Rebecca Henderson on Reimagining Capitalism
Jun 8 2020

Reimagining-Capitalism-194x300.jpg Author and economist Rebecca Henderson of the Harvard Business School talks about her book Reimagining Capitalism in a World on Fire with EconTalk host Russ Roberts. Henderson argues that the focus on shareholder value threatens to destroy capitalism from within. Henderson argues that business leaders need to manage their companies differently in order to create a more humane and stable capitalism.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Jun 8 2020 at 11:08am

The ideas in this weeks program remind me very much of John Mackey’s idea in Conscious Capitalism. He describes five groups of stakeholders in a business: shareholders, staff, customers, suppliers, and the community, and he posits that management should make decisions with the interests of all five groups of stakeholders in mind. He claims that if we do this, we will see benefits across all five groups. For example, Whole Foods employees were paid substantially more than their counterparts at other grocers, but any customer could see the effect of that in the enthusiasm of those staff. So the customer is happy, is willing to pay higher prices, and the investors win also.

John P.
Jun 8 2020 at 1:38pm

1. It would have been helpful to know whether Prof. Henderson is advocating an actual change in the legal regime (i.e., a change in the legal standards for subjecting directors and officers to monetary judgments) or merely a change in how directors and officers think about maximizing value. As the discussion went along, it sounded more and more like the latter is what she has in mind, but it was never made clear as far as I could tell.

2. I wonder what her thoughts are on the recent innovation of “public benefit corporations” (PBCs), which can now be formed in Delaware and many other jurisdictions. In Delaware, the corporate documents of a PBC identify a “public benefit” that the corporation is intended to promote (which could include something like “the health of the free-market system” or “living wages for employees”), and stockholders can sue the directors if they fail to manage the PBC in a way that “balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.” The PBC form has been surprisingly (to me) popular in Delaware since it was introduced in 2013. The option of forming a PBC rather than a traditional corporation would seem to allow management and investors to reveal by their choices what level of stockholder-value-maximization they would prefer.

Jun 8 2020 at 6:16pm

Key idea that I took away from the interview is that capitalism is imbalanced. Living in Salt Lake, I personally feel that capitalism works rather nicely in many ways. We have been designated the wealthiest state in the nation, but a key point here is that we don’t have as many uber-wealthy people here. They are merely wealthy. Maybe that works to our advantage.

I don’t think that capitalism is ‘the problem’, and I say that often. I don’t have expertise like an actual economist, but just from casual observation, capitalism is FANTASTIC at producing wealth. It’s actually quite stunning how productive it is. It just needs better direction. And obviously, the financial system could be less rapacious. Even Taylor Swift has been calling out the ‘unregulated world of private equity’. So it’s pretty obvious. Fix the excess in the financial world, first and foremost, and most people probably wouldn’t complain about capitalism.

There are many other pressing issues at hand other than ‘capitalism’, as it were. Like making our cities more livable and resilient, making the market more ‘free’, as is suggested in the interview, and so on and so forth. But having listened to Econtalk for so long, what I have previously believed to be the fault of capitalism is probably not the fault of capitalism at all. One thing that really highlights this point is that the government, for instance, through absurd regulations, mandates a minimum amount of parking per amount of square foot of building space, which is COMPLETELY unnecessary and hampers growth and productivity. On top of this, we have really strict ideas about zoning, which makes our cities inflexible, and so on and so forth. But Russ has already talked about this in numerous podcasts, which I’m really happy about.

Jun 9 2020 at 9:27am

01:23 Rebecca Henderson said, “I see three problems. First, accelerating inequality.”

“The only equality possible among men is equality before the law. Any attempt to reduce the inequality of men in their endowments in the hope of reducing the disparity of outcomes would result in the destruction of equity, the only equality possible: ‘Since people will differ in many attributes which government cannot alter, to secure for them the same material position would require that government treat them very differently (Hayek 1976, 82).’” (The Independent Review Vol24,Num4 p622)

I suppose it is possible that Rebecca Henderson, if asked, would agree that disparity in the application of law is the real and growing problem at the root of all of her concerns. It is conceivable that by, “the institutions that keep the market in check, that keep in balance,” she was referring to the institution of Rule of Law.

But she never mentioned rule of law. And her stated desire to increase “government capacity” does not sound anything like “limiting the scope of government to only those rules that can apply equally to everyone.” Still, one could hope.

Shayne Cook
Jun 14 2020 at 11:21am


Good catch, noting she never even mentions Rule of Law. Suffice to say, I consider that pretty important myself – and certainly within the context of “inequality”, per Hayek, as you noted.

But I noted a couple of other rather glaring omissions by Rebecca, the first of which also somewhat deals with her concerns about “inequality”.

I’m referring to the uniquely economic concept of Consumer Surplus that she never mentions. And it is just that Consumer Surplus that Capitalism not only produces, but uniformly and equally distributes as well. Yet Consumer Surplus isn’t mentioned by either Rebecca or Russ, for that matter.

They (and others) only discuss Producer Surplus, and how that is distributed (or mal-distributed, according to them) in this discussion. I found that omission particularly curious, given she is (ostensibly) an “economist”.

Evidently, what capitalist business folks like me know and can’t ever forget, is exactly what “economists” have already forgotten: That unless I and my capitalist businesses produce and equitably distribute LOTS of Consumer Surplus FIRST, there isn’t ever going to be ANY Producer Surplus to distribute, or re-distribute, or even mal-distribute!

The second glaring omission I noted is with regard to Fiduciary Duty. Rebecca notes that she is on the Board of Directors of two publicly-traded capital stock companies, which of course is all well and good.

But evidently no one explained to her that her Fiduciary Duty as a Board member is solely and exclusively to the shareholders. Under U.S. law, Boards of Directors are the folks hired by the shareholders – exclusively – to make absolutely certain that shareholder interests are being served. Based on what I heard from listening to Rebecca here, she has virtually everyone’s interests, except those of the shareholders, first and foremost on her mind – quite in contempt of her actual Fiduciary Duty as a Board member. (I hope for her sake that none of her actual shareholders realize whose interests she is really serving.)

In her opening statement, Rebecca notes her “third, and perhaps most important” concern – that of “run down Government capacity”. Given her obvious lack of concern for Rule of Law, lack of concern for even the most fundamental concepts of economics and Capitalism, such as Consumer Surplus, and even her evident contempt for own Fiduciary Duties, I shudder to think what her vision of a “fully functional Government” might be.

Indeed, about the only thing I did get from this episode is the hyperbole in the book title, “… World on Fire” (Really? the whole world is on FIRE!). Given the gross and glaring omissions we’ve noted in our comments here, the rather thorough mis-characterization OF Capitalism, and an equally thorough mis-attribution of “everything bad in current society” (“inequality”, global warming, failed government, and even “loneliness”) TO Capitalism, there isn’t much to recommend this book or this author other than hyperbole.

Al McCabe
Jun 16 2020 at 9:38pm

Thank you, thank you, thank you.  I was struggling with how to translate my thoughts into econ-talk, and you hit the nail on the head.

How much was a disease treatment or computer or color TV or recorded music or computer games worth a generation ago?  Two generations ago?  Five generations ago?

All that difference to today is now banked as “consumer surplus” for today and every future generation. That amount is now HUGE, probably several magnitudes larger than global GDP.  How much is penicillin worth if you are infected?  Or an AIDS drug if you have AIDS?

What would you accept as payment to live in a world like a hundred years ago instead of today?

