ISME Confernce 2015 Draft

(comments appreciated: caleb.bernacchio@gmailcom)

MacIntyre on Agency Theory as Corporate Ideology
By focusing primarily on several early articles, this paper develops
an account of MacIntyres theory of ideology. After which, this theory of
ideology is applied to agency theory as developed by Jensen and
Meckling (1973). MacIntyre describes ideology as a mode of
conceptualizing social life, such that conflict, rival conceptual schemes,
and uncertainty are minimized in a way that empowers some group by
authorizing their claims to expertise. MacIntyre says, The experts
claim always takes this form: his taxonomic ordering represents a set
of structures that determine the form of social and political life in ways
that ordinary agent do not perceive; and his predictions represents the
determinativeness of a future not available to ordinary agents
(Ideology, Social Science, and Revolution p. 339).
MacIntyre offers three characteristics of his use of the notion of
ideology. First, it is an expression of a partial truth. As such, ideology
cannot be neatly distinguished from science or legitimate truth
claims on purely epistemic grounds. Rather ideology is a matter of
treating certain beliefs as if they were not contestable; it concerns the
manner in which one holds beliefs. Second, ideology is neither a mere
reflection of a given social order nor a matter of the intentions or
motives of proponents of ideological claims. Instead, MacIntyre claims
that any such reflection is a function of theories, if they are
ideological, over and above whatever other characteristics those
theories may possess (Social Science Methodology p. 59). Third,
MacIntyres notion of ideology is distinct from Marxian views employing
the base / superstructure distinction, and centers largely upon
prominent features of quantitative methodology employed widely in
the social sciences.
MacIntyre then describes two characteristics effects of ideology:
first it works to conceal the features of particular conflicts,
contestable concepts and situations, and unpredictabilities; and
second, it does this by working to conceal conflict, contestability and
unpredictability as such (Social Science Methodology p. 60).
According to this perspective, ideology functions by presenting an
overly simplified account of some aspect of social life, which, by means
of this oversimplification, serves to empower some group or groups by
licensing their claims to knowledge or expertise, claims which are in
fact, unwarranted. In various places MacIntyre has argued that
bureaucratic managers, social scientists, revolutionaries, and theorists
of ideology have employed ideological claims in this manner.

But what is concealed by ideology? Conflicts about interests within

organizations provide one prominent example. MacIntyre points to the
notion of work as it has figured into labor disputes in an industrial
context. The collective bargaining process has been understood
primarily as a conflict over the proper manner to distribute the profits
earned from the labor process. This ignores the more fundamental
conflict over the nature of agency and its relationship to work; the
question of whether work is merely instrumental and engaged in for
the purpose of consumption or whether consumption is instead a
means to the exercise of human powers through work, what MacIntyre
calls the Aristotelian view. In the same vein, MacIntyre points to the
dominant conception of the political process as one of bargaining
between interests (Social Science Methodology p. 56). This
obscures the more fundamental conflict between an Aristotelian
conception of the common good and reductive notions that view the
common good as an aggregate of individual goods.
Such organizational and political conflicts are fundamentally related
to the notion of an essentially contestable concept, another form of
disagreement that is obscured by ideology. These are concepts for
which stable necessary and sufficient criteria of application are lacking
because they figure centrally within argumentative practices.
MacIntrye notes, Beliefs are partially constitutive of at least some
central social institutions and practices, and such beliefs always
involve some version of a concept of the institution or practice in
question. There is no parallel to this in the established natural
sciences (The Essential Contestability p. 3). Because of the way in
which beliefs are partially constitutive of social structures, the
continuity of practices and institutions is unlike that of the
characteristic objects of the natural sciences. In the latter case,
continuity is a matter of the continual applicability of law-like
generalizations, whereas in the former, continuity is typically a matter
of the historical relationship between stages in an argument
concerning the practice or institution in question, an argument
concerning the purpose and paradigmatic instances of the practice or
institution. Such arguments are normative and concerns what should
and should not properly be considered an instance of the practice or
institution. Here we foreshadow a point made below: the social
sciences are not neutral because decisions concerning the manner of
conceptualizing key relationships between social structures are not
independent from but are rather identical with positions internal to
debates between proponents of rival versions of the same social
structures.
What sort of unpredictabilities does ideology obscure? One form
concerns radical conceptual innovation; for instance, the outcome of
debates concerning the nature of the common good can never be
predicted since radical conceptual innovation is continuously possible.

