Tag Archives: Milton Friedman

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.

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December 11, 1987 (a Friday)

The point i$, ladie$ and gentlemen, that greed, for lack of a better word, i$ good. Greed i$ right, greed work$. Greed clarifie$, cut$ through, and capture$ the e$$ence of the evolutionary $pirit. Greed, in all of it$ form$; greed for life, for money, for love, knowledge ha$ marked the upward $urge of mankind. And greed, you mark my word$, will not only $ave Teldar Paper, but that other malfunctioning corporation called the U$A. Thank you very much.

— “Gordon Gekko” [at the Teldar Paper stockholder’s meeting], Wall Street (1987), Oliver Stone, director; screenplay by Stanley Weiser

Zen stones

Detail from Gaki-Zoshi, the “Scroll of Hungry Ghosts”: Ghosts devouring dead bodies in a graveyard (late 12th century).

Detail from Gaki-Zoshi, the “Scroll of Hungry Ghosts”: Ghosts devouring dead bodies in a graveyard (late 12th century).

On this date, Wall Street, the film directed by Oliver Stone, was released in the United States. It immortalized the unforgettable Ivan Boesky, king of risk arbitrage whose short-lived Reagan-era reign ended in prison, as the barely fictionalized Gordon Gecko, author of that eternal 1980s battle cry of the MBAs, “Greed is good.”

The economic dogma of our time is a belief that business is and must be exclusively based on the supremacy of profit, a belief that a relentless focus on profit above all else is the one and only way of creating sustainable business success. It’s a narrow and crippling bit of economic doctrine that seems now to pervade nearly all quarters of the business world. It is reflected in Milton Friedman’s foundational assumption that shareholder value is a corporation’s only (or at least primary) responsibility. In a 1979 interview with a young Phil Donahue, Friedman said:

Well first of all, tell me: Is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade. If you want to know where the masses are worse off, worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system. [emphasis added]

This American neoliberalism — guileless faith in markets and overweening hatred of government and public expenditure — still dominates the Republican Party today in the perpetual “crises” over debt ceilings, fiscal cliffs, and sequesters.

In an article in The American Prospect, Eric Alterman said that “Friedman mentioned during one of our conversations that he did not believe in public education, at all. I said I thought this was a bit hypocritical, since he had received one, and it had allowed him to grow up to be the most influential public intellectual in the country, if not the world. I forget what he said…He did not care a whit about fairness in the economy or the accumulation of wealth and power by the few over the many. Judging by the nature of his allies in South America, he couldn’t be bothered much about human rights, either.”

There is an implicit assumption by Friedman and mainstream economists that humans are, by nature, selfish and competitive. Psychologist Steve Taylor (and I) refute this:

Many economists and politicians believe that acquisitiveness – the impulse to buy and possess things – is natural to human beings. This seems to make sense in terms of Darwin’s theory of evolution: since natural resources are limited, human beings have to compete over them, and try to claim as large a part of them as possible.

One of the problems with this theory is that there is actually nothing “natural” about the desire to accumulate wealth. In fact, this desire would have been disastrous for earlier human beings. For the vast majority of our time on this planet, human beings have lived as hunter-gatherers – small tribes who would usually move to a different site every few months. As we can see from modern hunter-gatherers, this way of life has to be non-materialistic, because people can’t afford to be weighed down with unnecessary goods. Since they moved every few months, unnecessary goods would simply be a hindrance to them, making it more difficult for them to move.

Another theory is that the restlessness and constant wanting which fuels our materialism is a kind of evolutionary mechanism which keeps us in a state of alertness. (The psychologist Mihalyi Csikszentmihalyi has suggested this, for example.) Dissatisfaction keeps living beings on the look out for ways of improving their chances of survival; if they were satisfied they wouldn’t be alert, and other creatures would take the advantage.

But there is no evidence that other animals live in a state of restless dissatisfaction. On the contrary, many animals seem to lead very slow and static lives, content to remain within their niche and to follow their instinctive patterns of behavior. And if this is what drives our materialism, we would probably expect other animals to be acquisitive too. But again, there is no evidence that – apart from some food-hoarding for the winter months – other animals share our materialistic impulses. If it was necessary for living beings to be restless and constantly wanting then evolution would surely have ground to a halt millions of years ago.

And citing empirical evidence,the Smithsonian National Museum of Natural History reports that:

Sharing food, caring for infants, and building social networks helped our ancestors meet the daily challenges of their environments.

(…)

Beginning 2.6–1.8 million years ago, some groups of early humans began collecting tools and food from a variety of places and bringing them to favored resting and eating spots. Sharing vital resources with other members of the group led to stronger social bonds and enhanced the group’s chances of survival.

(…)

Beginning 800,000 years ago… early humans gathered around campfires that they made and controlled. Why did they come together at these early hearths? Perhaps to socialize, to find comfort and warmth, to share food and information, and to find safety from predators.

(…)

[Sometime] 500,000–160,000 years ago… early humans had evolved much larger brains. Infants were born with small brains, enabling the head to pass through the birth canal. The brain continued to grow throughout a long childhood. During adolescence, youngsters continued to prepare for the challenges of adulthood.

Humans are unique among primates in having long, distinct periods of childhood and adolescence. These stages enable us to learn, play, socialize, and absorb important experiences prior to adulthood.

(…)

[About] 130,000 years ago… humans began interacting with social groups located far from their own… groups who lived 300 km (186 mi) apart were exchanging resources. Social networks continued to expand and become more complex. Today, people from around the globe rely on one another for information and goods.

In fact, humans are a classic example of a social species — as the ancient Greek philosopher Aristotle famously wrote in Politics, “Man is by nature a social animal.” Part of our success as a species is due to the fact that prehistoric societies supported the elderly, sick, and poor among them, emotionally and physically. We ignore this fact of human nature at our peril.

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