Peter Miller
Jun 9 2020 at 3:02pm

In this episode, Russ goes back to a recurring theme of having some hope and confidence that behavioral norms and civil society, voluntary organizations can have corrective effects more beneficially than government regulation would. My priors run that way as well, but I’m increasingly concerned that the call to remove activity from government hands over the last four decades (at least back to Reagan’s government isn’t the solution it’s the problem, through Reinventing Government, and up to current rhetoric around resisting the nefarious “deep state”) have tended to not only shake public confidence in government solutions, but to reduce confidence in any kind of organized coordinated action. Even a lot of highly engaged activists for social change are against forming structured organizations with named leaders and written goals. I hope I’m just too old and set in my ways to envision how these unstructured collections of people will get things done, but I’m not seeing a lot of accomplishments from these not quite organizations. In parallel, norms seem to me to have been weakened by the attitude that almost all regulation is bad, so that if you can find a way to get something done that doesn’t clearly violate a specific regulation, it is always fine and praiseworthy to do so because you have outwitted and overcome the bad regulation. That attitude doesn’t leave a lot of room for norms to form and opperate. I know the proponents of less government / less regulation don’t feel they’ve achieved all the policy goals they wanted to, but they may have exceeded expectations in terms of changing attitudes, leading to their favorite bugbear of unintended consequences. Do we need a new public information / marketing campaign to sell people on the value of civil society and behavioral norms? What interests powerful enough to might be interested in carrying out such a campaign? Speaking eloquently about the wonders of civil society and norms on Econtalk probably won’t do the whole job. Good, thought provoking episode.

Jun 9 2020 at 6:21pm

Love this episode.

I was in Lawrence, Ma when Malden mills burned down. My father worked in the mills which provided the jobs of many local Dominicans moving to the area. It offered great benefits and being able to feed and house a family of six while having quintessential childhood experiences.

I understand why Rebecca would teach this as an example of what not to do, a cautionary warning to not leave yourself vulnerable but seeing how many of these mills were bought out in the first ten years of the 2000s it’s presumptive to assume that Aaron Feuerstein lost his hat because of taking care of his community. Could it have attributed to losing his company? Possibly, but considering neighboring towns lost their jobs to overseas markets as well we simply do not know just to use Russ’ Nike example.

What I do know that it’s shaped my view of what a business is capable of doing. Mr. Feuerstein helped foster a growing community, which drove down crime, spurred economic growth in people starting secondary business and gave young people a chance to settle down and start a family. In the last twenty years we have seen less and less of that in local communities which is leading us to raising inequality and corrupt institutions. Think of the beat cop 30-40 years ago. Usually a neighborhood guy, became a fixture of the community and really invested in his beat to make sure that everything was square.

Local businesses and ownership have an investment in keeping their communities thriving and spreading their philosophy. The demulas family has since taken on the torch that Aaron Feuerstein lit and applied it to grocery chains. They pay their employees a living wage, benefits, yearly bonuses for full time staff etc and they’re a multi billion dollar company. I agree with Rebecca in that if you simply look at a way to build something, the pieces will come and you will be all the more profitable. If you keep building the same ideology that does not fit into the moment we are in now, we will continue committing the same mistakes over and over again.

There’s a way to be profitable, charitable and all inclusive if you can grow a backbone about it.

Jun 9 2020 at 6:43pm

Yes, Peter, I have been saying for YEARS online, here and anywhere else that because of the ideology of individualism, the demonization of collective action and government, and the general lack of TRULY public spaces, our body politic has fractured to the point where people don’t feel comfortable acting as a collective. YES, YES, YES. It’s quite a hard argument to make, since it requires more than a few moving parts to understand. Russ also brings up the point that people are lonely and isolated, but that’s partly because people can only feel part of a group and part of a collective in the workplace, and workplaces are completely circumstantial as far as grouping people together and also transitory in nature, and also are predetermined by an individual’s personal achievement to date. Yes, there are various other reasons why people feel like they shouldn’t be centralized, one of them being that people are increasingly libertarian or anarchist-leaning, and some think that it works to the movement’s benefit. But it actually works in the opposite direction. I feel that in order to tear power structures down, people need to form power structures themselves. My point is that creating truly public spaces for people is the main goal, places where ANYBODY can go AT ANY TIME, and talk about ANYTHING, and not have to necessarily schedule in advance, since that destroys both spontaneity and consistency, which is needed for public institutions to form in the most beneficial way. Way back in the past, Russ has talked about the TRUE meaning of law. And well, natural law-making, which forms norms, requires people to be able to meet consistently in the public arena to openly debate various issues and come to conclusions on their own about policy, without the need for regulations or the mediation of a centralized media system. Meetings in small, ad-hoc groups in people’s homes doesn’t cut it, for example. I could bring up other examples, but this suffices.

David Zarecky
Jun 10 2020 at 8:15am

Such a massive disappointment to see that climate change still does not make Russ’ top 3 issues list! Let’s see where we get 10 years from now!

Armin Chosnama
Jun 10 2020 at 1:21pm

I think I’m older than you, so this may just be an experience thing. I’ve been hearing about environmental disaster since the 80s, and the time horizon for doom has been getting pushed a decade into the future for a while.

As a concerned news consumer, do you think it’s funny how the news never mentions any positive impact of climate change? Even if we all agree that on the whole, climate change will be bad, wouldn’t you expect at least some areas of the world and their citizens or some non-pesty species to benefit from a change in climate? To be clear, climate change is not a hoax, but the reporting on it sure sounds like one.

Armin Chosnama
Jun 10 2020 at 1:13pm

Interesting ideas. But, just because a system seems broken, doesn’t mean the replacement is going to be better. It’s very easy to reimagine capitalism as a new and improved version of itself, but you have to also consider the negative impacts of the new, reimagined system. I don’t think I heard much of that in the discussion.

Jun 10 2020 at 4:58pm

Thank you for another interesting episode.
Can someone help me understand why a large accumulation of wealth to a single individual is a problem when those funds get redeployed via our financial system to businesses, investments, projects and eventually jobs? Jeff Bezos isn’t building a giant pyramid to be filled with gold bars buried inside forever. Wealth is always being transformed, risk adjusted, and reallocated. If you want to improve the situation for individuals at the bottom (or start) of lifetime income, you should look for ways accelerate climbing the ladder (innovation in education, streamlining regulations, etc).   

Jun 10 2020 at 7:33pm

I think it’s too short-sighted to think of Rebecca’s line of thinking in terms of a specific firm demonstrating some “appropriate” level of corporate social responsibility through a one-time act (increase wages, make a pledge to support climate change, some sustainability effort, etc.). I was thinking in terms of how can we free corporations to make decisions in the best interest of future generations by promoting a high functioning capitalist system, which would maximize opportunity for profit in the long-run. One key way she discusses is preventing firms from rent-seeking opportunities. With that set of options off the table, perhaps more long-term thinking would bleed into current decision making. Another way to think about long-run, potentially cross-generational profit decisions, is in terms of risk mitigation. If some of the trends / issues both Rebecca and Russ list at the top of the show persist (inequality, gov’t bail out, ineffective education, decline of family, etc.), then long-term opportunities / GDP will shrink for all. Now of course, firms can’t count on being in existence across generations, but how do we infuse some of that thinking and stewardship into the short/medium-term decision making of our corporate leaders?

Al McCabe
Jun 16 2020 at 9:11pm

The idea that corporations should add “social change goals” to their management aspirations has been revealed to be far more dangerous than even crony capitalism. Just a few years ago some of the large internet media/advertising companies started doing that (Facebook, Google, Twitter) and the result quickly went from them censoring tiny extreme views of 0.0001% of the population to today censoring ideas and expressions of 30% or more of the population, though always the “others”.

Obviously no democracy can function when even 10% of the population is punished for their views by corporations that only exist with government protections from lawsuits for their political activity. Much less when 40-50% of the population is silenced and punished. “Social change goals” is just pure politics by a PC name.

Jun 26 2020 at 9:55am

Would love to see the data on Google, Facebook’s massive increase in censorship, not sure where that 30% figure comes from.

Jun 11 2020 at 7:53pm

At around 55:15, Rebecca says “Nobody, I think, would suggest we would be better off without fundamental safety regulations in factories,” and I believe I hear a “Hmmm” on your end.

Could you delve a little deeper on this?

Ben Riechers
Jun 13 2020 at 9:16am

I heard that too. I had hoped Russ would follow the hmm up with a comment.

