Milton Friedman and the New Attack on Freedom to Choose

By Richard M. Ebeling. Excerpt:

"This, now, gets us to the recent criticisms of Friedman and his arguments in “The Social Responsibility of Business” article, which is marking its half-century anniversary. The New York Times brought together a symposium of contributors made up of almost two dozen prominent corporate executives, think tank analysts and high profile “politically correct” economists, practically all of whom condemn, ridicule, and reject most if not all of Friedman’s case. 

One chief executive, Marc Benioff, accused Friedman of “brainwashing” an entire generation of businessmen to ignore their responsibilities to the wider society in which they do their business. He calls for a “stakeholder” capitalism that encompasses not only the company’s shareholders but also “employees, customers, communities, and the planet.” 

What does that mean in the concrete? Well, as far as Starbucks’ emeritus chairman, Howard Schultz, is concerned that means company-provided health care for part-time workers, tuition-free college education for employees, requiring workers to do neighborhood volunteering, and providing jobs to “impoverished youths” regardless of skills, experience or the company’s requirements. He insists on companies pursuing a “moral purpose” rather than profits. 

Harvard University economist Oliver Hart asks what if a shareholder does not like that a company into which he is invested makes and sells “military-style rifles,” and he cannot persuade enough of his fellow shareholders to change what the firm produces? It does not seem to enter his mind that the shareholder in question could choose to sell his shares and not be financially involved with such an enterprise rather than social bullying to get this and other companies to stop making firearms instead of what he considers to be the pursuit of desirable “environmental and social goals.”   

Erika Karp, chief executive of Cornerstone Capital Group wants companies to follow a “holistic” approach rather than simply profit maximization. Businesses should follow the guidelines of “Environmental, Social and Governance” (E.S.G.) standards. If you are wondering what that is, an answer is given in a different article that appeared about the same time as the New York Times symposium, this one in Fortune magazine (September 13, 2020) on, “50 years later, Milton Friedman’s shareholder doctrine is dead ,” by Colin Mayer, Leo Strine, and Jaap Winter.

Mandating Social Responsibility by Political Pressure and Power

The authors tell us that what is needed is a “renewal” of “the promise of the New Deal,” with “protections for workers, the environment,” and with America moving closer to the “Scandinavian” model of a more intensive social welfare state. Corporate internal rules and regulations must be transformed “to give fair consideration to stakeholders and to temper the need to put profit above all other values.” 

Corporate structures should be rewritten to make them into “public benefit corporations” (as Elizabeth Warren has proposed); that is, companies should be mandated to serve purposes and interests other than mere “profits.” Failure to do so would allow “courts to issue orders, such as injunctions, holding corporations to their stakeholder and societal obligations.” The authors insist that they advocate all this “to save our capitalist system.” Cumulatively what the New York Times and Fortune contributors are calling for is nothing less than the demise of what remains of any freedom for us to choose as consumers, investors and enterprisers. 

The Important Role of Market-Oriented Corporate Enterprise

In the narratives of these critics, the American corporation is too big and too powerful a villain in their tale. Lost and hardly mentioned is that individuals form voluntary business associations under the corporate heading to pool investable resources as well as the risk from doing so through limited liability. It has facilitated the formation of capital and production that has benefited all in society in terms of the quantities, qualities and cost competitiveness of much that is taken for granted by us as consumers in the marketplace. 

As economist Robert Hessen said in In Defense of the Corporation (1979):

“Combining the capital of millions of investors and the talents of millions of workers, giant corporations are a testament to the ability of free men, motivated by self-interest, to engage in sustained, large-scale, peaceful cooperation for their mutual benefit and enrichment. As a result, Americans today enjoy a standard of living – of luxury, leisure, and longevity – that is unprecedented in world history . . .  

“A business, no matter how large, cannot force anyone to work for it, to buy its products, or to invest in it; it cannot conscript capital and manpower or tax a person to pay for a service he neither wants nor uses . . .

