138. CLASSES OF CORPORATIONS1

Corporations are used for such a wide diversity of objects that any classification based on the purposes for which they are formed overlaps and is apt to be confusing.

A logical classification is that which separates all corporations into (1) public and (2) private corporations. Public corporations are those formed by the community for its own governmental purposes, as in cities, villages, and towns. These are called municipal corporations. In the Dartmouth College case it was said that "strictly speaking, public corporations are such only as are founded by the government for public purposes where the whole interests belong also to the government." All other corporations are private corporations.

Corporations formed to conduct public utilities, such as railroads, turnpikes, and telegraph systems, or to supply water, gas, and electricity, are frequently termed quasi-public corporations, but, if they are conducted for private gain, they are properly classed as private corporations, even though the state may own part of their stock.

Private corporations may be divided into corporations without capital stock and corporations with capital stock.

a) Corporations without capital stock. Most religious, educational, charitable, and social organizations belong to this class. They are non-stock, or membership, corporations. In some cases certificates of membership are issued to the members, but these are not stock certificates and are not usually transferable. When corporate action is taken each member has one vote without regard to the amount of his financial interests, if any, in the corporation. Mutual insurance companies are non-stock corporations, as are also stock exchanges and other similar organizations.

b) Corporations with capital stock.-Stock corporations have a capital stock divided into shares, usually of like amount, which are evidenced by transferable certificates of stock. These stock certificates are issued to the members of the corporation, who are termed stockholders, the certificates evidencing the number of shares to which their owners are entitled.

On account of the convenience of the system, all corporations intended for profit are organized as stock corporations.

Stock corporations may be conveniently divided into the following classes: (1) corporations for general business purposes;

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Adapted by permission from Thomas Conyngton, The Modern Corporation, pp. 16-20. (The Ronald Press, 1913.)

(2) corporations for public service; (3) corporations for financial purposes.

1. Corporations for general business purposes.-This class includes the greater number of existing corporations. In most states of the Union general laws have been passed providing that upon compliance with simple prescribed formalities and payment of certain moderate fees companies of this class may be incorporated. In a few states, corporations may also be authorized by special act of the legislature, but the practice prevailing in most of the states permits incorporation only under the provisions of general laws, the benefits of which may be enjoyed by all alike. Many of the states have constitutional prohibitions against special incorporations.

The law and procedure relating to corporations for general business purposes, such as manufacturing, mining, and industrial corporations, make up the great body of modern corporation law.

2. Corporations for public service.-The corporations which control railways, telegraph, and telephone lines, and which furnish transportation, light, water, and power in our great cities, form another exceedingly important class. These corporations are allowed, under certain restrictions, to exercise the right of eminent domain, and in some cases are given special and exclusive privileges in the public ways. The peculiar nature of the privileges conferred upon this class of corporations, and the not infrequent resulting abuse of their monopolistic powers, render them the subject of constant and increasing legislative restriction and regulation.

3. Corporations for financial purposes.-Under this head are included all banks, trust companies, insurance companies, guaranty companies, building associations, and other similar institutions handling the funds, savings, or investments of the public. The laws under which these may be organized usually require evidence of substantial financial responsibility and of actually paid-in cash capital. After organization certain detailed reports are required and the corporation is usually subject to some form of governmental supervision. In each state, corporations of this class are subject to special statutory regulation, except national banks, which are created and supervised only by the National Government.

See also 282. The Holding Company.

E. Some Defects of the Pecuniary Order

139. FAULTY DIRECTION OF ECONOMIC ACTIVITY1

The union between encouragement of individual efficiency and opportunity for wide co-operation is the great merit of the money economy. It provides a basis for what is unquestionably the best system of directing economic activity which men have yet practiced. Nevertheless, the system has serious limitations.

1. The money economy provides for effective co-ordination of effort within each business enterprise, but not for effective coordination of effort among independent enterprises.

The two schemes of co-ordination differ in almost all respects. Co-ordination within an enterprise is the result of careful planning by experts; co-ordination among independent enterprises cannot be said to be planned at all; rather is it the unplanned result of natural selection in a struggle for business survival. Co-ordination within an enterprise has a definite aim-the making of profits; co-ordination among independent enterprises has no definite aim, aside from the conflicting aims of the several units. Co-ordination within an enterprise is maintained by a single authority possessed of power to carry its plans into effect; co-ordination among independent enterprises depends on many different authorities contending with each other, and without any power to enforce a common programme except so far as one can persuade or coerce others. As a result of these conditions, co-ordination within an enterprise is characterized by economy of effort; co-ordination among independent enterprises by waste.

