Bartley Madden – Douglas Stevens | Michael Jensen: The Economist Who Tried to Fix Capitalism Twice

Their tribute presents his career as a three-act story of changing ideas about corporations, leadership, and human behaviour.

Jensen first rose to prominence in the 1970s, a period when financial economists were transforming finance into a rigorous scientific discipline. In a landmark paper published in 1976, he and William Meckling argued that managers are agents of shareholders and need powerful financial incentives to align their interests with the interests of shareholders. Agency theory soon became the dominant theory of the firm in accounting, finance, and economics.

Corporations increasingly tied executive pay to shareholder returns, while investors demanded greater accountability from management through increases in stock price. Jensen believed these changes would make companies more efficient and disciplined.

During the 1980s, however, Jensen concluded that corporations needed stronger discipline. This led to the second act of his intellectual journey. He became a leading proponent of the market for corporate control, which fuelled a wave of corporate takeovers, leveraged buyouts, and restructurings to improve poorly run businesses.

Then came an unexpected shift.

Following corporate scandals at Enron and WorldCom in 2001 and the global financial crisis in 2008, Jensen began to question whether he had focused too narrowly on incentives and self-interest. This led to the third act of his intellectual journey.

In his early work, people were primarily self-interested agents responding to incentives. In his final act, they became more complex beings shaped by integrity, shared values, and social norms.

Across the business world, debates continue over executive pay, shareholder primacy, stakeholder capitalism, and corporate purpose. Companies face growing pressure to balance profitability with social responsibility. Many of these debates trace back, directly or indirectly, to Michael Jensen’s ideas.

In their tribute, Madden and Stevens portray Jensen not as a rigid ideologue, but as a thinker constantly trying to improve the theory of the firm. Whether one agrees with all of his conclusions or not, Jensen’s intellectual journey offers an important lesson. Economic systems are ultimately built on human behaviour. Incentives matter. Markets matter. But integrity, shared values, and social norms matter too.