Innovative Enterprise or Sweatshop Economics?: In Search of Foundations of Economic Analysis

Abstract

In his essay on the sharp contrast between the theory of innovative enterprise and what he calls sweatshop economics, William Lazonick demonstrates how neoclassical economics with its methodology of constrained optimization trivializes the business enterprise while its ideology that companies should be run to maximize shareholder value legitimizes financial predators, many senior corporate executives among them, in the looting of the industrial corporation. As a result, even liberal economists have failed to comprehend the “era of corporate plundering” that since the mid-1980s has contributed to extreme concentration of income among the richest households and the erosion of middle-class employment opportunities. To come to grips with the key economic issues of our time, he calls for a transformation of economic thinking so that the innovative enterprise is at the center of economic analysis. The theory of innovative enterprise exposes as costly intellectual failures “perfect competition” as the ideal of economic efficiency, “constrained optimization” as the primary tool of economic analysis, and “maximizing shareholder value” as the ideology of superior corporate governance. The theory of innovative enterprise provides, moreover, a clear and compelling rationale for sharing the gains of business enterprise among stakeholders in the broader community, in conjunction with government policies that seek to support sustainable prosperity, characterized by stable and equitable economic growth.