Sunday, January 18, 2015

Henry Manne Has Died

By Don Bodreaux

Henry Manne’s death prompts me to ponder just why I admire him and his work so deeply.  The reason has much to do with Henry’s close association with the late Armen Alchian.
As anyone who has spent even a modest amount of time with Henry knows, Alchian was Henry’s great hero – and Henry was decidedly not a man prone to having heroes.  Yet Henry’s regard for Alchian, the man and his work, was vast and unreserved.  I think what Henry saw in Alchian – and what Henry’s own admirers saw in Henry – was the reality that each unfailingly understood that competition in human affairs is an intrepid force and, hence, realized that the ways that competition plays out in reality are far greater than are the ways that are identified in even the best economic textbooks.
Alchian and Henry had a too-rare knack for using formal economic theory properly.  Never did they mistake the categories (such as “prices,” “quantities,” “marginal-cost schedule”) used in textbooks for being either descriptions of reality or prescriptions for reality.  They understood what such categories – and their verbal, graphical, and mathematical depictions – are: tools of thought and analyses to help our puny minds get a better grip on the enormously complex economic reality.  Alchian and Henry used microeconomic theory with far greater facility than do 99 percent of all other economists because they understood its limitations better than do 99 percent of economists.
Alchian and Henry were both masters at identifying ways that competitive forces, if suppressed at point A in the economy, would intensify at points B and C.  The fact that points B and C are never identified in any formal economic model never kept Alchian and Henry from knowing that B and C exist and are affected when there is change in those parts of the economy that are identified in conventional theory.
Here’s one straightforward example of the insightful mindset that I’m describing:Henry Manne almost single-handedly exposed the fundamental flaw in Adolf Berle’s and Gardiner Means’s argument that, because executives in large modern corporations seldom personally own large ownership shares of the firms that they manage, this ‘separation of ownership from control’ causes modern corporations to be managed poorly.  Henry identified other economic margins in reality on which the interests of corporate managers are aligned with those of corporate shareholders.  The stock market, and the ability especially of corporate raiders to take advantage of the low share prices of poorly managed firms, protects shareholders from being victimized by lazy, incompetent, or corrupt managerseven when these managers own not a single share of stock in the corporations that they manage.  And, so, also of course, Henry understood that government efforts to prevent so-called ‘corporate raiding’ would not merely prevent corporate raiding: it would, in fact, protect incumbent managers from the bracing and healthy forces of competition – a protection that would indeed divorce the interests of incumbent managers from the interests of corporate shareholders.

1 comment:

  1. Sad... his work on why insider trading shouldn't be a crime was pretty groundbreaking.