I think safety was realized as a net positive to the bottom line around 1990, at least for construction and manufacturing companies i.e., that operating safely saves money. It became one of the values companies promote after that and became part of construction and manufacturing brands after that. And safety became an expectation of employees along the way. You don’t need the guardrails of regulation if you are staying on the highway of safety. Or, at least you don’t need nearly as many regulations.

Ben Riechers
Jun 13 2020 at 9:44am

Doing the right thing for people and the planet is and has been an incentive for companies for a long time.  Energy Services companies have been retrofitting buildings for more than 30 years to improve energy efficiencies.  Efficiency has been core to the heating and air conditioning business for at least 30 years.  Companies have always had an incentive to reduce energy costs and the more energy they consume, the bigger the incentive.

Construction and manufacturing companies connected safety to the bottom line at least 30 years ago.  In many industrial companies, safety has been elevated to a value that has become part of their brand.  CEOs promote and defend their brand regardless of their personal virtues. 

I generally reject the “self-evident technique” for persuasion used by your guest.   Politicians frequently use this technique to manipulate people and it is rarely a path to problem solving.  Perhaps her book provides an objective foundation for her self-evident lens.  I hope so.  One of my challenges to your guest would be to name 5 of the largest 200 construction and manufacturing companies who have NOT elevated energy efficiency and safety to core considerations relative to their decision making. 

I worry about return on investment calculations that sound good on the surface but then are based on wildly optimistic assumptions or ignore soft costs (or opportunity costs) while embracing soft benefits.  That was the caution light going on for me during the interview.

None of the above suggests there aren’t problems with our free market system (cronyism is near the top of the list), but implementations of grand reimaginations fail to provide feedback in a timely way.  A long-term commitment to continuous improvement is like the tortoise in the race between the hare and the tortoise.  Continuous improvement delivers more substantial change over the long-term.

Very few programs can deliver solutions unless they have a way to incorporate feedback in a timely way.

Jun 13 2020 at 10:50am

To me this episode illustrated a very important nuance in how and why people trust markets.

I think that if Walmart genuinely tried to do find the wage level that increases shareholder value over time, people would have trusted the outcome more than the outcome of a Government study, and much more than the conclusion of a Bernie Sanders campaign white paper.

However, people don’t believe that Walmart mangers, board members, and shareholders treat increasing and reducing wages as options that are equally worth exploring. People in these positions of power seem to be like Russ – very skeptical of ideas that increases anything but shareholder value, and very quick to believe that even something as horrific as slave child labor is actually the best possible outcome, and that any attempt to improve the situation would backfire.

The appeal of someone promising to force corporations to pay higher wages, or to be more environmentally friendly, is that it will force them to genuinely try to do this while still being profitable. Ironically, the best way to convince most people that markets produce good outcomes, is for them to believe that people at the top  are more like Rebecca, and are very worried about capitalism.

Roger Fox
Jun 16 2020 at 1:56pm

Of course, I agree with Henderson that business leaders must manage their companies differently in order to create a more humane and stable capitalism. This is great when the owner of the company thinks not only about his comfort, but also about the people who work in his company.

Al McCabe
Jun 16 2020 at 9:02pm

I suppose the relative wealth of a family or individual is a factor for consideration, but far more important has to be the absolute wealth, right?

There is little doubt that even the poorest 20th wealth percentile person in the USA is far better off than the 90th wealth percentile person even a few generations ago.  Who would trade their situation today for a very wealthy situation in 1920?

The improvement in human life is happening so fast now in medicine, travel, entertainment, nutrition, world peace, and so on that just about every kid will live a far better life than their parent, something that was about 50-50 for most of human history.

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TimePodcast Episode Highlights

Intro. [Recording date: May 4th, 2020.]

Russ Roberts: Today is May 4th, 2020, and my guest today is economist and author, Rebecca Henderson. She is the John and Natty MacArthur University professor at Harvard University and teaches in the Harvard Business School. Her latest book and our topic for today is Reimagining Capitalism in a World on Fire. Rebecca, welcome to EconTalk.

Rebecca Henderson: Russ, thank you very much. It's a pleasure to be here.

Russ Roberts: I want to alert people listening at home, we are recording this in the middle of the COVID-19 experience, which could affect our audio quality a bit: we're not able to use some of our usual equipment, and broadband is a little iffier in a house with four people at home unexpectedly, often using internet during the day. We may or may not talk about COVID-19. There's plenty to talk about in the book outside that. So, we'll see how this goes.


Russ Roberts: Rebecca, your book asks us to reimagine capitalism. What's wrong with the way that capitalism is now, and what problems do you hope to fix?

Rebecca Henderson: Let me begin by saying I'm a huge fan of capitalism. I think it's one of the greatest inventions of the human race. But I think in our current incarnation, we've allowed it to become unbalanced. I see three problems. First, accelerating inequality. A very significant fraction of the productivity gains from our booming economy over the last 20 years went to those at the very top of the distribution.

Second, we are singularly failing to deal with the major environmental risks we face, particularly the risk of climate change.

And, third, and perhaps most important, we have systematically run down our government capacity. 'Government' has become a dirty word. And I think the costs of that happening were visible before the pandemic in our very polarized and ineffective politics, and are very visible during the pandemic, when the costs of not having a fully functional government have become very visible.

Russ Roberts: One other thing I liked about the way you open the book with those three problems is it forced me to think about what my list would look like. I'm going to mention my three; and you can tell me if you think they're problems, and if you think they belong in your top 10. I don't want to spend too much time on this.

Rebecca Henderson: Sure. That's so cool. Please.

Russ Roberts: I thought, what are the three biggest problems--in America at least? Maybe the world is an even tougher question. But, in America, my three would have been the people who are left behind in our economic system--which is related to your concern about inequality. But, I feel very strongly that the focus on inequality--first, I think the data mistake how many people are being left behind. I think it's grossly overestimated the problem; but it's still significant. I think there's a way too large fraction of our population, especially young people, who struggle to get a foot on that ladder of economic growth. So, we semi-agree there.

My second issue would be what I would call the epidemic of loneliness. It's not unrelated to the first one. Some people are not integrating into the workforce; but certainly family life is very different than it was. We're in the middle of an experiment. That may or may not turn out to be so bad, but it doesn't seem so great right now. We have a large, a very high suicide rate among teens, which is deeply disturbing. So, that would be my number two, which I would--it's a cultural problem, but it's related to some economic problems.

And the third, I would argue, is the control of information, which is bouncing back and forth between government and large tech companies; and how we handle that is, I think, it's not a crisis right now, but I think going into the future, it's a big issue.

So, we overlap, at least I think we totally agree on this issue of people being left behind. Is that true?

Rebecca Henderson: Absolutely. And, one of the reasons I care so much about inequality is, it's not so much inequality per se: it's the fall in social mobility--the really tough times that people at the very bottom of the distribution are having and the failure of opportunity that that implies. I mean, that's what really troubles me. We can talk more about the political effects of having some very, very, very rich people, which also troubles me.

I mean, I'm with you. I'm out here in rural New Hampshire, and I know people that it's not that it's not a level playing field: They're not even on the field.

Russ Roberts: The education system has failed them, which I think we also agree on, based on what you say in your book.

Rebecca Henderson: Absolutely; absolutely agree.

The epidemic of loneliness is super-interesting. I do think we have a major cultural problem. I tend to sometimes frame it as we built a culture and a system, which is all about 'me right now.' And, 2000 years of human history, and much of philosophy, and all our major faith traditions say that's a serious mistake. And so, part of what I'm trying to do with this book is open up a conversation about what it would mean to be focusing on us and later. So, that's related to your second.

Russ Roberts: Yeah; that's a great way to phrase it.

I think about it a little bit differently, but it's the same issue. It's: the death of the family--the so-called nuclear family--and the death of religion for large swaths of the population has left a gap, a hole that our culture will, I assume, fill. Either there'll be a swing back to those things or something else will come to emerge that will help people deal with that loss. But, right now, I'd say we are in a transition of complicated impact.

