Organizations started as a form of spontaneous order. One had to undertake a task that was too large for one’s self, so one would associate with others who could help achieve that task. Alternatively, one would perform a task out of enjoyment or necessity that would somehow grow and evolve to the point that it required organization to perform effectively. The former became larger as the scale and scope of economic and political activity grew. States were required to create large infrastructural projects or to build armies. Voluntary associations or organizations were insufficient for the task; mercenaries, for example, could fight wars but lacked the continuity and consistency provided by paid organized soldiers. Similarly, infrastructure projects required people to perform tasks for indefinite periods of time; such a task was better accomplished through organization. The latter became the libertarian notion of free enterprise as the driver of the capitalist system. In this view, individuals — left to their own devices in a competitive marketplace — will provide the services needed by a society and will associate with one another when necessary to achieve this task.
What libertarians ignore is that such a system builds inequalities because in the absence of government control some organizations — or the individual interests they represent — grow large and impose their will on others. Moreover, without a law (whether by public consent or enforced from above) that recognizes free enterprise as a right (or at a minimum, a license), free enterprise cannot even emerge. The fear is as old as the Federalist Papers, where Madison railed against the dangers of association and majority influence on the nascent American nation. But the fear is even older than that, harkening back to Adam Smith’s recommendation that governments should ban the printing of industry lists for fear of collusion. And the fear has been a continuous current in American society through the concerns over the late 1800’s robber barons to the 1920’s concerns of Schumpeter about the ultimate concentration of power that unbridled economic activity produces (and Weber’s and Michels’ similar fear about the emergence of oligarchy from democratic origins), which in his view was the same whether the impulse was socialist or capitalist. More recently, we see the fear in the behavior of civil libertarians who seek to protect citizens from unbridled corporate power. The fears were shown to be real in the empire where corporations such as those in South Africa, India and elsewhere were able to build compounds that were labor prisons for all effects and purposes and, in many instances, to build armies that oppressed entire colonial societies.
There is some truth to these fears. Foucault spoke about how the state evolved organizations as it needed to tackle more and more functions over time, including the maintenance of a productive society to achieve the state’s needs. To this end, as organizational scholars have noted, the state established organizational (and later, corporate) charters to engage in war, first and foremost, and to manage economic activities and the requisite infrastructure needed for such activities to thrive. For without infrastructure, there is no transportation, and for that matter, there would be no communication or power provision for there would be no common standards for providing such services over large populations. As Olson’s thesis on collective action suggests, individuals living in a libertarian-democratic world would encounter extraordinary difficulties to organize collective action for the provision of such public goods, especially across large numbers of people. Without systems for transportation, power or communication to occur, it is hard to envision how the benefits of the capitalist system could be achieved.
Once the notion of charters was codified into an incorporation code in Victorian Britain, all individuals in principle were given the opportunity to organize. I say “in principle” for in practice there were a set of moral and legal codes that precluded certain persons — particularly those varied from the norm in terms of their status characteristics — from owning property or establishing enterprise. Of course, informal organizations have always existed, most notably, sects and secret societies. What changed was that the state was now recognizing the right — or at a minimum, providing a license — for people to pursue free enterprise. Libertarians rail against the welfare state that later developed, which was to “oppress” free enterprise through taxation, regulation and elsewhere.
What exists in our society today is a debate between those who want to restore the freedom of enterprise whether to a degree or to its pure utopian sense and those who believe that the free enterprise creates inequalities that require the state to intervene to correct them. What has been lost in this debate is the following: in the case that the state is overly oppressive, how to help individuals in spite of these measures overcome their effects to achieve the full potential of the free enterprise system; and in the other, how to enable the state to correct these inequalities without requiring active state intervention, i.e., by enabling the people themselves to police and intervene to correct these inequalities. (Some argue that the role lies in civil society, perhaps only implicitly for developed countries but certainly in an explicit manner for developing countries.) The former requires some form of organization as does the latter. The question is what form of organization is required.
Assuming for a moment, as transaction cost economists do, that state intervention increases the costs of starting business by means of complex filing and taxation requirements, then even in a world where all individuals had equal legal access to incorporation some would incorporate and others would not. In such a world, not all individuals would have the requisite knowledge of how to incorporate, thereby granting those who by means of superior inheritance (e.g., father teaching a son how to do it), experience, or education an advantage. Such specialization of knowledge creates barriers for the generalist individual, or even for the individual who lacks such specialized skills, and thus serves to increase the transaction costs associated with starting a business.
