PHM-Exch> Shareholder capitalism: The ugly legacy of Milton Friedman

Wed Sep 30 00:16:02 PDT 2020

From: Jomo <jomoks at yahoo.com>

Shareholder capitalism’s ugly legacy

Jomo Kwame Sundaram <http://www.ipsnews.net/author/jomo-kwame-sundaram/>

KUALA LUMPUR: Milton Friedman’s libertarian economics advocating
shareholder capitalism has influenced generations trying to understand the
economy, not only in the US, but all over the world.

He was not just an academic economist, but an enormously influential
celebrity conservative ideologue who legitimized ideas for the like-minded,
including the belief that ‘greed is good’. Now, shareholder capitalism’s
consequences haunt the world and threaten humanity with stagnation and
self-destruction.

*Friedman’s lasting influence*

In 1962, Friedman published his most influential book, *Capitalism and
Freedom*
<https://docs.google.com/file/d/0BxgMqtna1BWDdDlnTENYaHNBYnc/edit?pli=1>. In
September 1970, the *New York Times Magazine* published his essay, The
Social Responsibility of Business is to Increase Its Profits
<https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html>
.

The article -- reiterating the Friedman Doctrine, presuming perfectly
functioning markets that only exist in the minds and writings of some
economists -- is a manifesto for American shareholder capitalism. It
inspired the counter-revolution against Keynesianism, development economics
and other state interventions.

The word ‘competition’ appears only once, in the last sentence. Yet, some
supporters
<https://www.nytimes.com/2020/09/11/business/dealbook/milton-friedman-doctrine-social-responsibility-of-business.html>
 insist that Friedman was not ‘pro-business’, but rather ‘pro-market’. But,
unlike capitalism, the market has been with us for several millennia and
has happily co-existed with unfreedoms of various types.

Perfect competition rarely exists due to inherent tendencies undermining
it. Hence, various challenges to Friedmanite wisdom. For half a century,
information and behavioural economics have challenged his many assumptions,
certainly much more than the Austrian School advocacy and defence of
capitalism.

Thus, Friedman conveniently ignored ‘market imperfections’ in the real
world, although or perhaps because they undermined the empirical bases for
his reasoning. So, even if Friedman’s logic was true, reality prevents
profit-maximizing firm behaviour from maximizing societal welfare, if not
cause the converse.

Meanwhile, Friedman’s monetarist economics has been discredited, and has
little practical influence anymore, especially with the turn to
‘unconventional monetary policies’, particularly after the 2008-2009 global
financial crisis. Yet, his ideological sway remains strong, as it serves
powerful interests.

*Greed is good*

Hence, Friedman’s 1970 essay remains influential in the world, and has
long served
as the mainstream manifesto on corporate governance*.* Even then,
Friedman denounced
dissenting CEOs as “unwitting puppets of the intellectual forces that have
been undermining the basis of a free society”.

Generations of Friedmanites have insisted that ‘the only business of
business is business’, and their sole responsibility to society is to make
money. He emphasized, ‘‘there is one and only one social responsibility of
business — to use its resources and engage in activities designed to
increase its profits so long as it stays within the rules of the game,
which is to say, engages in open and free competition without deception or
fraud.’’

When Friedman insisted “make as much money as possible while conforming to
the basic rules of the society”, he may have presumed that market
imperfections do not exist, or were fully addressed by the ‘minimal’ state,
although it is well-known that the rule of law has never been adequate to
the challenge.

His singular focus on maximizing profits for shareholders justified
ignoring all problems due to corporate practices. The doctrine thus
absolved the firm of social responsibility. It justified and encouraged
generations of corporate leaders committed to the primacy of ‘shareholder
value’. Almost like religion, this thinking became the hegemonic ideology,
legitimizing ‘greed-is-good’ behaviour.

*Government the problem?*

Friedman’s ideology spread throughout the world with the ‘neoliberal’
counter-revolution from the 1980s.

Unsurprisingly, neoliberal economists’ claims have been discredited by
their policies’ failure to significantly increase investments in the real
economy in recent decades.

