Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
  • Browse All
    Managers and Market Capitalism
    11 Apr 2013Working Paper Summaries

    Managers and Market Capitalism

    by Rebecca Henderson and Karthik Ramanna
    In whose interests should managers act, particularly when structuring market regulations in highly technical or specialized matters that are largely outside public purview? This paper raises questions about the role of managers in sustaining the conditions for market capitalism to achieve its normative objectives. Rebecca Henderson and Karthik Ramanna begin with a discussion of the normative arguments for fully competitive markets as a resource allocation mechanism in complex societies. They suggest that Milton Friedman's assertion that the business of business is to increase its profits was in fact a moral assertion rooted in this normative framework. Next, they discuss the conditions for the existence of competitive markets and offer a brief overview of the institutions that provide them, noting that a combination of for-profit, pure public, and public-private institutions are needed to sustain capitalism. This perspective has two implications for managers. First, in many cases the opportunity to provide market completing institutions is a significant profit opportunity. Second, in those cases in which the provision of an institution is a scarcely attended political process or a public good that cannot be easily realized by managers, managers may have a duty to mitigate this market incompleteness even if it is not immediately profit maximizing to do so. Ultimately, managers' actions are likely to shape the moral and political legitimacy of market capitalism. Key concepts include:
    • Managers may have a responsibility to structure market institutions so as to preserve the legitimacy of market capitalism, even if doing so is at the expense of corporate profits.
    • Both conceptually and empirically, it is difficult to specify where legal self-serving lobbying ends and overt corruption of regulation begins. Even in those cases in which self-interested lobbying is clearly legal, it may not be consistent with the ethical objectives of capitalism.
    • Distorting market rules, whether through legal lobbying or through overt corruption, distorts market outcomes and erodes political and social support for market capitalism.
    • Finding a way to reconcile economic models of the role of the corporation and of business activity with the reality of events such as the financial crisis and the prevalence of "crony capitalism" and corporate corruption is one of the most important challenges of our time.
    LinkedIn
    Email

    Author Abstract

    In a capitalist system based on free markets, do managers have responsibilities to the system itself, and, in particular, should these responsibilities shape their behavior when they are attempting to structure those institutions of capitalism that are determined through a political process? A prevailing view-perhaps most eloquently argued by Milton Friedman-is that managers should act to maximize shareholder value, and thus that they should take every opportunity (within the bounds of the law) to structure market institutions so as to increase profitability. We maintain here that if the political process is sufficiently "thick," in that diverse views are well represented, and if politicians and regulators cannot be easily captured, then this shareholder-return view of political engagement is unlikely to reduce social welfare in the aggregate and thus damage the legitimacy of market capitalism. However, we contend that sometimes the political process of determining institutions of capitalism is "thin," in that managers find themselves with specialized technical knowledge unavailable to outsiders and with little political opposition-such as in the case of determining certain corporate accounting standards that define corporate profitability. In these circumstances, we argue that managers have a responsibility to structure market institutions so as to preserve the legitimacy of market capitalism, even if doing so is at the expense of corporate profits. We make this argument on grounds that it is both in managers' self-interest and, expanding on Friedman, managers' ethical duty. We provide a framework for future research to explore and develop these arguments.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: March 2013
    • HBS Working Paper Number: 13-075
    • Faculty Unit(s): General Management; Accounting and Management
      Trending
        • 23 May 2023
        • Research & Ideas

        Face Value: Do Certain Physical Features Help People Get Ahead?

        • 06 Jun 2016
        • Research & Ideas

        Skills and Behaviors that Make Entrepreneurs Successful

        • 25 Feb 2019
        • Research & Ideas

        How Gender Stereotypes Kill a Woman’s Self-Confidence

        • 26 Apr 2023
        • In Practice

        Is AI Coming for Your Job?

        • 16 May 2023
        • HBS Case

        How KKR Got More by Giving Ownership to the Factory Floor: ‘My Kids Are Going to College!’

    Rebecca M. Henderson
    Rebecca M. Henderson
    John and Natty McArthur University Professor (Leave of Absence)
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Economics
    • Capital Markets

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College