The Friedman Doctrine in the XNUMXst Century

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By MICHAEL ROBERTS*

Competitive capitalism has not avoided rising inequality, damage to the environment, extreme exploitation of its workers, and regular and recurrent investment crises.

O Stigler Center from the University of Chicago has just published an electronic book on a thesis by Milton Friedman that deals with the valuable and virtuous role of modern capitalist corporations. Named after the leading neoclassical economist George Stigler, the Stigler Center intended to honor Milton Friedman's work in justifying capitalist corporations as forces for good in society.

For those who don't know, Milton Friedman was the leading postwar Chicago School economist, a renowned exponent of monetarism. This theory says that inflation in the prices of goods and services is caused by changes in the amount of money circulating in the economy. Friedman was noted for his support of the “free market,” that is, small government and dictatorships (he was Pinochet's adviser in Chile in the 1970s).

What interests the Stigler Center is to emphasize Friedman's vision of corporations, the form that capitalist companies have assumed since the end of the XNUMXth century, replacing companies owned directly by their managers (family or partnerships). The “Friedman Doctrine,” as it has been called, states that a company's only responsibility is to its shareholders. And, as such, its objective is to maximize the return to shareholders. Corporations exist to maximize profits and that should be their only objective, without any distractions with issues such as “social responsibility” or “environment”. In fact, if companies or corporations behave like this in the world of free markets, there will be gains for the whole community: “There is one and only one corporate social responsibility” – said Friedman –: “we will use their resources and get involved in activities designed to to increase your profits; the only restriction is that they remain within the rules of the game, i.e. engage in open and free competition without deceit or fraud.”.

Stigler's book aims to defend and promote the way in which Friedman characterized the central goal of capitalist corporations. But it also contains essays by those who disagree with this position. I will not discuss here the details of the essays that defend Friedman's doctrine. I prefer to look at the arguments of those who disagree with him. But let's start by saying that Friedman is clearly right: the objective of capitalist companies or corporations is to maximize profits for their owners, whether those who retain direct ownership or as shareholders. And he is right in saying that any other motives or objects adopted can only harm the attainment of that profit.

Of course, where Friedman is wrong is apologetically assuming that capitalism's drive for profits in a "free competitive market" will benefit everyone, not just capitalist landlords, but workers and the planet as well. It is absurd that Friedman's defenders in Stigler's book, such as Kaplan, conclude that “Friedman was right on that point. A world in which companies maximize shareholder value has been immensely productive and successful over the past 50 years. Consequently, businesses must continue to maximize shareholder value as long as they stay within the rules of the game. Any other goal encourages disorder, disinvestment, government interference and, ultimately, decline.”

But criticisms of Friedman's doctrine by Keynesian/heterodox economists fall into a trap. As argued by Martin Wolf and Luigi Zingales, Friedman's doctrine fails because there are no free competitive markets in modern capitalism. Corporations have become so large that they have become “price makers” rather than “price takers”. According to Wolf, large corporations do not abide by the rules and regulations necessary for markets to be a “level playing field”: “Corporations are not rule-takers, but rule-makers. They play games whose rules they have created in part through politics.”

The implication of these criticisms of Friedman's doctrine is that if corporations followed "the rules," capitalism would work for everyone. In other words, there is nothing wrong with private companies producing for profit and exploiting their workers for that purpose. The problem is, your feet are too big for the perfect competition boots. It is only necessary to regulate them so that, in obtaining their profits, they compete fairly with each other, also taking into account the “externalities”, that is, the social consequences of their activities.

This critique assumes that competitive capitalism is a “good thing” and that it works. But would this capitalism, if it existed or was imposed by government rules, generate a “just and good society”? At the time when this "competitive capitalism" supposedly existed, i.e. in the early to mid-nineteenth century, Friedrich Engels pointed out that free trade, like competition, in no way produced an equitable and harmonious development of production for the benefit of of all.

