Intro to Political Economy Essay Series


Introduction to a Post-structuralist View of the Firm (including Enron example)

by Satya J. Gabriel

This essay was written for Introduction to Political Economy, a course at the University of Massachusetts designed to present students with a basic understanding of post-structuralist Marxian theory and the difference between that theory and both neoclassical and orthodox Marxian theories. The essay is also strongly influenced by my work in corporate finance.

February 3, 2002

Theory provides a way of seeing things and of understanding how the things we see relate to each other.  Different theories teach us to see different things and sometimes to understand the logic of the relationship of those things very differently.  Post-structuralist Marxian theory provides us with a specific way of making sense of the world:  it introduces the concept of class processes into our "sense" of the world, allowing us to perceive and debate certain aspects of society that are absent from other theories.  This focus upon class processes also points us in the direction of certain sites in society as the object of analysis.  One such site (or set of sites) is the  firm, as one possible location where class processes are created and reproduced. 

Post-structuralist Marxian theory is grounded in the concept of overdetermination.  Overdetermination provides us a logic for understanding the relationship of the concepts in the theory.  From this perspective, we need to conceptualize the various processes that make up the firm and the way these processes are connected:  the nexus between the various processes within the firm, so to speak.  Overdetermination tells us that all of the various processes that make up the firm are interdependent, mutually constitutive.  Why do we look at processes, rather than structures?  Because overdetermination (as a post-structuralist ontology) implies perpetual change, the world of Heraclitus (where you can never step in the same river twice).  If processes shape each other, then any change in any process leads to a change in all the other processes.  Something is always changing, therefore everything is always changing.  Just like with the human body.  We're always changing, always in flux.  Every cell is changing.  Some are being discarded by the body and new ones replace it.  We are new in each moment.  We can say the same for the firm. The firm exists in change, as a collection of processes. 

What are these processes that make up the firm?  When we think of the firm, we probably think first of economic processes.  We're trained to think of firms in that way, as sites of production and the origin of commodities destined for sale in various markets, etc.  But the firm is also comprised of political and cultural processes. 

Indeed, in a very identifiable manner the firm is constituted by political processes.  The firm is a legal entity, made possible by laws adopted by organs of the state vested with legislative powers.  The typical firm is organized as a corporation, although firms may also be organized as partnerships or sole proprietorships

Among the various political struggles in society are those over laws governing the identity of firms and the relative effect of social processes (e.g. taxation, regulation, and accounting requirements) upon firms of different identities (e.g. the relative treatment of corporations versus partnerships or sole proprietorships under tax laws and reporting requirements).  These political struggles have determinate impacts upon the economic processes occurring within the firm and those economic processes connecting the firm to other economic agents. 

The same can be said about political struggles within the firm.  Board members may disagree and struggle for control over policy making.  Executives may fight with one another, both explicitly and in more subtle ways, to influence the board or to effect specific practices within the firm. Alliances between various executives and board members may lead to the development of distinct and competing power groups within the firm and the struggles and agreements between these power groups may influence a wide range of processes within and without the firm. The decisions made by the board and executives are not, in any way, reducible to a simple decision-rule, such as profit maximization. Each and every decision is comlexly shaped by these power struggles and the different and changing objectives of competing power groups. Indeed, it may be a commonplace within the firm that less than optimal decisions, from the standpoint of either profit or value maximization, are adopted as a consequence of the complex interaction and competition between power groups (and the interaction between the ruling factions within the firm and external agents, including shareowners, government officials, non-governmental community organizations, and so on). 

Similarly, cultural processes, both external and internal to the firm, are important influences upon the firm and all the political and economic processes shaping the firm.  The "image" of firms, shaped by media presentations, books, the internet, etc., influences legal verdicts, support or opposition to political policies, willingness to purchase firm products, contracts with other firms, and so on.  The image of the firm produced by annual reports, press releases, speeches, company parties, and so on are important determinants of the consciousness of the workers, managers, and directors within the firm.  Thus, it is ultimately the interaction of these political, economic, and cultural processes (and technology and the natural environment) that results in the specific types of firms that prevail in any given social formation at any given historical moment. These firms are, in turn, important determinants of social life, more generally. Firms are both living environments for human beings and shapers of the living environment called the society or social formation.

