Enterprise Economics

This post is by way of a slight detour in our discussion of vampire squid; but it will cover an essential point in my argument.

Economics is called the “dismal science”; in fact, it is neither science, nor, in most cases, dismal. Evidence for economic theories is often slender; economists try to explain using their theories how people behave with money.

Some of that requires us to assume that there are rational actors – people who behave rationally; some, even, to assume that on average, everyone behaves rationally. Hang on a minute, we’re talking about human beings here.

But then we aren’t always. We’re also talking about enterprises, about companies, bodies which have “legal personality” and are required by law to act in the best interests of their shareholders. In practice, they don’t.  It is misleading and wrong to assume that enterprises act either as a single entity or in anyone’s best interests.

Companies, in legal theory, are their shareholders; but in daily practice, they’re nothing of the sort. They are organisations in which people interact, and the most significant such people are their executives.  These human beings are motivated by many complex human factors and emotions: pride, fear, loyalty, spite, jealousy, love, curiosity and, of course, greed. But not only greed. In many organisations, such as schools and hospitals, greed comes a long way down the list of motivations; in financial institutions, it’s quite high. But even so, in the macho world of financial institutions, the driving force isn’t always just greed, it’s often ambition and pride, the desire to do better than a colleague, to do down a rival, to win a competition in which the score is recorded in money. And shareholders scarcely get a look in in these games. At best, they are an expensive source of capital.

This means that any economic theory or competitive analysis that examines only the legal personalities, the companies and enterprises involved, will get the wrong answers. We have to look at how the individual people involved behave, and understand that they are mostly not rational actors, but human beings in all their diversity and with all their human weaknesses. The ones we are concerned about are  also often victims like us of the sociopathic financial system, people who work hard, play hard, party hard, earn money most of us can barely dream of, but who burn out young with their souls sacrificed to the shallow self-serving ideals that permeate the broken system.

 

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