status isn’t really appreciated. But that does not mean it is not there.”