Since most capitalist firms are organized as corporations and our initial focus (in the course on political economy) is primarily an analysis of capitalism, then it is firm as corporation that interests us here.   The specific corporate form of the firm (henceforth simply referred to as the firm) is epitomized by the legal separation of ownership of and control over (management of) the firm.  The law provides for ownership to be parcelled out in shares, commodified (capable of being bought and sold), and accorded privileged legal protection in the form of limited liability for the losses and other claims against the firm.  To a significant extent, this political constitution of the firm has resulted in the externalization of ownership, removing the body of owners from control over the firm, and creating a political space within which the board of directors and top level managers seize that control (although there are still rare instances where the directors and/or top-level managers may own a majority of ownership shares).

In other words, the state grants an ongoing legal right for human beings, constituted by political processes of selection to be agents of the firm, to engage in determinate processes that shape the distinct economic, political, cultural, and environmental processes engaged in by the firm.  In many cases, though not all, the political processes of selection of the agents of the firm is overdetermined by legal ownership of shares of the firm.  Owners are typically granted the right of electing (one share-one vote or some variation on that theme) the board of directors (or supervisors or trustees, etc) of the firm. 

These directors are the primary policy making and cash flow receiving and distributing body of the firm.  The board of directors is typically charged with the right of hiring and firing the top executives of the firm, who engage in a range of political, economic, and cultural processes shaping the day-to-day life of the firm.  The relationship between the owners, directors, and managers is invariably complex and at times contentious.  The contemporary capitalist corporation is not, then, the firm of Capital, Volume I, but more of Capital, Volumes II and III.  To the extent that there has been a tendency to think of the capitalist appropriator/receiver of surplus value as also the owner and manager of the firm, we now have a divided soul of Marx's Volume I capitalist.  It is not "two souls," however, that "dwell within his breast," but three (and counting).  Well, we're actually misusing Marx's quote from Goethe.  He was referring to the struggle within the capitalist over whether to engage in productive investment (accumulation) or to simply spend his appropriated surplus value on a new Ferrari, but you get the point.  The capitalist appropriator is now a collective titled the board of directors of the firm and empowered to hire or fire the top executives and responsible to the shareholders only to the extent that these shareholders can exert their will (which, in the case of dispersed ownership, tends not to be very far).  It is not one individual torn between possible uses of firm cash flow, but many such divided individuals, each of which is conflicted between more than "two souls."  Despite the assumption prevalent in orthodox economic theories (both the neoclassical and Marxian orthodoxies), the strategies pursued by directors need not be reducible to profit maximization.  As Bruce Norton has pointed out, accumulation is but one of the many possible objectives of directors and top-level executives of the firm.

As for the top level executives, they often manage to take advantage of their day-to-day authority over processes occurring within the firm to exert strong influence on who sits on the board of directors, as well as the policies made by the board, including decisions about compensation of and powers accruing to the managers.  This, coupled with the power of the board (through proxy votes and other legal mechanisms) to shape shareholder votes, can create within the firm a very strong management fiefdom.  Indeed, the cultural process by which the directors (who meet infrequently) acquire information on the company and the relationship of the firm to other economic and non-economic agents via the top level executives oral and written reports strongly influences the directors decisions.  The power of the board of directors to shape communications to and processes of elections by the owners of the firm may strongly influence the election of the board itself.  And let's not forget that the power of the board of directors to appropriate/receive the cash flow of the firm is one of the determinants of management behavior and decisions by owners.  Thus, it is clear that authority and decision-making within the firm is shaped in a complex interaction of top level executives, directors, and shareholders, with the typical firm being dominated, in this regard, by the top level executives who have privileged access to the cultural process of creating a knowledge of the firm (for consumption by the directors and shareholders) and effective day-to-day command over the internal processes of the firm.  Nevertheless, even this dominance is tentative and contingent.  Circumstances could arise in which the top-level executives and the directors come into conflict with each other or with the shareholders.  Under such conditions, the dynamics within the firm could become quite interesting and follow paths not at all predictable within the simplistic logic of orthodox theories.

