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CAPITALISM/ On Economic Myths

The idea that maximizing shareholder value is the essential task of any corporation has replaced the understanding that there is a duty to serve all stakeholders. By MICHAEL SEAN WINTERS

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Not all myths are created equal. No one worships Zeus anymore. Myths can only continue to shape a culture so long as they encapsulate what are accepted as essential truths. Nor are all myths false: The gods of the Greeks and the Romans disappeared into the mists of history when the Christian myth took root and I, for one, believe the Christian myth. That said, our Christian beliefs were better able to help people make sense of their lives and their world which is why they swept away the false myths that preceded them.

Think of the some of the myths that surround America’s founding and their enduring strength in shaping the national narrative. Myth 1: The Pilgrims came seeking religious freedom. Actually, the Pilgrims had as much religious liberty as they could want in Holland. They came to America mostly to seek a better life in this world, not the next. Myth 2: The Constitution was devised to put clear checks on governmental authority. In fact, the Constitution was adopted to provide for a stronger federal government, not a weaker one. These myths persist because they continue to have political usefulness.

Nowhere are myths more pernicious than when we examine the modern economy. In this morning’s Washington Post (February 12 -ed.), Harold Meyerson tackles one such myth, the idea that maximizing shareholder value is the essential task of any corporation. He correctly notes that there is no legal requirement that a corporation so conduct itself as to serve first and foremost the goal of higher dividends for stockholders. And, he also shows that this myth is fairly recent, emerging in the 1970s and replacing a previous cultural understanding that corporations had a duty to serve all stakeholders – investors, workers and the community – and not just the investor class. And, as soon as bonuses for management became linked with increases in shareholder value, you can bet they would become the primary focus.

The consequences of this new myth for growing income inequality are obvious and Meyerson notes them succinctly: While the value of the S & P Index rose thirty percent last year, capital expenditures for that same S & P 500 only went up by 1.3 percent and disposable income for Americans as a whole rose less than one percent. And, Meyerson usefully notes that while some of our laissez-faire friends point to new technologies and globalization of the labor force as the key drivers of growing income inequality, Germany is as subject to technological advances and a globalized market as the U.S. is, and they have far lower levels of income inequality because the stakeholder myth, rather than the shareholder myth, continues to govern that nation’s approach to corporate responsibility.

The money quote: “Shareholder capitalism is sustained not by law but by an institutional edifice of greed.”