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A Free Market Manifesto That Changed the World, Reconsidered


‘This is the basic reason why the doctrine of “social responsibility” involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses.’

JOSEPH STIGLITZ, professor of economics at Columbia University, was awarded a Nobel Prize in 2001

Friedman’s essay and his other writings on this subject were, unfortunately, enormously influential. They helped change not only the mind-set of the business community but also laws and norms on corporate governance. Courts have ruled that firms are obligated to maximize profits and shareholder value, to the exclusion of other objectives. In short, Friedman, through his various writings, promoted the idea of “shareholder capitalism,” in which the sole objective of corporations is to maximize the welfare of their shareholders. He didn’t originate the idea, of course, and if it hadn’t reflected the zeitgeist of the time, his arguments would have fallen on deaf ears.

By the time he wrote this essay, Friedman, who had done distinguished analytic and empirical work in economics, had become largely a conservative ideologue. I gave a talk at the University of Chicago around this time, presenting an early version of my research establishing that in the presence of imperfect risk markets and incomplete information — that is, always — firms pursuing profit maximization did not lead to the maximization of societal welfare. I explained what was wrong with Adam Smith’s invisible-hand conjecture, which said that the pursuit of self-interest would lead, as if by an invisible hand, to the well-being of society. During the seminar, and in extensive conversations afterward, Friedman simply couldn’t or wouldn’t accept the result; but neither, of course, could he refute the analysis — it has been a half-century, and my analysis has stood the test of time. His conclusion, as influential as it was, has not.

The absurdity of his analysis is seen most clearly by an example. Assume, in our imperfect democracy, that coal-mining companies use campaign contributions to block laws restricting pollution. Assume you’re a manager of one of the host of other companies that could spend a little bit of money to reduce pollution. You care about your children, your family, your community, but also about your business. Would you be irresponsible, as Friedman suggests, to curb your company’s pollution, because in doing so you reduce its profits? Would it be irresponsible for you to persuade others in your industry to do the same, even if you weren’t able to persuade Congress to pass a bill to compel you to do so? I think not. If you and others like you acted in this manner, societal welfare would be increased.

Friedman’s position is based on a misconception of both economics and the democratic political process. Yes, in an ideal world, Congress would pass legislation to ensure that one way or another private returns and social returns to any corporate activity were perfectly aligned. But in a democracy where money matters — clearly true in this country — it is in the private interest of corporations to do what they can to make sure that the rules of the game serve their interests and not the interests of the public at large. And they often succeed.

Today the downside of Friedman’s perspective is even darker: Is it Mark Zuckerberg’s social responsibility to allow wanton disinformation to roam over his social media platform? Is it Zuckerberg’s responsibility to lobby to get rid of a pesky foreign competitor while fighting for his company to be free from anti-competitive restraints and any accountability, so long as it increases his bottom line? Friedman would say yes. Economic theory, common sense and historical experience suggest otherwise. It is good that the business community has awaked. Now let’s see whether they practice what they preach.

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