The assumption that firms single-mindedly pursue profit maximization and/or capital accumulation can cause analysts to miss important strategies pursued by top-level executives and/or directors, as well as other aspects of the internal dynamics of real firms.  Under certain conditions it may even be in the interest of officers and directors of the firm to act against the long-term interest of firm survival.  For example, directors may approve management compensation based on accounting profits (rather than actual cash flow, which is closer to what both neoclassical and Marxian economists mean by profits).  This may encourage top-level executives to devise elaborate mechanisms for adding accounting profits to the firm's income statement, even while creating a context for the firm's eventual bankruptcy.  A recent example of this is Enron, where the firm's top officers developed a strategy of creating partnerships and other subsidiary institutions, operated under the control of Enron officer, financed with Enron equity and debt, that engaged in elaborate transactions with Enron that resulted in increased accounting profits for the company.   The accounting profits (and the fact that the partnerships were also used to mask Enron debt, further assuring that Enron officers could continue their strategy undisturbed by external intervention) not only did not result in increased cash flow for Enron but also masked a seriously deteriorating financial condition for the firm.  Nevertheless, the officers of Enron were rewarded with substantial bonuses and equity capital gains.  Thus, the use of partnerships was in the interest of Enron officers and directors but not in the long-term interest of the firm, which is now in bankruptcy.

The disconnect between the long-term interests of the firm and the self-interest of officers and directors may be viewed as a manifestation of a "cultural lag," to use the expression coined by William Ogburn, who seemed to "borrow" the idea from Marx: a disfunction resulting from the inability of "non-material" culture, in the form of social organization, to keep pace with material (or technological) advances, embodied in the physical apparatuses of the contemporary firm. Whereas the material has advanced to the point of making the workers in the firm highly productive (of surplus value), the non-material, in the form of the organization of the firm, leads to waste of this social surplus (on perqs and excessive compensation) for the officers and directors.  The irony is that the separation of ownership and management was a condition for the existence of the material advance within the context of capitalist firms: this form of organization made it possible to direct capital flows to such firms and finance the investment in technology. The quid pro quo was, however, the implicit (and sometimes explicit) promise of firm management to use the fruits of the productive workers' efforts to satisfy the claims on the residual surplus value. But the more independent the management, the greater the potential for management to violate this promise. 

Restricting our attention for the moment to the commodity producing (industrial) firm, we note that claims on firm cash flow (managers' salaries, commissions, and bonuses; taxes, merchant's fees, rent, dividends, and interest) depend critically on the performance of surplus labor by increasingly productive workers (whose powers of creation have been enhanced by prior workers' creative energies embodied in the material technology deployed in the planning, production, and circulation processes).  Someone has to produce the automobiles, routers, turbines, electricity, steel, or computer software that is sold in order to generate cash flow.  Most firms have a special department within their bureaucracy charged with hiring productive workers and determining, within parameters set by top-level management, the wage and benefits that will be offered to those workers.  Despite the neoclassical notion that firms and potential employees meet and negotiate as virtual equals, in reality, under normal market conditions, human resource managers (like their operations counterparts) wield greater power and have access to superior information than does the potential or existing employee.  The wage negotiation, when such a negotiation is possible, determines the compensation of the worker and is the first internal step within the firm towards the exploitation of that worker.  This compensation package and communication of firm expectations and rules helps to shape or reshape the behavior of the productive worker, who is then expected to use his or her creative talents and energy to create commodities whose value more than covers the cost of the compensation package (and the materials and technology expended by his or her productive labor).  The excess above the cost of the compensation package is the surplus value (assuming that the worker is not entitled to a distributive payment out of surplus for, say, belonging to a union with monopsonistic power).  The existence of this surplus value indicates the presence within the firm of a determinate class process.  The fact that this class process is shaped by a wage labor relationship and the surplus value received by a board of directors separate from the wage laborers tells us that this class process is capitalist.

