The Nexus of Contracts Corporation and Social Contract Theory

The dominant shareholder value maximization paradigm of corporate governance, which holds that the sole ambition of corporations is to maximize the profits for their shareholders, is founded upon the theoretical notion of the corporation as a nexus of contracts developed by Chicago School economists such as Milton Friedman, Michael Jensen, William Meckling, Armen Alchian, Harold Demsetz and Eugene Fama in the 1970s and 80s.
Instead of seeing the corporation as a legal person with property, rights, and duties distinct and separate from the individuals that make it up (shareholders, board of directors, managers, employees, contractors, and suppliers), as political and legal thought had done in different ways since Roman antiquity, the Chicago School economists argued that the corporation was a legal fiction serving as a ‘private market’ for a host of contractual relationships. While the notion of contract, hence, is absolute central for the Chicago School’s understanding of the corporation, surprisingly scarce engagement with the concept is found in these economists’ discussion, and no reference is made to vast literature on social contract theory in political thought.
By bringing the Chicago School’s understanding of the corporation as a nexus of contracts into conversation with social contract theory, the paper argues firstly (drawing on Hobbes) that voluntary contract between free individuals can indeed create hierarchical power relation, and secondly (drawing on Rousseau) that voluntary contract between free individuals can indeed change their interests, passions, and subjectivity. Together, these two arguments challenge the Chicago School’s notion of the modern corporation, and the free-market economy which it is a vital part of, as power-free, apolitical, and inherently voluntary.