What Kind of Community Is the Firm? - Corporate Governance and Business Ethics

The Firm as an Artificial and Imperfect Society,The Firm as an Intermediate Body

On account of their end or purpose, states are considered by Aristotle in the Politics to be “natural” and “perfect” societies. By contrast, therefore, modern day corporations could be characterized as examples of “artificial” and “imperfect” associations.

The state, like the family and the village, is a “natural” society, because it stems from an innate tendency in human beings (Politics, henceforth Pltcs). The family, which issues from the union of man and woman as husband and wife, is “natural” because it arises in response to a deeply felt need in human beings to leave behind living images of themselves in and through their children. The village, too, is “natural” because the human instinct for self-preservation requires that one look beyond the daily needs satisfied within the household to the requirements of a longer term of existence. The village which includes children, grandchildren and other relatives by blood or marriage is, in this sense, like a prolongation or extension of one’s original family. Next down this line of “natural” institutions comes the state, which results from several villages being united in a single, complete community.

From among these three “natural” institutions, however, only the state is “perfect” because it alone is “self-sufficing” for the good life. Not only day to day needs, but also those of a life whole and entire can be expected to be met within the bounds of the state. Only in the state can human beings truly aspire to live a completely good life. The state thus represents the “end” or “final cause”, the fully developed stage of human existence (Pltcs). For this reason, although the state may be considered chronologically posterior to both the family and the village, it is in reality prior to them:

The proof that the state is a creation of nature and prior to the individual is that the individual, when isolated, is not self-sufficing; and therefore he is like a part in relation to the whole.

Individuals, then, just like the families and the villages they form, are like parts with respect to the whole represented by the state. Moreover, although nature has implanted in all human beings a social instinct, only in the state can this innate tendency be fully developed and perfected through the institutions of law and justice. Otherwise, outside of the state, human beings become the most savage and worst of animals.

Within the context of Aristotle’s political architecture, just how does the firm fit? First of all, although Aristotle does not mention business firms and corporations in the Politics, we could find allusions to them in the “family connections, brotherhoods, common sacrifices and amusements” that draw human beings together. In contrast with the family and the village, and most importantly, with the state, the firm may be considered an “artificial” society because it arises neither directly nor organically from human nature. Rather, the firm is based on voluntary bonds of “friendship” a foreshadowing of contracts primarily among citizens of the same state. It is also called an “imperfect” society because it is not self-sufficing for the good life. A business corporation is an example of an “intermediate body or association” situated between individuals and their families, on the one hand, and the state, on the other. As such, it is not meant to substitute for the family in the provision of the daily needs for survival, nor the state as the proper locus of a full and flourishing human life. Rather, like all other intermediate bodies, its purpose is to supply some of the necessary means in this particular case, goods and services for the good life in the state.

The Economic End of the Firm

In the welter of intermediate bodies normally found in a healthy state, a special place is reserved for those that broadly seek economic ends, and it is among these that we include firms and business corporations. A primarily economic focus distinguishes businesses from other possible intermediate groups such as churches, professional colleges, sports associations, neighborhood councils, cultural clubs and the like. It’s not that these other intermediate bodies lack any economic dimension or significance; it’s just that such an economic dimension or significance is not their main concern, unlike firms and business corporations. Business firms and corporations, then, are intermediate bodies that pursue economic goals. But what exactly are these goals?

Returning once more to Aristotle’s Politics, we are told that the economy was born within the family, as “household management” (Pltcs). His treatment of the economy in its original, etymological meaning of “household management” begins with a survey of the different parts necessary for a complete household and the relationships among them:

The first and fewest possible parts of a family are master and slave, husband and wife, father and children. We have therefore to consider what each of these three relations is and ought to be: I mean the relation of master and servant, the marriage relation (the conjunction of man and wife has no name of its own), and thirdly, the paternal relation (this also has no proper name).

Early in his discussion of the economy as household management, Aristotle distinguishes between the art of household management in itself and the art of getting wealth or chrematistics In both arts, however, Aristotle acknowledges the difference between a natural and a non-natural form.

Natural chrematistics pertains to the provision of “such things necessary to life, and useful for the community of the family or state, as can be stored”, whereas non-natural chrematistics of “riches and property [which] have no limit”. Natural wealth-getting is based on the premise that true riches, the kind and amount of property needed for a good life, is not without limit. There is a level beyond which the mere accumulation of material things becomes more of a nuisance or a liability to human flourishing than an advantage or help. Nowadays, one could think of having more cars than could fit in the garage, or more foodstuffs than the refrigerator could store, for example.