The ability of the board of directors to satisfy cash claims against the firm depends upon this surplus value.  It is an important condition for their continued right to sit on the boards, so they have a good reason to care whether the workers produce commodities of sufficient value to generate that surplus value (in the form of cash flow).  But the directors are not the party responsible (as directors) for securing, within the command economy of the typical firm, the cooperation of the workforce in bringing this cash flow to fruition.  This is the responsibility of management.  Management must devise the correct strategy for getting concrete labor out of the hired labor-power of the workers.  While the human resource managers have done their part and created the proper conditions for the extraction of labor from labor-power, the next step in the process is, nevertheless, ripe with the potential for problems.  Again, despite another of those pesky assumptions in neoclassical (mainstream) economics that firms hire labor (rather than labor-power or the potential to perform labor), there is always the possibility that the workers who are hired may not do the work or may not do enough work to satisfy the claims on firm surplus value.

This is why we would typically find that a subset of the managers within the firm are primarily interested in devising strategies for pushing workers to create or increase the surplus value that is embodied in the product generated within the firm.  Sometimes this involves direct commands and coercion, at other times it may primarily take the form of persuasion.  Most of the time it is some combination of these political and cultural processes, as well as providing effective economic incentives.   In addition, capitalist firms have developed a tradition of paying workers only after they have performed the work.  In other words, as part of the wage labor contract, workers are compelled to lend their labor power in advance of payment.  This may provide an additional lever for management in their effort to extract labor from the direct producers.

Another subset of managers are charged with devising strategies to realize this surplus value through sales of the created product, generating cash flow.  The success or failure of these managers, in this endeavor, will have a significant impact on the cash flows received by the directors and used by the directors to secure the continued life of the firm through distributive (or subsumed) class payments to the various claimants on the underlying surplus value.  Thus, the firm can now be seen as a nexus of relationships between owners, directors, managers, and workers.

The aforementioned realization of the surplus value in the product created by its workers in the form of cash flow links the life of the firm to its customers.  Thus, there is a need to create an ongoing relationship between the firm and these customers.  Some subset of managers will likely be charged with the primary responsibility of securing this ongoing relationship with customers.  Thus, the firm can now be seen as a nexus of relationships between owners, directors, managers, workers, and customers --- the so-called stakeholders of the firm.

We could keep expanding the list of such stakeholders --- lenders (banks, bondholders), and suppliers would also be important agents with ongoing relationships with the firm, relationships which must be secured, on an ongoing basis, by the management team and through cash flow payments authorized by the board of directors (subsumed class payments).  The ability of the firm to continue as a living organism requires that a wide range of relationships be reproduced by determinate social processes (economic, political, and cultural).  The management team is kept very busy securing these conditions of the continued existence of the firm, including devising strategies for reproducing or expanding the necessary surplus value to meet claims on the firm.  The directors are responsible for hiring top-level managers who are motivated to meet these conditions for the firms' continued existence and for distributing portions of the cash flow to certain of these stakeholders to secure their continued cooperation in the life of the firm.  The workers are constantly being pushed to produce sufficient value that can be realized in cash flow to meet these claims on the firm.  And so on.  A break in this complex nexus can create a threat to the survival of the firm, i.e. a crisis.  The source of this crisis can come from any of the various relationships outlined above.



Copyright © 2002, Satya J. Gabriel, Mount Holyoke College