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Friedman’s bad turn

from Peter Radford

Today is quite an anniversary.  It is fifty years since Milton Friedman’s article on the responsibilities of corporate management appeared in the New York Times.  Whilst it was not the only argument in favor of the shift towards a narrow focus on shareholder value, it was certainly one of the more persuasive and influential.  I have long held that Friedman’s reputation was ill-deserved because of his overt ideological bias and thus lack of any pretenses to scientific thought, but I realize he is well respected and protected by his peers.  His academic peers keep pointing us to his many “contributions” and accomplishments in order to prevent too dramatic a revision of his stature.  I prefer to reflect on the enormous impact his relentless pursuit of libertarian politics under the guise of economic theorizing has had on working people throughout the world.  He and his fellow travelers have a great deal of responsibility for the current fiscal insecurity that their ideas produced.

Friedman’s ability to straddle between academia and public media stardom made whatever he said more potent than it might have been otherwise.  His legacy is questionable.  His contribution to the malaise of those unfortunate enough to be caught in the vise of the corporate rush for every last scintilla of profit is not.  He was one of the main actors in the bad turn in economics  that blinded the discipline to reality, to the cost that it imposed on society, and to its inability to force the disaster of 2008.  It’s a pretty rotten record, but Friedman remains in the pantheon.  At least for now.  Sometimes it is appropriate to tear down the statues and other symbols of a nasty episode in history.  Sometimes we need to be more diligent in learning from bad turns made by our predecessors.  In any case we need to move on and consign Friedman to the lower self where he can do less harm and where his naivety can be seen for what it was.

What stands out about his New York Time article is the easy way in which he transports his ideological blind spot from economic theory into business management.  He blithely ignores the prior tradition of management education with its focus on balanced administration, and he decries as “socialist” the notion that corporate managers ought to take social responsibility into account in their day to day deliberations.

As you all know, I consider business management and the role of the firm a complete black hole within mainstream economics.  Presumably most economists who specialize in other parts of the discipline simply ignore the existence of firms as a trivial problem unworthy of their time.  Those who devote time to it have struggled to incorporate the firm into a coherent overall look at real world economies.  Let’s not re-hash that debate here, it’s a fruitless conversation.  We ought, instead, dwell on the astonishing arrogance of a discipline that imagines its broad and sweeping embrace of individualism, rational behavior, and marginal analysis coupled with assumptions about maximizing  and the pursuit of efficiency can in any way shape or form be relevant to management.  The latter is inherently the art of dealing with uncertainty, diversity, limited knowledge, collective action, and time depend processes.  It’s hard to find much intersection between the imagined world of economics and the realities of management, but Friedman felt empowered by his ideological perspective to do just that.

The result was the burgeoning of shareholder value along with an array of associated enabling ideas to do with agency, competency, capabilities and so on.  The jargon of management post-Friedman is radically different from that before his 1970 article.

Shareholder value, which was the logical operational consequence of the Friedman line of reasoning, is not simply an arcane topic for business school education.  It is a pernicious piece of management technology whose effects have been widespread and devastating.  While there may be many causes of our modern malaise, and while there are several possible origins for the bad turn taken by our economy since 1980, shareholder value surely ranks high on the list.

Here in the U.S. Friedman was riding a wave of increasing energy and activism on the part of business.  The 1971 Powell Memorandum followed along by sounding the alarm and roused corporate leaders and their wealthy friends to start the effort to re-frame and delegitimize the New Deal and other more socially aware policies that had long been targets on the right in politics.  The stagflation of the 1970s allowed even the most obscure and flighty ideas, such as Friedman’s, to be taken seriously.  The apparent failure of the post-war Keynesian consensus, whether or not is was properly Keynesian, meant it was weakened and then replaced by the libertarian turn backwards to a supposed unencumbered economics that eschewed government involvement and, supposedly, empowered ordinary citizens to fend for themselves.  Reagan and Thatcher are, of course, the iconic political exponents of this radical turn.

What always strikes me about this radical approach to society was its inability to see the possibility of balance.  It was an all or nothing position that denied even a small element of efficacy to the government.  It was, thus, profoundly anti-democratic.  The ability or willingness of the citizenry to use their democratic right to interfere with the pristine imagined workings of the marketplace were instantly denigrated.  There was to be no thought given to the ethical output of the market.  It was assumed a priori to be superior to any other form of decision making.  It was this stunning naivety in the commitment to market outcomes that led people like Friedman to be both so powerfully and willfully self confined in their thinking.  It was the essence of a faith based effort.

