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The Debasement of Contracts and the Decline of Capital Markets

THE WORLD CAPITAL SHORTAGE, Alan Heslop, ed., The Bobbs-Merrill Company Inc., Indianapolis, Indiana, 1977

20 Pages Posted: 30 Nov 2003  

Michael C. Jensen

SSRN; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Abstract

The basic problem in the conflict between political democrary and free markets is the following: individuals, you and I, can make ourselves and our families better off in two major ways: (1) By expending time and other resources operating in the private sector to produce goods and services (be they art, automobiles, film, or education) which other people wish to buy. (2) By expending our resources in the political sector to get the government to change the rules of the game to reallocate wealth from others in society to ourselves. In the first of these activities we generally make other people better off and in the second, we make them worse off: We make them worse off for two reasons: (1) The direct effects of the wealth transfers, and (2) The indirect effects caused by the reduced incentive to produce—examples include income taxes, restrictions on production such as our former farm programs and licensing restrictions on entry into various professions or markets, and the attenuation of property rights caused by significantly increased uncertainty over what will be the future rules of the game.

Keywords: Political Economy, politics, markets, free enterprise

Suggested Citation

Jensen, Michael C., The Debasement of Contracts and the Decline of Capital Markets. THE WORLD CAPITAL SHORTAGE, Alan Heslop, ed., The Bobbs-Merrill Company Inc., Indianapolis, Indiana, 1977. Available at SSRN: https://ssrn.com/abstract=442701 or http://dx.doi.org/10.2139/ssrn.442701

Michael C. Jensen (Contact Author)

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Harvard Business School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Harvard University - Accounting & Control Unit ( email )

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