On the Promise and Limits of Prosocial Neoclassical Economic Approaches to Shareholder Primacy

Abstract

Oliver Hart and Luigi Zingales (Hart 2020; Hart and Zingales 2017a,b,c; Zingales 2017, 2018a,b, 2019a,b, 2020) have proposed to amend the influential view about the nature and function of the firm typically associated with Milton Friedman (1962, 1970). The core of their proposal is that ethical and social values should be given a more central role in an account of the objective function of the firm. The caliber of the authors and the growing concern with the ethical flaws in the traditional model of shareholder primacy, helps to explain why their recent contributions have received much attention. The paper utilizes Hart and Zingales’ account to examine whether neo-classical economics can offer an account of the objective function of the firm that is ethically sound. To assess this, we formulate two set of principles. The first highlights that the investigation into the objective function of the firm is normative. It requires thinking in normative terms of both managers and shareholders. Moral norms filter the desires that managers should promote on shareholders’ behalf. The second set of principles highlights the conceptual diversity of our normative language; any appropriate account of the objective function of the firm needs to have a rich normative conceptual vocabulary to reflect such diversity. The paper shows that while neoclassical economics may often meet the first set of principles, it lacks the resources to meet the second. It also shows that any account of the nature firm that is descriptively and prescriptively adequate needs economics to work hand in hand with legal scholarship and moral philosophy.