Saving species from extinction as called for by the Endangered Species Act (ESA) can be a public good. If attention is directed to those species that have reasonable recovery potential and the costs are not too great, then the resources might be well spent. If they are devoted to those that have little chance for recovery, then the exercise may be less beneficial. Proponents argue that all species deserve a chance, but because real resources are involved, people are affected. They must support funding and costly resource-use restrictions over very long periods to list, protect, and enhance at-risk species. There are opportunity costs and tradeoffs. The process of endangered species protection then ought to be a reasoned one that weighs costs and benefits. There is no avoiding the challenge. Unfortunately, as detailed in this chapter, protecting endangered species has not been a reasoned process. It is contentious and combative. The record of success is extremely sparce. Rent-seeking undermines chances for long-term recovery for prospective species.

This chapter initiates a neo-Aristotelian theory of the firm by arguing that firms are not merely governance mechanisms to overcome market failures but sites of moral formation that foster the development of practical wisdom and the virtues. Building on critiques of the Market Failure Approach (MFA) and insights from the Knowledge-Based View (KBV) of the firm, we challenge the assumption, common in market morality literature, that internal firm norms can be evaluated independently of their effects on external stakeholders, arguing that virtuous relationships with external stakeholders play an important role in establishing and maintaining efficient internal norms. We also argue that, regardless of their efficacy in promoting organizational performance, hierarchical authority and cooperative norms are justified only insofar as they contribute to organization members’ flourishing. Drawing on McDowell’s notion of Bildung, we show how organizational life can “open employees’ eyes” to valid reasons for action, shaping their character in ways that contribute to their flourishing while also promoting organizational performance. This chapter thus reframes the firm as a moral community and provides the foundation for a virtue-based account of corporate purpose, to be extended in Chapters 5–9.

When a government regulates an enterprise, regulatory costs arise due to bounded rationality, uncertainty, and asset specificity. To preserve flexibility, regulators are sometimes granted discretion by law to respond to new circumstances. However, such discretion can be abused to expropriate the interests of private investors, especially when private investments become specific assets that cannot be easily used for other purposes. State ownership alleviates regulatory costs by aligning the interests of the government and the enterprises, although it incurs higher ownership costs. In sectors where regulatory costs are low, private enterprises prevail because of their advantages in reducing ownership costs. Conversely, in sectors where regulatory costs are high, state-owned enterprises (SOEs) are more likely to prevail and are not easy to privatize. The degree of regulatory costs depends on several factors, including the need for intense regulation in a particular sector, the degree of uncertainty, and the availability of alternative institutions that support effective regulation.

This chapter extends our neo-Aristotelian theory of the firm by arguing that firms exist not merely to minimize transaction costs but also to foster entrepreneurial agency that contributes to human flourishing. Building on the theory-based view of the firm (Felin & Zenger, 2009; 2017), we contend that firms institutionalize eudaimonic efficiency by enabling members to specialize in value creation through collaborative experimentation and moral development. Whereas the Market Failure Approach (MFA) is bound to static efficiency and Pareto optimality, our neo-Aristotelian account emphasizes the dynamic, epistemic role of the firm in discovering new combinations of resources, which markets alone cannot coordinate. Drawing further on McDowell’s notion of Bildung, we argue that the moral formation of employees in the firm involves a range of virtues that support firm innovation, including benevolence, justice, entrepreneurial perceptiveness, and humility. This virtue-based framework offers a rich account of the way managerial authority can be morally justified, namely when it supports employees’ flourishing and the discovery of better ways to meet human needs. In short, firms are moral communities that inculcate and are sustained by virtues that support collaborative innovation.

Chapter 1 critically examines why corporate law traditionally excludes family relationships from its analytical framework. Despite the prevalence of family businesses, legal scholarship has largely overlooked their unique dynamics, often framing them solely through the lens of economic rationality. This chapter explores the dominant influence of law and economics in corporate law, emphasizing the firm as a nexus of contracts designed to minimize transaction costs. From this perspective, family ties are treated as economically rational mechanisms rather than intrinsic social bonds. This approach often disregards the complex interplay between familial motivations and business decisions. The chapter also critiques the limitations of the economic model, highlighting how the failure to account for family relationships may lead to inadequate legal responses to disputes within family-owned firms. Through this analysis, the chapter calls for a more nuanced understanding of family businesses within corporate law.

Public policy is designed in a marketplace in which policymakers and well-connected interest groups negotiate with each other. This is more than an analogy. There is an actual marketplace in which legislators exchange votes and other favors, and lobbyists and interest groups offer legislators benefits in exchange for supporting programs and policies they favor. The good that is supplied in the political marketplace is access to government power. An important characteristic of the political marketplace is that only a small subset of the population is able to participate in it. Most people face high transaction costs that exclude them from being able to participate in the political marketplace. The political elite engage in politics as exchange, while most people are unable to transact in the political bargaining process.

Institutions of organization are designed to lower transaction costs. Transaction costs tend to be prohibitively high when large numbers of people would be required to engage in a transaction, so those transactions will not occur. Classic cases of externalities, such as when large numbers of people in an area suffer from air pollution from nearby industries, are good examples. Large numbers prevent those suffering from pollution from negotiating with those who are causing it. One way that market institutions deal with the problem of large numbers is to reduce those large number cases down to bilateral exchanges. With two parties engaged in transactions, transaction costs are lower, which facilitates mutually advantageous exchange. That works well for institutions of organization, but is difficult to apply to institutions of governance because one set of rules is designed for the entire population. Transaction costs are necessarily high, which means that only an elite few will be able to negotiate in the design of those institutions of authority and governance.

Market institutions, including institutions in the political marketplace, are created to facilitate the ability of individuals to exchange for their mutual benefit. This chapter begins with an analysis of markets for goods and services, with the idea that those same principles of market exchange carry over into political markets. A general equilibrium framework is used to depict the outcome of exchange under the assumption that there are no transaction costs to impede mutually advantageous exchanges. That model is institution-free, so the chapter continues to analyze what institutions would be necessary to produce that general equilibrium outcome in an environment in which there are transaction costs. The chapter notes that institutions have three economic functions: lowering transaction costs, enforcing rights and contracts, and redistribution. The chapter analyzes those first two functions, deferring a discussion of redistribution until Chapter 8.

Economics is a central science to the understanding of regulation. Regulatory economics focuses on economic concepts that are relevant in regulatory contexts. Chapter 1 introduces key concepts of economics and regulatory economics, referring to a branch of social sciences concerned with how society chooses to employ its scarce resources to produce goods and services. This chapter offers a brief discussion of economic concepts that have shaped regulation (e.g., monopoly, market failures). It also discusses behavioral economics, the commons, and principal-agent theory.