Capitalism vs. Free Markets

Naked Capitalism has a great post up on some of the problems with the maximizing shareholder value theory of corporate governance. Put simply, maximizing shareholder value is an academic theory that went mainstream. In practice it has proven to be a terrible paradigm for corporate governance but powerful interests insist on keeping it this way despite shareholders having nothing but a residual legal claim.

To build on this, I think that concepts like maximizing shareholder value are at the root of what is wrong with our social system. It creates bad incentives and decays the culture and morals. I've been reflecting on these issues quite a bit since starting my MBA program; something I noticed very quickly is that compared to my previous studies there is little effort being made to question the root assumptions or to consider what impact these assumptions are having on behavior.

To start with, maximizing shareholder value is one of the more obvious giveaways of the authoritarian ideology at the root of our supposedly free market right wing. There is no good objective reason why maximizing shareholder value should be a priority of corporations in a free market, other stakeholders, especially employees but also customers and suppliers, have much more powerful and pressing interests in the good governance of corporations. Shareholders often have interests at odds with other stakeholders in a corporation yet those that claim to be in favor of free markets uphold norms that favor these modern absentee landlords over stakeholders with a far greater stake and stronger incentives to make a business run well and profitably. Unless a business anticipates a near term need to raise greater equity financing there is no reason to put shareholders anywhere but last among the various stakeholders, yet our system favors the capitalists over the rest. This leads to an upward distribution of wealth and makes our corporations less competitive than earlier doctrines of corporate governance which emphasized shareholders less.

Another issue is that it gives managers interests and incentives that are often at odds with the wellbeing of the members composing the organization they manage. In just about any other organization the members that compose that organization are regarded as effectively being that organization, yet, with the maximizing shareholder value theory of corporate governance the actual employees that make up the organization are often rated no higher than the plant and equipment the corporation owns. Since we do know that how organizations are conceived of and how members relate to each other is important for organizational functioning it should be obvious that this doesn't maximize organizational effectiveness. The idea that an organization can be "owned" distinctly from the members composing it should seem a bit odd to us, especially since the ownership adds no value beyond the ability to occasionally raise capital. That it doesn't is an indictment on our culture.

These two issues are enough for a quick post. This is a subject I'll probably have more to right about later. Something that I didn't expect to happen when I started a business program was that it would make me think more about whether or not capitalism is actually a useful concept. Seeing the number of unexamined assumptions in my business classes is making me think that it just might be something useful. There is certainly something distinct about an ideology that places owners above workers despite this relationship being inefficient and corrosive to good organizational behavior. Free markets certainly don't demand these relationships. That they exist argues in favor of a distinct capitalist ideology with essentially authoritarian roots that undermines free market institutions in the interests of siphoning wealth and political power towards the top. This needs more thinking on my part but I'm coming around to the idea that there is something to the Marxist notion of capitalism, provided that the Smithian idea of the free market is retained as the proper comparison point to diagnose the evils of capitalism rather than some sort of fantastical socialist utopia.