Do Market Libertarians Believe Their Own Hype?

For several years now, two very smart people—Nobel Prize-winning economist Gary Becker and polymath jurist Richard Posner—have written a blog together in which they debate the economic and legal issues of the day. Now their essays from that blog have been collected into a book, Uncommon Sense, which includes insights on everything from polygamy to organ sales to taxes on fattening foods. But there's one idea that the book pushes that's worth focusing on, because it's one of the worst in the history of thinking about business or morality, and a truly striking example of how smart people can come up with dumb ideas: the “shareholder value” theory of corporate ethics.

Uncommon Sense: Economic Insights, from Marriage to Terrorism, by Gary S. Becker & Richard A. Posner

You can read Becker's take on corporate social responsibility here if you want to get his side of this in his own words. But in summary, Becker's view of corporate morality is that the only ethical responsibilities of business executives are to obey the law, adhere to contracts (really just a subset of the first rule), and, most critically, to maximize the price of their companies' shares. The first coherent statement of this moral view came from the economist Milton Friedman in a full-throated defense of capitalism with the brilliantly blunt title, “The Social Responsibility of Business Is To Increase Its Profits.” Now the bogeyman of creeping socialism that Milton worried about 40 years ago is long gone, as is Friedman himself, who died in 2006, but his contentious and now ossified principles live on in the writings of Becker, his most faithful student.

The Friedman-Becker moral theory has three virtues. The first is its simplicity; it reduces the whole tangle of moral issues to a simple bright-line test. The second is that it is able to justify most miserable behavior and even turn the tables on anyone who suggests, for instance, that companies should worry about the treatment of workers in Chinese factories or the fairness of offering subprime mortgages with usurious terms. To care about things like this is not only unnecessary, the theory suggests, but actually wrong because it betrays the interests of the shareholders who are the executive's ultimate employers.

The third virtue is that it combines supremely well with the idea that senior executives should have pay packages that rely mainly on stock options and reward them for a single-minded devotion to the share price. The combination of the “shareholder value” theory and stock- and options-based compensation creates a beautifully virtuous circle. The profits of the shareholders are the CEO’s own interests, too, so if acting in the best interests of the shareholders (that is, raising the share price) is the CEOs main moral responsibility ... well, gee, acting ethically means acting in his own best interest is always the right thing to do.

The shareholder value theory demands almost nothing of contemporary executives that they don't already want to do. And on top of this, it defangs the one meaningful charge—following the law—because, in general, proponents of the theory have absolutely nothing to say about corporate efforts to affect the law (think of the Chamber of Commerce campaign against environmental legislation). So the shareholder value theory winds up telling executives that their only responsibility is to maximize their own profits, except insofar as they are guided by regulations that they actively try to minimize by lobbying. And, by the way, defeating or creating loopholes in laws is not only OK, but the only right thing to do because it, too, is—you know where this sentence will end—in the best interests of the shareholders.

For most ordinary people, the Alice-in-Wonderland absurdity of this is ragingly obvious. But not to Becker, who is a shareholder-value-theory absolutist. This is not because he is an evil man. It's simply that he is convinced that having corporations follow their economic bliss will create the biggest economy, and the details of what happens along the way don't really concern him. He is like the drawing room social Darwinists of the turn of the last century, looking so far ahead toward the mountain peak of “progress” that the treacherous crevasse directly in front seems like a miniscule concern. The immediate objections that even the most ordinary reader will come up with—what happens if a company discovers that, say, using radioactive materials to make day-glo gadgets is dangerous, before the government has made them illegal?—elude his Nobel-prize winning gaze.