Home > Uncategorized > The firm, yet again

The firm, yet again

from Peter Radford

There is a new eBook published by the Stigler Center which is an offshoot of the Booth Business School at the University of Chicago.  The publication contains a number of short essays either attacking or defending the infamous pronouncements by Milton Friedman on the role of the corporation.  This year, you may recall, is the 50th anniversary of the newspaper article in which Friedman described his view that the purpose of the corporation is too maximize shareholder value.  The subsequent decades have seen that view permeate the business and  legal systems such that to argue against it is seen as oddball in the extreme.

Steve Kaplan leads the defense of Friedman with the opening essay and slides almost immediately into a humdrum general defense of capitalism rather than staying on the specific topic of the corporation.  Thus we read this:

“Many observers, including the organizers of the Stigler Center’s Political Economy of Finance Conference, believe that his view has been extremely influential. It has been implemented in the US and globally starting in the 1980s, encouraged by scholars like Michael Jensen (a Booth alum and my thesis advisor).1What has been the result of corporate shareholder value maximization mixed in with globalization? Let me cite Nicholas Kristof, of the New York Times, who wrote at the end of 2019 (and pre-pandemic): “For humanity over all, life just keeps getting better.” People living in extreme poverty fell from 42 percent of the world’s population in 1981 to below 10 percent today. That is 2 billion people who are no longer suffering extreme poverty. Absolute poverty declined substantially in the US, from 13 percent in 1980 to 3 percent today. And this is more or less what Friedman predicted. The pandemic will affect these numbers, but I am hopeful that the effect will be temporary.”

Notice that the reduction in world poverty is, apparently, a consequence of the acceptance that corporations ought to devote themselves exclusively to enriching their shareholders.

This extraordinary over-reach is best left to you to absorb and think over at your leisure.  Just make sure you are sitting down when you do so.

This claim follows a subtle revision of Friedman’s intentions.  In order to immunize against what he clearly thinks is a vulnerability in the Friedman line of thought, Kaplan adjusts Friedman’s use of the word”profits”: the word is narrowed to mean “long term shareholder value” as if the specification of the longer term somehow eliminates the corrosive worry that corporations have become ever more short term in their focus.  Of course they have.  The average share is owned for a paltry four months.  There are fewer long term shareholders than there were in Friedman’s day, and the manic search for that little extra profit is one of the root causes of the much criticized short term nature of most management nowadays.  But, the longer term view is, we are assured, what Friedman “surely meant”.

Then he ought to have said so.  Friedman was never one to avoid saying what he meant.  So I think when he said “profits” he meant exactly that.  Kaplan’s revision is simply an attempt to soften a potential fatal blow against his idol.

It gets better: Kaplan suggests that all those who argue for a return to the older stakeholder focus for management are creating insurmountable difficulties.  Just how, he asks, is management supposed to choose between all those competing ends for whatever their limited resources are?  Worse still, since, he goes on, corporations compete against other value maximizers, any corporation who fails to maximize will likely invest less efficiently and operate worse.  Notice the weasel word “likely”, it sounds as if Kaplan is a little unsure of himself.

And that’s it.  That’s all we need to know.  Without shareholder value as a single point of focus, our managers will dither, dally, and the world will slide into oblivion.  Kaplan’s convinced:

“To conclude, Friedman was and is right. A world in which businesses maximize shareholder value has been immensely productive and successful over the last 50 years. Accordingly, business should continue to maximize shareholder value as long as it stays within the rules of the game. Any other goal incentivizes disorder, disinvestment, government interference, and, ultimately, decline.”

Oh no!  Disorder? Disinvestment? Government interference? Decline?

Enough.  This is old ground.  The fact that the shift towards shareholder value exactly coincides with the stagnation of wages, the helter-skelter dive into globalization, the decline in domestic investment, and the rise of populist politics is just, well, a coincidence.

As ideas go shareholder value has been a failure for most households.  CEOs have done well though, and they probably will continue to direct their generous support to the Stigler Center, and the various academics it houses, in return

It is an irony that I came across the Stigler Center eBook this morning just as I was about to comment on the continuing confusion in economics over the firm.  It is a stunning omission from mainstream economics that there is no well worked through story of how business sits within the economy.  The continued effort to flatten business into the pre-existing, and more easily mathematized, structure of aggressive individualism, distorts reality out of all recognition.  It’s as if physicists theorized the universe only as an assemblage of atoms.  No stars, galaxies, or even planets, just atoms.  Imagine the lack of insight that would result from such an approach.  Yet that its exactly what economics does.  No intermediate structure is tolerated between the individual and the market [whatever that is].

This is laughable.  But that’s what economics is.

When economics tries to engage with the firm is is almost invariably through the lens of contracts and the cost of transacting.  This is familiar turf for economists, so they attempt to bash the firm into a shape they can deal with using their preferred methods.  They ignore anything that gets in the way of this wholly unscientific approach.

Just too add to the confusion, economists are prone to use the. two words “firm” and “corporation” interchangeably.  This is a monstrous error.  The two are totally different animals.  Confusing them leads to all sorts of subsequent errors.  One of which is the notion of shareholder value.  Friedman might not have expounded as he did had he grasped the difference between a firm, which is an organization created to undertake economic activity, and a corporation, which is a legal person created as a shell within which a firm may, or may not, sit.