Incorporation, in practice, also works to increase legitimacy, which means simultaneously that those who do not incorporate are de-legitimated. Examples abound in our society of the pervasive influence of such de-legitimation. An incorporated organization receives preferential treatment from the state and the media, which view such entities as the only legitimate ones for conducting business. Informal grassroots organizations experience the pressure to incorporate in the form of a state that will prosecute for regulatory reasons, particularly taxes, as such organizations refusing to incorporate would sap revenues from the state, and in the form of a media apparatus that will provide limited coverage unless the voluntary association of people provides a legitimate corporate name that reflects their actions. This situation is the same whether we speak of a limited liability partnership such as an LLC, a formally corporate entity such as an INC, or a non profit entity such as a 501c(3) or (4). While the right to associate is guaranteed by the constitution in theory, the right to form associations — and furthermore, organizations — is not. One is a right, the other a license. The former should not be subject to government regulation, the latter by definition is. Unfortunately, the legitimation the state provides to the corporate status through licensing results in the de-legitimation of free association and organizing as a right.
One way for libertarians and liberals to find common ground would be for the libertarian to acknowledge that the elimination of state regulations on business is utopian, even when reducing regulations may remain a worthwhile pursuit, and for the liberal to recognize that other forms of non-state intervention could be used to correct inequality, perhaps even more effectively. Under such circumstances, a consensus could be reached that reducing the costs of business by means of civil society solutions could be a worthwhile goal as well. Again, it is important to remind ourselves why free enterprise as a right is important: First, organizational scholars tell us that society as we know it would be impossible in the absence of organization for there would be no economic or political security. Second, in a neoclassical economics sense, a limited number of organizations translates into limited competition, which leads us into the distopian world of monopoly and oligarchy that so scared Smith, Madison, Schumpeter, Weber, and Michels, among others. And third, as if the first two reasons were not enough, our constitution warrants such a system, so a state of affairs where free enterprise can only be attained in a legitimate fashion through incorporation should not be tolerable.
At this point, one may be tempted to suggest that this is a libertarian line of reasoning (the varying political views of the aforementioned cadre of scholars notwithstanding), so it is important to remind ourselves the important function government serves: helping to direct public attention to those areas where economic or political security can be enhanced through collective action. It has proven difficult to build large infrastructural systems in the absence of state intervention undoubtedly because state power has often preceded these projects historically but also — as mentioned earlier — because collective action is so difficult in the absence of third-party intervention. There is no reason to assume, however, that the state is the only third party that can solve the collective action problem. There have been plenty of instances in our society when in spite of all concerns to the contrary industry has organized for good to create the appropriate standards needed for large-scale collective action. In such circumstances though, the question is always whose interests are being represented and to what effect. That is, government can rightly make a claim to the public interest when it is democratically elected and subsequently pursues large-scale collective action in the name of those who elected it. Industry, on the other hand, cannot make such a claim. The local provision of electricity in the early 20th century United States worked because neighbors banded together to provide this public good. Some would say anarchosyndicalist cooperatives in civil war Catalunya and Aragon worked to some extent because of this public consent. The question then is how to enable such public consent to work at a larger scale without the liberal requisite of government intervention. While difficulties exist in pinpointing the exact cause of the transformation from a primitive to a modern (or some would say, post-modern) society, one can undoubtedly acknowledge that improvements in communication played a role.
Along with effective transportation, improvements in communication enable larger groups of people to become connected whether in a virtual or real sense (which psychologically speaking, can be the same thing), thereby growing the size of markets and providing more opportunities for free enterprise to make a difference in people’s lives. As our experience with capitalism over the last couple hundred years suggests, the larger the free enterprise system, the more goods and services exist. The larger the possibilities for free association and the more goods and services that exist, the greater the likelihood for people to be Simmelian individuals, i.e., differentiated and unique. To further this point, consider a person in primitive society. His or her role in society was dictated by place of birth and position of birth. For example, if you were born in feudal Russia, chances were you were a peasant. But one could say with all certainty that you were a peasant if your father had been a peasant. In a democratic social capitalist system, more opportunities for differentiation exist based on free association since you no longer need to associate only by family and class and based on production-consumption patterns since you can now define your individuality based on the larger number of goods and services available, thereby providing a wider array of choices and activities available at your convenience.
(As an aside, these choices affect you not only as a social individual but as a biological one too because, according to extant research, your particular consumption and activity patterns influence the activation of genes from an overall predetermined gene pool.)
One of the most fundamental changes in communication in our society has come from the implementation of mathematics via computers to build new systems such as the Internet. By using logical rules, the routine and ordinary activities of human beings can be codified into programs (hence, the term computer programming) and beckoned to perform complex tasks at the spur of the moment. It has become a cliche to state that the Internet has changed society in fundamental social, economic and political ways. But it is true that the Internet in its current embodiment has reduced the transaction costs of business by creating a global communication system where programs can be collaboratively built and shared, often at the expense of and sometimes leading to the eradication of existing systems of capital and labor. Yet in the rush to use programming to improve the effectiveness of existing businesses, few have actually explored how programming could reduce the transaction costs of free association. And it is true that programs have been used to build systems to help individuals connect with others and enrich their social settings, but few have actually explored how programming can be used to enable people to connect with each other for new productive ends outside of specific specialized settings.