“Many companies are shielded from both domestic and foreign competition by means of subsidies, loan guarantees, protective tariffs, import quotas, and arbitrary licensing requirements. These restrictions can be created and sustained only by political power – by invoking the threat of governmental intervention to forbid or penalize various forms of production and trade . . . Corporate power is to be feared only when it involves attempts to secure favors and achieve results that could never be obtained in a free market.” (pp. xi and 109-111)

Corporate Social Responsibility Equals Socialization of Business

What the corporate social responsibility proponents, especially in the E.S.G. framework, threaten is the full and complete “socialization” of business under the supervision and ultimate control of government. It is pertinent that in his 1970 article Milton Friedman referred to the social responsibility of business models as “socialism.” It is no longer individuals voluntarily and peacefully coming together to form and work within private enterprises, and deciding what products or services to produce and supply as the market means of honestly earning profits through the successful provisioning of their fellow human beings in their role as consumers within the arena of competitive and cooperative exchange.  

No, it is “stakeholders,” meaning ideological busybodies, special interest groups with political axes to grind, and those who simply want to make others do under intimidation and force what they cannot get them to do – as consumers or producers – through reason and persuasion in the free marketplace, who will determine what, why and how things are produced. Investment decision-making, production, employment, marketing and sales all become political matters of pull and plunder between competing groups wanting to coercively make others act in ways differently than those others would if not compelled or prohibited from doing so. 

Should more of the private enterprise’s resources be invested in hiring unqualified workers at wages no longer reflecting the market-based supply and demand for that type of employee? “At the margin,” should the corporation devote more financial expenditures to sensitivity training about race and gender discrimination or on community outreach concerning climate change education along with monies dispensed for the widening of bicycle paths? There are no market-guiding correct or more objective answers to these questions. There is only political power in the changing currents of ideological fashion and fancy in the ongoing game of “democratic” politics.

Throwing Overboard the Rationality of Profit and Loss

In the market arena of profit and loss and competitive prices, the answers to business decision-making still have degrees of prospective uncertainties concerning the future. But it is easier to evaluate whether an advertising strategy is meeting revenue expectations; whether one department or division of the company is financially doing better than another; and whether investments should be expanded in one part of the company and reduced in some other due to the profit earning potentials; and whether workers hired seem to be supplying value-added relative to the market wage that must be paid to them given their competitively determined opportunity costs of employment.

Once a market-based profit-maximization approach is discarded for the “social responsibility” paradigm of business decision-making, all such rational economic calculations increasingly disappear. They are replaced with power, political pull and social pressures in influencing and dictating how the scarce resources of such private enterprises are used in directing their activities. This, in fact, represents the abolition of the market system and its replacement with forms of pressure group political planning of economic affairs. To use a phrase that Ludwig von Mises employed as the title to one of his shorter works, we are left with, de facto, “Planned Chaos,” in the name of political correctness in the business world. 

Production is no longer directed to producing and supplying what private enterprisers anticipate being the more highly valued and demanded goods by the consuming public. Production is no longer guided by the goal of minimizing expenses to get the most out of the scarce means of production, so as to satisfy as many of the wants and desires of all of us in society as seems possible through the actions of profit-pursuing entrepreneurs and executives steering corporate enterprise activities. 

The consuming public, which means all of us, become captives to whatever segments of the society in their role as ideological busybodies and political power lusters can successfully impose on the supply-sides of the marketplace to fulfill their collectivist and coercing dreams of what the world should look like, if only everyone thought like them.  

Joseph Stiglitz’s Rejection of a Free Market System

The worst of these voices among the participants in that New York Times symposium of critics of Milton Friedman’s 1970 article is, without a doubt, Columbia University economist and Nobel Prize recipient, Joseph Stiglitz. Not only does he disagree with Friedman’s argument for profit-maximizing as a primary goal in business (and in the process calling Friedman a mere “conservative ideologue”), he rejects the very idea that markets work! He insists that everything that economists have said since Adam Smith about the “invisible hand” of self-regulating and self-coordinating markets is false. If people have imperfect knowledge and if less than perfect markets for risk exist in society, then markets will fail because people will make mistakes and be able to take advantage of situations that may not assure perfect “social welfare” outcomes benefiting everyone.

