Rethinking the Social Purpose of the Corporation

Capitalism goes in stages : Mercantile in the 18th century, industrial in the 19th and global capitalism throughout the 20th.

Each period broadly based on the concept of capitalisation — That is, the net value stored in all forms of capital — natural, share, intellectual, human, financial, social, promissory and manufactured — tended to increase as a result of economic processes and transactions.

Capitals Canvas (capital).png


Capitals are any store of value employed to sustain an individual, corporation or nation.  The capitals are the building blocks of common wealth.


The latest epoch of capitalism has seen the process of capitalisation reversed.

Under this new stage of capitalism, the capitals are no longer converted from one form into another or exchanged with stakeholders to create the greatest value but the greatest profit.   To a thinking capitalist this defies reason.  For if the other seven capitals invested for that profit hold greater value than the resulting financial capital there is no capitalisation or increase in value.  The net effect is logically a reduction in total value or what I call "decapitalisation" or "anti-capitalisation".

My argument is that an economic system that seeks to maximise and prioritise financial capital above all else has the tendency to create a negative return on the investment of all eight capitals when measured in terms other than money.

The paradox of decapitalism is that it produces more money but less value.

Closing factories, slashing costs, cutting jobs, reducing research, automation and not paying tax may all boost the financial bottom line. But, when measured in the universal currency of value, the alternative balance sheet might well be negative.  

Commentators call these management measures “short-termism”.  But the reality is that short-term decisions have nothing to do with time. What makes a short-term decision so damaging is that they invariably  involve an inefficient conversion or transfer of capitals. The negative return on the investment of capitals reducing the total value available to sustain individuals, corporations and even nations.

Value, Capitals and Capitalisation

 My approach to capitalisation is based on the following assumptions:

  • the universal measure of equivalence between all capitals  are units of value or more accurately, energy.    There is a strong (and largely forgotten) argument that physical and social energy is the true currency of capitalism.  Value and energy are interchangeable concepts. 
  • Value is stored in all forms of capitals - natural, intellectual, human, financial, social, and manufactured (IIRC 2013).   As a corporate lawyer, I also include share and promissory capital as forms of capital.
  • Financial capital is one form in which value/energy is stored.  Financial capital cannot be used as a universal measure of equivalence and is not a synonym for value (see below).
  • Capitals are not created equally. Each form of capital has unique properties and qualitative characteristics that make them, in energetic terms, more or less useful. For example, social capital increases by use and financial capital exhausts by use (and non use - inflation). 
  • Capitals are subject to laws of conversion. Like Joule discovered the laws of energy conversion in relation to physical energy, Karl Marx and Adam Smith were in search of the laws of social energy conversion.
  • Based on these laws, capitals can be converted from one form into another or exchanged.  
  • In broad terms, the embedded value in each form of capital determines the efficiency of conversion/exchange of capitals. 
  • Not all capitals can be converted or exchanged directly into financial capital and vice versa.  The price mechanism cannot co-ordinate capitals that have value but no price.
  • Capitalisation results from the efficient conversion of capitals to increase net value calculated across all capitals.
  • Decapitalisation results from an inefficient conversions of capitals that decreases net value calculated across all capitals. 

Each assumption interacts and is integrated with the others to form a rudimentary model of how capitalisation and its antithesis works and to provide the basis for prediction.  For example, the theory of capitalisation can be used to provide a novel and surprising explanation for why corporations exist collectively and why they cease to exist individually.

The Purpose of the Corporation

If the central organising principle of capitalism is capitalisation, the purpose of the corporation is not to serve shareholders or stakeholders. My research leads me to find that the purpose of the corporation, as a legal and economic construct, is immensely more exciting  and compelling than that imagined to date and, if correct may have a profound impact on the future.

Strange as this proposition sounds, in the same way that Watt exploited the principles of energy conversion to invent the steam engine, I think the unnamed architects of the 1856 Joint Stock Companies Act, exploited the laws of capital and capital conversion to invent the ultimate (social) energy conversion system — the modern corporation.   A entity with separate legal existence from its shareholders and surroundings.

The Economist was prescient when it declared in 1926 that: 

“The economic historian of the future may assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honour with Watt and Stephenson, and other pioneers of the Industrial Revolution."

Each invented an engine.  

My argument is that corporations can be conceived in law and for other purposes as autonomous energy conversion systems that maintain their existence independent from their surroundings through a process of efficient capitalisation (not unlike metabolism) — converting and exchanging useful energy (use value) stored in various capitals and accumulating the same for later use.    

 A symbol for the autonomous independent corporation

A symbol for the autonomous independent corporation

The genius of the 1856 Act is the invention of an entity that could efficiently convert and exchange capitals with their surroundings — shareholders, customers, employees, suppliers and other groups — and thereby accumulate more net energy/value than an individual could and do so in perpetuity.      