Perhaps Friedman was always an ideologue rather than a scientifically driven thinker.  His mentor, Hayek, can be more excused for his similar lack of balance.  Hayek had lived through the chaos of the decline of Austria and its humiliation after World War One, and his inability to see the worth of democracy was rooted in that experience.  But Friedman has no excuse.  His legacy is twofold: he is one of the forefathers of our current malaise, and his contempt for democracy fits well with the  thinking of the populists whose rise to power was fueled by the failure of his ideas.

Getting rid of the Friedman bad turn will be difficult.  It is, however, essential.

  1. Ed Zimmer
    September 14, 2020 at 10:06 pm

    Looking forward to see who comes to Friedman’s defense & what arguments they can possibly offer.

  2. yok
    September 15, 2020 at 5:02 am

    He was a political hack. He died a wealthy man for how well he served the wealthy.

  3. Craig
    September 15, 2020 at 5:26 am

    Freidman’s overturning of Keynesianism should be a lesson about how easily reforms can be undone. All the more reason to affirm a genuine paradigm change when it presents itself.

    • September 16, 2020 at 4:10 pm

      Friedman had little understanding for people and was friends with James McGill Buchanan who was the arch Libertarian funded by the Koch brothers — now one — to propagandize or popularize libertarian thought after Atlas Shrugged. The economy and hence corporations have a serious obligation to enhance life on this planet not just exploit and thereby destroy it. If a corporation or business is not doing that in a serious way it should be allowed to die.

      In other words business and economic interests should serve society but Friedman’s thinking had it the other way around. I think that most people in society — the latter which Thatcher denied existed — should not be serving economic entities but they should serve society. These are ideological perspectives but significant empirical data can be mustered to support them just as the pro-Friedmanites will support their notions. But an example is the NAIRU.

      A clear economically justified and reified theory that inflation should be combatted by putting people out of work so as to reduce their demand and thereby prices will fall towards the so-called clearance level. The empirical data seemed to support that notion so it was reified.

      However as a labour organizer during those days (70s) I did not see us looking to use collective agreements for any other purpose than to keep up with the price rises which at the time were unexplained and somewhat mysterious. There were articles speculating on the causes of inflation but the ideologues supporting business settled on demand-pull instead of looking at other potential factors or even considering the feedback loops. They made serious errors of logic when they saw salary raises and inflation going up together confusing cause and effect. In some instances there was demand-pull going on but, for most of us doing the bargaining, it was trying to keep up with inflation with COLA clauses which I will acknowledge themselves may have set up inadvertent feedback loops to prices. Perhaps when businesses believe consumers have more money they will raise prices.

      Cost-push was ignored especially the role of interest rates which during that time increasingly became a part of of every level of the production and selling process and in every step in the pricing process as companies increasingly used credit to fund their business activities. Also not factored into price rises were the costs of increasingly complex government programmes with their feedback loops including myths about money, debt and deficits. Longer supply chains became a price factor. Being forced by government regulations to incorporate some of the externalities may have been a factor. Not being anything more than an amateur economist, I am not aware of better approaches being applied. Perhaps they exist in the arcane archives of Central Banks or the literature.

      Did we have the technology to analyze the complexity? Was it applied? Were the right questions asked? Yes, no and no. The reason I answered “yes” to the first question is that during those years, my father-in-law, a brilliant doctor of engineering, showed me the computer programmes he developed in the 70s for National Research Canada to analyze the stress of launching the then-new communication satellites powered by solar arrays to ascertain their robustness in surviving launch and deployment and he also showed me the analysis he and three others performed for NASA on the feasibility of the Shuttle. Since then we have seen the most amazing accomplishments in space technology with fewer and fewer crashes. If engineers designed rockets like economists design the economy they would be crashing all over the place! Yes there have been spectacular failures but it seems to me that they are learning from them. Successful launches are becoming more routine.

      So that is why I answered “no” to the other two questions.

      Humans do not like to think slow to use the language of Kahneman. We also do not tolerate ambiguity and uncertainty — some of the Animimal spirits according to Keynes? — so we form theories, reify them into beliefs and think fast when confronted by a problem. Our good scientists are able to tolerate ambiguity and uncertainty without reifying theories. But they must also follow a moral and ethical imperative like the Hippocratic Oath requires. First do no harm. That is the challenge facing economists too, along with to make society — it is real and exists as communities — better. We had a politician in the 70s who talked about the country being a community of communities. He was derided for that comment probably by the Neoliberals of the day.

      • Craig
        September 16, 2020 at 4:47 pm

        Very good post. And every problem you enumerate is resolved by guaranteeing abundant individual demand, implementing the new monetary paradigm at the point of retail sale, taking profit out of the financial equation with a national non-profit banking and financial system and being smart and real enough to effectively regulate the new paradigm against those who are irrationally other-intentioned and/or anti-social enough to attempt to de-stabilize a universally beneficial new system.

