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Inefficient markets

Corporate crisis

Don’t blame the scandals

After the string of corporate scandals in the US, the public is blaming the destruction of trillions of dollars of “shareholder value” on the malfeasance of top management. This is misguided.

In fact, the frauds serve to conceal the economic readjustment which inevitably follows periods of great innovation. Joseph Schumpeter observed that booms occur at times when “swarms” of entrepreneurs simultaneously attempt to apply some new innovation. He claimed that both the profits in the boom and losses in the ensuing depression were “essential elements in the mechanism of economic development.”

This process can be…

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