Monday, March 26, 2012

Pro-Market is not Pro-Business

Mark Thoma today links to an interesting post by INSEAD professor Niraj Dawar noting the inconsistency inherent in most business school curriculums. Dawar points out that while professing love for free markets, business schools also stress the importance of maximizing shareholder wealth. But because the best way to ensure profits is often to create regulatory barriers that create rents, business schools actively encourage their students to subvert the principles of the free market they claim to believe in.

His post highlights an important, but oft-overlooked point, in economic policy discussions--pro-market is not pro-business. One can believe markets serve as the best way to allocate resources without believing corporations--or rather the people working for corporations--always seek to do that*. Businesses making mistakes don't invalidate markets; only a failure of the market to punish those mistakes does. A belief that markets eventually get things right doesn't require a belief that the markets are getting things right at any particular time.

Oddly though, market supporters often do reflexively back corporations and the rich**--even though it does not seem a preference for markets requires them to do so. Tyler Cowen, for instance, tries to justify CEO salaries using studies that don't really help his cause. Why, though, does someone that believes in markets need to believe CEOs earn their keep? One could consistently hold the position that: 1.) CEO salaries result from a market failure and principle-agent problems; 2.) because of that, many CEOs are overpaid; 3.) but the government should not take measures to correct this, because the market will eventually eliminate firms with inefficient management structures. I'm not completely satisfied with this answer for a number of reasons unimportant to this post, but it seems to me a plausible market-based response. Yet instead of admitting CEOs are overpaid and explaining why they're not concerned, people often try to fight the underlying premise.

A worrying consequence of this is that it leads to unnecessary tension between the left and right. The focus of debates often centers around anti- and pro-business forces rather than focusing market mechanisms and whether they're working. And we end up in a scenario that shouldn't please anyone--markets don't work and businesses win***.

* Indeed, market adherents should, be skeptical of corporations for one of the reasons they're skeptical of government: central planning. Of course, if the government screws up its planning, it retains its monopoly on force; if a corporation screws up its planning, it goes out of business. But that doesn't require believing companies themselves are good.

** I find the political leanings of most college football and basketball coaches particularly galling. Rich, middle-aged men backing Republicans that believe in "competition, etc." while earning their millions thanks to a labor cartel imposed on teenagers. So much for the free market.

*** And, even worse, the MBAs that run them get rich.

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