CEOs are qualified to make a profit, not to run the company
And it is not clear how to motivate them to do so. From a company’s stock price, a board can tell how well its leader is serving shareholders. That’s why boards often hold CEOs accountable by compensating them with shares or stock options. No similar metric is available to judge how well a CEO serves the company as a whole.
Certainly, a change of perspective on business management could be justified despite these difficulties if the personal interest inherent in shareholder capitalism were pernicious. Sometimes it is undeniably, but it is not necessary. A lesson from Econ 101 is that the self-interested behavior of consumers and businesses, driven by market forces and constrained by competition, can lead to desirable outcomes.
In more advanced economics courses, this lesson is called the First Fundamental Theorem of Welfare Economics. In essence, the theorem says that competitive markets with interested players make the economic pie as big as possible. This result is arguably the crown jewel of economic theory.
Lest this be thought to be naively Panglossian conclusion, let me note three caveats.
First, a well-functioning government is necessary to protect property rights and maintain the rule of law, on which competitive markets are based. Widespread corruption is one of the reasons many countries remain mired in poverty.
Second, while free markets yield a large economic pie, they do not guarantee that it is distributed fairly. A strong social safety net is essential to help those who are left behind and to maintain confidence in a market economy.
Third, the first welfare theorem does not apply perfectly in the real world, where market activities can have significant negative side effects. Carbon emissions that contribute to climate change are one example, which is why many economists endorse carbon taxes to correct the market failure.
In other words, the world needs people to take care of the general well-being of society. But these people are not business leaders. They are elected, competent and trustworthy leaders.
Unfortunately, we haven’t had such leadership in the White House in the past four years. That is why I intend to vote for Mr Biden in November. I just hope he reconsiders his view of shareholder capitalism.
N. Gregory Mankiw is Robert M. Beren Professor of Economics at Harvard University.