by 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
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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.