Corporations did not evolve

At the 3:30 mark, Rep. Barney Frank, in arguing for the recently passed act giving shareholders the right to have a (non-binding) say on executive compensation, responds to a Republican's claim that the government has no right to regulate corporations in this way. As Frank says: "God made no corporations. No corporations evolved--I'll be neutral on that subject." Corporations, as he claims, are artifices of positive law, given special priveleges by the government. Therefore, the government has the power to regulate them.

I had a similar argument in mind during a discussion that took place in my State and Society class at the Yale School of Management. In the course of discussion about a Merck case and an exhibit that showed pharmaceutical companies' return on equity averaging around twice that of the average industry, I claimed that that level of return was socially suboptimal. If we could achieve the same quality while the pharmaceutical companies received lower profits, most all of us would be better off. Certainly the risks of the pharmaceutical industry justified higher profits, I said, but a risk-premium of 100%? Unlikely.

My professor responded with: "First, I want to congratulate you on your astute analysis ... but you're a communist." Apparently, to argue that the government--whose regulations guarantee the pharmaceutical industry high profits, thanks to the FDA drug approval process, and, more importantly, patent laws--could alter those regulations to enhance competition and reduce profits makes me a communist. I'm not arguing for government ownership of ... anything. I'm arguing that the pharmaceutical companies, granted legal monopolies over molecules by the government, make fewer, or no, economic profits. Let them have profits--let the best companies succeed and earn their shareholders an above-average market return. But don't let an entire industry earn exorbitant profits at the expense of the we whom the government is entr

Econo-messed up

When I was a junior in college, on the first day of Game Theory class, our professor had the class run through a prisoner's dilemma. We were all to imagine that our grade for the class would be determined by this one exercise, in which we write either an alpha or a beta (beeeeta, in his English accent) on a piece of paper. We would then be randomly paired with another student. If we had both put alpha, we'd get B's. If we had both written beta, we'd be rewarded with B+'s. However, if one of us put alpha and the other beta, the one who wrote alpha would be rewarded with an A, and the one who wrote beta would be punished with a C. Thus the prisoner's dilemma--everyone wants to get a B+, but no one wants to risk getting a C, and everyone, by the logic of game theory, should write alpha.

I, of course, being far too moral and upstanding for my own good, wrote beta, and it turned out that around 40% of my classmates did as well. The rest were alpha-writing bastards.

Having taken the class and learned my lesson, I got the chance to do the same exercise with the same professor, only this time at business school (very Boy Meets World). This time, I wrote alpha, and got to explain to everyone else in the class why it was the "strictly dominant" strategy. Afterwards, I thought a lot about the fact that the ethical rightness or wrongness of the options hadn't changed, but my beliefs about what was normatively right had. My moral calculus, unchanged, had now been outweighed by a weightier economic, or utilitarian, calculus--I had been taught that cooperation gets punished, and rightly so, since it's "strictly dominated."

Fast forward to the release of the Yale School of Managements magazine Q(n) and this essay by Jim Barron, which casually mentions some research that has shown that studying economics makes a person less likely to cooperate. The study can be found here, and among its findings are:

1. Economists donate less to charity than predicted by their incomes;
2. Even one semester of economics will teach you the costs of being honest, and make you less likely to be so;
3. And, the smoking gun, given a prisoner's dilemma situation akin to the one I faced, graduate students of economics are about 1.5x more likely to defect than the average college student.

So there it is--economists are bastards. Going back to Jim Barron's point, though, anyone who studies economics is likely to start behaving as if the precepts of utility maximization are widely-heald determinants of behavior. They are--among economists, and MBA students. Most other people value things like cooperation, doing the right thing, being good.

This is why it's so frustrating that there isn't a required ethics class as part of the core curriculum at SOM. We're all getting exposed to these potentially corrosive concepts without the countervailing weight of normative ethics. Utility (profit) maximization is not the be all and end all of decision-making. Without ethics in the curriculum, when an ethical question comes up, there tends to be a lot of hand-waving and gesturing--"Shouldn't we worry about this?"--but there isn't any sense that there are good, rational ways to deal with ethical dilemmas. There are, and I'd been exposed to them before I took Game Theory. Perhaps that's why I was so willing to play the strictly dominated strategy of cooperation.