About the Conference
In two previous conferences1 and in a sequence of papers,2 we have suggested that there is a “crisis” in the neoclassical theory of the firm. We read the theory as suggesting that managers are positively required to invest in political activity—including political activity that weakens institutions on which the free market relies – if such investments are likely to increase shareholder value of individual firms. Indeed, an extensive body of research suggests that firms routinely engage in the political process with the aim of shaping the rules of the game to their own advantage.
To be sure, there may be circumstances when such political activity is not welfare reducing (e.g., in cases in which public institutions are sufficiently robust or when political markets are themselves sufficiently competitive). Under less favorable conditions, however, such political activity can plausibly be expected to reduce social welfare by distorting the institutions of the free market. Since the primary justification of the pursuit of shareholder value is the belief that it maximizes social welfare in the presence of the free market, suggesting that this pursuit justifies firms actively distorting the market through political activity would seem to present a fundamental contradiction.
Notably, Milton Friedman argued that firms should maximize profits “while con¬forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” He did not argue that firms should maximize profits through investments designed to change the basic rules of the game to their advantage. Yet this is exactly what seems to be required under the prevailing theory of the firm.
The conference will be by invitation only. Researchers interested in receiving an invitation, please submit your CV and invitation request here.
- Professor Rebecca Henderson, Harvard Business School
- Professor David Moss, Harvard Business School
- Professor Karthik Ramanna, University of Oxford Blavatnik School of Government
- Professor Luigi Zingales, University of Chicago Booth School of Business
1At Harvard, November 20-21, 2015; at Chicago, March 3-4, 2017.
2See, for example, https://www.brookings.edu/research/do-managers-have-a-role-to-play-in-sustaining-the-institutions-of-capitalism/ and http://www.hbs.edu/faculty/conferences/2015-crisis-in-theory-of-firm/Documents/Crisis%20in%20the%20Theory%20November%202015.pdf and https://www.aeaweb.org/articles?id=10.1257/jep.31.3.113.