Corporation 2020 and the Free Market Fallacy

Current economic policies challenge the rise of an equitable society, including government subsidies to corporations. “Corporation 2020” breaks down the new blueprint necessary to revitalize America and critiques the free market fallacy.

| May 2013

  • Corporation 2020
    Corporate lobbying and crony capitalism have left the American economy and society in a dysfunctional and broken state, argues Pavan Sukhdev in "Corporation 2020".
    Cover Courtesy Island Press
  • Free Market Fallacy
    Pavan Sukhdev lays out not only why business-as-usual will continue unless we are prepared for a major overhaul but also takes a look at the free market fallacy.
    © peshkova -

  • Corporation 2020
  • Free Market Fallacy

From arbitrage trading and foreign direct-investment to crony capitalism, Pavan Sukhdev lays out not only why business-as-usual will continue unless we are prepared for a major overhaul but also takes a look at the free market fallacyCorporation 2020 (Island Press, 2012) presents new approaches to measuring the true costs of business and the corporation’s obligation to society. 

Today’s corporation is something of an anachronism, the result of a long history of development which began in ancient India and Rome, continued in medieval Europe, and culminated in nineteenth-century America and England. However, most of the development of today’s corporation happened during an eventful century beginning in the early 1820s and lasting until early in the twentieth century. These hundred years achieved limitations on shareholder liability, established corporate personhood, and unshackled the corporation’s operations from restrictions on time, place, and purpose, enabling the corporation to engage in any business, anywhere, for as long as its shareholders desired. These hundred years also freed the corporation from social purpose, and established the primacy of profits as the corporation’s raison d’etre. A landmark judgment in the United States (Dodge v. Ford, 1919) affirmed that the purpose of the corporation was indeed its own self-interest. By 1920, therefore, the corporate form had crystallized as the corporation we recognize today, and for the purposes of this book, I shall refer to today’s corporate entity as “Corporation 1920.”

The key drivers of Corporation 1920’s success are demand creation and expansion, product innovation, and low-cost production. It is characterized by its multinational presence, as well as its success at employing large-scale and international “price arbitrage” in every aspect of its operations. It arbitrages raw-material costs by sourcing cheaply from resource-rich, ill-governed developing countries in Africa and Asia, or from Australia. It arbitrages labor costs by hiring labor cheaply from populous developing countries in Asia to expand its manufacturing capacities. It arbitrages foreign direct-investment benefits from source countries, and investment subsidies from development-hungry destination countries keen to grow their manufacturing and services sectors. Last, but not least, it arbitrages demand from rich consumer markets (particularly Western demand for branded consumer goods) by branding and selling goods at hefty premiums that translate to substantial profit margins.

As technology is forever evolving, the successful corporation needs to grow turnover at a rate fast enough to cover the costs of product obsolescence (through technological innovation and rapidly changing products—as we see with cars, cell phones, and laptops). Indeed, the most successful corporate models (such as Apple) actually build obsolescence into their product and marketing strategies. The successful corporation also needs to grow volume to counter competitive losses of margins (such as air travel in real terms, microchips, etc.). Corporation 1920’s basic mantra is “more is better.” It needs and feeds that other central mantra of today’s dominant economic model, “GDP growth.”

Corporation 1920 has four defining characteristics. First, determined pursuit of size and scale in order to achieve market dominance. Second, aggressive lobbying for regulatory and competitive advantages. Third, the extensive use of advertising, largely unhindered by ethical considerations, in order to influence consumer demand and, often, to create entirely new demand by playing on human insecurities and “turning wants into needs” which can only be satisfied by new products. And finally, aggressive use of borrowed funds to “leverage” the investment that shareholders have made in their corporation.

Leverage, advertising, and lobbying often combine to drive size, thus creating positive feedback loops. Size, in turn, creates cost efficiencies and economies of scale which can deliver more competitive pricing that, in turn, leads to more sales. In the corporate quest for growth, even without the excess, misuse, or abuse that so often attends lobbying, advertising, and leverage, the collateral damage inflicted by corporations on society is not small. This damage typically leads to three exclusions: the exclusion of small- and medium-sized companies through lack of access to leverage; the exclusion of poor consumers from public alternatives to manufactured and marketed private goods; and the exclusion of competing new products (especially clean-tech or green alternatives) by means of a corporate stranglehold on media and distribution networks.

7/18/2014 7:49:33 AM

Our economic model has suffered a lot of changes due to the evolving technologies, corporations always try new marketing ideas that grant them access to new markets and obtain high customer response rates. I heard successful stories about a lot of companies that tried strategies and believe this should be a top priority for any corporation.

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