The impact of understanding this separation of the two concepts is profound.  One of which is that a corporation is decidedly not owned by shareholders.  The entire Friedman project unravels at this point.  Corporations are not owned by anyone.  They exist at the whim of the state to perform functions that further the ends of the state.  In return for so doing they are given all sorts of legal capabilities such as that of limited liability, the ability to sue and be sued in court, to own and dispose of assets and so on.  Shareholders are peripheral.  They own pieces of paper that give them access to financial rewards as defined by the board of directors.  After the initial influx of capital at the launch of the corporation, shareholders contribute nothing.  They benefit from the upside potential of the stock price, but are immunized against personal losses if the corporation fails or goes bankrupt.  It is rare to hear economists comment on this monumental example of moral hazard.  Which is odd because they like to rabbit on about it elsewhere.

Legal personhood is an extremely valuable asset that the state endows a corporation with.  It is an ancient concept — the Romans had corporations precisely because of the benefits the concept bestows.  It is a privilege to be a corporation.  It allows economic activity to be defined and protected against risks that might preclude that activity otherwise.  Indeed the modern use of the corporate form since industrialization is a recognition of the immense value legal personhood brings into commerce.  It is a vital technology the absence of which would most certainly have hampered modern economic development.  We all benefit from the existence of corporations.  They mitigate risks as they help stave off uncertainty.   Everyone associated with a corporation receives these benefits, not just shareholders.

On the contrary, shareholders rank low within a corporation.  Least of all do they “own” the corporation.  In David Ciepley’s words:

“And all of the rights over the firm’s assets that we normally think of as bundled into the right of ownership – such as rights to exclude, use, lend out, collateralize, sell, or profit from the use or sale of an asset – are held by the legal entity and exercised on its behalf by the board and its hirelings. The stockholders possess none of them, which makes them very odd “owners.”

Odd indeed.

Perhaps Kaplan and his hero Friedman need to revise not just the word profit, but also their entire notion of ownership.

No one owns a corporation.  It is a ward of the state.

  1. Ikonoclast
    December 9, 2020 at 11:33 pm

    “And did we tell you the name of the game, boy?
    We call it Riding the Gravy Train.” – Pink Floyd.

    It’s a game. Games have rules, not laws. The Laws of Thermodynamics (for example) are laws; fundamental laws of the natural world. The legal laws and regulations of capitalism are rules, not laws, under this definition. Thus the legal laws surrounding corporations and their legal acceptance are rules, not laws, in my strict definition. This matters because rules are a matter of human artifice. They are not fundamental like the fundamental laws of nature. Hence, it is very easy to prove that economics cannot have laws. It has rules, which when taken as wholly prescriptive, function as axioms.

    Let us remember what an axiom is. “An axiom, postulate or assumption is a statement that is taken to be true, to serve as a premise or starting point for further reasoning and arguments. The word comes from the Greek axíōma (ἀξίωμα) ‘that which is thought worthy or fit’ or ‘that which commends itself as evident’.

    In the end, the axioms of capitalism, as customs, legal laws and regulations are “merely” humanly invented rules. I put “merely” in quotes because we know that the “merely” in our system is very strongly enforced by those with the capital (which equates to capital-power) and those, usually the ones with capital power and/or political-police-military power, who can bring the power of the state and its monopoly on violence to bear on the mass of the people to enforce the rules (not fundamental laws) of capitalism.

    Under these conditions, the conditions of a competitive-cooperative game, there are rule makers, rule takers and rule breakers. Organized rule breakers tend to complete the circle by becoming rule makers which limit others while making special rules and special loopholes to extend and advantage themselves and their own leverage in the system.

    Any notion that a game has fundamental laws within itself is a non sequitur. What fundamental law of nature determines that a chess board must be an 8×8 array and a go board must be a 19 x 19 array (or a 13×13 array for training beginners)? What fundamental law of nature determines that vehicles should drive on the right side of the road in some countries and on the left side in other countries. None. To continue with the array game example, the board sizes and rules of play then determine what essentially are the theorems of the game (mathematical deductions, usually performed as tree search algorithms) from starting positions. For example, a king with opposition and a pawn can force its pawn to the queening square against a lone king. A rich corporation with a team of lawyers can force a lone operator with shallow pockets and in a court room without representation, out of business and out of the game, at least to a very high degree of certainty.

    Competitive-cooperative games come up against fundamental laws as multipliers, dividers and limits. Competitive-cooperative games do not have or create these fundamental laws within themselves. This is a very important point and this is where conventional economics fails to develop an empirically-based ontological analysis. There is a reason that the rule book of rugby stipulates a playing field of 68 m (74 yards) wide and 112-122 m (122-133 yards) long and not a field very much smaller or very much larger. The field is sized to match the size and physical capabilities of 15-man teams of men. There is a reason that the rule book of the game Go stipulates a 19×19 array for expert and competent players and a 13×13 array for beginners. These are sizes compatible with the mental capabilities of expert and beginner humans receptively and are also sized relative to the time people are likely to make available for the playing of games.

    There are fundamental law-of-nature reasons why the institution of property (private and public) has arisen in human societies but not fundamental law reasons why the institution of property exists in its current form under capitalism. We can look at the current rules-based nomos to explain how property is instituted under capitalism. John Locke made a fundamental mistake in attributing both explanation and justification for the creation of property to the act of labor. Property, as exclusive possession and ability to dispose, arises not from labor (the mixing of labor with some natural resource) but from, in the first instance, two biological imperatives innate to all life forms: the imperative to gain sustenance to live and the imperative to reproduce.

