The nature of a corporation and how it changed in the 1980s

By Matt Stoller

Let’s start with Pfizer, which announced the acquisition of generics maker Hospira for $17B this week. Pfizer isn’t a drug company.  Pfizer is a financial company that happens to own some labs and drug factories.  Pfizer’s business model is to acquire small companies who innovate, lay off their scientists, and ride the patent or other monopolies.  Former employees of acquired companies explain this clearly. So does Pfizer itself.

Pfizer is telling Wall Street that the acquisition will be ‘accretive to earnings’ and it will cut $800M in costs. Laying off scientists.  What this means, in reality, is that large pharma companies are actually innovation destroying machines. How did we get here?

Prior to the 1980s, Americans understood that corporations were private governments of resources and people.  Large corporation consolidations in the 1890s were done under the auspices of rationalizing the economy.  Then antitrust from the 1930s to the 1970s was done to force these private governments to act in the public interest. RCA, GE, Alcoa, Dupont, Xerox, etc – all were forced by antitrust actions to put their patents into the public domain.  The US gov’t structured markets as a way of ensuring that these political entities had checks and balances on their activities.

Antitrust was a Madisonian solution to the monopoly problem of the 1890s-1920s, which was understood as political NOT economic.  This had an incredible effect. Large companies, like Dupont, were forced to spend more on R&D instead of acquiring innovation.  Because they had to compete against smaller firms and they couldn’t acquire (due to merger scrutiny).  Pfizer’s business model, in other words, would have been illegal prior to the 1970s.

Most of the laws that forced this state of affairs are still on the books. The were just reinterpreted by Reagan.  Any President can simply go back to the pre-1981 model through executive action. Every merger is still reviewed by DOJ.

In the 1980s, an intellectual revolution took hold. Corporations were no longer private governments. They became property.  They weren’t political entities, but economic entities pursuing ‘efficiency’. Corporations exist only for shareholder benefit.  This idea was radical. Prior to this, few thought large shareholders were the only stakeholders, or even the most important ones.  Eliminating all other interests – workers, managers, customers, communities, national security, small shareholders – was truly radical.

It was a political fight, but the Reagan conservatives along with Wall Street Dems of the early 1980s won.  Liberal Democrats had focused their energies on important social questions, rather than the nature of the corporation.  The result was Wall Street primacy and a massive merger boom in the 1980s. Layoffs, offshoring, globalization, monopolies, etc.

This idea that these private governments – corporations – exist solely for shareholders has led to a dangerous unbalanced politics.  In which the industrial base, worker rights, small businesses, consumers, don’t matter. Even China’s strategic threat is irrelevant.

This is changing. Net neutrality is the first significant antitrust concept to emerge and take hold since the Reagan revolution.  Because tech companies and citizens intuitively understand but can’t articulate that telecoms are private governments, not just property.

Which brings us back to Pfizer. The ability to create/sell medicine is of deep public interest. Pfizer has a state charter to do this.  That Pfizer instead is full of financial engineers who generate cash by destroying access to medicine is increasingly understood.  Same with hospital monopolies. These should not be run to maximize cash generation over patient well-being. This is a consequence of the Reagan revolution in corporate governance. It is unsustainable. And the ideas behind it are stale and bad.

All it will take to reorganize our culture is relearning that corporations are part of our political system and need to be managed through a Madisonian checks and balances system of ensuring competition and the public interest as mattering.

Antitrust is popular, Zephyr Teachout got huge applause lines on it when she ran a shoestring campaign in NYC.  Net neutralit generated 4 million comments to the FCC. People get it. It’s simple stuff. The liberal lawyer elites aren’t there yet.  But we’re beginning to understand the importance of the government protecting private property from corporate predators.  And Citizens United is opening up a new (or rather old) way to understand how political corporations really are.

And that is why these ideas are coming back. And why our political system feels deadened, but is on the verge of renewal.

(And to make the point another way: In 2008, Pfizer/Wyeth spent $13B on R&D. 2009, Pfizer bought Wyeth. In 2013, the combined company spent $6.55B on R&D. Down 50%.)