Stiglitz is a captive of what is known as the “perfect competition” model of a market economy, in which everyone is presumed to possess perfect or sufficient knowledge to never make mistakes in their roles as consumers and producers, and in which every conceivable market fully and perfectly exists to cover any and all forms of uncertainty and contingency. Stiglitz looks around the world and is clearly “shocked” to discover that people do not possess perfect knowledge, and either do not or cannot guard themselves against every conceivable contingency in their contractual arrangements. He proceeds, therefore, to shout, “market failure.” 

Stiglitz’s immediate response then follows: Government must regulate, restrict, direct, prohibit or guarantee seemingly almost everything. Why? Because in ways that he never fully explains or justifies, he has absolute confidence that those in government – of course, advised by people like himself – can successfully make all the right decisions on “fair” wages, “optimal” productions, “rational” uses of resources to satisfy “socially necessary” needs, while “saving” the planet and overcoming all the injustices of everyday life. 

How it is that those in political power somehow overcome the “knowledge problems” that the rest of humanity seems unable to solve and sufficiently handle is something that Stiglitz chooses to glaze over. Of course, government can do harm, but that is reserved for those instances in which government fails to do what Joseph Stiglitz considers best for all of humanity. Thank goodness that we have at least one person among us with such magnanimous generosity in his heart, combined with the extraordinary wisdom to know what is right for all of us. 

Stiglitz as Adam Smith’s “Man of System” Who Wants to Plan Society  

Perhaps Stiglitz’s slighting of Adam Smith is due to seeing too much of himself in Smith’s warning observation in The Wealth of Nations ( Canaan ed., [1776] 1937) that,

“The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which can safely to trusted, not only to no single person, but to no council or senate whatever, and which would never be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.” (p. 423)

We see in Joseph Stiglitz’s mindset what Adam Smith referred to in his earlier work, The Theory of Moral Sentiments ([1759] 1853) as “the man of system,” or what today we would call the social engineer or the political paternalist who believes he knows how society should be arranged:

“The man of system, on the contrary, is apt to be very wise in his own conceit, and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it . . . He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon the chess-board; he does not consider that the pieces on the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it . . . It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him, and not he to them.” (pp. 342-343)

Markets and Prices Overcome Human Imperfections

The fact is, as Friedrich A. Hayek (1899-1992), also a Nobel Prize recipient, demonstrated 75 years ago in his famous article, “The Use of Knowledge is Society,” (1945), it is precisely the fact that each of us inescapably has imperfect knowledge about so many others and their activities in the wide world, including what they might want as consumers and their potentials as producers, that competitive market prices serve as the communication device that summarizes the minimum amount of information about relevant demands and supplies that enables each of us to have a reasonable and often successful chance to coordinate all that we might do with the plans and actions of all the billions of others participating in the, now, world-encompassing market system of division of labor. (See my articles, “Capitalism and Asymmetric Information” and “Capitalism and the Misunderstanding of Monopoly” and “Capitalism and How Expectations Coordinate Markets”.)

With amazing effectiveness and efficiency markets “do their job,” in bringing the talents, abilities, knowledge, and creative discovery and innovative imagination of humanity into the service of all of us each and every day – at least as long as those markets are sufficiently left free of government’s intervening and disrupting hand. When markets seem to “fail,” better understanding can be had if one looks around and sees that almost always it has been due to the regulating, manipulating and redistributing policies of the government. The financial crisis of 2008-2009 and the recent government lockdown-decreed response to the coronavirus with the resulting recession are among the damaging examples of this. (See my articles, “Ten Years On: Recession, Recovery, and the Regulatory State” and “Tragedies of Our Time: Pandemic, Planning and Racial Politics”.) 

If the paternalistic policies and the ideological arrogance and intolerance behind these counterrevolutionaries against freedom and the free market fully prevail, the liberty that we still possess will be even more greatly curtailed than at present, as those who call for the “social responsibility” of business restrict our remaining freedom to choose. This is not just a renewed attack against corporate or business decision-making guided by the profit motive. It is an onslaught against the liberty of each and every one of us to direct and manage our own lives as we think best in peaceful and voluntary cooperation with all others inside and outside of the marketplace."