Recent commentary on the patent system has argued that there is little evidence supporting the incentive justification for patenting, so that continued faith in patents constitutes a kind of irrational adherence to myth or falsehood. While an obituary for the incentive theory of patenting is likely premature, the concept that the patent system is based upon myth should not be surprising. Over the past 30 years, some of the most prominent work in sociology has focused on social ordering, including legal ordering, that is found to be structured around prevalent social narratives or myths. Explicitly rejecting the economic construct of rational behavior, such “new institutional” approaches to social ordering recognize that organizations adopt practices and structures according to widely recognized scripts or conventions that lend legitimacy to their goals. In this essay I suggest that the known behavior of patenting firms likely fits the models developed in new institutional sociology: firms patent because other firms patent, because investors expect them to patent, and because patents validate the firm as innovative and reputable. Following such conventions is socially rational, but not necessarily economically rational. Applying new institutional approaches to patenting could explain several pervasive yet puzzling behaviors within the patent system, and moves us away from interminable fruitless arguments over the idealized efficiency or inefficiency of patents.'How Stock Buybacks Make Americans Vulnerable to Globalization' (Working Paper, East-West Center Workshop on Mega-Regionalism) by William Lazonick comments
Drawing on a large and growing body of research, I summarize how rationalization, marketization, and globalization have eroded middle-class employment opportunities since the 1980s. Then I document the extent to which over the same time-period financial interests, including senior corporate executives, have extracted cash from companies in the name of maximizing shareholder value. Finally I indicate why this value-extracting activity has rendered ineffective traditional macroeconomic and international trade policy. I call for a policy focus on the governance of business enterprise to support stable and equitable growth.He argues
There is an integral relation in the U.S. economy between the explosion of the incomes of the richest households and the erosion of middle-class employment opportunities. Since the early 1980s, employment relations in U.S. industrial corporations have undergone three major structural changes, summarized as “rationalization,” “marketization,” and “globalization,” that have eliminated existing middle-class jobs in the United States. Exacerbating the rate of job loss and limiting business investment in new career employment opportunities has been the financialization of the business corporation, manifested by massive stock buybacks in addition to dividend payments.
From the early 1980s, rationalization, characterized by plant closings, terminated the jobs of high-school educated blue-collar workers, most of them well-paid union members. From the early 1990s, marketization, characterized by the end of a career with one company as an employment norm, placed the job security of middle-aged white-collar workers, many of them college educated, in jeopardy. From the early 2000s, globalization, characterized by the offshoring of employment to lower-wage nations, has left all U.S. workers vulnerable to displacement, whatever their educational credentials and employment experience.
These structural changes in employment relations were, initially, business responses to changes in technologies, markets, and competitors. In the early 1980s, permanent layoffs of blue-collar workers were a reaction to the superior productive capabilities of Japanese competitors in consumer-durable and related capital-goods industries. In the early 1990s, the erosion of the one-company-career norm among white-collar workers was a response to the dramatic technological shift from proprietary systems to open systems, integral to the microelectronics revolution; a shift that favored younger workers with the latest computer skills, acquired in higher education and transferable across companies, over older workers with many years of company-specific experience. In the early 2000s, the sharp acceleration in the offshoring of jobs was a response to the emergence of large supplies of highly capable, and lower wage, labor in developing nations such as China and India which, linked to the United States through inexpensive communications systems and global value chains, could take over those U.S. employment activities that had become routine.
Once U.S. corporations transformed their employment relations, however, they often pursued rationalization, marketization, and globalization to cut current costs rather than to reposition their organizations to produce competitive products. Defining superior corporate performance as ever-higher quarterly earnings per share (EPS), companies turned to massive stock repurchases to “manage” their own corporations’ stock prices. Trillions of dollars that could have been spent on innovation and related job creation in the U.S. economy over the past three decades have been used instead to buy back stock for the purpose of manipulating stock prices. Legitimizing this financialized mode of corporate resource allocation has been the ideology, itself a product of the 1980s and 1990s, that a business corporation should be run to “maximize shareholder value” (MSV). Through their stock options and stock awards, corporate executives who make these resource-allocation decisions are themselves prime beneficiaries of rising stock prices and EPS. While rationalization, marketization, and globalization have undermined stable and remunerative employment relations that characterized the post-World War II decades, the financialization of the U.S. corporation has ensured that new employment relations that support stable and equitable economic growth have not been instituted to take their place. Rather the top priority of senior corporate executives has been MSV, manifested by massive stock repurchases, often in addition to generous cash dividends. Incentivizing these distributions has been the stock-based
remuneration of top corporate executives. Over the past decade, moreover, at an accelerating rate, hedge-fund activists have joined in the feeding frenzy in a process that can only be described as the legalized looting of the U.S. industrial corporation. Drawing on a large and growing body of research, I summarize how rationalization, marketization, and globalization have eroded middle-class employment opportunities since the 1980s. Then I document the extent to which over the same time-period financial interests, including senior corporate executives, have extracted cash from companies in the name of MSV. Finally I indicate why this value-extracting activity has rendered ineffective traditional macroeconomic and international trade policy. I call for a policy focus on the governance of business enterprise to support stable and equitable growth.