Thursday, January 28, 2016
“Thin political markets” are the processes through which some of the most complex and critical institutions of our capitalist system are determined—e.g., our accounting-standards infrastructure; rules for bank-capital adequacy; actuarial standards; and auditing practice. In thin political markets, corporate special interests are largely unopposed because of both their tacit knowledge and the general public’s low awareness of the issues. This enables the special interests to structure the “rules of the game” in self-serving ways. On one level, this behavior embodies the capitalist spirit articulated by Milton Friedman: “The social responsibility of business is to increase its profits.” But the ethics of profit-seeking behavior are premised on the logic of competition and this logic breaks down in thin political markets. The result is a structural flaw in the determination of critical institutions of the capitalist system, which, if ignored, can undermine the legitimacy of the system. Ramanna will close with some proposals on how to address the problem.
Karthik Ramanna is an associate professor of business administration at Harvard Business School.