Monday, December 11, 2023

Milton Friedman was wrong about society

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What should be the goal of the corporation? For a long time, the dominant opinion in English-speaking countries and, increasingly, elsewhere, was that advanced by economist Milton Friedman in an article for the New York Times, “The social responsibility of the company is to increase its profits», Published in September 1970. I believed in it too. I was wrong.

The article is worth reading in its entirety. But its core is in his conclusion: “There is one and only one corporate social responsibility – to use its resources and engage in activities aimed at increasing its profits as long as it remains on the playing field, this that is, engages in open and free competition without deception or fraud. The implications of this position are simple and clear. This is its main virtue. But, as HL Mencken is supposed to have said (although he may not have), “for every complex problem there is a clear, simple and wrong answer“. This is a powerful example of this truth.

After 50 years, the doctrine must be reassessed. Given Friedman’s connection to the University of Chicago, the Stigler Center at his Booth School of Business has just published a ebook, Milton Friedman 50 years old Later, containing various views. In an excellent concluding article, Luigi Zingales, who promoted the debate, attempts to give a balanced assessment. Yet, in my opinion, his analysis is devastating. He asks a simple question: “Under what conditions is it socially effective for managers to focus solely on maximizing shareholder value?”

His answer is threefold: “First, companies should operate in a competitive environment, which I will define as companies that are both price and rule takers. Second, there should be no externalities (or the government should be able to deal with these externalities perfectly through regulation and taxation). Third, contracts are comprehensive, in that we can specify in a contract all relevant contingencies at no cost. “

It goes without saying that none of these conditions hold. Indeed, the existence of the company shows that it does not hold. The invention of the company allowed the creation of large entities, in order to exploit economies of scale. Given their scale, the notion of companies as price takers is absurd. Externalities, some of which are global, are clearly pervasive. Corporations also exist because contracts are incomplete. If it were possible to write contracts specifying all contingencies, management’s ability to respond to the unexpected would be redundant. Above all, businesses are not rule makers, but rather decision makers. They play games of which they have a big role to create, through politics.

My contribution to the ebook emphasizes this last point by asking what a good “game” would look like. “There is one,” I argue, “in which companies don’t promote unwanted climate and environmental science; it is a business in which companies would not kill hundreds of thousands of people by promoting addiction to opiates; this is a situation in which companies would not lobby for tax systems that would allow them to invest a large part of their profits in tax havens; this is an area where the financial sector would not push for inadequate capitalization which causes huge crises; this is an area in which copyright is neither extended, nor extended, nor extended; this is a situation in which companies would not seek to neutralize an effective competition policy; this is an area in which companies would not lobby strongly against efforts to limit the negative social consequences of precarious work; And so on.”

It is true, as many authors of this collection argue, that the limited liability company was (and is) a brilliant institutional innovation. It’s also true that making company goals more complex is likely to be problematic. So when Booth School’s Steve Kaplan asks how companies should arbitrate many different goals, I have sympathy. Likewise, when business leaders tell us they will now serve the broader needs of society, I ask: first, do I believe they will; second, do I believe they know how to do it? and, finally, who elected them to do it?

Yet the problems of the manifestly imbalanced economic, social and political power inherent in the current situation are vast. On this point, the contribution of Anat Admati of Stanford University is convincing. She notes that companies have obtained a host of political and civil rights but have no corresponding obligations. Among other things, people are rarely held criminally responsible for corporate crimes. Purdue Pharma, now bankrupt, pleaded guilty to criminal charges for his handling of the pain reliever OxyContin, which has made many people addicted. People are regularly imprisoned for trafficking illicit drugs, but she points out “No individual within Purdue wants to be jailed.”

Notably, the unchecked corporate power has been a factor behind the rise of populism, especially right-wing populism. Think about how you can persuade people to accept Friedman’s libertarian economic ideas. In a democracy with universal suffrage, it is really difficult. To win, libertarians had to ally themselves with ancillary causes – cultural wars, racism, misogyny, nativism, xenophobia and nationalism. Much of this has of course been whisper and so plausibly deniable.

The 2008 financial crisis and the subsequent bailout of those whose behavior caused it made the sale of a deregulated free market even more difficult. So it has become politically essential for libertarians to double down on these secondary causes. Mr. Trump was not the person they wanted: he was erratic and unprincipled, but he was the political entrepreneur best positioned to win the presidency. He gave them what they wanted most: tax cuts and deregulation.

There are many arguments for how businesses should change. But by far the biggest problem is how to create a good level playing field on competition, labor, the environment, taxation, etc. Friedman surmised that none of this mattered or that a functioning democracy would survive prolonged attack by like-minded people. Neither of the two assumptions turned out to be correct. The challenge is to create good rules of the game, through politics. Today we cannot.

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