Here’s a letter to the Washington Post:
Megan McArdle ably warns against the dubious ethics lurking within calls for “stakeholder capitalism” (“It’s hard to argue against firms looking beyond investors. But let me try.” August 21). Also lurking within these calls is dubious economics – namely, the mistaken belief that, by intentionally “looking beyond” investors, corporations will thereby better serve all stakeholders.
The ironic reality is that when businesses respond to market prices and wages in ways that maximize share values they generally promote the welfare of a far larger number of stakeholders than when businesses discount the importance of share values in order to intentionally promote the welfare of stakeholders. The reason is quite practical: the only stakeholders whose welfare businesses can intentionally promote are those who are known and, hence, who currently exist. But precisely because the range of people who are affected by each business’s decisions extends well beyond today’s investors – it extends to consumers, workers, and citizens distant both in space and time – attempts to promote the welfare of known stakeholders will inflict larger, if unnoticed, harms on multitudes of real but invisible people.
Suppose, for example, that businesses intentionally sacrifice some share value in order to promote the welfare of American workers by refusing to buy inputs from abroad. We can see, and feel glad for, workers who thus keep their jobs. But what about consumers who, as a result of this solicitousness for salient stakeholders, must pay higher prices? What about firms and workers who, because consumers must reduce their spending on some goods and services, go bankrupt and lose their jobs? What about businesses that lose sales, and workers who lose jobs, because, with foreigners now earning fewer dollars supplying Americans with imports, foreigners have fewer dollars to spend on American exports? What about consumers tomorrow who, because businesses today intentionally operate at less than peak efficiency, have access to fewer and lower-quality goods and services? And what about workers tomorrow who – also as a result of businesses today operating inefficiently – are paid lower wages?
Competitive markets, and their resulting prices and wages, oblige businesses to take account of the welfare of far larger numbers of people – many not yet born – than can possibly be taken account of intentionally.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030