Rebecca Henderson: Have you read Angus Deaton's and Anne Case's book, Deaths of Despair?

Russ Roberts: I've read a chunk of it. They were scheduled to be on the program, and I've talked to Angus about the work that underlies that book before on the program; but, yeah, they'll be back. I've looked at the book. I think--well, that's another topic.

Rebecca Henderson: Okay, okay. I'm just saying that some of the data in that book is truly sobering.

Russ Roberts: Yeah; no; and I agree, and that's the left-behind part. It's a combination of cultural--I think 'failure' is not necessarily the right word. I'll call it a challenge: cultural challenges in a time of change brought on partly by technology, partly--all kinds of phenomena are going on in the world.

Rebecca Henderson: All kinds of factors.

Russ Roberts: And we agree on the failings of government. One of the things I thought I'd give it an asterisk, I picked 3A as maybe my fourth problem, is the rise of populism around the world and where that's leading. And I think that's an interesting challenge. And, you and I have a different take on what's wrong with government. We'll come to that, I hope toward the end of the conversation.


Russ Roberts: But, let's talk about the capitalism part. You're very concerned about the emphasis on shareholder value in the modern capitalist state, like in the United States. What's wrong with that? Tell us what's wrong with that and what we should be doing differently.

Rebecca Henderson: I'm super concerned about the unilateral focus on shareholder value maximization at any cost, which is slightly different from not liking shareholder value maximization. I'm on the board of two public companies. One of them is a Fortune 200; and I'm a card carrying member of the Neoclassical Guild. I think returning, you know, returning profits to shareholders is central and a major function of the corporation.

But, I have two worries. One is timeframe and we can talk about whether the system is too short- or too long-term focused. But I, for example, believe that there are a number of opportunities that many firms should be pursuing that would be NPV-positive [Net Present Value-positive] over the long term, but they're having difficulty pursuing.

Russ Roberts: Net present value.

Rebecca Henderson: I'm sorry, pursuing net present value at any cost. And, so, I believe there are a number of long term opportunities that will generate very healthy returns for investors, but for a variety of reasons, they're not pursuing them.

And one of those reasons is a misapprehension. That is, 'No, no, I have to do shareholder value at any cost right now.'

The second problem is that, it'ss almost as it were a contradiction in terms. I'm worried about firms that maximize shareholder value by changing the rules of the game. One of the most effective ways to make money, after all, is to go to a local legislature and build yourself a cozy little monopoly.

In the book, I talk about Disney's extension of the Copyright Act as an example of this. A move that--really it's incredible to believe it created any kind of social value at all--but dropped several billion dollars to Disney's bottom line, money taken from the pockets of their customers. But no real value created. It's just a rule change. That's what makes me nervous.

When we say to a manager, 'Your duty is to maximize shareholder value.' Period. And not, 'Your duty is to maximize shareholder value in the service of a genuinely free and fair capitalism, which is supported by a complex network of rules and ethical custom and one of your duties is not to subvert those rules,'--that's what bothers me.

Russ Roberts: Yeah; obviously, it bothers me too, as listeners know, it's often called crony capitalism. It's the temptation, as you say, to use the rules of the game to enhance your competitive situation. The phrase that you used after that was more complicated than one might hope for, though. When you said, instead of maximizing shareholder at any value, at any cost, you should maximize shareholder value subject to--then there was a long set of interesting, lovely ideals. How does an actual CEO [Chief Executive Officer] deal with that?

Rebecca Henderson: So, forgive me. What I would say, more colloquially is, instead of only maximizing shareholder value, you have a duty to the health of the institutions that support free and fair markets, and to the health of the society on which you rely.

Russ Roberts: So, how would you advise--and I know you've advised some--how would you advise a CEO who is uncertain about that trade off? There's a trade off there, you are suggesting. When you have more than one goal, and of course, you and I both agree that I wish there were a norm today that said, 'Don't use the political system to exploit other people.' I wish that were in play for both legislators and lobbyists and corporations, and that isn't there, but okay.

But, now, let's say, the larger set of challenges that a corporation might face, that its product might contribute to global warming, that it certainly could pay more higher wages than the market wage. How do I navigate that as a CEO? How do I deal with the trade-offs between shareholder value, which is pretty clear--it also has its own ambiguity--but pretty clear, versus these other social goals that you want them to follow?

Rebecca Henderson: What I tell them is you can still use the same metric: that, what we're trying to maximize is long term prosperity and freedom. And so, it's not a matter of trading off profits now for some intangible good. It's a matter of changing off profits now for profits later.

At the extreme, at the general level, if we think for a moment--and I don't know if you'll like this--but let's, for a moment assume that you and I are the only two business people in the world and we control everything; but we're not monopolists: we have lots of little competition going on. But, suppose that we have decision rights over the whole of business. I think we would decide to invest heavily in mitigating the problem of global warming, in trying to slow it down: That we would see that that's an enormous potential risk to our business and to the stability of the whole system. And we'd say, 'You know, that's worth coughing up 2% or 3% of GDP [Gross Domestic Product] to head off.'

And so, it is a trade off, but it's a time-based trade off. Now, you're going to say to me, 'But, wait, wait, wait, your average CEO [Chief Executive Officer] is worried about the free riding problem,' right? I'm going to go to them, and I'm going to say, 'Mary, I want you to invest now because the good of the system in the long term, blah, blah, blah.' And she's going to look at me and say, 'Well, that's very nice, Rebecca, but right now I have a business to run and investors to serve. And, you know, I could make the investment, but unless everybody else makes the investment, we all still go down together.'

So, to the individual CEO, I say two things. The first is: you need to be aware of the larger problem. And we can come back to this about how business might come to act collectively to really focus on these broader goals, which suffer from massive free rider problem, but how do we think about a collective movement to create that public good we all need?

At a local level, I say, 'Mary, well, do what you can.' Lots of research suggests that there are billion-dollar opportunities in thinking carefully about your environmental footprint, depending on the business you're in. Lots of research suggests that if you treat your people better, if you adopt what I call a high road employment model, for many businesses, you'll see productivity and creativity and innovation increase. Lots of evidence to think that while consumers won't pay more for so called sustainable products, you can see share gains, if consumers really believe you're doing the right thing. Lots of evidence that your investors are starting to worry about these big problems, and that they may have gotten themselves together to solve the collective action problem, and they're going to come to you and say, 'What are you doing about climate? What are you doing about your people? You need to get ready for that.'

So, I'm a very pragmatic person, Russ. It's not like, 'Well, throw everything out the window, and we have a new way of dealing,' It's more like, 'We need to make progress against these problems; what can we do right here, right now?' And, how might that add up to something like--you and I would both love this--a norm against using your power to buy the political process for your own gain.


Russ Roberts: Yeah; I hate to disappoint you on the climate change thing. It's an issue that--I have passionate listeners on both sides of this issue. So, I want to try to say this in a way that doesn't have anyone stop putting down their phone.

I would suggest that while you and I are both concerned about it, your concern is stronger than mine. I'm more optimistic about the ability of humans to adapt to climate change. I'm uncertain about the scope of it.

And, we might want to live in a world where you and I are in charge where we give that problem to the political process, which is about compromise. That political process, the political process recognizes that we have different goals. Some of us have different costs and benefits from various policies. Some of us have uncertainty about what the actual outcomes are going to be.

And, the political process is supposed to adjudicate those uncertainties and compromise, because it can't deal with unanimity 99% of the time. There's always going to be disagreement. And that's how the political system is designed to work. It's designed to deal with that non-unanimity.

But, if you're telling me that, as CEOs, we should decide--whereas[?] designers of the rules for CEOs--that we should decide a level of expertise that none of us have--almost none of us--about how serious the problem is, what are the options for mitigation versus adaptation? I think we're in a very uncertain world of, again, how to behave. That's all I would suggest there: That the implications of that--I would say it a little bit more strongly. If you task--I can't believe I'm using 'task' as a verb, I think it's the first time of my life--if you task CEOs with the job of making the world a better place, through public policy, rather than using the political process for that, you've opened a Pandora's Box, because there's going to be a lot of things that CEOs want to do that you and I might think are awful. But, I don't want them to do that using other people's money.