    This idea was eludicated by Robert Ardrey in his book “The Territorial Imperative” in 1966. Another example of a great book ignored and lost in the mists of time. This book “describes the evolutionarily determined instinct among humans toward territoriality and the implications of this territoriality in human meta-phenomena such as property ownership and nation building.”

    Here, I will follow my own line of reasoning, not necessarily Ardrey’s. Thus the justification for possession of property is not a right to it by labor mixed with resources and then as occurs so often under current laws, a right to by the legal laws (rules) of inheritance in our culture. The biological imperative and thence the moral philosophy justification lies in its conferring the wherewithal to survive. In a eusocial species, the possibilities of cooperation exist along with and alongside the possibilities for competition: hence our characteristic mode as a psecieis to create competitive-cooperative games. Any human society, nation or community of nations is itself an extensive competitive-cooperative game.

    The construction of private and public property would be more beneficially (for a eusocial species) re-imagined by an application of both the insights of the evolutionarily determined instinct among humans toward territoriality and property and the insights of the possibilities of eusocial cooperation in a modern setting. This would permit a more rational and effective alloacation of what need to be public goods and private goods in modern urban, peri-urban and even rural-but-connected settings. These are conditions, modern enuclturated conditions, far removed from our evolutionary origins and it indicates a strong requirement to marry up our evolved nature to our modern enculturated behaviors.

    Now primitive feudal, pre-capitalist and capitalist possession and inheritance rules are not appropriate to our modern position. This is so from an evolutionary-eusocial standpoint and also an ecological standpoint. The rules of capitalism are failing us on both fronts. They are just rules. They are not fundamental laws. The more fundamental nature of humans is most clearly a competitive-cooperative one. The allocation of ownership to the private and public spheres needs to follow this more fundamental law of (evolved) human nature and not the specious “labor theory of property”. What is required is a need theory of property.

    What needs to be private or personal property? The answer is anything for exclusive use for personal, health, safety and developmental reasons. This means from toothbrush, to clothes, to (I think) a domicile as a safe personal and family space. What needs to be public property? The answer is anything that is not an exclusive good. In other words, non-excludable goods should be public goods. But the test should be broader than non-excluaable. Any good where public sharing is not deleterious or where public sharing is less deleterious than privatising the good (in the old sense of the greatest good of the greatest number) means it should be a public good available to all.

    These ruminations are “thoughts in progress”. I do not pretend I have this all worked out or that it is all original. It’s simply me trying to figure these things out for myself by working from the totality of my autodidact researches. Clearly, chunks are derivative from other thinkers from Marxian theorists, to Veblen and the Capital as Power theorists (Bichler, Nitzan et. al.)

    My angle into this issue might or might not be unique (or idiosyncratic). When I speak of “ontology” some here think I am talking about speculative metaphysics. I most assuredly am not. I am talking about an “ontology of empirically verifiable objects, processes and constructs”. That is why, following the CasP theorists, I throw out the labor theory of value and then the labor theory of property (which might be the next natural development from CasP theory or they might have already covered that). It is why I introduce Ardrey to illustrate where the drive for property really comes from in empirical terms.

    It is why I introduce a discussion of human rules versus fundamental natural laws: to illustrate why conventional economics cannot uncover its own laws but it has none (and can have none as an axiomatic system) but can only run up against real, fundamental laws of nature, like the limits to growth. This process of course is a very different thing to having genuine, internal, innate fundamental laws. Conventional economics’ claim to to be searching for its own fundamental “laws of economics” is really illustrative of an entirely bogus enterprise, as the claim for fundamental laws in a rules-based system devised by human artifice, and capable of being re-made differently by human artifice, is an ontological contradiction.

    • pfeffertag
      December 10, 2020 at 12:47 pm

      “Any human society … is itself an extensive competitive-cooperative game.”

      On your own terms, that is not adequate. You talk extensively about rules. Rules are coercive. A rule is not a request. Thus society must be a competitive-cooperative-coercive game. It is conceivable that rules could be made cooperatively and even competitively, but neither competition nor cooperation is needed. A rule is coercive by definition. (Coercion may, of course, occur without rules.)

      Each of those three modes of interaction—competitive, cooperative, coercive—is independent of the other two; each can exist alone. You can surely think of examples. As some social scientists would say, the three modes are mutually orthogonal. But here is a claim: you cannot have both competition and cooperation without coercion. For example, a war, a sports event, a political election, everyday trading. If there is no situation which refutes this claim, it really does cement the place of coercion alongside your competition and cooperation, doesn’t it?

      It seems to me that all three modes must occur in all social species (eusociality is not needed). Among non-social creatures, competition is universal and the other two modes might occur. Nothing here proves that these three modes of interaction are the only ones, but I think they are. At any rate, they will do to go on with.

      Mainstream economic theory presumes competition. It has been extremely effective—effective beyond the dreams of all other social sciences. However, as people never tire of pointing out, its correspondence to reality is flawed. It follows, therefore, that for more realism perfect cooperation and perfect coercion must be theorised along with perfect competition.

      This just has to be done and until it is, economic theory’s 50-year stagnation will continue.

      • Ikonoclast
        December 11, 2020 at 8:28 pm

        I had presumed that coercion and violence were covered under the banner of “competition”. Not all competition is friendly. In Darwinian evolutionary terms competition is conceived of as being very savage indeed. However, my examples of competitive-cooperative games could have left the impression that I was conceiving of competition only as agreed competition, agreed between equals.

