“Political Engagement by Corporations Would Be Far Down the List of Forces Responsible for Popular Discontent”

The third installment in ProMarket’s new interview series on the economic theory of the firm. In this installment, we ask Chicago Booth’s Steven Kaplan how the existing theory should be modified, if at all. “The biggest source of populist discontent is the dislocation caused by technological change and globalization.”

 

 

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On March 3-4, the Stigler Center at the University of Chicago Booth School of Business, along with Harvard Business School and Oxford University, will host a conference in Chicago to answer the following questions: Should the economic theory of the firm be modified? And if so, how?

 

The standard (economic) theory of the firm is silent on the role firms can play in shaping the rules of the game under which they operate. In reality, many firms lobby politicians and try to capture regulators in order to modify the rules of the game in their favor. Some scholars have argued that the resources devoted to these activities are relatively so small that they are likely to have insignificant effects, and/or that regardless of how much firms invest in political activities, in a well-functioning democracy there are countervailing forces that effectively level the playing field. Other scholars have noted that the resources firms devote to shaping the rules of the game to their own advantage are sufficiently large and their effects sufficiently important to warrant a rethinking of the standard economic theory of the firm. Which of these two views has more empirical support? If the latter, should the economic theory of the firm be modified? If so, how, and is the potential fix better or worse than the existing problem?

 

The following interview with Professor Steven Kaplan is part of an interview series with influential scholars who are addressing these issues in their work. You can view all previous installments here 


 

 

Steven N. Kaplan
Steven N. Kaplan

Steven Neil Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business. His research focuses on issues in private equity, venture capital, entrepreneurial finance, corporate governance, and corporate finance. Kaplan co-founded the entrepreneurship program at Booth, and was named one of the top 12 business school teachers in the U.S. by BusinessWeek.

 

In a brief interview with ProMarket ahead of the upcoming conference on the theory of the firm,  Kaplan shared some thoughts on the role of corporations and government interference in the market.

 

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

 

I am a bit confused. Hasn’t the idea of regulatory capture and, implicitly, political engagement, been a subject of economic study since George Stigler’s “Theory of Economic Regulation” in 1971? In other words, it would be a big omission if, in fact, it were omitted. In reality, economists have paid attention to political engagement for a long time.

 

Q: To what extent is political engagement by corporations responsible for the current populist discontent?

 

Very little. The biggest source of populist discontent is the dislocation caused by technological change and globalization. That dislocation has made the global economy much better off overall. The global poverty rate has declined substantially. Billions of people now earn a living rather than starving. It is a huge success. As Nobel Prize winner Angus Deaton wrote, “Life is better now than at almost any time in history. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.” At the same time, this success has challenged the less skilled in developed countries—particularly the U.S. and Western Europe. 

 

The second biggest source of discontent comes from the policies implemented in those countries that make it more expensive to hire less skilled workers. Raising the minimum wage, licensing rules, and other employment mandates increase the costs of hiring less skilled workers. At the same time, technology and globalization reduce the costs of substitutes. The net effect is fewer jobs. France is the best example. Germany is one of the few countries that moved in the opposite direction and has had less of an employment problem. Immigration policies also have fueled discontent. 

 

Political engagement by corporations would be far down the list of important forces.

 

Q: The World Economic Forum has called for “reimagining” and “reforming” capitalism. To what extent is this need for reform the result of disruption brought by technological change, globalization, and immigration and to what extent is it the effect of rent seeking and regulatory capture?

 

Technological change and globalization are paramount.

 

Q: Some people describe Donald Trump’s economic policies as “corporatism.” Are you more worried by Trump’s interference in the market economy or by companies’ ability to subvert markets’ rules?

 

I am concerned about Trump’s proposals to restrict economically desirable immigration, to restrict trade, and to interfere with corporate decision making.

 

I am encouraged by Trump’s proposals to reduce regulations of all kinds that will make it more desirable to invest in the U.S. and hire people in the U.S.

 

Again, I think companies’ ability to subvert rules is less important relative to these other issues.

 

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy. 

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