What is the goal of the limited liability, joint-stock company, the core institution of the contemporary capitalist economy? What implications does the answer have for such a company's freedom to be “creative” in the way Bill Gates uses the term? The classic answer to the first of these questions, repeated often in these discussions, is that its aim is to maximise profits. This statement is not false. But it is vastly too limited. Here are ten points relevant to this theme.I will make some brief comments on some of his 10 points.
His first point is that the role of a company is to provide goods and services and its goal is profit-maximisation. Wolf writes
The goal of profit-maximization drives the firm to fulfill its role.No, its the other way round. The role of the firm is to maximise profits and the way it does this is by providing people with goods and services they want. So the goal of providing goods and services drives the firm to fulfil its role, profit-maximisation. Profit-maximisation makes possible consumption maximisation and as Adam Smith pointed out more than 240 years ago that "Consumption is the sole end and purpose of all production".
Wolf's third point is
... a company is viewed in the Anglo-American world as a bundle of contracts.No. Ever since Grossman and Hart (1986) the economist's view of a company is as a collection of assets under common ownership. That is
... a 'firm' is defined as a collection of assets over which certain agents have property rights. (Moore 1992)In his fifth point Wolf claims
... shareholders are not genuine owners.Again following Grossman and Hart, the owners of a firm are those who have residual control rights over the non-human assets of the firm. Such a view seems in line with the legal approach. As Oliver Wendell Holmes Jr. put it,
But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))Shareholders would have ultimately the residual controls of the firm. Normally, for good efficiency reasons, shareholders also have the residual income rights over the firm. But if income and control right are separate, then the "owner" of the firm is whoever has the control rights. Wolf goes on to write that those people with the biggest investment in the firm and thus those with the greatest exposure to firm-specific risks are not shareholders, but core workers. And one would say such "core workers" (however one defines that term) are paid, at least in part, directly to carry such "risk."
Wolf goes on to say
Sixth, if companies can be freely bought and sold, relational contracts, which depend on continuing interaction among specific people inside the business, are hardly worth the paper they are (not) written on.But why? If relational contacts are truly important to the working of the firm, why would a profit maximising owner not want to honour such contacts? Not to do so would seem to endanger the aim of profit maximisation.
In point 8 Wolf claims
The failure of Japanese capitalism to achieve the highest level of productivity and sustained dynamism may have far more to with repression of domestic competition in many markets for goods and, above all, services, rather than with the absence of an active market for corporate control.But are these things related? Is the lack of an active competition for corporate control just an example of a more general lack of competition in many markets.
Wolf's point 9 is that
Because these companies cannot be forced to maximize shareholder value, they can indeed undertake a range of costly “charitable” activities, provided they do not threaten the company’s ability to survive.In other words, Wolf want the management of the company to be able to steal the profits of shareholders and use them for whatever “charitable” activities they just happen to want to support, for whatever reasons. If Mr Wolf was to invest in a company I was manager of I would use his money to support the New Zealand Society for the Making Fun of Pommy Journalists, a well known and respected “charitable” activity in these parts. But I'm sure Mr Wolf wouldn't mind. But I do have to ask, Would it not be better for the firm to maximise the income of its shareholders and then let them decide which “charitable” activities to support? What makes a firm's managers so much better at deciding which “charitable” activities to support than the shareholders of the firm?
Wolf ends his article by pointing out
... the more “Anglo-American” capitalism becomes and so the more shareholder driven, [...] the less concerned with wider social results it is likely to be.And I say that is just as it should be. A firms job is not to be "concerned with wider social results". If Mr Wolf wishes to do social work, which seems likely given that he has given up any pretence of doing economics, let him do it with his money and not by stealing the money of others.
Let me end by making the point that one of the strengths of Anglo-American capitalism is the many forms of governance that it has developed to deal with different situations. We have profit maximising firms, not for profit firms, producer cooperative, consumer cooperatives, worker-owned firms and so on. These firms have developed organically and have evolved through time in response to the changing economic and social environment. Such governance structures may be better suited to dealing the issues Wolf seems to want to address.
- Grossman, S. and 0 . Hart, 1986, The costs and benefits of ownership: A theory of vertical and lateral integration, Journal of Political Economy 94, 691-719.
- Moore, John, 1992, The firm as a collection of assets, European Economic Review 36 493-507.