In detail, then, economic activity is planned and directed with skill; but in the large there is neither general plan nor central direction. The charge that "capitalistic production is planless" therefore contains both an important element of truth and a large element of error. Civilized nations have not yet developed sufficient intelligence to make systematic plans for the sustenance of their populations; they continue to rely on the badly co-ordinated efforts of private initiative. Marked progress has been made, however, in the skill with which the latter efforts are directed, and also in the scale on which they are organized. The growth in the size of business enterprises controlled by a single management is a gain, because it increases the portion of the field in which close co-ordination of effort is feasible.

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Taken by permission from W. (University of California Press, 1913.

C. Mitchell, Business Cycles, pp. 38-40
Author's copyright.)

2. But, as pointed out above, the managerial skill of business enterprise is devoted to making money. If the test of efficiency in the direction of economic activity be that of determining what needs are most important for the common welfare and then satisfying them in the most economical manner, the present system is subject. to a further criticism. For, in nations where a few have incomes sufficient to gratify trifling whims and where many cannot buy things required to maintain their own efficiency or to give proper training to their children, it can hardly be argued that the goods which pay best are the goods most needed. It is no fault of the individual business leaders that they take prospective profits as their own guide. On the contrary, they are compelled to do so; for the men who mix too much philanthropy with business soon cease to be leaders. But a system of economic organization which forces men to accept so artificial an aim as pecuniary profit cannot guide their efforts with certainty toward their own ideals of public welfare. The business management of single enterprises may be admirably systematic in detail; but it is controlled by no large human purpose.

3. Even from the point of view of business, prospective profit is an uncertain, flickering light. For it has already been shown that profits depend upon two variables-on margins between selling and buying prices and on the volume of trade-related to each other in unstable fashion, and each subject to perturbations from a multitude of unpredictable causes. That the system of prices has its own. order is clear; but it is not less clear that this order fails to afford certainty of business success. Men of long experience and proved sagacity often find their calculations of profit upset by conjunctures which they could not anticipate: Thus the money economy confuses the guidance of economic activity by interjecting a large element of chance into every business venture.

4. The hazards to be assumed grow greater with the extent of the market and with the time which elapses between the initiation and the fruition of an enterprise. But the progress of industrial technic is steadily widening markets, and requiring heavier investments of capital for future production. Hence the share in economic leadership which falls to lenders, that of reviewing the various chances afforded them for investment, presents increasing difficulties. And, as has been shown, a large proportion of these lenders, particularly of the lenders on long time, lack the capacity and the training for the successful performance of such work.

These defects in the system of guiding economic activity and the bewildering complexity of the task itself allow the processes of economic life to fall into those recurrent disorders which constitute crises and depressions. Much patient analysis, however, is required to discover just how these disorders arise, and why, instead of becoming chronic, they lead after a time to the return of prosperity.

See also 9. Planlessness and Conflict.

104.

Some Shortcomings of Self-Interest.

140.

PRODUCTION FOR PROFIT

All our system revolves around that central sun of profit-making. Here is a factory in which a great many people are making shoddy clothing. You can tell at a glance that it is shoddy clothing, and quite unfit for wearing. But why are the people making shoddy goods-why don't they make decent clothing, since they can do it quite as well? Why, because there is a profit for somebody in making shoddy. Here a group of men are building a house. They are making it of the poorest materials, making dingy little rooms; the building is badly constructed, and it can never be other than a barracks. Why this "jerry-building"? There is no reason under the sun why poor houses should be built except that somebody hopes to make profit out of them.

Goods are adulterated and debased, even the food of the nation is poisoned, for profit. Legislatures are corrupted and courts of justice are polluted by the presence of the bribe-giver and the bribetaker for profit. Nations are embroiled in quarrels and armies slaughter armies over questions which are, always, ultimately questions of profit. Here are children toiling in sweatshops, factories, and mines while men are idle and seeking work. Why? Do we need the labor of the little ones in order to produce enough to maintain the life of the nation? No. But there are some people who are going to make a profit out of the labors which sap the strength of those little ones. Here are thousands of people hungry, clamoring for food and perishing for lack of it. They are willing to work; there are resources for them to work upon; they could easily maintain themselves in comfort and gladness if they set to work. Then why don't they set to work? Oh, Jonathan, the torment of this monotonous answer is Adapted by permission from John Spargo, The Common Sense of Socialism, pp. 75-78. (Charles H. Kerr & Co., 1911.)

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