Non-natural wealth-getting, on the other hand, believes that “more is always better” and that for the good of the economy there should be no stop in piling up possessions. Although the example may be a bit dated, by non-natural wealth getting Aristotle referred primarily to retail trade and exchange, which allowed one to accumulate riches in the form of money or coin, practically without limit. But, coined money is a mere sham, a thing not natural, but conventional only, because, if users substitute another commodity for it, it is worthless, and because it is not useful as a means to any of the necessities of life, and, indeed, he who is rich in coin may often be in want of necessary food. But how can that be wealth of which a man may have great abundance and yet perish with hunger.

Somehow we can still relate to the situation Aristotle describes if we imagine ourselves in a foreign country without the proper currency or where our credit cards are not honored. Whatever wealth or money we think we have is rendered useless, unable to pay even for a piece of bread.

However, the art of household management or economy properly speaking seems to refer more to the use of property rather than to its acquisition, Aristotle implies. Once again, in the use of property or its corresponding art we ought to differentiate between the natural or proper and the non-natural or improper. Take the case of a shoe: if it is used for wear, one makes a proper use, while if it is used for exchange; one makes an improper use, “for a shoe is not made to be an object of barter”. The proper use of any material possession acknowledges a limit or a further end that makes the activity honorable, whereas its improper use is void of limit and thus becomes censurable. To illustrate this unnatural and inappropriate use of wealth once more, within the context of a primitive economy Aristotle points out to usury, which makes a gain out of money itself. For money was intended to be used in exchange, but not to increase at interest.

It is important to realize that, both in the acquisition and the use of wealth, the difference between the natural and the non-natural depends more on the dispositions of human beings than on the material things themselves. Unbridled desires, the want of wealth and pleasure or enjoyment untutored by virtue, lead human beings to non-natural forms of getting and using material possessions. This way, unbeknownst to them, their search for happiness or flourishing becomes self-defeating. Failure then won’t be the fault of the material things but of their own vices.

Speaking about the non-natural art of chrematistics or wealth-getting in which business firms and corporations ultimately engage, Aristotle states that in the first community, indeed, which is the family, this art is obviously of no use, but it begins to be useful when the society increases. For the members of the family originally had all things in common.

The next stage, characterized by a still natural form of chrematistics, begins when the family grows and becomes big enough to be finally, non- natural chrematistics inevitably takes place when a society’s needs become more complex. Together with it come the widespread use of money and the establishment of the first businesses or firms. As Aristotle relates, When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use. (Pltcs)

These new functions resulting from the development of the economy and society can only be carried out effectively by larger organizations such as corporations or firms, understood as extensions of the family or “economic friendships” Insofar as business firms and corporations play a role in the production of goods and services, they operate within the realm of wealth-getting or chrematistics. And inasmuch as business firms and corporations are artificial societies, they are meant as a help or complement to the material resources that nature, in principle, ought to provide. In other words, the activity of business firms and corporations forms part of the so-called non-natural chrematistics. What is clear by Aristotle’s reckoning is that business firms and corporations only fulfill a subordinate or secondary function in the economy, which that is to say, the main purpose of the economy is to facilitate the development of human excellence or virtue by guaranteeing to the extent possible the material conditions for its practice. And virtue, in turn, is sought primarily because it affords us happiness, a good, flourishing life.

Getting back to our initial query of how business firms and corporations fit in the state, we can now say, in accordance with Aristotle’s teachings, the following: As a class of artificial intermediate bodies, business firms and corporations belong to the realm of the economy. In particular, their purpose is the non-natural acquisition or provision of material goods beyond the capabilities of the family. Resulting from a variant of the art of wealth-getting or chrematistics, business firms and corporations should be subject to the superior art of the economy itself, which consists in the administration and use of material goods. All economic activity in turn and the institutions it gives rise to, such as business firms or corporations and the market should function under the guidance of ethics, which is the “practical science” or art of virtue. The economy has as its mission to facilitate the practice of virtue by establishing favorable material conditions among the citizens of a state. And virtues, in the final analysis, are sought insofar as they help us attain happiness or a flourishing life in the state, under the tutelage of politics.

Only within this hierarchy of disciplines and institutions, each one with its own proper object, can the true role of business firms and corporations within society be ascertained. Because “the end of the state is the good life, and these [i.e., family connections, brotherhoods, common sacrifices, and amusements, and by extension, firms] are the means towards it. The economic ends that corporations seek are simply means to the political end that city-states for their part propose. The production of goods and services which is the purpose of business corporations and firms is not at all self-justifying. It is desirable and acquires meaning only insofar as it contributes to a flourishing life in the state. Later on, we shall have the occasion to draw from here implications for the proper governance of business corporations and firms.

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