Within the framework of private law, where individuals are largely self-governing subject to the basic principles of the law of obligations (contract, property, and tort) the law has nothing to say about whether everyone should have the same amount of stuff or even the same amount of social standing or economic power.
The question then is: how much inequality is acceptable? Different people have a different level of tolerance for how much richer they can get before it starts becoming embarrassing and they feel that Something ought to be done. But who exactly should do Something, and how, exactly? Is private ordering superior to legislative fiat in achieving prosperity for all?
Free markets may well be better than state regulation in terms of achieving efficiency and wealth maximization, but if the goal is to create a more equal society then nobody can realistically look to capitalist markets to achieve that. The question must then turn to the interaction between market efficiency and social equality. To a large extent the two goals are symbiotic and support each other so that a trade-off between them is not required. However, given that efficient markets are indifferent as to wealth distribution, it cannot be assumed that efficiency will usually, or even often, produce distributive equality.
There are three possible regulatory responses.
1. The equality preference
First, the proposition that the policy priority ought to lie with promoting economic equality wherever possible. In the context of company law this is reflected in some of the ideas underlying employee participation in decision-making, such as parity representation of employees and shareholders on the company’s board of directors.
2. The open-ended preference
Second, the proposition that policy-makers should attempt to strike some kind of balance between conflicting goals, preferring neither efficiency nor equality but making case by case assessments depending on the context. This approach is reflected in various manifestations of stakeholder theory, which argue that instead of prioritizing profit maximization the board of directors should set its priorities according to the context, preferring one stakeholder group or another depending on whose interests are most at stake.
3. Free markets
Yes, no market is perfectly free or perfectly competitive, thank you for pointing that out, but freedom may nevertheless stand as a policy goal or ideal standard to aim for. This lies at the heart of our third proposition: given that efficiency and social justice often work in tandem, it may be proposed that when it comes to a choice between economic freedom and equality, the policy preference should favour economic freedom and free market transactions. This is the proposition at the heart of the predominant shareholder primacy ideology in corporate law and reflected in Friedman’s assertion that the social goal of corporations is to maximize their profits as rising prosperity across the economy as a whole is the best way to maximize social welfare.
In my academic work I examine how these three preferences have influenced the framing of corporate contracts, and specifically contracts between the company and its key stakeholders, the shareholders and employees. The equality preference would create a policy framework ensuring that company welfare does not favour the rich over the poor; the open-ended preference would adopt something like the current legal framework which relies heavily on disclosure rules and voluntary codes of conduct; in turn the free markets preference would allow the large corporations currently disrupting traditional employment relationships through the gig economy (yes, Uber) to flourish despite concerns about unequal outcomes.
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