How institutions undermine the economy

An interesting article was published today on The Conversation web site about the role of corporate law in the demise of BHS, a British retail corporation that was deliberated bankrupted by its main shareholder and director, Philip Green. All in all, it is a horrendous case of how corporate law facilitates the undermining of economic wealth generation in favour of the extraction of extreme wealth for a few powerful individuals.

As set out by the author, Professor Lorraine Talbot, BHS was deliberately loaded with debt to transfer the value of its assets to other corporations that paid out significant dividends to the family of Philip Green. All of this is not illegal and fits within the framework of the law. Therefore, this case clearly shows how bad institutions, in particular the law, undermine the proper functioning of the social division of labour as an economic wealth generator in the contemporary global economy.

Another aspect of this case is that this same corporate law was created in the past at a time that greed was less of an issue and provided the flexibility of the system to support entrepreneurial activity. Thus, institutions that functioned reasonably well in the past might falter completely if behavioural attitudes change. In this case, the rise of extreme greed as an accepted behavioural norm, caused these institutions to fail spectacularly.

I note that selfishness and greed themselves are social norms and as such foundational social institutions. In this regard, how institutions attune with each other impacts economic performance and wealth generation.