So, for me, the value of the shareholder maximization--without fraud, of course, without cronyism--the value of that model is, it lets those problems be solved by the political process, and gives business leaders a metric that they can actually use and that they have skin in the game in, which they don't really in that public policy game.

So, I'm worried about pandering, I'm worried about self-righteous decisions by CEOs, again using other people's money. That doesn't seem like the right feedback loops are going to be there, either. What are your thoughts?

Rebecca Henderson: Russ, you've opened up at least two enormous questions. So, let me just touch on the first and see if we can bracket it for the moment. Which is: I completely agree with you that the best way to address climate change is through the political process. And I completely agree with you that the thought of CEOs making policy for the world makes me all jumpy. And I also completely agree with you that good people can disagree about climate change, and how fast we move against it, and what kinds of trade offs we make over time. Completely there with you on all three of those points.

So, let's see if I can back into where the points of disagreement are.

Russ Roberts: And, see if you can budge me a little bit. Pull me in your direction. See what you can do.

Rebecca Henderson: This is intriguing. I'm not going for budge: I'm going for intrigue you.

Here's the issue--two things. First, I do think that if I were maximizing shareholder value for the world, I would personally invest my own resources to head off climate change now, which is the point I was trying to make when I said if just you and I were CEOs for the world. So, that's the point about, trade offs--I think, and I've met a bunch of investors who think this, that they want to make those investments now because they are worried about the risk.

Again, for me always the argument about climate change is how much do you want to bet against these long tail, potentially really unpleasant risks? So, we could have that climate change conversation.

But, let's come back to the: How much do we want CEOs in business? Because you're pointing to a central weirdness of my book, which is: I suggest that CEOs should lobby like crazy to make it really hard for them to lobby.

The single ask from my book--when people say, 'What are the three things you want?' I say, 'I want CEOs to lobby to get money out of politics. I want a genuine political process, which is really adjudicating these issues.' One of the reasons I believe that we're making so little progress against climate change is precisely because our political process around these issues is mucked up with hundreds of millions of dollars invested by fossil fuel companies that stand to lose if we enact any kind of climate legislation. And so we don't have a genuine political process. So, I'm trying to tell business, like, 'This is really a bad idea. We've got to get business out of politics, and you should use your power to do that.' Which I fully understand is a little strange. But, I'm desperate.

Russ Roberts: Well, on the flip side of that, you'd have to concede, I think, that the profit motive--pure profit, just shareholder value equivalent, in all its dimensions--gave us the fracking revolution, which has reduced the amount of carbon put in the air because the natural gas that's been discovered is cleaner than the oil and coal. And, it hasn't given us, but it's tried to give us a nuclear power revolution that would have done an enormous amount to reduce climate change. That profit opportunity isn't there because of policy in response to politics.

I could argue, I would like to, that we should push to have more nuclear power in the United States, because our political system has irrationally responded to that and taken out the profit opportunity that should be there.

Rebecca Henderson: So, two things. First, I am so with you on the profit motive. As I've been talking about Reimagining Capitalism to a wide variety of audiences, I run into people all the time that say, 'Why reimagine it? Why don't we just throw it out the window?' And I say, 'No, no, no, you really don't want to do that. Trust me, you really don't want to do that.' There's no way we're going to solve the problems we face without harnessing the profit motive full on. So, I am so with you; and of course, as you would guess that's one of the reasons I'm really in favor of some kind of price on fossil fuel emissions, on--because I think it would just really give the private sector this huge boost.

But, on the nuclear point, I was an MIT [Massachusetts Institute of Technology] professor for 20 years. I love nuclear power. If it were me, I'd be building a nuclear plant a week. And, I agree: the politics of that are super-tricky. We could talk about people overvalue risks of a certain type, and undervalue others. And, if it were me, I'd be running massive campaigns on why, you know, 'No, it has to be nuclear, and that has to be a part of the solution, and don't worry.' I would do all the things I suspect you want me to do.

Russ Roberts: Do you tell your students that?

Rebecca Henderson: I'm sorry?

Russ Roberts: Do you tell your students that urge?

Rebecca Henderson: Oh, yes.

Russ Roberts: What's their reaction?

Rebecca Henderson: Any time anyone ask me about nuclear power, I give you this answer. On this I'm completely consistent. If you were to watch my, the online version of Reimagining Capitalism, which is called Sustainable Business Strategy--

Russ Roberts: And we'll link to it.

Rebecca Henderson: Thank you--I highlight an MIT-founded startup, which is all about building a next-generation nuclear plant, which burns its own waste, which has passive safety. No, no; I'm completely consistent on those.

But, to be fair, I very rarely get pushback.

Russ Roberts: Interesting.

Rebecca Henderson: It's interesting. I think at least, in my own little world, but I talk to a lot of environmentalists, I talk to a lot of people who care about climate. I don't get pushback on this. I think it's clear that we need as many solutions as we can get.


Russ Roberts: Let's move on to labor practices, which take up a chunk of the book, and I think are really interesting and challenging both in the United States and outside the United States. I want to take an example you use in the book. Certainly[?] again, it highlights some of the challenges of what might be called a more compassionate perspective, as opposed to say, maximizing shareholder value. But, that I think it's not as straightforward.

So, you talk about the example of Nike, the athletic shoe company headed by Phil Knight. And Nike gets singled out, and you mention an article in Harper's, the magazine, in 1992, where an activist reveals that workers in Nike's factories make very little money. A particular worker is highlighted who is making $1.03 a day--14 cents an hour, roughly--and that the labor cost of the $80-pair of Nike shoes is 12 cents. And, that this is unconscionable. The last--it ends with a dramatic statement about how free market advocates should be not so happy with this.

So, let's talk about that. Talk about how Nike responded to that, and whether you thought that was the right thing to do or not .

Rebecca Henderson: Can I begin by saying that what you quoted is not my belief. That's what the media threw Nike--

Russ Roberts: Correct. Absolutely. And that was one of many. There were just--

Rebecca Henderson: One of many. So, Nike had a massive brand problem, and it was a real brand problem. So--forgive me, I've lost track of your question.

Russ Roberts: The question is : What should Nike do in the face of this? They had a brand problem. They could have responded in a variety of ways. How did they respond? And, you use it in the book as an exemplar of how firms should deal with the fact that many workers are underpaid by Western standards.

Rebecca Henderson: Yes. So, it's really interesting. You're focusing on pay, and I think what Nike focused on was the fact that it was a 12- or 14-year-old boy--

Russ Roberts: Oh, that too; yeah, go ahead--

Rebecca Henderson: And, that many of the workers--they discovered that many of the workers they were using were effectively child slaves--that they'd been sold by their parents. There's a legal form for it. But, that was what they thought the brand vulnerability was. And so, they started pushing like crazy to get child labor out of the system.

Similarly, when accusations started to surface of widespread sexual abuse in the supply chain--female workers in many apparel factories and male supervisors, very high rates of abuse--they believed and continue to believe that it's super-important to get these kinds of practices out of the chain so that we don't have forced overtime, we don't have child labor, don't have abuse.

And what they did is, first they tried to do it themselves. And that turned out to be almost impossible. The global supply chain in footwear and apparel is too large, too badly policed. They sent auditors into factories, but the factories were working with multiple buyers. I mean, it was super hard.

And so, what they did was set up something called the Sustainable Apparel Coalition, where they tried to get the majority of Western buyers of footwear and apparel to uphold the same standards, with the idea that then these factories would be faced as it were with a united voice. People saying, 'No, no, these practices are not okay.'

And that was moderately successful, but it's very hard to police these kinds of global coalitions, which is one of the reasons that, increasingly, these kinds of coalitions have turned to partnerships with local government. And so, trying to increase local capacity; trying to do what can be done about local corruption. Trying, in essence, to raise the floor in countries like Bangladesh and South Vietnam, in ways that will mean that no one is tempted to use child labor or a range of other harmful practices. That's my reading of the history.

