Anders writes: > Doug said that mainstream economists would explain the failure of IBM, > etc. by saying that in the new international economy, they didn't make it > because they'd gotten "fat and lazy." I guess what I'm trying to ask is, > how do smart neoclassicals explain how + when large corps get "fat + > lazy" + stop acting as rational, calculating entities? It's easy to > ignore if it happens to only one corporation--chalk it up to > randomness--but when most of the large U.S. corporations who were > dominant in their fields all make amazing foolish decisions, presumably > you need a more systematic explaination. I'll take a shot at this. The generic mainstream explanation, I think, would feature a)market power and b)the so-called principal- agent or incentive problem with respect to the relevant firms' management. Market power, while it lasts, gives a firm the leeway not to act in a strict profit-maximizing fashion. The question then becomes why a firm would not do so. This is where the principal-agent problem comes in. A firm's management has no _necessary_ personal interest in strict profit maximization. As Anders' wording suggests, ensuring the latter is hard work, and as long as the managers get paid well, they might be willing to slough off to some degree. Profit-sharing compensation schemes and stock options alter the degree but demonstrably do not eliminate the basic problem. This is the central point of principal-agent analysis, a descendant of the "separation of ownership and control" discussion in the older institutionalist literature. Stockholders presumably prefer profit maximization (but even that concensus depends on the operation of certain market mechanisms--the point of my recent paper with Greg Dow), but lack perfect means to induce the same motives in management. Note on this score that to be "fat and lazy" does not imply that management is no longer a "rational, calculating entit[y]"; it may be rationally calculating its own, rather than shareholders', interests. As earlier posts have suggested, increased competition is a partial substitute for internal incentive schemes, but an imperfect one, since competitors may face their own agency problems as well. Gil Skillman
