Macroeconomics & The Modern Corporation

Richard Shamos, Columbia Law School

Abstract

This paper examines the intellectual basis of corporate law in order to develop a theory of the firm—metering theory—that is rooted in team production and institutional economics. This reconceptualization is distinct from the pure free market approach promoted by agency theory, which emphasizes the role of incentive effects on microeconomic actors. The main limitation of the agency analysis is its reliance on property law to analyze the modern corporation, which is instead driven by entity law. The crux of the economic analysis lies in the application of the macroeconomic model for the flow of goods and money in the economy to describe the flow of goods and money in a firm. Such analysis provides great insights into corporations and markets, particularly the relationship between capital and labor, how supplier and purchaser markets define the scope of the corporate nexus, and why rent-seeking opportunities may arise during team production. Most importantly, it shows how a common pricing problem—the metering of ex post money markets to capital and labor inputs that are priced ex ante—permeates corporate production. While this metering problem challenges the efficacy of corporations in organizing development, it has been met at the institutional level with various innovations which promote efficiency. These responses include labor unions, German codetermination, tort law and profit sharing arrangements, all of which help define different varieties of capitalism. By examining the role of these institutional innovations in organizing economic systems, policy makers may better devise institutional solutions to market failures in the future. In the area of corporate law, I argue that economic policy has much to gain from pay ratio scales, which tie managerial pay to employee pay, and from works councils in organizing labor at the firm level.