        If I play chess at my local club (not that I have done so for a long time) I am entering an agreed competition. If I am born into a capitalist society and it turns out that I have to be a wage slave as my only feasible option of survival (as it did turn out), then I am in some sense coerced or dragooned into a macro situation which is far from being entirely of my own choosing.

        I can walk into or out of a chess club. I am born into a capitalist society and I cannot walk out of it because it extends everywhere and there is no other way to make a living. It is a totalizing system. People can attempt to walk out of the oppressions and coercions of capitalism by becoming homeless tramps or mansion-owning millionaires. But these attempts are not really successful. They are still enmeshed in the totalizing system: a system which expands to envelop everything.

      • pfeffertag
        December 13, 2020 at 12:04 am

        To Ikonoclast

        “I had presumed that coercion and violence were covered under the banner of “competition”.”
        Your discussion was not of coercion; it was of rules. How can rules be construed as competitive? Thus I pointed out that your seeing society as “competitive-cooperative” omitted any place for the rules you had regarded as important.

        It is curious that you introduce violence. Competition, cooperation and coercion are universal characteristics of social living. They do not imply violence, or even any unfairness or impropriety. As far as I can see “friendly” is also irrelevant.

        Attributing coercion to competition is standard left bias (not at all iconoclastic). It is a mistake and it is properly rejected by the free-market right. Unfortunately, the right makes its own standard mistake of seeing cooperation as a coercive attempt to cheat the public, stifle innovation, tax the industrious, reward the indolent, and bring on socialism. (With such muddled thinking it is no wonder economic theory stagnates.)

        “In Darwinian evolutionary terms competition is conceived of as being very savage indeed.”
        More violence. And quite incorrect. The daffodil that attracts the most pollinators wins in the Darwinian competition. The peacock with the best display, wins. No savagery there. Whoever leaves the largest genetic legacy wins the evolutionary competition. Competition can be savage—as can cooperation and coercion.

        People do opt out of the three modes of interaction. They become hermits or recluses. This is actually quite common and some even become famous: Buddha, Diogenes, Thoreau, Garbo, Howard Hughes, Steppenwolf, Ignatius J Reilly… More normally they are the professor who is never seen in the lunch room, or the widower who spends all day fishing. They are usually older men who have drifted from the socialising influences of women, work, and war. They are an interesting and almost entirely unstudied social phenomenon.

    • December 10, 2020 at 2:34 pm

      What is often forgotten historically is that ‘private property’ in the commons is a relatively recent invention, at least in the West. Barons in England and Europe, Land Lords so to speak in order to escape their feudal obligations tied to their possession of land, proposed to monarchs that the monarch would be financially better off imposing annual property taxes than continuing the reciprocal obligations tied to personally assigned possessions of land by the monarch or previous monarchs.

      From their perspective, their possession of lands carried annual onerous and costly obligations ‘inherited’ as it were from a feudal past. They would most certainly be ‘better off’, as would often warring monarchs by trading off those obligations for less onerous annual taxes. As you say, that had nothing to do with Locke’s myth about private property arising due to improvements to the land by those in temporary possession of it. This is also why one’s property in land is forfeit today if the taxes on such land are not paid.

    • Questa Nota
      December 10, 2020 at 4:14 pm

      There is a DC version of the Gravy Train. See the linked article about how elected and appointed officials play the system and use your tax dollars for their own benefit. In rough economic terms, they have maximized their own welfare to the detriment of others. Their equilibrium and optimal behavior come at quite a cost to the rest of the country.

      The message should be alarming across the political spectrum as the DC insider behaviors hurt almost everyone else.


  2. ghholtham
    December 10, 2020 at 1:03 pm

    But I don’t think many economists think there are “laws” of economics. Every time the word “law” has been used in economic literature – Okun’s law, Verdoorn’s law, Bowley’s law etc – it referred not to a theoretical proposition but to an observed empirical regularity. Moreover in every case the regularity has broken down, either permanently or intermittently. Rules, formal and customary, governing human conduct in social situations are not the same as laws of nature, granted. I am not aware of serious attempts within economics to derive the rules that exist from more fundamental biological laws or imperatives. Economics has generally taken most rules for granted and sought to find generalisations, i,e’, statements that are true more often than not, about how different situations in socio-economic life work themselves out. Two approaches have been followed: in each case first ask a question then either 1 carry out some case studies and hope to generalise from them 2 construct a highly abstract model of the situation being examined, work out the logical implications of the model and then see if those implications seem to be reflected in real observations. Neither approach is conclusive or fool-proof. Either can be and has been used for ideological justification. Moreover some abstract models survive in the literature despite never having been found to be empirically supported or useful. Most important disputes are about what questions should be asked, a fair and legitimate subject for debate. When it comes to tackling them, I haven’t come across practical alternatives to the methods mentioned above.

  3. ghholtham
    December 10, 2020 at 1:10 pm

    PS The development of computers arguably creates a third possible means of enquiry: specify less abstract, more detailed models of a situation as you understand it and simulate the model to explore its implications.
    I am not sure minds would be closed if anyone came up with another method of empirical research.

