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The Theory of the Firm, Managerial Responsibility, and Catholic Social Teaching

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Abstract

The costs of transacting the myriad individual contracts needed to operate a complex productive enterprise are prohibitive. The “firm” provided the solution, by substituting hierarchy and command for perpetual negotiations. The legal system played its part in the development of firms by establishing a sort of standard-form contract that defines the rights and duties of those operating under the umbrella of the firm. The primary duty of those who manage a firm is to maximize the interests of the firm’s shareholders; that is, to maximize profits. Catholic social doctrine, while essentially supporting the critical elements of private enterprise such as private property and profits, does superimpose a higher duty. The firm must ensure that it never undermines the dignity of all who are affected by its economic activities. Workers, managers, and consumers may never be reduced merely to producing or consuming things. Every firm, moreover, has a duty to promote, and not to detract from, the common good.

George E. Garvey, "The Theory of the Firm, Managerial Responsibility, and Catholic Social Teaching," Journal of Markets & Morality 6, no. 2 (Fall 2003): 525-540


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