More specifically, programs could be used to build a system that enable individuals to organize by conducting many of the functions of legally incorporated enterprises without having to engage in actual incorporation. While the financial costs of incorporation would not be eliminated, the system would provide a legitimate way for people to associate, while circumventing the state intervention associated with incorporation. Systems have been developed for organizations to incorporate, pay taxes, and abide to other government regulations. But there is currently no system in place for enabling people to connect with others, start an organization (and an industry by extension), manage budgets and track finances, and conduct marketing and advertising, product supply, and the other functions of business, all in one place. In so doing, the system could overcome the inequalities imposed by specialized knowledge. The system would have the potential of enabling a single person to become an entire organization, or even for a large group of people to work for the organization without requiring any one of them to be subjected to a strict hierarchy or impervious boundaries. People could trade places in the everyday management of the organization in the same way that anarcho-syndicalists once attempted, or they could simply discontinue their involvement in the organization should another organized enterprise housed in the system catch their fancy. The growth of the system could also provide for a ready-made network for collective action, or lobbying, to reduce the costs imposed by state intervention on free enterprise. In fact, considering that many of our laws have resulted from everyday practices, it is possible that the evolution of such a system with the force of collective action could lead to the changing of laws of incorporation, thereby restoring the right of free association to its rightful place of legitimacy in society, while reducing the need to engage in the financial cost of incorporation. (I admit, however, that there is a complex issue at work here, as it is unclear whether Internet usage today is a right or a license, even though the Internet is a product of government policy.)
If we look around us, we can already see the desire of people to participate in such a system. Emergent mobilization is all around us. People routinely organize spontaneous campaigns in favor or against the issues they care about. However, it is my experience from conducting research on the subject that people find themselves reinventing the wheel every time. Once the effort is off the ground, the activists have to figure out how to market and advertise it. If they begin to receive any form of remuneration for their activities, they need to figure out how to manage their budget and conduct finances. If they need to begin manufacturing products, they need to figure out the best source of raw materials, and the best place (and way) to sell these products. If they want to expand their operations, they then need to figure out potential customers to target. In the process, many activists become frustrated by the scale of the project, and put simply, quit. These are people who are perfectly capable of managing such projects to fruition but who may lack the experience, connections, and social support to see it through. In other words, their tolerance to risk is low and the transaction costs are so great that these activists refuse to commit to such an uncertain project. Thus, specialized knowledge rears its ugly head: In the absence of specialized knowledge, people are less likely to undertake the required risk. There are many individuals who have a low risk tolerance who still pursue uncertain ventures because their specialized knowledge creates the illusion of low risk. But people may choose to give up even when their knowledge is quite specialized. For example, an artist may be remiss to start up a new venture even when her knowledge of art is quite specialized because she may lack the specialized knowledge associated with starting up that venture and not know where to get it. To put it simply, people are more likely to undertake risk in the presence of a system that reduces the transaction costs related to acquiring the specialized knowledge needed to create a successful organization. In the context of such a system, people could easily find experienced people willing to help them, either free or for a fee. They could easily connect with potential stakeholders such as possible employees or customers. They could also receive the social support needed to undertake the requisite risk. In other words, they could find the human and material resources needed to see the venture through. It is often stated by economists who study entrepreneurship that information is more important to success than money; the proposed system implements this vision. Of course, such a system would not be free, except in its basic functionality. But as we have learned from the growth of capitalism, quite diversified goods and services at competitive prices are obtained as systems of free enterprise grow.
So while a person may not be able to afford the best specialized knowledge for building their enterprise at first, they will be able to obtain more specialized knowledge for free than they would be able to obtain in the current system of incorporation. The system would have at its disposal experts that provide basic advice; beyond that, a veritable free market of goods and services would be available, in some cases supplied by the very people who may access the system for their own needs. Thus, people will enter the system looking for specialized knowledge and find they too have specialized knowledge they can share, thereby fostering the growth of a competitive ecosystem of specialized knowledge. In this way, the system has the seeds for its own growth and generates the feedback effects needed for it to become self-reinforcing. Through reputation subsystems, the system can also police itself. As long as the system is organized as a non profit a la Wikimedia or Mozilla Foundation rather than as at profit-driven commercial system, such a system can remain free and provide a civil society-based alternative to the current state-centered incorporation system.
About the Author: Yosem Eduardo Companys is a PhD student in engineering at Stanford University and a coordinator for the Program on Liberation Technology at Stanford University. He may be reached at companys[at]stanford[dot]edu.