  4. Ikonoclast
    December 11, 2020 at 10:13 pm


    You make some good points, up to a point. These are the kind of points that academic economists make when they engage on genuine ontological grounds, which one has to say is rather rarely. For the most part, academic economists and especially the “drys” plus the business economists, talk and act as if economics has fundamental laws. They mostly sweep under the carpet the, sometimes grudgingly acknowledged, fact that theirs is a prescriptive and normative discipline, not a descriptive and objective discipline: that it begins with axioms and ends in theorems, just like euclidean geometry. And just like euclidean geometry it does not describe many real topographies very well at all. It also posits a non-existent entity (the “util” or else some highfalutin’ theoretical ordinal variant of it) and measures and equates all things in the fictional dimension of “use value” via its inconsistent metric, the numeraire, or money. See Blair Fix – “The Aggregation Problem”.

    Of course, one can set up prescriptions to govern the behaviors of real people and that’s the kind of game conventional economics is playing with the connivance of the more minarchist state of neoliberalism. A clear prescription in everyday modern life is the set of rules for traffic lights: green for go, amber for an impending change and red for stop. When people (mostly) obey these prescriptions and light timings then new real occurrences emerge in the real system of real people in real metal boxes on wheels on roads. I refer to traffic flow patterns. And there are ways of attempting to time lights to optimize traffic flows.

    In like manner, conventional capitalist economics sets up the prescribed axioms and parameters for capitalist economic life; especially those which govern the possession of private property, the rights of that possession and the capitalization of property and rights. It then attempts to control real flows (the real economy) with these axioms and rules. The contention of now-dominant neoliberalism or market fundamentalism is that these Axioms of Capitalism, these Prescriptions (one can accurately call them nothing else) produce the best possible behaviors in people in so far as economic and even social production, consumption and coordination are concerned. It is swept under the carpet that the theoretical minarchist state, let alone our more interventionist real states, underwrites and guarantees this system by its state systems of law, order and contracts, not to mention interventions with respect to market failures and welfare failures.

    The other problem, as explored by Blair Fix (op. cit.) in terms of scientific ontology, and by the environmentalists in terms of empirical real world outcomes for ecologies and biosphere systems, is that there is no connection between conventional economics’ value system (in the nominal and ever-fluctuating numeraire) and the real dimensions (real scientific and measurable dimensions) of the real world. You cannot fully and successfully manage a real system with nominal measures and nominal allocations. Money is nominal of course. There is no real linkage between the nominal and the real except persons attempting to behave as this nominal system prescribes until that attempt becomes impossible because of real obstacles and limits.

    This disconnect between conventional economics and the real limits of nature is now becoming critical. It is no longer acceptable to say pragmatically that capitalism works and is the “least worst” system for managing the economy and even society (though these claims were never true either). By now it is clear that the nominal management of the real by capitalist economics and finance is nothing short of disastrous tending to the catastrophic. Catastrophic climate change is now a near certainty at something like a 95% probability and that is just one problem. We could mention the ongoing 6th mass extinction for example.

    The only good outcome of the coming collapse will be that capitalist economics will be destroyed forever. Unfortunately, the human race may well go extinct as well.

    • December 12, 2020 at 12:52 am

      I fully agree with everything you say here. The replacement of actual values to users (and of human values also) by nominal units expressed in units of money was one of the disastrous consequences glorified so to speak by the subjective marginalist schools which arose in the late 1850s and after (apart from the earlier Gossen who, in many ways, actually did not quite say what they implied he did). It provided ‘capitalists’ with an ideology of self-justification that has harmed us and virtually all other life forms on our planet.

  5. ghholtham
    December 11, 2020 at 10:39 pm

    Your argument moves around between two sorts of proposition: one, methodological statements about the nature of our subject matter and how it must necessarily be approached and, two, empirical statements about the way many people do approach it and what motives they may have. I agree with some of the things you say about the second sort of proposition but that really has little bearing on the first sort of proposition. What is possible is not delineated by pointing out failures. I sometimes think you are mixing things up – but I may have misunderstood.
    The disconnect between conventional economics and the real limits of nature is indeed very real – and regrettable. The reason for it is simply that it is only in recent decades that the impact of the economy on the natural environment has become serious and evident. People don’t study problems they aren’t aware of. The environmental problem will be solved, if it is, without big changes to economics. Economics is used to dealing in trade-offs but here there isn’t one. People will decide that decarbonisation, for example, is necessary and they won’t need economics to come to that conclusion. The way they tackle it will depend on physical and engineering possibilities and on politics. Economic motives will certainly figure but economics as a study will play a very minor role.

  6. Ikonoclast
    December 12, 2020 at 1:15 am


    You might or might not be right that I am mixing up the methodological and the empirical. I am not exactly sure what you mean by that unless you mean that I am proposing a certain method for approaching economic ontology while at the same time looking at the climate crisis as an empirical outcome example of our current practices (as determined by money-finance operations) and their failures.

    There is an unfortunate tendency (I believe) by some on this forum such that when one mentions ontology, they immediately think in terms of speculative and religious metaphysics. I am not saying you are doing that here but mention it to illustrate a point. There are also formal ontologies, in the computing field for example, and empirical ontologies, in the sciences for example in the fields of biology and medicine for example. There is also an inescapable element of formalism (in categorization rules such as those for taxonomies) in empirical ontology. That also must be admitted.

    Nevertheless, I argue that “empirical ontology” is a genuine, though broad, field and as such the genuine empirical sciences develop empirical ontologies: meaning studies of what are the real base existents for the discipline in question such that testable hypotheses may be raised, dependable laws of fundamental relation found, dependable predictions made and consistent explanatory systems developed for the science in question and which link scientifically to the explanatory systems of the other sciences.