Russ Roberts: Yeah; and I'm glad you brought up the age issue of the for child labor, because that is the other issue. It wasn't the one that was singled out in the article you quoted; but, obviously, you talked about it in other places in the book as Nike's biggest, both, PR [Public Relations] problem for sure, but also disturbing--unavoidably disturbing.

For me, the question is: When Nike did that, responded the way it did to all those variety of possible responses--acting on their own, trying to cooperate with local government and so on--did they make the world a better place?

And, I think that's a tricky question, because there's what was seen--which was the child laborers, and making very little money. What was unseen, is, first of all, the growth in wage rates and the reduction in child labor as those countries have grown and gotten more successful. Certainly, China is an credible example of that. The improvements in standard of living, the reduction in--I don't know this, but I assume in child labor as people become more able to educate their children for longer periods of time.

The more disturbing part is that, when that practice was stopped, of using young workers--and the same would be true of, say, a minimum wage standard--a lot of people who used to work in those factories weren't able to.

And, the question is: What's their alternative? That's the thing we don't see. The alternative is going through trash, and it's prostitution for young people, it's--the tragedy isn't that Nike is a greedy company. The tragedy is, is that in some of the places that Nike puts factories, the alternatives are tragically horrific. And it's not obvious to me that putting Western standards on those countries where they are in the process makes those children and their families better off. And that's just not seen. I might be wrong, of course. But, I don't think we want to over-encourage people to impose their standards on those societies.

Rebecca Henderson: I think there are two issues here. One is that there's an important subset of actions which increase economic value, so--and that those are to be encouraged. So, I believe, that when Unilever attempted to move its entire supply chain in tea to be more sustainable, that that increased economic value for everyone up and down the chain.

I think the data on that, what I've seen on Ph.D. studies, internal documents, but I think the data suggesting that farming more sustainably increased yields, that that enabled higher payments for the workers who were there, that the--labeling the tea more sustainably increased brand share, which enabled the firms to pay more for the sustainable tea--that there are an important class of moments or cases when doing the right thing is entirely consistent with generating economic value.

And, that's important. I argue in my book that those opportunities are sometimes hard to see. That trying to do the right thing provides the kind of vision and courage required to develop these kinds of new business models.

Now, you're focusing on a second, really important class of changes, which are costly--and costly to society. Difficult, difficult-trade offs.

And, I think--what I believe, but cannot prove--the data here is tricky--is, one of the fastest ways to increase economic well-being is to increase the capacity of the local institutions.

That: Yes, the free market is an unparalleled source of growth and change, but it needs to be paired with good institutions: minimal corruption, government that can provide public goods for its citizens--the full set of, what I would argue, are the great institutions of the West.

And the reason the kind of thing that Nike is doing is important, is not because in the short term, right here right now, are we sure this village is better off? Hard trade-off; I would argue sometimes yes, sometimes no. But I'm completely with you: You can't say unilaterally, 'Yes.' What I think you can say is if firms like Nike become more engaged with increasing the quality of the local institutions, that that's almost certainly a good thing.

And so, to the degree these consortia really try and bring the whole society to a place of better functioning, that's really worth doing. And that's in essence--when I talk about Reimagining Capitalism--that's what I have in mind, is firms in service to building the institutions.

Now, you could reply, I think entirely legitimately, 'Ahh, I'm not sure I want multinational firms working with local institution'--wrr, rrr, rrr, rr. And here again, I'm with you. I think that's a spectrum. I think this is tricky.

But, one of the cases I teach is about a massive goldmine in Papua New Guinea. And the case is about: Should the firm be trying to train the local police force, or provide the money for training the local police force, and, you know, doing the education and the healthcare and the school and working with the government?

And, you know, there is no government. We're, you know, hundreds of miles down a single road and there is no government. And, almost everyone will say in that circumstance, 'Well, maybe the firm should do something.'

I think that we need to really think carefully about the role of firms in shaping and being shaped by these, the institutions that keep the market in check, that keep in balance.


Russ Roberts: It's a really interesting question, in what role corporations might play in less developed or poorly developed countries with poor institutions. But, you and I agree, we certainly don't want them doing that here in the United States. The issue, longtime listeners will know, is that what Bruce Yandle calls the Bootlegger Baptist problem, invoking something with high ideals that actually serves yourself. Right? Higher wages--a large multinational can handle that. The local competition can't. There are a lot of, again tricky, hidden, not so easily seen consequences of that. So, I that is an issue.

One of the things, of course, as you point out, is that often, doing good is consistent with profit maximization. I want to raise, talk about something you discuss in the book which is related to leadership. You ask, "If managing with purpose," which is your ideal of how a corporation should lead and create a culture for its employees, and its compensation, "If managing with purpose is not only possible, but potentially such a powerful source of competitive advantage, then why doesn't everyone manage this way?" It's a good rhetorical question.

My answer would be that: It's really hard to do. Herb Kelleher, when he worked the baggage claim on Thanksgiving and Christmas for Southwest Airlines, created an incredible love among the employees for him, and respect. Other CEOs didn't copy him because they would have been seen to be not enjoying it.

Herb seemed to enjoy doing those things with his employees. And I think that's just a scarce talent. That's one example of that kind of leadership that is so special.

But, I think it's just really hard to create a corporate culture that motivates people to feel they're on a team, they're working together, and they can be treated as teammates rather than, as, quote, "employees."

Rebecca Henderson: I think you're entirely right. And, my solution to the problems we face is not that all firms should become purpose-driven firms and treat their employees well, and we're done.

I really think we need to rebuild the institutions. That, the solution to the people who are left behind is through government policy. And we can argue about what kinds of policies. And, before we go there, I'm not just massive redistribution. I'm all about increasing education and health and thinking about how we support the free market in places where it's never reached, and letting everybody participate.

But, that my end state is all about a stronger government in partnership with the private sector. I think the purpose-driven firms could be catalysts in helping to get us there. That, firms like Southwest Airlines demonstrate that: Yes, you can treat people well, and you don't have to say, 'And it hurts economic growth,' or 'It makes bad trade offs.' I think what they do is show us a glimpse of what a more just and more effective and productive world might look like. And that's why they're so important. I agree, it's tough. Herb is an exceptional human being. And, most of the people I profile in the book are very exceptional people.

But, I think there's an important middle ground of people who are pretending that they don't want to manage that way because, you know, 'Real people take names and manage by the numbers.' And, there are many people who actually could be Herb, who restrain themselves because somehow it's not quite the done thing.

Russ Roberts: Yeah, that's interesting.

Rebecca Henderson: And I want to encourage people like that to go for it, to give it a try.

Russ Roberts: In the same vein, I can't resist reading the Nordstrom--I don't know if it's, I can't remember, is it the employee guide?

Rebecca Henderson: Oh; it's the handbook. It's the handbook. Yeah.

Russ Roberts: The handbook. It's one page. And I'm going to read it in its entirety. It's quite short. 'Welcome to Nordstrom. We are glad to have you with our company. Our number one goal is to provide outstanding customer service, set both your personal and professional goals high, we have great confidence in your ability to achieve them. Nordstrom rules. Rule number one, use good judgment in all situations. There will be no additional rules.' That's just fantastic. I just love that.

Rebecca Henderson: Oh, and they mentored[?] it. And they built a fabulous business on the back of that handbook.

Russ Roberts: It reminds me of my--I have one I prefer, which is the Ritz Carlton motto, which is, "Ladies and gentlemen serving ladies and gentlemen." That's the whole thing. That's their motto. It kind of gives you a vision of what a great employee is, and a great employer.

Rebecca Henderson: Oh, I love that. I didn't know that.

Russ Roberts: Well, what's beautiful about it, is that if you're in a Ritz Carlton--it's so fantastic. I don't know if they still do it. I haven't been in a Ritz in a while. But, in the past when I've been in a Ritz Carlton--because I'm a weirdo--I would ask a employee sometimes, 'Do you happen to know the motto?' They do.