In this way corporations do not seek profits they seek utility.  The neo-classical economic assumption that “individuals maximise utilty and firms maximise profits” is flawed in the eyes of the law (and society).   Firms (in the form of a corporation) being granted existence  by the law must seek utility by exploiting the laws of capital to sustaining their own existence.   Maximising profit at the expense of utility is destructive and self harming.

 How corporations capitalise

How corporations capitalise

This might not sound that important. But in science, net energy, or the energy available to an organism or society after investments to obtain that energy is considered critical to long-term survival and the well-being of both humans and society (Tainter 1988; Hall and Klitgaard 2012). Indeed, in the history of human progress, the single most important factor has been breakthroughs in energy conversion efficiency.

The sublime innovation of the corporation is that by creating an entity whose existence depended almost entirely on capitalisation, the legislators had assured the future social energy needs of society.

If energy is stored capitals, the modern corporation is the high performance engine of capitalisation. Created in law with the powers to convert social and physical energy into all the capitals required to drive both social and economic growth. What ever the purpose of the incorporator of an individual corporation, the legislature had invested in the legal form a far greater ambition — whether they were aware of it or not.

What this means is that corporations don’t just exist, as economists and some lawyers argue, because they reduce transaction costs for shareholders. After all, transaction costs are the energy/value used to convert or exchange one capital into another.  More importantly, reducing transaction costs can never turn a negative value return on the value invested into a positive one. This is because the transaction costs are always deducted from the net value. 

To sum up, corporations exist because they are more efficient at converting capital to produce greater value than individuals.  When properly conceived, incorporated entities naturally increase the efficiency of value/energy conversion within society as a whole.

The social responsibility of a corporation is therefore simply to be a corporation. For embedded in its design as a legal and economic entity that sustains itself through capitalisation, is the increase of net value/energy available to individuals and society.   In this way corporations are not unlike plants.   Whereas plants convert forms of energy to exist thereby producing oxygen, corporations convert forms of energy to exist thereby producing the building blocks of society - the capitals.  Humanity has a vital symbiotic relationship with both these animate prime movers.     

The Rise of the Decapitalists and the Fall of Capitalism

In a 1970 New York Times article, Milton Friedman famously argued that a businesses’ social responsibility was to generate profit for shareholders. The late economist was a decapitalist. Who, along with Jensen and Meckling in 1976, broke capitalism by turning corporate boards against their corporations.   

In fact, many who claim to be the champions of capitalism are better understood as decapitalists. Consider the following statement from Warren Buffett defending a Brazilian private equity firm known for “zero-based budgeting,” or in plain speak, cutting jobs, closing factories and slashing costs:

“ they have followed the standard capitalist formula, market system formula, of trying to do business with fewer people,” ….”That benefits everybody, particularly benefits the owner, but it’s a painful process and sometimes there’s a big political reaction to it.”

This is the decapitalist formula. There being no assurance that fewer people means more value — particularly if the fewer people worked in research and development. All too often, Buffett’s formula results in the impossible task of trying to do business with less and less capitals. This makes no sense other to the investment industry. Investors and the industrial complex behind them who can only capitalise their businesses by convincing company directors to decapitalise theirs. Buffett’s intentional mistake is to confuse his business model with capitalism.

 How corporations decapitalise

How corporations decapitalise


This does not mean the corporations should not seek profits. What it means is that corporations should strive for both increasing profits and increasing value at the same time. Because if profits go up and net value goes down, what has happened is that the corporation has been decapitalised. More money but less total energy to draw on to sustain its own existence. Remembering that key factor in determining longevity is the total energy returned on the energy invested. If that’s negative, the corporation is less likely to survive.  

If you doubt the impact of the decapitalists, consider that the average “lifespan” of a corporation listed on the S&P 500 has decreased by over 50 years in the last century. From 67 years in the 1920’s to under 15 years today and predicted to decline further. I think (and hope to one day prove) that there is direct causality between corporate mortality and life expectancy and the inefficient use of the 8 capitals.  

The grim reality is that since the time of Friedman’s article directors have been encouraged to decapitalise their corporations. Under the influence of shareholder primacy, the mantra of maximizing profits and the goal of financial efficiency corporations have been systematically turning capitals with more value than money into money. Resulting in less overall value available to sustain not only the existence of the corporation but society as whole. The impact of this ranges from regulatory capture, rising rates of public company mortality to broader social inequality to the very way we measure growth.   In fact, just about everything called short-termism can be explained and measured using the central idea of capitalisation.

Welcome to decapitalism.

More on this and measuring the impact of decapitalisation soon.

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