I am grateful to Adam Seagrave for his thoughtful and thought-provoking response to my review of Samuel Gregg’s fine book, For God and Profit. This is not the first time that Seagrave and I have exchanged views on the pages of Public Discourse (see here and here), and I hope it will not be the last. In this most recent essay, Seagrave demonstrates a characteristic commitment to principle and intellectual rigor of the sort that leads to clearer understanding. And he is pointing toward something importantly problematic about contemporary financial institutions.
Nevertheless, I think he overstates his case. Seagrave accurately diagnoses a pathology afflicting our body politic (as he is wont to do). Yet as in our earlier exchange, his zeal to excise the ailment leads him to amputate a mostly healthy limb. While his criticism hits home against defective institutions of capital finance, he suggests that institutions of capitalism themselves are the problem—stock exchanges, corporate legal fictions, and moneylending at interest.
As Michael Novak famously argued more than three decades ago, healthy institutions of democratic capitalism can and do advance the common good. Corporate ownership and other legal fictions are not inherently problematic, as Seagrave suggests. Instead, they vary in their efficacy to serve human flourishing according to how well they facilitate responsible moral agency. Groups and partnerships can constitute responsible agents, just as individuals can. Corporations, trusts, limited liability partnerships, and other legal devices that protect and facilitate responsible group agency can therefore serve good ends, though corporate structures that divorce responsibility from agency are morally problematic. Getting this distinction clear enables one to see the difference between healthy and unhealthy capitalist institutions.
Seagrave laments what he refers to as extreme inequalities of wealth. For Seagrave, these inequalities are evidence of something problematic about contemporary economies, in which bankers and financiers “have the sole privilege of using money outside of the purposes for which it needs to exist.” The purpose of money is to provide a medium of economic exchange. Charging interest for loans and trading on stock markets involve the exchange of money for more money rather than for goods and services, Seagrave argues. Exchanging money for money in this way is “tantamount to gambling.”
This provocative argument is a radical challenge to Western economic institutions. Seagrave is not merely targeting defects in financial and economic institutions, such as crony capitalism and regulatory privilege. He is calling into question the legitimacy of finance institutions that function as designed.
Consider Seagrave’s criticism of capital stock exchanges. He argues that stock markets pervert or distort business ownership:
. . . money goes in and either disappears or generates more money. The partial ownership of a company or fund that occurs in the meantime is usually a legal fiction. It is an ownership that most often carries no responsibility or agency in the enterprise, and hence it involves no ownership at all in its true signification.
Seagrave proposes that stock trading should be limited to “real ownership” of specific companies. Whatever that means, it seems to require at least that investors not invest solely to obtain a return on investment but must also make “an investment in a company’s success.”
Seagrave is on to something important. As I acknowledged in the essay to which he is responding, public stock trading can separate ownership of a business from moral agency in the business. This is a difference between a publicly traded corporation and a closely held corporation or partnership, such as a family business. In those latter enterprises, the owner is more often the same group or individual who makes decisions for the enterprise, deliberating and choosing on its behalf and thus directing its activities toward its ends. The moral commitments of the owners are the moral commitments of the business, and, to some extent, vice versa. In this important sense, the forms of ownership derived from common law are generally superior both to collectivism on one hand and publicly traded capital ownership on the other.
Yet Seagrave goes further than this. He objects to partial ownership of businesses that rest in a legal fiction. In this, he echoes a line of argument with a distinguished pedigree. For example, Richard Weaver argued that “the abstract property of stocks and bonds, the legal ownership of enterprises never seen,” is a “violation of the very notion of proprietas.”
Yet this argument sweeps too broadly. Legal fictions perform important moral work. A well-designed legal artifice will not destroy moral responsibility but instead will define the agent’s boundaries and constituent jural relations, thereby enhancing responsibility and enabling accountability. And this is as true of corporations and other business associations as it is of more foundational legal institutions, such as estates and future interests of property ownership, civil marriage, and the branches of government.
