Shareholder Optimization and the Degradation of Democratic and Economic Institutions
One of my biggest learnings from my recent research on capitalism and inequality is the extent to which corporate capture of government has contributed to the extreme inequality we see today. This is counter to the common narrative that inequality has been driven largely from an embrace of neoliberalism (i.e. free markets) in economic policies. Ironic too, as corporatism inhibits competition and as a consequence, the very free market efficiency that underpins neoliberalism itself.
The shareholder value maximization view of the firm is not fundamental to capitalism, it took hold in the 1960s on the heels of Milton Friedman’s Capitalism and Freedom, which argued “few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.” This led to a shift from the firm being viewed as a dynamic organization with complex decision making to a “nexus of contracts” where the managers were agents acting on behalf of the owners of the firm.
The story from there is well captured in the passage above. In all fairness to Friedman, he held a belief in the ability of governments to enable free markets, which would in turn yield optimal social outcomes. His words were also written to make the case for the freedom enabled in capitalist economies as opposed to communist ones.
Friedman underestimated, or entirely missed, the risk that the market would capture governments for the benefit of the singular and grossly oversimplified objective function of financial returns to shareholders. As a consequence, the very institutions that enable markets to function as they should have been degraded.
It’s clear how far we’ve drifted from the ideals and intentions that started us down our current path. This also lays bare that reforming campaign finance is just as important for the reformation of capitalism as it is for the reformation of American democracy.
To be continued…
#capitalism #capitalismandinequality #corporatism #miltonfriedman #reimaginingcapitalism
