E Are Free Trade And Shareholder Wealth Maximization Tarnished Ideas?

American voters are expressing a lack of confidence in free trade and question whether the purpose of a corporation is to maximize shareholder wealth. These two ideas have guided U.S. economic policies for decades. Why are they tarnished in the minds of voters across the political spectrum?

Three developments help explain this question: the end of the Cold War, outsourcing, and computer technologies. Each benefited consumers and businesses globally. But by making it easier to use cheaper labor, each development eroded job and wage security for U.S. workers.

The end of the Cold War led countries such as China and India to adopt export-oriented policies. At first, their workers provided competition for low-skill jobs in the U.S. but eventually they competed for high-skill work as well.

Companies outsourced activities beginning with computer services then migrated to payroll, customer support, and even manufacturing. Out-sourcing begat off-shoring; once a function was contracted out, it was less of a leap to secure it from abroad.

Computer technologies digitized knowledge and communications which made it easy to spread know-how and relocate where work was performed.

Put another way, these developments increased the return on capital and weakened the return on labor.

Free Trade

Free trade brings lower prices and innovation because it makes it easier for foreign producers to sell in the U.S. Trade costs are borne by those who own or work for domestic suppliers that are not efficient or innovative enough to compete locally.

Economists argue that free trade results in more efficient use of resources because it encourages nations to produce the products and services that they have competitive advantage in and to import what others produce more efficiently. Economic natural selection results when products are made by the most efficient producers which then lowers prices. Arguably, it provides the greatest good for the greatest number of people.

With free trade, there is supposedly less corruption on other sides as there are no gatekeepers to pay for market access. It can improve the standard of living of disadvantaged people. Trade promotes peace as interdependent nations are less likely to engage in aggression. Yet, free trade can be a difficult pill for countries to swallow because it may threaten domestic producers and make it harder for policy makers to achieve economic goals and maintain political stability.

Once free trade is adopted, it is difficult to put the genie back in the bottle as it has many benefits. That said, it is easy to be theoretical about the dynamics until you or someone you know is a casualty.

Shareholder Wealth Maximization as Corporate Purpose

What is the purpose of business? There was a time when corporate purpose was tied to customers, employees, and the communities in which they operated, as well as benefit to their owners. This appears to be a quaint notion to some. Drug companies implement colossal price increases simply because they can. Multi-national corporations structure transactions to keep income in a low tax country. So-called tax inversions are mergers that achieve the same purpose. Such behavior undermines socio-economic confidence.

In a compelling article called How the Cult of Shareholder Value Wrecked American Business (http://wapo.st/18Kr1yY ), Washington Post columnist Steven Pearlstein writes: