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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
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.

Ethics on the cheap

In this moment of public anger over corporate malfeasance, plenty of people are ready to blame the economic crisis on the moral downfall of business, and ideas such as Becker's will make it easier for them to do so. But a more subtle reading of the effect of the shareholder value of business morality is not that it made business executives markedly less ethical, but that it insulated them in a comfortable cocoon of ignorance, encouraging them to think about what they were doing in the narrowest possible terms, telling them that if they took care of the stock price (and themselves), there was nothing to worry about. It is a formula for avoidance, for never thinking about what can go wrong.

At some point in the future, folks will read Becker's ideas about corporate social responsibility and wonder how anyone could really believe them. They will seem as dated as the 19th century musings of writers like Herbert Spencer do now. But one of the most perplexing things about reading Uncommon Sense is that it ultimately leaves you wondering just how much Becker believes his own rhetoric.

Toward the end of the book there is a chapter that takes on Yahoo’s and Google’s dealings with the government of China, which has tried to use the records of Internet companies to identify dissidents. For Yahoo to turn over the names of its users to an authoritarian state, however, is clearly going too far. Says Becker: "I do believe that it is reprehensible for Yahoo to disclose the names of Chinese citizens using its services, particularly when the information Yahoo has about one of them led to his arrest and imprisonment. Whatever one's beliefs about other rules of corporate behavior in China, disclosure of names of 'dissidents' who face arrest and punishment is unacceptable."

It's hard to see what the bright-line difference is here between this and "other rules of corporate behavior." Yahoo's justification for doing that was that it was merely following the local laws. And why shouldn't it? Surely getting an edge in China is in the shareholders' interest. The most plausible explanation here is pretty simple. It's that Becker doesn't really think much of corporate efforts to raise foreign living standards or avoid bribery (possibly he doesn't care much, but, more charitably, it's clear that he doesn't think they do anyone any good) but does care about the speech rights of dissidents in a dictatorship. I think this last part is to his credit, but it is also devastating to his thesis, which just shows how quickly an absolute rule on the preeminence of shareholder rights, like many similar uniform principles, falls apart when it collides with an issue you really care about.

There's the rub of the minimalist view of business morality: When it's pushed far enough, nobody really believes it, and corporate chieftains who operate on its precepts climb its steps to find not a lectern but a hidden noose. The more assertively that industries—from health insurers who sell plans whose fine print makes them worthless to power generators hooked on coal—have embraced the “whatever serves the shareholders” mode of operating, the more they have found themselves on the defensive. Forty years ago, maybe capitalism really did require a contentious defense, but now the moral minimalism looks like a very tattered seam in the social fabric, and even Becker can't fully rouse himself to stitch it back together in the same old way. The shareholder value theory is ethics on the cheap, a low cost way of justifying anything you want, but like the cheap straw house in the fable, it tends to fall over at the first wind—and right now, the winds of outrage are blowing really hard.