Milton Friedman’s Dumbest Idea (The article actually says “the world’s dumbest idea,” but it is longer than the recommended length for titles if you are doing “search engine optimization and I had to cut it. jp)

I wish I had written the article below. I love every word of it, and the most astonishing thing about this writing is where it appears, in Forbes. That takes by breath away. How did he get past the editor?

Well, enough of that –

The article is very much what I have been saying in previous articles on this web site and in public, that is, the idea that a corporation’s sole purpose is to make money for the shareholder is ridiculous. I’d start my analysis with “non-profits,” and get more legally  critical as I went through the various kinds of corporations and what they were used for.

This is a quote of mine from 2010 –

Generally speaking, articles dealing with the crisis focus on derivatives, Sallie Mae, the business press, rating agencies, etc. They all share blame and a lot of it. I have always been convinced that the underlying problem was greed, self interest, the corrosive effects of Milton Friedman’s bizarre doctrine of economic utopia, and the replacement of critical scrutiny by frantic cheerleading in the financial press, and I have some more villains to name.

Bogle doesn’t dodge the ethical question. He wonders how we got here and how we can get out. He longs for the day when businessmen understood the value of trust and fair dealing. I’m not surprised to find that Mr. Bogle has no simple solution. It took four decades of worship of the financial means of production of little more than electronic impulses to triumph over the creation of actual goods. This isn’t going to be easy, and it it likely to fail subjecting this country to a chain of financial meltdowns each one of which will severely damage the lives of millions of Americans who will bear the chief cost not only of their way of life but paying for the meltdown themselves out of their “widow’s mite.”

This is another from 7/25/2010.

This is capitalism run off the tracks. Greed out weighed simple good judgment. Obvious signs of trouble, not just obvious but certain evidence of approaching disaster, were ignored as money piled up.

The market was supposed to be self regulating. Read a little Milton Friedman. This economic freedom to innovate was supposed to lead to better lives for all Americans, perhaps the whole world. This utopia, this nirvana, has thus far failed to appear. But incomes in a handful of the well placed are measured in the billions.

And another from 12/20/2009.,

Now, you could make a good argument that this kind of business thought (Milton Friedman, etc) actually falls into the second level where self interest and avoidance of punishment become primary concerns.  However, making moral decisions at the second level of Kohlberg’s six stages is just about as insulting as reasoning at the first.

My second point is when business is considered only as a money making endeavor, all the other levels of moral development don’t just become irrelevant, they become a block and a hazard to making maximum profit.

If you are short on time, please read the brief excerpt below, but if you have time click on the link and read the whole article. It merits it.

James Pilant

No popular idea ever has a single origin. But the idea that the sole purpose of a firm is to make money for its shareholders got going in a major way with an article by Milton Friedman in the New York Times on September 13, 1970.

As the leader of the Chicago school of economics, and the winner of Nobel Prize in Economics in 1976, Friedman has been described by The Economist as “the most influential economist of the second half of the 20th century…possibly of all of it”. The impact of the NYT article contributed to George Will calling him “the most consequential public intellectual of the 20th century.”

Friedman’s article was ferocious. Any business executives who pursued a goal other than making money were, he said, “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.” They had even turned themselves into “unelected government officials” who were illegally taxing employers and customers.

How did the Nobel-prize winner arrive at these conclusions? It’s curious that a paper which accuses others of “analytical looseness and lack of rigor” assumes its conclusion before it begins. “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.

Come again?

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.

From around the web.

From the web site, Brad DeLong.

But Friedman also produced a less felicitous legacy. In his zeal to promote the power of markets, he drew too sharp a distinction between the market and the state. In effect, he presented government as the enemy of the market. He therefore blinded us to the evident reality that all successful economies are, in fact, mixed. Unfortunately, the world economy is still contending with that blindness in the aftermath of a financial crisis that resulted, in no small part, from letting financial markets run too free.

The Friedmanite perspective greatly underestimates the institutional prerequisites of markets. Let the government simply enforce property rights and contracts, and – presto! – markets can work their magic. In fact, the kind of markets that modern economies need are not self-creating, self-regulating, self-stabilizing, or self-legitimizing. Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance.

From the web site, Reflection to Transformation.

The birth of the shareholder value movement is commonly traced to a speech Jack Welch gave at New York’s Pierre hotel in 1981, shortly after taking the helm at GE.  In that famous speech, entitled “Growing Fast in a Slow-Growth Economy,” Jack Welch outlined his beliefs in selling underperforming businesses and aggressively cutting costs in order to deliver consistent profit rises that would outstrip global economic growth.  He told analysts then, “GE will be the locomotive pulling the GNP, not the caboose following it…,” according to reports of the speech.

Jack Welch said in the interview given on 11-March-2009 that he never meant to suggest that setting, and meeting, profit expectations quarter after quarter in an effort to boost a company’s share price should be the main goal of corporate executives.

“It is a dumb idea,” he said. “The idea that shareholder value is a strategy is insane. It is the product of your combined efforts – from the management to the employees”.

What he was talking about is the commonly held belief that the purpose of business is to increase shareholder value. That belief is variously attributed to Milton Friedman, Adam Smith, and perhaps common sense.  BUT, it was the operating principle that resulted in two market busts and innumerous scandals in the past decade. The fact that Welch was one of the main proponents certainly adds a fair amount of gravitas to his comments.

Profitability, shareholder value, and measures like economic value added (EVA) completely miss a point that Welch articulated so well. Namely, increased “shareholder value” is a result, not a strategy.

Enhanced by Zemanta