        Oh, and I forgot to mention be able to (finally begin) rationally directing consumption so as to dove tail it with ecological sanity. That’s all.

        Now we can all get back to chatting about the minutiae of the pattern…instead of the pattern itself.

  4. Yoshinori Shiozawa
    September 15, 2020 at 5:39 am

    In fact they are … preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades. (Milton Friedman 1970)

    The notion of social responsibility existed far before 1960’s. There were many house precepts in Japan, even before the Meiji Restoration. The most famous one is the teaching of “Sampōyoshi”. This became quite popular as work ethic among merchants or business persons in the emerging capitalism of Japan (early phase of Meiji period, 1868-1912)

    The teaching is now often cited as “Urite yoshi, kaite yoshi, seken yoshi.” (Good for seller, good for buyer, and good for the society). Many interpret “Good for the society”as an emerging form of social responsibility. See for a detail, two of my posts on September 14, 2020 at 2:28 pm and September 15, 2020 at 4:03 am.

    Friedman’s accusation that “social responsibility is socialism” has no basis. It is purely ideological. However, it remains the questions whether stockholder value maximization is a right principle for a sound capitalism. I will argue this point in the next post.

  5. Ikonoclast
    September 15, 2020 at 7:40 am

    Milton Friedman was a complete charlatan. I wouldn’t waste any time on him.

  6. Gerald Holtham
    September 15, 2020 at 10:32 am

    Friedman had a malign influence in economic theorising as well as in the approach to business management. His defence of “as if” theorising justified wild and undisciplined abstraction in the construction of economic models that led to inappropriate theory from which macroeconomics has yet to recover. He was an ideologue whose political views shaped his economic analysis but that’s true to some extent of most of us. His forebears escaped oppression in Eastern Europe and I think he genuinely believed that a “free” market was essential to a free society and that autocracy and socialism went together. If sincerity means you are not a charlatan, he wasn’t one. You don’t need to be a charlatan, though, to be a thoroughly bad influence.

    • September 15, 2020 at 11:14 am

      I have just received the latest copy of the AER and can assure you that the recovery that you envisage is far, far away. There is not even the slightest bit of awareness.

  7. Gerald Holtham
    September 15, 2020 at 11:31 am

    PS I’m not sure about the black hole concerning theory of the firm that Peter Radford talks about. H A Simon did a lot of good work about decision making in organisations and also showed how managerial pay was empirically related to layers of hierarchy and nothing to do with marginal product. One of the tragedies of economics is that Friedman had much too much influence and Simon had far too little. I think that’s because political and sociological factors influence the evolution of economics more than they do of other disciplines.

    • Yoshinori Shiozawa
      September 16, 2020 at 4:03 am

      I agree with Gerald. Management science (or economics) has a thick accumulation on firms study. I have also pointed in my post on August 11, 2020 at 6:41 pm in the thread of Peter Radford’s article The missing middle?. Peter seems to think that economics and mangament science are different disciplins. It is his freedom, but it is no good to define economics narrow, espeically when we question the missing middle.

      The actual separation between economics and management science is the main cause of “missing middle”. As I have argued in the next post of mine on August 13, 2020 at 11:28 am, mainstream economics has a logical structure that excludes management science from economics.

  8. Gerald Holtham
    September 15, 2020 at 11:34 am

    Christian, I accept what you say. ‘Yet to recover’ means it hasn’t recovered. There is a bit more pluralism than there was but the majority of academics are still in the mire

  9. Craig
    September 15, 2020 at 5:15 pm

    My Dad once told me that eternity is a little bird pecking a 1000 mile square mountain once a day.

    Eternal economic domination and enslavement by the present monetary and financial paradigm is a one data point peck or even a woodpecker chipping away a rock reform….and a paradigm change is a 9.3 level earthquake reality re-setting and problem resolving event.

  10. Yoshinori Shiozawa
    September 16, 2020 at 4:29 am

    I wonder if commentators to this piece of Peter Radford have read Friedman’s paper on September 14, 1970 in the New York Times.

    All express their impressions on Friedman, but do not show any intention or sign to refute what Friedman deployed in the article except Gerald and me. Friedman’s argument is quite solid. Unless we effectively counter-ague Friedman’s logic, many readers will be persuaded that Friedman is right, except those people who believe that capitalism is essentially greedy and there is no remedy on this malady. Even if those ardent criticizers of capitalism are right, they are absolute minority. If you cannot persuade those who believe that market economy is not ideal but better than any other systems ever proposed, you cannot change the capitalism by simply accusing greedy capitalism. Majority of people would think that you are simply old socialists who failed miserably in the 20th century.

  11. The Frenchman
    September 17, 2020 at 5:27 pm

    Friedman was a midget in the shadow of Galbraith and Keynes. May he rot in peace.

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