Because of this research in political science that establishes

correlations between social policies and measures of the common
good, in what has the appearance of causal statements, obscures the
necessarily provisional status of such claims, provisional because the
meanings of key terms lack stability. Other sources of uncertainty
include the impossibility of predicting ones future decisions and the
game-theoretic character of life. This includes the fact of indefinite
reflexivity (predicting what others will predict that I will predict that
they will predict), efforts by agents to render themselves
unpredictable, as well as the fact that, as MacIntyre says, Not one
game is being played, but several, and, if the game metaphor may be
stretched further, the problem about real life is that moving ones
knight to QB3 may always be replied to with a lob across the net (After
Virtue p. 98). One further source of unpredictability is straightforward
contingency, those historical events that are instances of pure
randomness, for instance Cleopatras nose and its impact on the rise of
the Roman Empire.
Ideological claims - in the form of quantitative methodology obscure these fundamental sources of conflict, conceptual
contestability, and unpredictability not primarily by making false claims
but by over emphasizing partial truths. This happens in a number ways
but MacIntyre first notes that statistics can be used for two legitimate
purposes, determining that certain correlations are not random, and
using hypothesis testing to reject a given theory. What should be noted
is that even these uses of statistical methods may be ideological.
Especially in certain financial contexts, for instance the Black-Scholes
options pricing model, statistical methods require the assumption of a
normal distribution. When this assumption is unwarranted, uncertainty
may be minimized in a way that serves to legitimize the authority of
particular parties, as Nicholas Nassim Taleb as argued in his popular
book The Black Swan (2010).
MacIntyre argues that what statistics cannot do is ever establish a
causal relationship from the mere fact of a correlation. He says [F]rom
no set of purely statistical premises can any conclusion of a purely
causal kind be validly derived (Social Science Metholodgy p. 61).
What fills the logical gap between statistical premises and causal
conclusions, according to MacIntrye, are the shared assumptions
characteristic of standard social science methodology, shared
assumptions which inculcates a common worldview. MacIntyre
enunciates five canons which describe the way the world is allowed to
appear to and to be approached by social scientists. These canons
serve an ideological function by dramatically oversimplifying social
structures and events. First, reality is composed of discrete,
independently identifiable variables. This is necessary to ensure the
applicability of a variety of quantitative procedures. Second, these
variables must be such that they can be identified in an evaluatively

neutral, non-contestable way. Insofar as this condition is not met, the

data description section of the social science paper is of more
relevance than the results of the statistical analysis. Third,
conceptualization is often governed by convenience rather than rival
conceptualizations. Very often methods of quantitative analysis
determine the type of data that can be collected or employed and
rarely are rival conceptualizations considered on any terms other than
their methodological relevance. Fourth, MacIntyre argues that causal
laws, understood in the manner of Hempel as covering laws are
implicitly or explicitly the aim of much social scientific research. And
fifth, these laws are thought to provide causal knowledge, such that
they enable the manipulation of social structures for the purpose of
achieving some goal or goals. These canons select certain features of
reality for attention and neglect others. They simplify the world and
hypothesis selection and allow for conflict only within the context of a
recognized or accepted regularity. Returning to an earlier example,
political conflict is viewed primarily in terms of conflict between
individualism and collectivism but from this perspective the more
fundamental conflict concerning the nature of the common good is not
visible
MacIntyre argues that social science methodology exhibits the first
characteristic effect of ideology: it obscures conflict, rival
conceptualizations, and uncertainty, in general. And that it also
exhibits the second characteristic effect: it serves to empower
managers, social scientists, and a certain type of revolutionary by
establishing their expertise in a given domain, precisely by obscuring
conflict, rival conceptualizations and uncertainty. In what follows, I
consider the case of agency theory, a widely influential perspective on
the theory of the firm, to determine whether it exhibits ideological
characteristics, and if so, whose claims to expertise it authorizes.
Jensen and Meckling s Theory of the Firm (1976) is a foundational
account of agency theory. This theory provides a model that explains
why firms exist and operate in the manner that they do, why they have
a given capital structure, why debt financing has been employed in the
absence of tax advantages, and why management has been willing to
voluntarily adopt auditing requirements. Jensen and Meckling do this
by employing the notion of maximizing behavior on the part of all
individuals (Theory of the Firm p. 307). They adopt a rational
choice model of individual agency and describe how utility maximizers
can be expected to behave under different conditions, i.e. as managers
of firms with differing ratios of debt to equity financing, as creditors
faced with the potential for bankruptcy, as shareholders holding
significant numbers of outstanding shares, etc. Agency costs describe
the potential for one party to gain at the expense of other parties as a
result of divergent interests and the opportunities afforded by their

