September 13, 1970 (a Sunday)

Margaret Thatcher famously claimed that “there is no such thing as society” and mainstream economics works from exactly the same assumption – for mainstream economists society is simply the aggregation, the adding together, of millions of individual economic actors and actions. All of these actors are assumed to be “rational” – a word which economists also use in a way that reflects their own prejudices – a purely calculating and narrowly self interested mentality focused on short and long run material gratification, whose relationship to other economic actors is intrinsically competitive. Thus “rational economic man” has no emotion, is part of no social psychological processes involving mutual influence, common hopes, beliefs and fears, no mutual support, no group or common class interests. Instead “rational economic man” is a calculating machine, focused on maximizing his satisfactions or “utility”.

— Brian Davey, “Economics is not a social science”

It is clear, therefore, that Buddhist economics must be very different from the economics of modern materialism, since the Buddhist sees the essence of civilization not in a multiplication of wants but in the purification of human character.

— E. F. Schumacher, “Buddhist Economics” (1966)

Zen stones

On this date, The New York Times Magazine published an article by Milton Friedman entitled “The Social Responsibility of Business is to Increase its Profits.”  It has been held up by neoliberals as the foundation of their economic beliefs ever since.

Neoliberals are fierce advocates of so-called free markets, as though they are some magical solution to all of the world’s problems. What Friedman called the “free market” is actually laissez-faire, the elimination of any government influence in the market. The only role for the government in the system would be for the protection of property rights.

The problem, of course, is that laissez-faire fails every time it is tried. The grand laissez-faire experiments during America’s Gilded Age resulted in the most devastating economic collapses, the last of which we now call the Great Depression. Friedman’s “free market” offers no safety and no rules. The unscrupulous exploit any advantage to develop a monopoly, with the result being that the market itself becomes unstable and will eventually self-destruct.

The other problem with the free market is that it makes no accommodation for the commons. The commons is a very old concept, pre-dating even colonial America, existing in English common law as far back as 800 CE. A “commons” is any resource used as though it belongs to all. In other words, when anyone can use a shared resource simply because one wants or needs to use it, then one is using a commons. For example, the radio frequencies that pass in and around and through us all are part of the commons. Nowadays, a government agency, the FCC, prevents any two businesses from broadcasting on the same frequency because otherwise nobody could listen to either of them. However, in laissez-faire, there would be no commons, and things such as the radio spectrum would be unusable in its entirety, due to encroachment by other ventures.

Sometimes it is not a question of taking something out of the commons, but of putting something in — sewage, or chemical, radioactive, and heat wastes into water; noxious and/or dangerous gases (for example, carbon dioxide) into the air; and distracting and unpleasant advertising signs into the line of sight. If a corporation’s share of the cost of the wastes discharged into the commons is less than the cost of purifying those wastes before releasing them, then we are locked into a system of “fouling our own nest,” so long as the government, even though it represents the people, cannot effectively regulate polluting corporations.

Milton Friedman offered no solution to these problems; in fact, his writings exacerbated them. The article he published on this date was ferocious. He said that any business executives who pursued a goal other than making money were “unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.” They were guilty of “analytical looseness and lack of rigor” and had even turned themselves into “unelected government officials” who were illegally taxing employers and customers. Ironically, Friedman himself was guilty of “analytical looseness and lack of rigor” by assuming the conclusion of his argument at the beginning of his article.

On 26 June 2013, Forbes published “The Origin of ‘The World’s Dumbest Idea’: Milton Friedman” written by Steve Denning. He points out several flaws and inconsistencies in Friedman’s paper:

“In a free-enterprise, private-property sys­tem,” the article states flatly at the outset as an obvious truth requiring no justification or proof, “a corporate executive is an employee of the owners of the business,” namely the shareholders…

If anyone familiar with even the rudiments of the law were to be asked whether a corporate executive is an employee of the shareholders, the answer would be: clearly not. The executive is an employee of the corporation…

A corporate exec­utive who devotes any money for any general social interest would, the article argues, “be spending someone else’s money… Insofar as his actions in accord with his ‘social responsi­bility’ reduce returns to stockholders, he is spending their money.”

How did the corporation’s money somehow become the shareholder’s money? Simple. That is the article’s starting assumption. By assuming away the existence of the corporation as a mere “legal fiction”, hey presto! the corporation’s money magically becomes the stockholders’ money.

Denning then points out how Friedman later, in a conceptual sleight of hand, recasts the money:

The article goes on: “Insofar as his actions raise the price to customers, he is spending the customers’ money.” One moment ago, the organization’s money was the stockholder’s money. But suddenly… the organization’s money has become the customer’s money…

The article continued: “Insofar as [the executives’] actions lower the wages of some employees, he is spending their money.” Now suddenly, the organization’s money has become, not the stockholder’s money or the customers’ money, but the employees’ money.

According to Denning, Friedman’s entire paper rests on the false assumption “that an organization is a legal fiction which doesn’t exist and that the organization’s money is owned by the stockholders.”

The success of the article was not because the arguments were sound or powerful, but rather because people desperately wanted to believe. [emphasis in original]

As a result of Friedman’s writings, self-interest has reigned supreme. His theories justify the impulse to make money by whatever means are available. As recent scandals have made clear, even breaking the law is acceptable, if the corporation gets off with civil penalties that are small in relation to the illicit gains that are made.

Roger Martin, in his book, Fixing the Game, writes:

It isn’t just about the money for shareholders, or even the dubious CEO behavior that our theories encourage. It’s much bigger than that. Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism. These theories underpin regulatory fixes instituted after each market bubble and crash. Because the fixes begin from the wrong premise, they will be ineffectual; until we change the theories, future crashes are inevitable.

References:

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One response to “September 13, 1970 (a Sunday)

  1. Basically a moral justification for greed. Novel economic models won’t work unless they account for the moral nature of mankind. Sustainability for the sake of survival may offer a balance between economic and moral goals. I hope.

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