Econ 450

That’s according to former New York Governor,* Eliot Spitzer, writing in Slate.com. As emphasized in the Economics of the Firm course (Econ 450), the evolution of the ubiquitous “M-Form” corporate structure created a chasm between equity shareholders and company managers. The split presents the classic principal-agent problem (or simply “agency” problem) where the incentives of owners and managers might not be aligned. Although Williamson (1975) goes to great pains to show how the problem is resolved, Chandler (1977) flat out says that corporate managers are clearly not maximizing shareholder wealth.

However you come down on the issue, the Spitzer piece argues that new communications technologies that (allegedly) transformed political campaigns in 2008 can also be used for shareholders to reclaim ownership of their firms.

Whether that is a good thing or not, I suppose, is an open question. Some would argue that shareholders are more interested in short-turn returns than looking out for the long-run health of the country. Certainly, this question isn’t settled.

For those of you wondering what this winter’s ECON 450, Economics of the Firm, is all about, might consider taking a peek over at the Machiavellian personality test. These are exactly the types of issues that we will be tackling in class — how different assumptions about how people actually think and behave shapes markets and organizations.

As you probably know, Machiavelli famously said that the “prudent ruler ought not keep faith when by doing so it would be against his interest…” Recent Nobel Prize winner Oliver Williamson responds by saying, “the more important lesson, for the purposes of studying economic organization, is this: Transactions that are subject to ex post opportunism will benefit if appropriate safeguards can be devised ex ante.”

Well said!. No wonder he gets his own parking spot.

Another important lesson you might want to keep in mind, especially around grading time, is that I received a “high Mach” on the test, revealing my high levels of Machiavellian thinking.

Oliver Williamson and Elinor Ostrom are sharing this year’s Nobel Prize in Economics. Williamson is out of what is known as the Carnegie School of organizational economics, and is the titular head of “transaction cost economics.” If you wanted a theoretical model to help understand why Lawrence contracts out its food service rather than doing it internally, you might pick up a copy of The Economic Institutions of Capitalism. Much, much more on Williamson in the Economics of the Firm course this winter.

Ostrom is one of the founders of the Indiana School, and thinks about collective management of common property resources. She has found that private groups are often able to avoid the dreaded tragedy of the commons and become long-term stewards of common property resources. More on Ostrom in Econ 385, Natural Resource Economics.

Sadly, there was no winner in the Pick the Nobel contest. We will put the pears in the storeroom and award them to next year’s winner. See you then.