Public Policies to “Protect” Firms and Workers
Historically in the United States, the government has rarely stepped in to protect individual businesses from changing levels of demand or competition. There have been some notable exceptions, including the federal governments guarantee of $1.5 billion in loans to the Chrysler Corporation, the nations third-largest automobile manufacturer, when it faced bankruptcy in 1980.
Although direct financial assistance to corporations has been rare, the government has provided subsidies or partial protection from international competition to a large number of industries. Economic analysis of these programs rarely finds such subsidies and protection to be a good idea for the nation as a whole, though naturally the companies and workers who receive the support are better off. But usually these programs result in higher prices for consumers, higher taxes, and they hurt other U.S. businesses and workers.
For example, in the 1980s the U.S. government negotiated limits on Japanese car imports, and the price of new Japanese cars sold in the United States increased by an average of $2,000. The price of new U.S. cars also rose on average by about $1,000. Although the import limits did save some jobs in the U.S. automobile industry, the total cost of saving the jobs was several times higher than what workers earned from these jobs. When fewer dollars are sent to Japan to buy new automobiles, the Japanese companies and consumers also have fewer dollars to spend on U.S. exports to Japan, such as grain, music cassettes and CDs, and commercial passenger jets. So the protection from Japanese car imports hurt firms and workers in U.S. export industries. Still other U.S. firms and workers were hurt because some U.S. consumers spent more for cars and had less to spend on other goods and services.
It is simply not possible to subsidize and protect everyone in the U.S. economy from changes in consumer demands and technology, or from international trade and competition. And while most people agree that the government should subsidize the production of certain types of goods required for national defense, such as electronic navigation and surveillance systems, economists warn against the futility of trying to protect large numbers of firms and workers from change and competition. Typically such support cannot be sustained over the long run, when the cost of protection and subsidies begins to mount up, except in cases where producers and workers represent a strong special interest group with enough political clout to maintain their special protection or subsidies.
When the special protection or support is removed, the adjustments that producers and workers often have to make then can be much more severe than they would have been when the government programs were first adopted. That has happened when price support programs for milk and other agricultural products were phased out, and when policies that subsidized U.S. oil production and limited imports of oil were dropped in the 1970s, during the worldwide oil shortage.
For these reasons, if public assistance is provided to a particular industry, economists are likely to favor only temporary payments to cover some of the costs of relocation and retraining of workers. That policy limits the cost of such assistance and leaves workers and firms free to move their resources into whatever opportunities they believe will work best for them.
Most producers in the United States and other market economies must face competition every day. If they are successful, they stand to earn large returns. But they also risk the possibility of failure and large losses. The lure of profits and the risk of losses are both part of what makes production in a market economy efficient and responsive to consumer demands.
CORPORATIONS AND OTHER TYPES OF BUSINESSES
Three major types of firms carry out the production of goods and services in the U.S. economy: sole proprietorships, partnerships, and corporations. In 1995 the U.S. economy included 16.4 million proprietorships, excluding farms; 1.6 million partnerships; and about 4.3 million corporations. The corporations, however, produce far more goods and services than the proprietorships and partnerships combined.
Proprietorships and Partnerships
Sole proprietorships are typically owned and operated by one person or family. The owner is personally responsible for all debts incurred by the business, but the owner gets to keep any profits the firm earns, after paying taxes. The owners liability or responsibility for paying debts incurred by the business is considered unlimited. That is, any individual or organization that is owed money by the business can claim all of the business owners assets (such as personal savings and belongings), except those protected under bankruptcy laws.
Normally when the person who owns or operates a proprietorship retires or dies, the business is either sold to someone else, or simply closes down after any creditors are paid. Many small retail businesses are operated as sole proprietorships, often by people who also work part-time or even full-time in other jobs. Some farms are operated as sole proprietorships, though today corporations own many of the nations farms.
Partnerships are like sole proprietorships except that there are two or more owners who have agreed to divide, in some proportion, the risks taken and the profits earned by the firm. Legally, the partners still face unlimited liability and may have their personal property and savings claimed to pay off the businesss debts. There are fewer partnerships than corporations or sole proprietorships in the United States, but historically partnerships were widely used by certain professionals, such as lawyers, architects, doctors, and dentists. During the 1980s and 1990s, however, the number of partnerships in the U.S. economy has grown far more slowly than the number of sole proprietorships and corporations. Even many of the professions that once operated predominantly as partnerships have found it important to take advantage of the special features of corporations.
In the United States a corporation is chartered by one of the 50 states as a legal body. That means it is, in law, a separate entity from its owners, who own shares of stock in the corporation. In the United States, corporate names often end with the abbreviation Inc., which stands for incorporated and refers to the idea that the business is a separate legal body.
The key feature of corporations is limited liability. Unlike proprietorships and partnerships, the owners of a corporation are not personally responsible for any debts of the business. The only thing stockholders risk by investing in a corporation is what they have paid for their ownership shares, or stocks. Those who are owed money by the corporation cannot claim stockholders savings and other personal assets, even if the corporation goes into bankruptcy. Instead, the corporation is a separate legal entity, with the right to enter into contracts, to sue or be sued, and to continue to operate as long as it is profitable, which could be hundreds of years.
When the stockholders who own the corporation die, their stock is part of their estate and will be inherited by new owners. The corporation can go on doing business and usually will, unless the corporation is a small, closely held firm that is operated by one or two major stockholders. The largest U.S. corporations often have millions of stockholders, with no one person owning as much as 1 percent of the business. Limited liability and the possibility of operating for hundreds of years make corporations an attractive business structure, especially for large-scale operations where millions or even billions of dollars may be at risk.
When a new corporation is formed, a legal document called a prospectus is prepared to describe what the business will do, as well as who the directors of the corporation and its major investors will be. Those who buy this initial stock offering become the first owners of the corporation, and their investments provide the funds that allow the corporation to begin doing business.
Separation of Ownership and Control
The advantages of limited liability and of an unlimited number of years to operate have made corporations the dominant form of business for large-scale enterprises in the United States. However, there is one major drawback to this form of business. With sole proprietorships, the owners of the business are usually the same people who manage and operate the business. But in large corporations, corporate officers manage the business on behalf of the stockholders. This separation of management and ownership creates a potential conflict of interest. In particular, man