respective positions. The classic example is the CEO who consumes

substantial corporate resources at shareholders expense.
Agency theory views the primary conflict within the firm as resulting
from the divergent interests of managers, creditors, and shareholders,
who are conceived of as owners. The question of whether this theory is
ideological, in MacIntyres sense, turns initially upon the further
question of whether the theory obscures conflict through its manner of
constructing a data set. In an attempt to model agency relationships,
discrete variables are developed but at least two more fundamental
forms of conflict are obscured. The first concerns the interests of the
respective parties. Rational choice theory models preferences
according to the fundamental axioms of transitivity, completeness, and
consistency but the typical agent is a site of conflict in way that is not
captured by this approach (as empirical research has indicated). While
the maximizer of agency theory is myopically focused on short-term
value, the typical agent has a range of, sometimes, inconsistent
desires for goals that are often incommensurable (in violation of the
fundamental axioms). This is especially true concerning the distinction
between short and long-term goals. The idealized maximizer is willing
to disregard research and development, customer service, and
employee education in order to boost short-term share price, in way
that disregards actual agents conflicting preferences for short-term
gain and long-term employment, economic stability, community wellbeing.
Thus, agency theory exhibits the first characteristic effect of
ideology, it obscures conflict, as such, but does by doing this does it
legitimize particular groups claims to expertise? Lynn Stout has
argued, [T]he idea of maximizing shareholder value rests on an
impossible abstraction of the shareholder as a Platonic entity that
cares only about the market price of a single corporations equity
(The Shareholder Value Myth p. 107). Instead the manager of an
undiversified hedge fund comes as close as any living entity can to
the Platonic ideal of a rational agent seeking solely to maximize profit
(p.92). Thus the hedge fund managers interests serve as the implicit
model of interest in general; by doing this agency theory acts as an
ideology that authorizes the expertise of hedge fund managers who
quite often use their power to achieve short term capital gains at the
expense of a firms ability to achieve success in the long-term, as a
source of value-creation that contributes to the communitys common
good both by making useful products and by providing employment.
The second fundamental conflict obscured by agency theory is
between employees and management. This conflict turns on two axes;
the first of which concerns the distinction between standards of
excellence embodied in practices and the norms of the market. As
representatives of institutions, managers face pressure from outside
market conditions to coopt the goods of excellence internal to

practices for the purposes of attaining goods of effectiveness. The

second axis concerns managers interests to exact more output from
employees at the lowest wage rate possible. As such, employees face
the constant threat of receiving less than a just wage as compensation.
According to Jensen and Meckling, the firm is a mere legal fiction, and
employees relationship to management is adequately specified
contractually. But this ignores role of trust or commitment within the
firm. Hegel argued that marriage was a contract in which the parties
agreed to stop relating to each other contractually. Colin Mayer has
argued the firm necessarily operates in a similar manner. He says,
We invest in our places of work. If they turn their backs on us or move
elsewhere they impose costs on us that we cannot recover. We try to protect
these investments through contracts but ultimately they can only offer us
partial security because of the complex and subjective nature of trying to
attribute fault in the event of contract failure. We are ultimately exposed through
the commitments that we make in the same way as shareholders. (Firm
Commitment p.33)

By describing the firm as nexus of contracts agency theory obscures

conflict between stakeholders, whose relationship cannot be
completely specified contractually; instead it presents stakeholder
relations within the firm as a technical problem to be solved by
experts. But whose expertise does agency theory authorize? Certainly
managers, corporate lawyers, and business school professors, but also
financial analysts; agency theory legitimizes the primacy of financial
analysis of firm - a point acknowledged by the authors themselves1 - to
the detriment of rival both rival conceptualizations of the firm in social
and political terms rival interests within the firm, especially that of the
labor movement.
Agency theorys ideological power derives from its partial success as
an explanation of the existence and activity of the firm and because it
is widely incorporated into business school curriculum its empirical
applicability is partially a result of its informing corporation members
expectations of other members behavior. By obscuring the essentially
contestable nature of the concept of interest, or desire, and the
fundamental political conflict at the heart of the firm agency
legitimizes financial experts, particularly the character of the hedge
fund manager and the financial analyst. The expert, as MacIntrye
says, turns out to be a mythological beast (Ideology, Social Science,
and Revolution p.339).

1 Furthermore, the analysis of this paper would seem to indicate that to the extent that security
analysis activities reduce the agency costs associated with the separation of ownership and
control, they are indeed socially productive (Theory of the Firm p. 355)