Milton Friedman is one of the giants of modern Economic thought and one of his big contributions (it seems to me) has been his explanation of why corporations should not be bound by any moral code.
He is the guy, or at least one of the guys, who promoted the idea that the only measure of success is profit. In fact he went so far as to say that the only social responsibility that a company has is to use its resources to create maximum wealth for its shareholders.
But don’t get mad yet, most of his arguments for this point of view actually seem pretty good.
However, there is one massive problem with what he is saying: he relies on the assumption that shareholders even have the right to maximum profits, in the first place.
Now the first thing you need to know that in his landmark essay about the topic (linked above) Friedman consistently points out that it is the responsibility of government to create laws that prevent businesses from behaving badly, and it is the responsibility of business to obey those laws when they are enforced.
He either didn’t know, or didn’t care, that the laws in his native America are heavily influenced by business, which completely corrupts these dual roles. This occurs through the use of lobbyists, bribes and through the hiring to oversight groups of business people, so that they end up policing their own businesses.
Secondly, he either didn’t know, or didn’t care, that many companies laugh loudly at the idea that they should obey laws that the government cannot enforce.
Look at Trafigura. They dumped tons of toxic waste in Cote d’Ivoire, and put 100 000 people in the hospital. They also used their lawyers and the UK’s ridiculous libel laws to force the BBC, and others, to not tell anyone about it.
Thanks to Twitter and Wikileaks the story got out anyway, but I digress.
Friedman’s argument thus relies on the idea that corporate action will be constrained by outside forces that will ensure that it is moral and remains within certain limits that are set by society and government. If this were true then his argument would be pretty unassailable. But, as I’ve just mentioned, this is not true. In fact I don’t think it has ever been true.
Friedman goes on to say that if a company’s CEO decides to reduce profits for ethical reasons then she is, in effect, stealing money from the shareholders. After all, the shareholders have a right to the return on their investments. To deny them that money after they have invested it in good faith is nothing short of theft! And then you’re no better than Bernie Madoff!
But there is a problem with the assumptions of that argument, and like most philosophical flaws, particularly in economics, it is hard to see it because it occurs off screen. If you look at the argument in the above paragraph there doesn’t seem to be anything wrong with what is in it.
But there is something seriously wrong with what has been left out of it, because Friedman is assuming that the shareholders even have a right to those profits in the first place.
This might be difficult for me to explain (stupid words!) so stick with me. Friedman is essentially describing the world of business as if it occurs in a moral vacuum. In other words he is trying to say that nothing that happens in business could possibly be immoral.
Now for him this makes sense. Remember: he has already said that it is the responsibility of government to enforce rules over businesses and keep them in line. He is assuming that this function will be performed, and thus he is assuming that everything that a business does will occur within a clearly defined moral space, that has been restricted by the government to ensure that no business does anything evil.
But, as I’ve pointed out above, this is not the case. Businesses frequently flout morals, ethics and laws in search of a profit.
Friedman is assuming that the right of the shareholders to make a profit is the most important moral virtue in play, because he is assuming that it is the only moral virtue in play.
So let’s go back to the Trafigura example. The only way that Friedman’s ideals make sense in this case is if we assume that the shareholders’ right to make a profit is more important than the victims’ right to not be poisoned to death.
I think that the foolishness of this point is obvious, but in case it isn’t let’s think about this: why don’t we all become drug dealers?
I mean in Friedman’s way of looking at the world it is the perfect business, right? Low overheads, high markup, no conceivable way in which demand could decrease, few players in the market and so on. It’s a goddamn goldmine!
After all the only “flaws” in drug dealing are the moral and legal issues. The legal ones aren’t a problem because you can get your workers to take all the risks, and the moral ones aren’t a problem because, according to Friedman, they don’t actually exist.
My point is this: the belief that business occurs in a morally-neutral space is simply incorrect. Friedman is wrong about CEOs not being allowed to make moral decisions because he is wrong to assume that shareholders have a right to maximum profits, at the expense of other’s rights.
So if you’re a capitalist and you’re reading this don’t you think it’s time you quit the rat race, and joined the crack race? ;)
[Standard Disclaimer: this post was entirely my own opinion and was not paid for in any way, directly or otherwise, by anyone or anything that stands to gain in any way from the ideas expressed herein.]