The other thing that the Ritz does, because they are 'ladies and gentlemen serving ladies and gentlemen,' is that, if you ask for directions in a Ritz Carlton, any employee, of any kind, not just the concierge, they will not give you directions.

If you say, 'Well, how do I get to the ballroom?' or 'Where's the restaurant,' or 'Is there a bar on this floor?' Or 'Where's the elevator?' They will escort you, they will walk with you. And, it's a strange feeling. You can say, 'No, no, I got it.' No, no, they will walk beside you because that is their culture. And I think there are obviously times when that's silly and wasteful, but because they enforce that cultural norm, it creates a different feeling of what it's like to work there and be a customer there.

Rebecca Henderson: Yeah. So, it's super-tricky. Often when I'm talking, I'm like, 'Well, why don't we just fix all the problems right now?' This is really hard. Moving in a positive direction is super-hard, because we have to preserve the raw grit and focus of competition, and the change and innovativeness that, that gives you.

But, you know, if that becomes all you have--this takes us back to the epidemic of loneliness. And just focusing on me right now. If we cease exploring for: Is there a better way? Can we structure things? Can we set the rules so we play a different kind of game? Then we risk--we risk, really--I'm trying to moderate my language, but I'm really concerned about the number of people who can't engage, who are lonely.

I see the escalating suicide rates. I am deeply worried about what we're doing to the planet. You know: the dead zones, the declining topsoil--it's so short-sighted. To me, it's not a conflict with the free market. It's just a matter of sensibly getting the rules right. But, that's easy to say and hard to do.


Russ Roberts: Yeah. Let me raise an issue, I don't think is in the book, which is about corporate structure generally and the very existence of the corporation. So, I would make a distinction between privately held firms and publicly held firms. A famous example that occurred at the end of the 20th century, I think it was in 1997, Malden Mills, which is the maker of Polartec. Their mill burned down, and the owner of the mill, which was Aaron Feuerstein, it was his mill, his family home business, decided two things: he would rebuild the mill, and he would pay the employees in the meanwhile. Which he did. He got an enormous amount of loving coverage from the press, and deservedly so on the surface, at least. It's his money. My view was, if he wants to do that, I think that's a wonderful thing.

He went bankrupt in 2001, and then I think, again in 2007, and part of the reason he went bankrupt is that he had lost the cushion, which he could have had, when he did this compassionate, wonderful thing.

But, he made himself vulnerable, which is always I think the issue with these take-less-profit encouragement: when you encourage firms to take less profit, you make them more vulnerable to bankruptcy. You also, I think, risk mis-allocating capital.

But, the point is, that's his call.

As a publicly-held company, I don't think it's his money to do with it as he would like. And there are other ways, of course, to help people who are out of work, both public and private.

I think you have to argue that at the root of the problems that you're disturbed by is this publicly-held company, which is offered capital under the investment of stockholders, with the understanding that profits will be maximized.

And if you don't have that, that's fine. But I don't think--how do you still have a publicly held firm, how do you allow for that indulgence, which is not always going to be good, of CEO power over the money that isn't theirs, but rather that of investors?

Rebecca Henderson: I don't allow for it. I am not in favor of changing the governance structure of public corporations. It is a betrayal of your fiduciary duty to spend money on projects you know will not return money to the company. I'm a board member of two publicly held companies. I'm completely with you. I'm also the course head for the course we teach on leadership and governance at the business school. And we taught Malden Mills for years, for exactly the two teaching points you point out--which is: It's his money, but it made him bankrupt.

You know, I say to the students all the time, don't crash the company. This is not about some kind of fuzzy, 'Let's forget about the profits and embrace our stakeholders.' What I'm talking about is the fact that, in the longer term, consistently failing to think about our stakeholders and consistently running down the institutions that surround us, even though they may drive short-term profits, is a mistake. An economic mistake.

Russ Roberts: So, you give the example of Aetna, which raises their minimum salary to $16 an hour. I don't remember what it was at originally, but it was a significant increase. I want to say it was $11, but I can't remember.

But they had some floor before this decision. And it went--they decided to--this, for a bunch of reasons--that this was not a good policy. They wanted to raise that lower amount. So they raised it to $16 an hour. So, you're arguing that if that led to lower profits, they shouldn't have done it?

Rebecca Henderson: Absolutely. Here's where I think the tension is, Russ. I was the Eastman Kodak Professor of Management at MIT for 20 years. For 20 years, I studied large firms that would not respond to major shocks in their environment--even though I think the arguments could be very strong that they should have done, and it would have been better.

My first paper that I sent to an economics journal was called "Underinvestment and Incompetence in the Face of Radical Change." And the editor wrote back to me, it was the RAND Journal, he said, 'Rebecca, you have written a paper about how the moon is made of green cheese, and economists have too little considered the motion of cheesy planetoids. What do you mean, incompetence?'

But, incompetence is real. Failure of vision is real. I believe, continue to believe, that Mark Bertolini at Aetna made the right decision: that it increased his shareholder value. And why hadn't everyone else seen it? Was there really money on the floor? You bet there was. Because everyone was just operating the standard heuristic: We pay people as little as we can get away with, and that's the way to maximize profits.

Firms, I believe, make mistakes like that all the time, particularly at moments of transition, when the world is really shifting. That was what my research was. I think where we stand now is--I have this hokey phrase, might even be in the book--but it's a Kodak moment. That we can't go on using up the planet's resources as if they're completely free. We can't go on running down government and regulation as if that has no consequence. And we can't go on treating people as things. They will turn around and bite us.

Now, you can absolutely hit me on the collective action problem. So, what I say to firms is what I say to you: You have to move together. You can't go out and spend all this money and not have a return. But, if you move together, you can raise the floor for everyone. We'll all be better off--

Russ Roberts: But, Rebecca--

Rebecca Henderson: I remember--I mean, let me give one more example.

Russ Roberts: Go ahead.

Rebecca Henderson: When Walmart in 2005, announced super-aggressive targets for energy reduction, everyone thought it was necessary PR [Public Relations]. That Walmart was in such a bad place PR-wise that, 'Okay, okay, they can do these green investments.' What they discovered is that they threw money to the bottom line.

Redoing the trucking fleet took a billion dollars in profit to the bottom line, which even for Walmart was a lot of money. Was that money lying around? It turned out it was. When people started looking improving energy efficiency, gave people 16%, 17% rates of return. They just weren't looking.

It's a Kodak problem. My book is about the Kodak problem. That's how I think about it. It's not: Throw economic returns out the window. That's a mistake, a super mistake.


Russ Roberts: Well, as a passionate defender of free markets,I'm prone to making, reading the book perhaps a different way than you meant it, right?

But I want to go back to the Aetna, the Aetna example. You said: if you do it on your own, it's risky--say, raising the wages of your workers. And, you need to have everyone else go along with you.

The problem with that model is we don't know what the right level is. The beauty of markets is it sets that level in a decentralized way. I'm not going to pretend it sets it perfectly. I don't believe the blackboard models of economics and efficiency. There's lots of inefficiency. There's mistakes; there's money laying around; there's entrepreneurial opportunities, of course. I just don't think you want to have a bunch of employers sitting around deciding what that wage should be, if, for example, it leads to workers not being able to find work because they're not productive enough. So, I think it's complicated.

I'll give you another related example and you can react to it. Costco, I think, pays its workers more than Walmart. A lot of people like to point this out and point out that Walmart therefore is oppressing its workers or somehow exploiting them. They're different kind of people, there are different kinds of tasks in the two firms. I don't think it would be good for Walmart to raise its wages to the level of Costco. But I'm really confident that I don't know. And I'm assuming that Walmart focuses on it. It's true--they could make a mistake. There could be money laying around that they're missing. But, I don't think again, you want to just say, 'Well, look, they underpay their workers.' I assume that they don't actually, despite that differential between Costco and Walmart workers.