And without sufficient investments to enhance productivity, growth has
declined, if not stagnated, while dimming future economic prospects. With
labour incomes declining relatively, if not absolutely, consumer spending
has declined, reducing aggregate demand while feeding a vicious circle of
stagnation.

Meanwhile, deregulatory initiatives have not increased real investments and
output growth.Market finance ideology
<http://www.ipsnews.net/2020/03/share-buybacks-enable-predatory-value-extraction/>
 claims that the stock market can best allocate investment resources among
companies. But share buybacks imply that US corporations have no better
investment options than to further raise already high, over-valued
financial asset prices, thus reducing resources for real investments and
future growth.

The Friedman doctrine also celebrated and justified short-termism, and
undermining protection for employees and the environment to maximize
shareholder value by increasing corporate profits. This type of capitalism
has spread throughout the world with the ‘neoliberal’ counter-revolution
since the 1980s.

‘Getting government out of the way’, the neoliberal ‘free market’ mantra,
was supposed to boost private investments. But more handsome corporate
profits due to cost savings – from weaker anti-trust and other regulations,
lower wages and taxes – have not significantly increased real investments
in the US.

The 2007-2009 US financial crisis exposed some problems of short-termism,
particularly related to financialization and ‘shareholder value
extraction’. The crisis cast doubt on Friedman’s legacy and its
implications, encouraging new challenges to corporate governance norms and
regulations.

*Business and politics*

Friedman would have us believe that power and politics are not exercised in
free markets. But this ostensible insulation of politics from supposedly
power-free markets is a fiction which thoughtful Friedmanites knew only too
well, not least from their own advocacy, behaviour and conduct.

All markets are shaped by various historical and contemporary influences,
economic, cultural, social and political. These are often driven by
business and other lobbies. Thus, politics, collective action and advocacy
shape policies, in terms of design, implementation and enforcement.

To be fair, Friedman’s view of politics and business
<https://www.nytimes.com/2020/09/11/business/dealbook/milton-friedman-anniversary-sorkin-essay.html>
seems
contradictory. His writings argue that business should stay out of
politics, and not use shareholder money to influence politics. But he is
remarkably understanding when it happens:

“I can’t blame a businessman who goes to Washington and tries to get
special privileges for his company”. “If the rules of the game are that you
go to Washington to get a special privilege, I can’t blame him for doing
that. Blame the rest of us for being so foolish as to let him get away with
it.”

*Neoliberal inequality*

Former Clinton Labor Secretary Robert Reich
<https://www.nytimes.com/2020/09/11/business/dealbook/milton-friedman-doctrine-social-responsibility-of-business.html>
 has argued that larger US corporations have acquired so much influence
over government, undermining US democracy. Instead, he argues for public
financing of electoral campaigns while curbing corporate influence, e.g.,
via lobbying and campaign spending.

He cites an old study of 1,779 policy issues during 1981-2002 which found
lawmakers acceding to the demands of big businesses with the most lobbying
capabilities while the average American had “only a miniscule, near-zero,
statistically nonsignificant impact upon public policy”.

With the Citizens United ruling in the new century, the US Supreme Court
has legally enabled powerful corporate interests to lobby politically.
Unsurprisingly,
corporate taxation has been dramatically reduced, while social protection
and public investments, e.g., in health and education, have declined
further.

Instead of gains being shared by top executives and shareholders with
workers, as during the post-Second World War Golden Age, benefits have
become increasingly skewed to the very wealthy in the past four decades
<https://www.nytimes.com/2020/09/11/business/dealbook/milton-friedman-doctrine-social-responsibility-of-business.html>,
thanks to Friedman’s increased influence.

>From 1948 to 1979, US worker productivity more than doubled while wages
fell slightly behind as the stock market grew over six-fold. But from 1979
to 2018, worker productivity rose 70 per cent, as worker pay rose by only
11.6 per cent, while CEO compensation rose almost ten-fold and the stock
market 22-fold!

Link:

https://www.ksjomo.org/post/shareholder-capitalism-s-ugly-legacy
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