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Monday, March 26, 2012

"Markets or Shareholders?"

Where do crony capitalists get their training?:

Markets or shareholders?, by Niraj Dawar, INSEAD: There is a fine line between professing free-market capitalism and teaching the subversion of those markets that is crossed in business-school classrooms every day. ...
We like to believe in the ideal of free markets because competition, we are convinced, is good for the economy. Competition forces sellers to keep the interests of the buyers at the heart of what they do; competition marginalizes and eliminates inefficient players; and competition for customers and resources spurs innovation... In short, these ideal markets lead to an efficient allocation of the economy’s resources, making us all better off in the long term.
If there is one principle that informs business school curricula, it is the belief in the efficiency and inherent goodness of free markets.
But there is another principle that contends for the title, and that is the belief that the goal of a business organization is the maximization of shareholder value. ... This is a worthy goal... Businesses that aim to maximize shareholder value in competitive markets will use the economy’s resources efficiently.
In a real economy – one that is not your textbook picture-perfect market – the maximization of shareholder value is most efficiently achieved by exploiting market imperfections..., companies get into the business of creating and maintaining regulatory wrinkles so that they can continue to exploit them... Firms that push for government protection in the form of trade barriers, longer patent life, or more global application of patents are attempting to keep competitors out. This type of lobbying for protection and favorable regulation undermines markets in many industries in many countries, including telecoms, banking, airlines, energy, infrastructure, pharmaceuticals, etc. ...
And business schools often end up supporting the erection of regulatory barriers to entry. In other words, at the same time as we profess a reverence for the markets, we’re teaching the subversion of freer markets. ...
Restoring society’s eroding faith in capitalism is not something that will happen overnight. Alleviating popular skepticism of business schools and their graduates may take even longer. But a good place for business schools to start is with some soul searching about where their allegiance resides: with efficient markets in the service of society, or with the creation of market inefficiencies in the service of oligopolies?
(Amusing as it may be to watch, the theater of having MBAs take oaths and participate in ring ceremonies is not going to restore society’s faith in business schools).

This problem won't be solved from within, i.e. by hoping that businesses will suddenly drop behaviors that lead to increased profits. It's the institutions surrounding markets that must adjust.

    Posted by on Monday, March 26, 2012 at 11:28 AM in Economics, Market Failure, Regulation | Permalink  Comments (18)


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