As this author has argued, although classical economists had preached competition and free trade against the evils of monopoly, they failed to recognize the greatest monopoly of all: the exclusivity of private ownership of the means of production for some and the lack of it for the rest. vast majority. Competitive capitalism has not avoided rising inequality, damage to the environment, extreme exploitation of its workers, and regular and recurrent crises of investment and thus production. And this occurs precisely because the capitalist mode of production aims at profit, as Friedman claims. That's where it all comes from.

Yes, said Engels, “competition is based on monopoly and self-interest. But competition turns into monopoly.” Now, this does not mean that monopoly is evil and that it should be banned so that there is a return to free markets and competition (within established rules), under the assumption that in this way everything would work properly. This is the trap into which some leftist economists fall when they speak of the evils of “state monopoly capitalism”. It is not monopolies as such, or their “capture” by the state, that should be at the heart of the critique of Friedman's doctrine. It is capitalism as such that must be targeted: profit-oriented private ownership of the means of production is the problem. This is the most decisive critique of Milton Friedman's defense of modern corporations.

Instead, authors like Martin Wolf or Joseph Stiglitz just want to correct the “rules of the game”. The first wants to institutionalize what he calls a “good game” in which polluting companies would stop promoting “scientific garbage” about the climate and the environment. So, he says, these “companies wouldn't kill hundreds of thousands of people by promoting opiate addiction; they would not lobby for tax systems that would allow them to place theirs in tax havens; the financial sector would not lobby for the inadequate capitalization that causes big bubbles; copyright law would not be extended and extended and extended; companies would not seek to neutralize an effective competition policy; would not lobby strongly against efforts to limit the adverse social consequences of precarious work; and so on." For Wolf, the task is simply to know “how to create good rules of the game about competition, work, the environment, taxation and so on”.

All of this is not just a misinterpretation of the nature of modern capitalism; it is, in fact, an extreme utopia. How can any of the inequalities described above by Wolf be eliminated by preserving capitalism and corporations? Just keep in mind the endless reports about people in the financial sector colluding with corporations to hide their own profits from national governments. According to the Tax Justice Network, multinational corporations transferred more than $700 billion in profits to tax havens in 2017, and this criminal action reduced global corporate tax revenues for national governments by around 10%.

Carbon-emitting fossil fuel corporations have shifted billions of profits to various tax havens. In 2018 and 2019, Shell earned more than $2,7 billion – about 7% of its total revenue for those years – tax-free, reporting profits on companies located in Bermuda and the Bahamas that employed just 39 people and generated the most of its revenues from other Shell units. If this large oil and gas company had booked profits through its headquarters in the Netherlands, it could have faced a tax bill of around $700 million based on the 25% Dutch corporate tax rate.

And then there are the FAANGS – Facebook, Amazon, Apple, Netflix and Google – the big tech corporations that amassed huge profits during the COVID-19 pandemic while many smaller companies went bankrupt. They dominate the field of software and technology through intellectual property rights, thereby eliminating any competition. Governments around the world are now considering how to regulate these giants to bring them under the “rules of the game”. They seek to divide these “monopolies” into smaller competitive units so that there is competition. I am sure that Friedman, with his “libertarian” doctrine, would have approved of this solution.

But would that really solve anything? More than a century ago, US antitrust regulators ordered Standard Oil to break up. The company had grown into an industrial empire that produced over 90% of America's refined petroleum output. The company was divided into 34 “smaller” companies. They still exist today. They are now called by the names of Exxon Mobil, BP, Chevron etc. Wolf and Stiglitz, as well as the opponents of “monopoly capitalism”, really think that the solution given to the “Standard Oil” problem ended with the “irregularities” practiced by the oil corporations, promoted their “social responsibilities”, as well as forced them to take better care of the environment, globally? Do they really think that “stakeholder capitalism” can replace the corporation, thus working magic? Regulation and restoration of competition will not work; Now that just means that Friedman's true doctrine will continue to operate in practice.[1].

*Michael Roberts is an economist. Author, among other books, of The Great Recession: A Marxist View.

Translation: Eleutério Prado

Originally published on The next recession blog.

 

Translator's note


[1] For one thing is what this doctrine explicitly means, another is what it actually says by implication. Milton Friedman has always been the most cynical of economists.

 

 

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