“Not everything that can be counted counts and not everything that counts can be counted,” is a quote often attributed to Albert Einstein, which I think aptly sums up the past 40 years. Since the 80s, we’ve been laser-focused on numbers and missed the underlying math. We’ve become finance-obsessed but lost track of economics.
Consider Jack Welch, who Fortune magazine named “Manager of the Century.” In the article explaining why he deserved such an honor, it lauded the CEO’s ability to increase the stock price and deliver consistent earnings growth, but nowhere did it refer to a breakthrough product or impact on society.
There’s a good reason for that. As NY Times columnist David Gelles explains in, The Man Who Broke Capitalism, Welch increased profits largely by firing workers, cutting investment and “financializing” the firm. During his 20 year reign, innovation faltered and the company produced less, not more. Clearly, we need to reevaluate what we consider valuable.
What’s The Purpose Of A Company?
In a famous 1937 paper, Ronald Coase argued that the economic function of a firm was to minimize transaction costs, especially information costs. For example, it makes sense to keep employees on staff, even if you might not need them today, so that you don’t need to search for people tomorrow when important work needs to be done..
In 1976, Michael Jensen and William Meckling built on Coase’s work in their groundbreaking paper entitled The Theory of The Firm, which asserted that the purpose of the firm was to make money for its owners. They further argued that there is a fundamental principal-agency problem between managers and owners because their interests are not perfectly aligned.
These were brilliant works of economic theory, but as reflections of reality they are somewhat absurd. People start businesses for all sorts of reasons, profits being just one motivation. That’s why we have public benefit corporations and socially responsible investment funds. Heirs such as Abigail Disney have spoken out strongly against corporate greed.
There is simply no basis for the notion that owners of businesses care only about profits, much less the stock price over a given period. Yet during…