What Determines The Demand For Ideas?

Most people understand how corporate lobbying influences decisions made by governments.  This article describes the marketplace for ideas.  Ideas are important.  They shape the way people think about issues and they influence important outcomes.  There is not a free market for ideas.  Some ideas a not pursued because they do not coincide with prevailing incentive systems.  Academics, and others who are in the business of idea creation, are influenced by their understanding of the incentive system.  Idea creation needs to be funded. Some ideas are more likely to be funded than others.  Furthermore, ideas have little influence  unless they are amplified.  Control over funding, and the means of amplification, have a powerful effect on the products that are produced in the marketplace for ideas.

Some good  examples are provided in this article to show how this works.  Michael Jensen published an article in 1990 that made the case for linking CEO compensation to increases in shareholder value.  He was attempting to deal with the economic problem of agency.  CEO's are agents for shareholders and they are more likely to work in their interest if they also benefit from increases in the stock price.  Corporate executives loved that idea and the article has been one of the most frequently cited articles in the field.  It was amplified like few ideas are ever amplified.  Jensen changed his mind about the idea after he observed how it affected CEO behavior.  He wrote an article which expressed his concerns about linking CEO compensation to stock price appreciation.  The article did not get published in a prestigious journal, and it did not receive much attention when it was published.  Jensen's regrets did not receive the amplification that they deserved.  CEO compensation is tightly linked to various methods of obtaining stock awards.  Moreover, the stated objective of most corporations is to increase shareholder value. The older idea, that there are multiple stakeholders in a corporation, that deserve consideration, has fallen into the dustbin of history.

The article concludes by raising an important question for academics to consider. How is their idea creation determined by the incentive system that they understand very well.  Do they want to be part of the problem or part of the solution?  For example, business profits are affected by the degree of competition in their market.  Given a choice, businesses prefer less competition in their market, and that is reflected in their strategies.  On the other hand we also extol the virtues of free markets in which consumers benefit from competition. Perhaps we are part of the problem.