As a many-times business owner, I noted a couple of years back that in the ecosystem of publicly traded companies, there is nobody who thinks, acts, has incentives like, or is really anything like a real business owner.
I’m pleased to find that Adam Smith agrees with me (emphasis mine):
The trade of a joint stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of those proprietors seldom pretend to understand anything of the business of the company, and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half-yearly or yearly dividend as the directors think proper to make to them. This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery. Such companies, therefore, commonly draw to themselves much greater stocks than any private copartnery can boast of. The trading stock of the South Sea Company, at one time, amounted to upwards of thirty-three millions eight hundred thousand pounds.*65 The divided capital of the Bank of England amounts, at present, to ten millions seven hundred and eighty thousand pounds.*66 The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
This of course speaks to principle-agent conundrum that has been so widely studied and discussed, notably the pathological separation of ownership and control discussed in Berle and Means, The Modern Corporation and Private Property. (1932, revised edition 1967.)
But it’s nice to see Adam articulating it so nicely.
Modern corporatism is freakishly removed from, really bears no resemblance to, the fairy tale of “free-market” village butchers and bakers on which libertarians rest so much of their intellectual house of cards. (To quote my daughter’s high-school econ prof: “Econ schools should be teaching a lot more game theory and a lot less price theory.”)
It’s also worth noting that the Koch-brothers shop over at GMU and econlog, from whose “Library of Economics and Liberty” the above passage is copied, has never, in all those bloggers’ years of blogging, even mentioned this passage from their hero.
Cross-posted at Asymptosis.