The Capitalist’s Dilemma is on solid footing to the extent that managers, as trustees of public wealth, have to perform according to the expectations of shareholders.
I would respectfully submit that the solutions suggested are unlikely to work.
As Professors Joseph Bower and Lynn Paine have argued in their HBR article, the agency theory is fundamentally flawed. The notion that shareholders “own” a corporation does not stand the test of legitimacy in the 21st century. Unless we can devise a model that does not require managers to always act in the interests of shareholders (the default interest today is short-term gains) except in the long-term, I am skeptical about a solution.
Second, a significant part of economic theory is based on the assumption that humans are rational. As Professor Thaler’s (this year’s winner of the economics prize) work shows, we are far from being rational. We are irrational, but in ways that may be predictable. Behavioral economics has not received the acceptance that is its due. Unless we are willing to accept alternate premises for consumer behavior, managers are unlikely to change their approach to investments.
Third, as Professor Roger Martin’s latest work shows, in our anxiety, even enthusiasm for, optimization we end up making the “least-worst” decisions and choices. Herbert Simon was criticized, even ridiculed, for suggesting that there is no optimization in the real world. Again, if we have to start with diametrically opposite choices (short-term and long-term, as an example) and come up with a creative solution that results in the best of both ends of the spectrum, we need a fundamental shift in mind-set (perhaps a growth mind-set).
Until we resolve these issues (ownership, rationality, and choice) the Dilemma is likely to persist.
I may be pardoned for suggesting this – capitalism in the form that it was espoused has failed. It is of little value that other forms have failed too. The inequalities of today are staggering. One projection suggests that in the next 15 years, a billion people or more who are currently in the work force may be out of it due to the onslaught of technology – machine learning, AI, robotics. Can we imagine the consequences?
We need to revisit capitalism itself if we are serious about resolving the Capitalist’s Dilemma.