Economics

Milton Friedman’s World Is Dead and Gone

Five overlooked historical developments should reshape the debate between shareholder and stakeholder capitalists.

By 

Peter R. Orszag

January 29, 2020, 6:00 AM EST

The annual conclave of the rich and powerful this month in Davos, Switzerland, put the longstanding debate about the social responsibility of corporations front and center by proclaiming its official theme as “stakeholders for a cohesive and sustainable world.”

By using the word “stakeholders,” the World Economic Forum confirmed that it’s taken sides in a debate rekindled last year by the Business Roundtable, a lobbying group representing chief executives of major U.S. corporations. The Roundtable had issued a statement highlighting a “fundamental commitment to all of our stakeholders,” including shareholders, clients, employees, suppliers and communities, thereby situating itself in opposition to the view of corporate responsibility made popular half a century ago by the economist Milton Friedman. Friedman had famously stated in a 1970 New York Times magazine essay that business executives who diverted corporate assets toward social goals were betraying their obligations to shareholders.

>> Here is the link to the original article. The author overstates Friedman's case.
>> http://umich.edu/~thecore/doc/Friedman.pdf
>> The author also forgets that what Friedman is saying is much broader and not untrue.
>> In each of these cases, the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.

Yet the debate between Roundtable supporters and Friedman supporters, a main topic of panels and unofficial conversation at Davos last week, missed five key points.

1. When Friedman was writing, the consequences of his view were more modest than they later became. In the 1960s and 1970s the regulatory state was often more interventionist than it is today — especially in industries such as transportation and telecommunications — and social norms were different. Before the deregulation wave of the 1970s and 1980s, arguing that a business executive should focus only on maximizing shareholder value thus may or may not have been wrong theoretically, but the practical impact was less significant. Whether business leaders pursued a narrow or broad definition of their responsibilities didn’t matter as much because government regulation constrained the consequences.
2. In no small part because of Friedman’s influence, an extreme definition of capitalism has become dominant. By this definition, only perfectly competitive markets with minimally interventionist governments and business executives who maximized shareholder value should be considered capitalist. It’s a strange argument. I doubt that anyone would have said during the 1940s, 1950s or 1960s that the U.S. wasn’t capitalist, but somehow the qualification standards seem to have changed. I heard one person argue at Davos that regulating or even taxing carbon would be “anti-capitalist.” That’s nonsense. Virtually the entire range of policy options for more or less government action on climate change would not, if enacted, affect whether an economy remains capitalist.
3. As Friedman’s worldview as taught in introductory economics classes became more dominant, policymakers emphasized the effect of incentives and individual skills. Economists focused on assessing how much more productive an individual could be if she faced a lower marginal tax rate or had more education. Studying, instead, how much more productive an individual could be if she worked at Company A instead of Company B, or lived in City X instead of City Y, went out of fashion. And yet the evidence over the past few decades shows the importance of the place-based perspective, with growing differences in productivity and wages for otherwise similar individuals working at different firms, growing differences in returns on capital across firms, and growing differences in upward mobility for people living in different cities.
4. The evolving view of government’s proper role and the emphasis on individual-based policy instead of place-based policy coincided with fundamental changes in the global economy, especially a substantial expansion in the effective global labor supply, and the evolution of the computer era. Over roughly the same period, the U.S. experienced a disproportionate rise in political polarization, as a new analysis from the National Bureau of Economic Research shows. The authors of that article argue that diverging views among elites (which is plausibly about the role of government, though the authors don’t make that argument) may be the cause of the rapid rise in broader polarization relative to other countries. At the very least, it’s interesting that the country that has most forcefully adopted the Friedman-inflected approach to policy has polarized the most.
5. Some people who want businesses to adopt a broad view of corporate responsibility argue that companies have to fill a gap left by the diminishing effectiveness of government. (They might not realize that Friedman addressed that issue in his 1970 essay.) Like the old saw about the child who murders her parents and then complains about being an orphan, however, the dominant paradigm of the past several decades has plausibly produced a dramatic rise in inequality and polarization, and that polarization in turn has made the government unable to function effectively. In other words, we have basically done this to ourselves.

So what is the best pathway forward? There is no easy fix, but I like many recent ideas about making public investments and regulatory adjustments to encourage creation of business ecosystems like technology hubs, as has been done in Palo Alto, California; Austin, Texas; and Boston. That would require more government action than is likely in the near term. But as Friedman’s success in altering the dialog demonstrates, a first step is to be clear about what we should be doing, even before we’re capable of doing it. And an approach to policy making focused more on where we work and live seems vastly more promising than what we’ve tried over the past few decades.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.