Legal Structure and the Common Good
Legal philosopher Dwight Newman has provided a helpful conceptual framework for understanding and critiquing the moral agency and responsibility of groups and communities. Newman identifies two components of a community’s status as an agent: (1) central values and (2) structure. In a typical for-profit corporation, the community’s central values are found in the business’s plan of action, around which its agency is naturally constituted. Its structure, by contrast, can be either natural or artificial.
What Newman calls “central values” might be more familiar to regular Public Discourse readers as the community’s common good. Newman explains that central values “can be understood in a rough sense as the aims of the community or the common good around which it is oriented,” comprising those “factors rendering the continued collaboration of the members viable and reasonable.”
This common good of a non-state community is not necessarily the same as the common good of the political community at large. Different communities are oriented around, and therefore constituted by, different goods. The most comprehensive of all communities, the natural family, exists for the comprehensive goods of its members. Most communities are oriented around more limited goods. The political community, for example, exists for the instrumental goods of providing physical security and just administration of the law.
The common good of a business enterprise is less comprehensive than that of a family and more basic than that of a state. The business does not aspire to meet its member’s dependent needs comprehensively, as a family does. Yet unlike the political community, a business enterprise can be constituted around basic goods. These are reasons for action that have value in themselves, goods such as friendship, health, beauty, and knowledge.
A community’s structure defines the community and distinguishes it from other communities, including others that share its values. It is secondary in the sense that it cannot define the community without a common good. And while structure might appear artificial, even arbitrary at the margins, it is necessary. A class of students that is randomly divided into sections, or a military company that is randomly divided into platoons, could have been defined and constituted differently consistent with the common good toward which the group is oriented. But without definition and division the community cannot pursue its proper ends.
The structure of a corporation both facilitates liability for wrongdoing and limits it. A corporate charter clarifies who has which duties within the enterprise and to whom. It enables executive and judicial officials to identify who is responsible for the decisions of the agent and who is not. In exchange for this clear accountability, investors are insulated from liability in their personal capacities, marking their uninvested assets off limits and reducing disincentives to invest.
Corporate Ownership: It’s Not All Bad
Seagrave rightly identifies a danger of capital stock ownership but fails to acknowledge its benefits. The more layered or fractured the structure of a business organization, the less the owners are participating in the enterprise’s common good as such. An investor in a publicly traded company is less morally invested in the company’s common good than the owner of a family business, because his reason for owning is primarily instrumental. Meanwhile, an investor in a mutual fund that invests in a publicly traded company has a purely instrumental interest in the company’s success.
Contrast the practical reasoning of an investor in a publicly traded agribusiness with that of a family farmer. The investor’s reason for investing is to earn an economic return on his investment. By contrast, the family farmer who owns his own farm and farming enterprise is invested in the farm as a farm, and he is more likely to be responsible for its stewardship and reasonable management. But this is not because of the presence or absence of legal fictions. Ownership of the family farm might be divided into different estates, placed in trust, or committed to a corporation. If the legal structure supervenes on the group or individual who is responsible for operation of the farm, then agency in the enterprise is preserved.
These are generalizations. Even publicly traded companies have distinctive moral commitments that investors take on board. This is why environmentalists divest from companies that sell fossil fuels and social conservatives divest from companies that produce smut. In each case, the would-be investor makes a moral judgment (correct or not) about the values toward which the company is oriented. This is also why investors reasonably invest in companies that they understand to do good things in the commercial world.
Finally, having an instrumental stake in a commercial enterprise is better than having no stake at all, as long as the enterprise is doing good rather than evil in the world. Stock markets enable hundreds of thousands of people to invest who otherwise would have no skin in the game. Together, their investments can help bring to market goods and services that would otherwise not exist, and their voices can direct powerful market actors toward the good and away from evil. Capitalism enables equalities of participation that would not otherwise be possible, even as it facilitates inequalities of wealth.
These are important moral benefits, which must be counted alongside the costs associated with stock markets. I venture no opinion on how our current institutions of corporate ownership should be rated in the cost-benefit analysis. But we should count the good along with the bad.
Adam MacLeod is an associate professor at Faulkner University’s Thomas Goode Jones School of Law, author of Property and Practical Reason, and co-editor with Robert McFarland of Foundations of Law (forthcoming).