It is due to a dangerous doctrine: Shareholder Value Maximization (SVM)
The goal of shareholder value maximization (SVM) is now widely adopted by corporate boards and taught in business schools. to the exclusion of all other goals. SVM is a new doctrine in economics. It is most often attributed to Milton Friedman, who said in New York Times Magazine back in 1970: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits” (Friedman 1970). He also said that corporations are not “persons”, even though corporations have the legal status as persons, and that shareholders necessarily (being rational utility maximizers, by assumption) want to maximize profits, whence any act of corporate social responsibility to be ‘taxation without representation’. This fits the ‘principal-agent” theory of economics, which assumes that corporate managers are simply agents of the owners (shareholders), whence SVM seems to follow automatically (Jensen and Meckling 1976).
The activists and SVM “believers” (it is a religion, not a rational policy) have taken over most of the corporate board rooms.
From an article in Evonomics by Didier Jacobs,special advisor to the president at Oxfam America. Full text at http://evonomics.com/extreme-inequality-not-driven-merit-wealth/. Based on an interview by Sam Pizzigati, veteran labor journalist and Institute for Policy Studies associate fellow
Defenders of our deeply unequal global economic order had to put in a bit of overtime last month. They had to explain away the latest evidence — from the global charity Oxfam — on how concentrated our world’s wealth has become. A challenging task.
Back in 2010, Oxfam’s new stats show, the world’s 62 richest billionaires collectively held $1.1 trillion in wealth, far less than the $2.6 trillion that then belonged to humanity’s least affluent half.
Now the numbers have reversed. The world’s top 62 billionaires last year held $1.76 trillion in wealth, the bottom half of the world only $1.75 trillion.
Jacobs: Put simply, economists define rent as the difference between what people are paid and what they would have to be paid to do the work anyway. In other words, a rent is excess income, income that does not generate any effort. So if your farmland happens to be more fertile than surrounding farmland, you get more production out of it for the same effort, and that extra income you get is a rent. Rent-seeking entails getting hold of wealth produced by others. Lobbying government to obtain a subsidy is an example.
A Dangerous Crack in Economic Theory:
Why growth is slow and world trade is not always win-win.
As Larry Summers and many other economists have lamented (and even Donald Trump has said in several campaign speeches), it is true that the global recovery from the financial collapse of 2008 has been extraordinarily slow. Explanations vary widely. My own explanation up to now has focused on the shift from growth based on the exploitation of natural resources (especially oil and gas) to growth based on ICT technologies incubated in Silicon Valley but employing very few people. Another explanation centers on the working class reaction (in the US) to globalization and “free trade deals” favoring the export of manufacturing jobs to low wage countries.
A related explanation centers on the rise of the financial industry, along with its preference for moving money into the creation of asset bubbles rather than investment in small businesses in the “real” economy. A cousin of this explanation is that the money available for investment by the richest few is increasingly devoted to increasing the power of money in the political process. There is probably some truth in each of them.
The end of the era of increasing debt, with near zero interest rates is coming very soon. When it does, the cost of those deficits will explode, and the pressures for a major revolution in economics, capitalism and democracy, will also explode.