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The Neoclassical Theory of the Firm Does Not Consider Political Engagement

Wednesday, March 15, 2017 11:58
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From an interview with John C. Coffee at ProMarket:

Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big of an omission do you think this is?

The problems in expanding the theory of the firm to consider political engagements are considerable. Of course, political engagement by firms can be viewed as merely rent-seeking. Unavoidably, this produces waste… (and possibly also corrupt[s] the political system).

But before one jumps to the conclusion that therefore corporations should be denied the right to influence political decisions in the interests of efficiency, more must be considered. For example, this week, over one hundred public corporations, most of them high-tech firms, filed a brief opposing the legality of the executive order signed by President Trump barring various immigrants.1) This can be viewed as collective action by firms in defense of capitalism and the free flow of goods and services. Those opposed to firms lobbying regulatory agencies would probably approve this defense by corporations of human rights. Nor was this case unique. Corporations, like Apple, Facebook, and Google, have regularly defended human rights.

What this implies is that any absolute, prophylactic rule against political engagement may be undesirable. How then should we distinguish between “good” and “bad” political engagements by corporations? One approach might be to refine the rules of corporate governance and give shareholders greater rights in the process. To the extent that shareholders are diversified, they should rationally oppose rent-seeking by competing firms, as such activity just raises the costs for both sides.

Conversely, however, in concentrated industries where collusion is more likely than competition, diversified shareholders might rationally support rent-seeking (and even reduced competition) by the firms in which they invest. Some empirical evidence suggests that investors in the highly concentrated airline industry have behaved this way. Hence, stronger corporate governance may supply a partial answer sometimes, but hardly always. At best, it can add transparency to the process, thereby making rent-seeking less feasible.

Theorists of the firm who wish to restrict political engagements by firms face a serious problem that they have not yet recognized: at least in the United States, corporate political engagement may be protected by the First Amendment. This means that reforms such as disclosure are possible (and, I think, desirable), but stricter, prophylactic rules are probably not. …



Source: http://economistsview.typepad.com/economistsview/2017/03/the-neoclassical-theory-of-the-firm-does-not-consider-political-engagement.html

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