Reconsidering the Role of the Firm in an Economy Full of Rents

What is wrong with the modern business corporation? Some people criticize it for making profit-maximization its only goal; they want corporations to devote a portion of their revenues to social needs so that corporations make a positive impact on society in addition to earning profits. This movement has led, in various jurisdictions, to (proposals for) the adoption of legislation authorizing the creation of a hybrid corporate form, a new corporate form which allows the corporate board to combine profit generation with social responsibility, such as the benefit corporation. We take a different approach in thinking about how to improve the functioning of the modern corporation for the benefit of society. We use insights from modern rent economics both for diagnosting the problem and for providing a remedy for the perceived divergence between the pursuit of private profits and the public interest underlying the discussion about corporate social responsibility. We posit that it is not the pursuit of profit which is bad; it is the pursuit of artificial profit (‘rent’) enabled by a variety of market failures which causes social harm. The solution lies not in legislation authorizing the creation of a hybrid corporate form, but in legislation which makes the markets in which corporations operate more competitive in order to remove rents ex ante.