Adam Smith on Corporate Governance

Clive Crook has an excellent post on Adam Smith’s legacy. He concludes, however:

As a general matter, it would be true to the spirit of Moral Sentiments to say that owners of businesses should attune their conduct to the good opinion of mankind. But note that I say “owners”, not managers. Who knows what Smith would have thought of 21st century corporate governance? The modern corporation is a form he could barely have envisaged.

An alternative view:

Adam Smith would not have been surprised by Enron, Parmalat and the rest. The father of economics famously believed that joint-stock companies could never prosper because managers had no incentive to take care of the interests of widely dispersed shareholders. “Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company,” he wrote in The Wealth of Nations.

But Clive is perhaps right not to draw too many conclusions from an 18th century view of 21st century corporations.

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Tim, also known as the Undercover Economist, writes about the economics of everyday life.