Thursday, June 19, 2008

RAND, The Corporation and It's Non-shareholders

11 June 2008 I attended another ALoud talk at the Los Angeles Public Library. The topic that night, "Soldiers of Reason: The RAND Corporation and the Rise of the American Empire".

When I was in college, the idea of working for a 'think tank' was very appealing. I read some early book on the phenomenon, and naively thought of think tanks as an extension of the college dormatory all night yak session. The speaker was not totally negative about RAND, but pointed out that they had successes on some studies, failures on others. Most people don't realize that today it is not the little Dutch boy plugging the dike hole that keeps Holland from getting flooded, but a RAND Corp. study.

The speaker grabbed my attention when in the first few minutes of the talk phrases like 'Ayn Rand', 'Milton Friedman', 'Chicago School of Economics' and 'logical expectations' were brought up. The speaker criticized a lot of RAND's studies and results as being flawed by describing people as 'logical actors'. He mentioned the idea, as an example, that Corporations only have a duty to maximize profits for their shareholders.

This may have been an underlying belief at RAND, but to associate such naive ideas with Milton and the 'Chicago School' is doing them a disservice. Economist's have long been dealing with the idea of 'externalities', what the others might call side effects. Prominently, Ronald Coase of the University of Chicago developed the so called "Coase's Law" to provide a guide on this topic.

But actually, you can understand the idea by a simple observation. Maximizing the profits of the shareholders may be the most obvious goal of a corporation, but they clearly have others. There are usually more non-shareholders than shareholders, and not provoking them into a lynch mob out to destroy the corporation and it's owners is clearly something they have to keep in mind. 19 June 2008

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