    The appropriate base existents (empirically derived but ordered somewhat formally in discipline-appropriate taxonomies and ontologies) must be empirically sought out for each discipline. It is a long and winding road of discovery. The base existents considered in epidemiological science (theoretical and applied) are different from the base existents considered by structural engineering as an applied science. The first is concerned with pathogens and even protein structures (for examples) the other is concerned with columns, beams and even macro and microscopic materials structures and their characteristics (composites, aggregates, atomic crystalline lattices etc.) as bearing on load bearing strength for example. And these sciences meet in chemistry and then in physics as the most empirically ontologically fundamental sciences.

    In any discipline, a flawed or false dogma of base existents applicable to the discipline precludes any possibility of raising up an empirically consistent and pragmatically useful discipline. In medicine, the humor theory of disease (humors as base existents and thus as an ontological base) failed to prodiuce progress and onlt the germ therory (pathogen theory) permitted the development of a conistent approach to fighting pathogen borne diseases.

    Economics has raised a strange amalgam of prescriptions and descriptions. Property and money are taken as basic existents even though they are fictive constructs, in any given extant form, invented by humans. This does not overstate the case. The basic existence of private property is an unchallengable axiom and right in bourgeois or capitalist economics. Its specified derivation, by John Locke originally, is from the idea of labor mixed with the resources or free gifts of nature. That which a man has mixed his labor with, he has made his own even though it was before a part of free nature. This is the labor theory of property, soon intrinsically contradicted and made ignoble by the noble device of inheritance if I may be ironic. The infant son had mixed none of HIS labor in what his his father had made but still stood, or rather lay and squalled, there in the cradle ready to inherit what the father, or rather his serfs, minions, employees, and even wife, had made.

    The genesis of property lies rather in the territorial imperative as Robert Ardrey stated. A certain amount of assured territory, nowadays as the occupation of a job slot or the ownership or part or all of a firm (as these are modern territories) is necessary for the sustenance of a person or a family of persons. Looked at in this manner, the property imperative is linked back to the territorial imperative in a biologically consistent manner. The term “territorial imperative” simply expresses the need for a real space which supplies real resources or the wherewithal to purchase real resources in a market economy. This is an empirical and scientific link. It is unlike the theological (and later made ideolgical) link made by John Locke.

    Profound differences arise between theorizing with an empirical ontology and theorizing with a theological or ideological ontology. The empirical ontology permits us to see exactly why a human needs some personally reliable and disposable private property and exactly why he ought not be permitted too much, for reasons of inequality and poverty elsewhere. Whereas the labor theory of property, added to by the windfall theory of property, augmented by the inheritance theory of property, multiplied by the monopoly and political influence theory of property (again I am being plainly accurate as well as intentionally sarcastic) admits of no reasonable limit to personal property and the personal property of an elite few who garners far more than is required for even a comfortable and enlightened life.

    My plea or campaign for an empirical ontology of economics and of economic objects goes far beyond these rather polemical examples above. However, space in a blog is limited and people do not want to be presented with an endless wall of text. That is why books have not much more than hand-size pages and these are stacked on each other. It’s so that a book does not look like a wall! A blog post is a pamphlet and if pamphlets get too big the public won’t read them. As a blog poster, I consider myself and other like-minded blog denizens to be operating in the tradition of the pamphleteers of yore. ;)

  7. December 12, 2020 at 11:41 am

    ” A blog post is a pamphlet and if pamphlets get too big the public won’t read them”.

    Yes and no, Ikonoclast. In his pamphlet here, Peter Radford’s distinction between a firm and and a corporation started a series of “pamphlets” all of which I’ve read with great interest, though Ikonoclast diverts from economic function into ownership, Pfeffertag (rightly) brings in competition, Larry history and Questa Nostra government. This moves Gerald to dispute the difference between laws and the rules of gamesmanship, resolvable perhaps by simulation. That led Ikonoclast to talk of laws and the reality of aggregating numeraires, which Larry saw as self-justification. That got Gerald comparing method and empiricism, according to Ikonoclast mixing these up due to a common misunderstanding of ontology, as illustrated in the theory of property. All very interesting, and stirring up echoes of other threads: Humpty Dumpty saying “Words mean exactly what I want them to mean”, and Econoclast explaining where macroeconomics went wrong, his “invisible hand” ordering an American freeway with no cross-roads … .

    Even the summary is getting long! What can I briefly add?

    It would have helped if Ikonoclast had named names where he says “There is an unfortunate tendency (I believe) by some on this forum such that when one mentions ontology, they immediately think in terms of speculative and religious metaphysics”. If that is directed at me, can I say it is is totally misdirected? I’ve argued that metaphysics was Aristotle’s equivalent of post-graduate material: to be studied after graduation. And there is nothing speculative about my ontology. It is based on science representing reality, representation requiring some form of symbolism, and the Law of Information Science proverbially understood as “A picture is worth a thousand words” and “You can’t fit a quart into a pint pot”. So I’m not going to try to!

  8. Yoshinori Shiozawa
    December 14, 2020 at 1:16 pm

    I have posted a comment here three times (last Satuerday, Sunday and today) and none of them appears here. Does that mean my comment is too long? I cannot imagine other reasons. It contains only one outside link.

    • Yoshinori Shiozawa
      December 14, 2020 at 1:19 pm

      I found why my post has been refused. It contained some double-byte characters which are out of the normal list. I learned one thing.

