Thursday, August 22, 2019

The More Deeply One Examines the Case for So-Called “Stakeholder Capitalism,” the More One Sees Its Confusions, Contradictions, and Potential Dangers

Here’s a Don Boudreaux letter to Joshua Johnson, host of NPR’s “The 1A”:
Mr. Joshua Johnson, Host
The 1A
WAMU Radio
Mr. Johnson:
I enjoyed today’s show on “Shareholders To Stakeholders: Why Business Leaders Are Shifting Focus.” I write, however, to register disagreement with Rick Wartzman’s case that corporations should aim to maximize, not share values, but, instead, the well-being of so-called “stakeholders.” Mr. Wartzman’s case is filled with several flaws, including …
… his repetition of familiar yet thoroughly debunked myths, such as that the inflation-adjusted pay of ordinary American workers hasn’t risen in 40 years (see, for example, here and here), and that maximization of share values requires corporate executives to ignore the long-run and focus only on the short-run. If corporations ignored the long-run, it would be impossible to explain, for example, why Google is spending $13 billion this year to build new offices and data centers.
… his mistaken suggestion that corporations that successfully maximize share values in competitive economies yield benefits only to their shareholders. In reality, the case for keeping businesses free to earn as much profit as possible in competitive markets is not only, or even chiefly, that successful businesses yield maximum possible profits to their owners but, instead, that such businesses, in their pursuit of profit, create an abundant flow of goods and services out of which ordinary people improve their living standards. I, for example, have never owned a single share of Amazon, Apple, Google, or Ikea, yet each of these companies has contributed greatly to my improved well-being.
… his presumption that identifying “stakeholders” is easy. For example, do workers who would get high-paying jobs in the future only if resources are released through painful corporate downsizing in the present count as stakeholders? If not, why not? And because workers at, say, Walmart will suffer if Target successfully devises a better means for it to serve consumers, should Target, when deciding whether or not to implement this means of better serving consumers, take account of the likely negative consequences that its innovation will have on the shareholders and workers of rival retailers – and if that negative impact is judged to be sufficiently big, refrain from implementing this means of better serving consumers? If not, why not?
Declarations that corporations should maximize “stakeholder” welfare rather than “merely” maximize share values have a nice ring to the ears of people who think only superficially about such matters. But the more deeply one examines the case for so-called “stakeholder capitalism,” the more one seesits confusions, contradictions, and potential dangers.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
The above originally appeared at Cafe Hayek

1 comment:

  1. ---"[...]have a nice ring to the ears of people who think only superficially about such matters."---

    And there lies the origin of bad economic thinking: pondering these matters only in a superficial manner.

    Stakeholder theory has grabbed the attention of too many clueless executives who think that espousing nice-sounding notions gets then a "good and moral person" clean bill of health, as if it provided any true value and as if the enmiea of Capitalism cared even a bit. This afternoon I was listening to an NPR interview of the person who may be the main contributor to that awful anti-capitalist screed published in the NYT. The person was making the claim that Capitalism is intertwined with racism. Talk about superficial thinking. The interviewer made no attempt to challenge that claim,by the way.