Following on Per Bylund's citation of Adam Smith's first reference to
"self interest" in the Wealth of Nations, I'd like to suggest Smith's
second reference to the axiom, which appears to address the issue of
shareholder wealth maximization rather than some "societal good" more
directly:
"As every individual ... endeavours as much as he can both to employ his
capital in the support of domestic industry, and so to direct that
industry that its produce may be of the greatest value; every individual
necessarily labours to render the annual revenue of the society as great
as he can. He generally, indeed, neither intends to promote the public
interest, nor knows how much he is promoting it. By preferring the
support of domestic to that of foreign industry, he intends only his own
security; and by directing that industry in such a manner as its produce
may be of the greatest value, he intends only his own gain, and he is in
this, as in many other cases, led by an invisible hand to promote an end
which was no part of his intention. Nor is it always the worse for the
society that it was no part of it. By pursuing his own interest he
frequently promotes that of the society more effectually than when he
really intends to promote it. I have never known much good done by
those who affected to trade for the public good. It is an affection,
indeed, not very common among merchants, and very few words need be
employed in dissuading them from it" (WN, 1: 477-8).
Milton and Rose Friedman (Free to Choose, 1979, xvi) quote this passage
from Adam Smith. I have the feeling that Milton was applying Smith's
argument in a modern context: the CEO's pursuit of profitability on
behalf of shareholders achieves the same purpose as the individual who
employs his capital (funds) to his own advantage.
James Ahiakpor
Bylund, Per wrote:
>
> There are some obvious potential links to early economics works such
> as to Adam Smith’s famous passage “It is not the benevolence of the
> butcher, the brewer, or the baker that we expect our dinner, but from
> their regard to their own interest” (/Wealth of Nations/).
>
> I’m not sure Friedman would need to have borrowed the idea from
> anybody else, however. It seems to follow rather directly from an
> economic understanding of how markets work and the assumption that
> they do so with (little or) no error or friction. If the price system
> perfectly incorporates all relevant information and all prices
> therefore are general equilibrium prices, and the same goes for
> interest rates and thus the temporal tradeoffs (value in the short vs.
> long term), then it follows that a corporation maximizes its benefit
> to society by maximizing its profits. Laborers would do the same as
> would land owners and capitalists.
>
> Of course, it is safe to say that the price system does not quite work
> as in the (often maligned) model of perfect competition. The question
> then becomes if the economy is “close enough” for it to apply, and I
> wouldn’t be surprised if Friedman held that view (but I’m guessing).
>
> PLB
>
>
>
> *PER L BYLUND*|/Associate Professor/
>
> Records-Johnston Professorship
>
> School of Entrepreneurship
>
> 424 Business Building | Stillwater, OK 74078
>
> 405-744-4301| [log in to unmask] <mailto:[log in to unmask]>
>
> /business.okstate.edu/
>
>
> Sent from Surface Pro 7+ with Windows 11
>
> *From: *Holden Fitzgerald <mailto:[log in to unmask]>
> *Sent: *Thursday, January 13, 2022 3:15 PM
> *To: *[log in to unmask] <mailto:[log in to unmask]>
> *Subject: *[SHOE] Origins of the Shareholder Wealth Maximization Norm
>
> *CAUTION:*This email originated from outside of the organization. Do
> not click links or open attachments unless you recognize the sender
> and know the content is safe
>
> Hello all,
>
> I am working with Professor Dalia Tsuk Mitchell, corporate law
> professor at the George Washington University Law School, on a project
> that involves exploring the origins of the norm of shareholder wealth
> maximization in the legal domain. At a glance it seems that the norm
> bleeds into the corporate law from academic and popular economists in
> the 1970s. Milton Friedman’s famous essay in the NY Times on the
> social responsibility of corporations being to maximize shareholder
> value seems like a great starting point, of course, but I wonder if
> anyone on this list can point me to work that precedes that essay,
> upon which he may have drawn. Or does this essay mark the foundation
> of the norm of shareholder wealth maximization?
>
> Thanks in advance for any leads you can provide.
>
> Best,
>
> Holden Fitzgerald
>
> J.D. Candidate | 2023
>
> The George Washington University Law School
>
--
James C.W. Ahiakpor, Ph.D.
Professor Emeritus
Department of Economics
California State University, East Bay
Hayward, CA 94542
510-885-3137
510-885-7175 (Fax; Not Private)
|