    • Yoshinori Shiozawa
      December 14, 2020 at 1:25 pm

      I have found the reason of why my comment has been refused many times. It contained several double-byte characters. I have learned one thing.

  9. Yoshinori Shiozawa
    December 14, 2020 at 1:17 pm

    I was observing how people argue Friedman’s thesis: The purpose if the corporation si to maximize shareholder value. As David rightly pointed it, there were various arguments but there were no arguments that reply Peter Radford for his problem setting. I wonder why? Does it mean that nobody in this blog site has a solution to propose in place of Friedman’s thesis? Surely not, but let me give a small proposal which may replace Friedman’s thesis.

    My proposal may not be very different from what Peter Radford wanted to explain. At first, I explain how the mainstream neoclassical economics explains how wages and profits are are determined and how it is related to Friedman’s thesis. After this, I explain a new theory of value (a modern version of classical theory of value) and how the neoclassical theory of distribution (marginal theory of distribution) is wrong and ideologically laded.

    To make the story simple, let us think a big company. It runs by the cooperation of various people: top management, lower-level managers, workers, engineers, clerks, sales persons, and many other operators including cleaners and guards. If the concerned firm is a producer of a product, it is supposed that its production can be expressed by a production function in a form like this:

    Y = f(L, K). (1)

    In other words, a certain amount of product is produced by a combination of labor (L) and a capital (C). Here, the concept capital is quite ambiguous. It may mean a set of materials, parts and components. In other case, it represents machines and equipment with necessary utilities. But it is normally assumed that capital goods are expressed by a single amount of K expressed in the national currency. If the function f is homogeneous of degree 1 and continuously differentiable with regards to L and K, Y can be expressed as

    Y = (∂f/∂L) L + (∂f/∂K) K . (2)

    The core theory of neoclassical economics is the marginal theory of distribution, a theory that pretends to explain how wage and profit rates are determined. It assumes that ∂f/∂L is equal to wage rate w and ∂f/∂K is equal to profit rate r. Then, equation (2) takes the form

    Y = w L + r K . (3)

    It means that all proceeds is distributed to wages and profits. Neoclassical economics considers that this exhaustion equation (3) signifies a fair distribution, because everyone is rewarded by his or her contributions. Workers receive wage according to labor productivity and the cooperation receives the profit that is the contribution of capital. If this is right, the profit is the reward for the capital that was advanced before the production. This reward must go to the shareholders, because it is the shareholders as a collective who have contributed to provide capital necessary to the production.

    Friedman contends that the corporation was founded in view of gaining profit. To gain the profit is the purpose of the corporation. Managers are appointed to repond to this purpose. It is their obligation to maximize the profit. If we simplify the situation, the present value of the future flow of the profits is equal to the total shareholder value or the equity value of the company. Then, we can rightly say that the purpose of the corporation is to maximize shareholder value.
    Now, let’s us proceed to how new theory of value explains distribution (wage rates in particular). The new theory does not use production function like (1). This formulation is awfully contaminated by neoclassical theory of distribution (i.e., marginal theory of distribution). Instead of production function, the new theory assumes that a firm has a production technique to produce a product. (The firm can be multi-product manufacturer). It means that to produce y unit of the product, it requires y u labor and y a1, y a2, … , y aN units of inputs. Schematically we can write this

    (u, a1, a2, … , aN) -> y e(j) , (4)

    where, e(j) signifies a unit of the product. The production may be done by a combination of various works made by various workers of different skills, but we do not enter in this complication. Inputs are composed of different items and assume they are all products of some firms (domestic or foreign). The price of product e(j) is determined by normal cost pricing or

    pj = (1 + mj){ u w + a1 p1+ … + aN pN}, (5)

    where mj is the markup rate for product e(j) and w, p1, p2, … , pN are wage rates and prices of each product. Other pk are determined in a similar way. [In fact this is a system of equations.] If we write in the form (5), people think this is strange, because it seems that the producer firm can price arbitrary high if the firm chooses mj high enough. It is wrong to think so. When mj is higher than the plausible level that is determined by the competitive state, total sales decreases enormously and the profit decreases. The essence of the new theory is that prices do not play the traditionally supposed function in neoclassical economics to make demand and supply equal. Demand and supply (near) equality is realized by producer’s (or seller’s) quantity adjustment. Then, what role do prices play?

    The answer is that they play as guidance to technology improvement. If each firm reduces its unit cost of production, the real wage rate increases (with possible retardation of one or two years). Dynamics of capitalism lies in this dynamic efficiency depends on this price guidance. (See for more details my recent paper in Journal of Evolutionary Economics.) It is the gross error of neoclassical economics that it believed the efficiency of market economy is obtained by allocative efficiency induced by price movements.

    Thus the dynamism of modern capitalism depends on the velocity of production techniques improvement. Now, who brings this improvement? Is it shareholders? They play only a minimal role for the change of production techniques. Those who contribute to the improvement of production techniques are most of time the team of mangers, engineers and workers of the production site.

    When a firm succeed to reduce the unit cost of the product, the top management can distribute the fruit of the improvement among three parties: (1) to the clients by reducing the price, (2) to the workers (including managers and engineers) by raising their wages, and (3) to shareholders by increasing profit. The third part can be used to expand the business, or saved for the time of predicament. This may increase the shareholder value.