So, I think there's a danger in being too confident about what works and doesn't work as outside observers.

Rebecca Henderson: I am not suggesting to any firm that they unilaterally raise their wages. I am suggesting that for some firms, and some times, there are business models which could enable them to pay more.

And I think the research we have about Costco versus Walmart is really interesting on this point. Costco runs a completely different work system from Walmart, which enables them to pay more. I wouldn't suggest for a moment that Walmart should unilaterally raise its wages if it didn't have an economic case for doing so, and a sense of how to cover those costs.

I think the economic case might take two or three years to play out, because when they did raise their wages, the market punished them hard. They did see the improvements in productivity and engagement that they expected and were able to pay more. But again, this is a time horizon model, not a you-should-give-up on economic value.

There is, I think, a broader question, which I suspect is too much for the time we have left or for our conversation now, which is: Should society as a whole set guardrails which constrain what firms can do?

So, firms used to fight back against safety regulations, for example, as being an interference with free market competition. Nobody, I think would do that now. Nobody, I think, would suggest we would be better off without fundamental safety regulations in factories. I think there are societies where average wages are higher, and those societies seem to be internationally competitive. I think there are ways to build a society where people at the very bottom don't have to be paid so little they have to work two jobs and their children rely on subsidized food to get adequate nutrition.

But, that's a systemic question. I am not suggesting that individual firms should try and get us there themselves if there's no business case. That's crazy. The free market will put them out of business. I realize there are lots of people running around saying, 'Firms should do good.' It's not helpful. My colleague, Forrest Reinhart, used to say they want firms to do all the things they can't get NGOs [Non-Government Organizations] to do. That's not what I'm talking about. I'm talking about whether we can shift the whole system so that some of these big problems we face can be addressed in a way that doesn't mean sacrificing the power and drive of the free market.

Russ Roberts: Well, I do think there's a really important issue that you talk about, as that relates to your point which is--you describe it as self-regulation. I think of it as norms that emerge, that are hard to steer. And one could take your book as an attempt to try to change what those norms are, in the boardrooms and corner offices of corporate America. Particularly the time horizon and the environmental consequences of corporate decisions.

Certainly, it would be wrong to poison your neighbor's water or air even if, "you could get away with it." Even if it was legal. And so, demanding that kind of ethical balance seems to me to be a good idea. I think the application in particular areas is where it gets challenging.


Russ Roberts: Let's close with a--you can respond to that if you want--but let's close with something about the current situation. I like to think of EconTalk as timeless. That sounds grander than what I mean by it. I mean it doesn't respond to the news. But there's some issues in the news right now that I think have general applicability.

In particular, the one I'm thinking about lately is medical treatments or vaccines for coronavirus, COVID-19. It was in the news in the last few days that remdesivir, a drug that Gilead developed for Ebola, which had no value to them at the time: Ebola disappeared, or it didn't work for Ebola, I think; but they saved it. That's what happened. It didn't work so well for Ebola, they saved it. It might have worked with MERS [Middle East Respiratory Syndrome, a coronavirus] and SARS [Severe Acute Respiratory Syndrome, a coronavirus], which came in the meanwhile, but they didn't last long enough to test it. Now, we're in this horrific crisis, pandemic, where remdesivir has some indication that it shortens hospital stays, which is quite important, actually. It's been underestimated, I think in the press, as has the potential impact on mortality.

This is an aside: the mortality in the study that just came out fell from 12% to 8%, an enormous reduction, but it quote, "wasn't statistically significant" and because it wasn't, and a lot of people ignored it, and didn't even mention it in the news stories. It was significant at the 94% level, not the 95%. That's like saying, if you're 59, you don't have to worry about COVID because it only gets bad when you're 60. It's just absurd. It's a misunderstanding, I think, of what statistical significance is and how we communicate the media.

But, let's suppose it turns out to be, and it may turn out that that study was flawed for 100 reasons and isn't replicated, and whatever. But, Gilead decided, until June 1st, at least, to give away their stockpile of 1.5 million doses, which of course is applauded and lauded.

I want your reaction to that, and whether a pharmaceutical company that develops a vaccine going forward, which would have enormous value, should they be allowed to charge for it? Should they give it away? If you were advising the CEO of a company like Gilead, what would you advise? Easy question, Rebecca.

Rebecca Henderson: Well, I'm on the board of Amgen, and I think a lot about pharmaceutical pricing. You're right, this is the hard question; but here's what I would recommend. I would say, of course, charge for the vaccine. That, the prospect of being paid is what will generate the kind of effort and energy that you want to get that vaccine. If I were the president, I would say, 'I'd be delighted to pay a fair price for the vaccine.'

And then I would say to the CEO, 'But be careful how much you charge.' That, there is a social norm here that, yes, you want to charge, but if you put it too high, you risk undermining the public willingness to tolerate pain.

So, I think this is an economic decision. I think deciding to give away the doses was a smart, strategic choice. I think it was also ethically correct, that the fact that they had the drug and that they had the stockpile would have made charging a very high price very tricky politically and socially.

But, I don't think firms should work for the public for free. No, I don't think that. I think it's all about the balance. It's all about a decent return on the energy and focus and attention that you put into develop that vaccine. But, not a completely bizarre, 'hold everyone else to random ransom while people die' price. And, how do we think about setting that price? That's super hard. In Europe, they have ethics boards and medical boards that think about that. Is that an ideal solution? No. Is a complete free-for-all that we have here now, given the structure of our healthcare system, I think that's creating all kinds of problems.

For me, it's all a matter of balance. But, I'm certainly not going to hold up a flag and say, 'Pharmaceutical firms should give away their discoveries.' That would be a mistake.


Russ Roberts: Let me close with a related problem to that and then get your reaction. I've argued on this program that the problem we have with pharmaceuticals today is that Medicare is not allowed to negotiate price. The elderly consume an enormous portion of the pharmaceutical products of the American and international pharmaceutical system. The pricing of those is a terrible free-rider problem where the current system allows pharmaceutical companies to reach into my pocket as a taxpayer, and there's no skin in the game for consumers--most consumers. Tax taxpayers don't observe what's going on.

And so, a company starts with a drug, and it might be a wonderful drug. Many of them are not: they have marginal impacts on survival, a couple of months sometimes. Get approved by the FDA [Food and Drug Administration], get, therefore the opportunity to charge large prices from Medicare and health insurance follows along. And so this drug comes out; it's $100,000 for a year's supply, say, of treatment. And the next year, they decide, 'Let's raise it.' You think about what's the rationale for raising it any amount? Is 10%, 20%, 30%, what's the--there's no market there. It's a bizarre system.

And often, generic competitors have been regulated out of business through the crony capitalism we were talking about earlier--legislation that protects existing firms from those generic competitors. The medical profession is compromised in how they interact with that system as we talked in a recent episode with Vinay Prasad on his book, Malignant. And so, each firm has to make its own decision. But, they're each imposing costs on each other. They're destroying and eroding the trust, I think, that people have because of their ability to abuse the system.

And, it's going to be very hard for, I think, most pharmaceutical companies to avoid that temptation, and I think it's not going to last forever. I think that's going to end. I'm curious what you think of that.

Rebecca Henderson: I think what you've described is a microcosm of the broader problem, that we have neither a free market, nor of functioning government, in the case of pharmaceutical pricing. And so, we're getting the worst of both worlds. And so, what we need to do is to rediscover that balance between a free market and appropriate regulations so the free market doesn't run amok.

I don't think the current healthcare system can survive in its current form. I worry about our broader system. I think we are losing the competitiveness and the drive and the ability to have really democratic and responsible government. The risk is we're going to end up at the worst place, which is, as you say, crony capitalism. I call it extraction--a few rich people collect the money and the power and they keep it for themselves. And it is not fun.

Russ Roberts: My guest today has been Rebecca Henderson. Her book is Reimagining Capitalism in a World on Fire. Rebecca, thanks for being part of EconTalk.

Rebecca Henderson: Russ, thank you for having me on the show. I really appreciate it.