    What will happen when the top management omit distributing the fruit of improvement to clients and workers? If the firm keep its product price, its competitor will bring down the price when the unit cost decreases and will take away the clients. If the firm do not compensate their workers, the workers will not try to improve the production techniques. To make continuous improvement in place, it is absolutely necessary to reward the workers on the production site. If all firms continue to distribute all the fruit of improvement, it stops the dynamism of capitalism. If we consider all these effects, Friedman’s thesis is wrong even if we stand on the shareholder’s side.

    As a conclusion, Friedman’s thesis must be replaced by this principle:

    Distribute the fruit of improvement fairly for those who have contributed to the improvement.

    Of course, it is not always easy to determine the weight of contribution of each party. But, at least, this dictum refutes Friedman’s thesis.

    • Blissex
      January 14, 2021 at 4:44 pm

      It is an interesting approach, but a bit ahistoric and with wishful thinking.

      «prices do not play the traditionally supposed function in neoclassical economics to make demand and supply equal. Demand and supply (near) equality is realized by producer’s (or seller’s) quantity adjustment.»

      In the distinct but similar marginalist models by Marshall and Walras, the mythical “equilibrium” is reached by “tatonnement” adjusting either the prices, given the quantities, or the quantities, given the prices.

      «the gross error of neoclassical economics»

      The wishful thinking is that the three “parables” (as described by Samuelson) of J.B. Clark are the accidental product of neoclassical theories, so there is a “gross error” that needs to be corrected.

      But the “parable” that “profit that is the contribution of capital” is not really a random result: in Economics what matters is “internal consistency” of theories with the tradition of Economics, in particular “internal consistency” with that parable, not “external consistency” with how political economies actually work. J.B. Clark even restructured marginalism to exclude the original distinction between economic rents and profits.


      • Yoshinori Shiozawa
        January 15, 2021 at 10:09 am

        Dear Blissex

        are you a Georgist? All references you cite are historical. But arguments on production functions are actually done almost all neoclassical growth theory, be it classical (à la Robert Solow) or new/endogenous (à la Paul Romer) growth theory.
        Both of them received a Nobel Prix. You can imagine how they are influential among mainstream economics. To refute their arguments are probably far more important than you imagine.

        You think my approach is ahistoric and contains a wishful thinking. Probably it contains some wishful thinking, but “ahistoric” characterization does not applies to my approach.

        Have you really read my paper A new framework for analyzing technological change? I have added a subsection 4.6 the title of which is “History-friendly framework”.

        If you like, I can send you the PDF. Please send me a request at y@shiozawa.net

      • Meta Capitalism
        January 15, 2021 at 10:28 am

        You think my approach is ahistoric and contains a wishful thinking. Probably it contains some wishful thinking, but “ahistoric” characterization does not applies to my approach. ~ Shiozawa Unable to See His Ahistoric Horse Blinders

        Indeed Shiozawa’s book and posts on this forum are ahistoric; blind to realities of the progress of of science in many diverse fields ranging from theoretical biology to physics etc., and he is utterly unware of these developments. He uses 1962 citations from Hayek (follow the citations in Hayek to see how he misuses them). He makes superficial (simple minded) appeals to authority taking his sources out of context for self-serving purposes.

      • Yoshinori Shiozawa
        January 15, 2021 at 12:11 pm

        Thank to Meta, I get a new chance to advertise our book again. No need to read the book itself. It has received already three book reviews:
        Mark Lavoie
        Yoshio Inoue
        J. Barkely Rosser, Jr.
        Readers can judge how much of accurateness Meta’s estimation above has.

  10. Ken Zimmerman
    January 2, 2021 at 1:48 pm

    As with his fellow ‘market’ economist, James McGill Buchanan, Milton Friedman was well compensated for his many services to far-right economics in America and the ‘individual rights’ ideology whose only purpose was to keep racism and massive economic inequality a central part of American (and if possible, the world) life. This includes his 1970 article on the social responsibility of business. Friedman was given the Nobel Prize for Economics in 1976 and was the Paul Snowden Russell Distinguished Service Professor of Economics at the University of Chicago from 1962 onward. He, like Buchanan often received the largess of businesses and business organizations and lobbying groups. If Buchanan outlined and justified the resoundingly undemocratic ‘Public Choice’ economics ideology, Friedman pushed it out into virtually every aspect of American life. And he pushed with a glee that remained vivid and unyielding throughout his career. He and Buchanan share another feature as economists. Both spent their career mostly attacking the ‘wrong’ economics and proselytizing the ‘right’ economics (pun very much intended). Research was not their game. A certain version of theory was their game. Their only game. And there is no evidence that either ever considered the wider or long-term consequences of their single-minded pursuit. Fame and fortune were their only compensation (also pun intended).

    In the weird world that rolled from the demented mind of Milton Friedman, it is more appropriate to ask, ‘who owns the state?’ In Friedman’s world it is shareholders. After all they own nothing else. The sovereign in democracy is the people met together to decide their ways of life and ultimately their fate. Following this on through, it is the people as polity that own, have sovereignty over businesses, firms, and corporations, and the economy. Considering the requirements of Buchanan’s and Friedman’s economics both will oppose this position with every ounce of their energy and intellect. And with their allies their opposition has generally been successful. Proving conclusively, in my view that present day American economics is a violent and authoritarian political movement. That will not surrender its power or its advantages voluntarily or peacefully. Essential workers = the wealthy. Essential politics = plutocracy.

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