The Friedman doctrine in the 21st century

The Stigler Center at the Booth Business School of the University of Chicago has just published an e-book commemorating Milton Friedman’s pronouncement on the valuable and virtuous role of modern capitalist corporations. Named after leading neoclassical economist George Stigler, the Stigler Center wanted to honour the work of Milton Friedman in justifying capitalist corporations as a force for good.

For those who don’t know, Milton Friedman was the leading economist of the ‘Chicago School’ in the post-war period and the renowned exponent of ‘monetarism’ ie that inflation of goods and services prices is caused by changes in the quantity of money circulating in an economy.  Friedman was notorious for his support of ‘free markets’, small government and dictatorships (he gave advice to the Pinochet dictatorship in Chile in the 1970s).  See my 2006 review of Friedman’s work in my book, The Great Recession, p119.

What interested the Stigler Center was Friedman’s view on corporations, the form that modern capitalist companies have taken since the late 19th century, replacing most firms directly owned by their managers (family owned or partnerships).  The ‘Friedman doctrine’, as it has been called, says that a firm’s sole responsibility is to its shareholders.  And as such, the goal of the firm is to maximize returns to shareholders.  Corporations are there to maximise profits and that should be their sole aim, without any distractions of ‘social responsibility’ or other ‘external’ concerns. Indeed, if firms or corporations do just that, in the world of free markets, gains to the whole community will follow: “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (Friedman).

The Stigler book aims to defend and promote Friedman’s characterisation of the aim of capitalist corporations. But it also contains essays by those who disagree.  I won’t discuss the details of the essays defending Friedman’s doctrine; I prefer to look at the arguments of those who disagree. But let’s start by saying that Friedman is clearly right: the aim of capitalist firms or corporations is to maximise profits for their owners, whether directly owned or through shareholders. And he is right to say that any other motives or aims adopted can only detract from achieving that profit.

Of course, where Friedman is wrong is to assume that capitalism’s drive for profits in a ‘free competitive market’ will benefit all, not just capitalist owners, but workers and the planet. It’s nonsense for defenders of Friedman in the Stigler book, like Kaplan, to conclude that “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.”

But the critics of Friedman’s doctrine from the Keynesian/heterodox economists fall into a trap. Their line, as argued by Martin Wolf and Luigi Zingales, is that Friedman’s doctrine fails because there are no free competitive markets in modern capitalism.  Corporations have become so big that they have become ‘price makers’, not ‘price takers.’  As Wolf puts it, the big corporations do not keep to the rules and regulations for a ‘level playing field’ in markets: “corporations are not rule-takers but rather rule-makers. They play games whose rules they have a big role in creating, via politics.”

The implication of this critique of the Friedman doctrine is that if corporations kept to “the rules”, then capitalism would work for all.  In other words, there is nothing wrong with private corporations producing for profit and exploiting their workers to do so.  The problem is that they have become too big for their boots.  We need to regulate them so that, in making their profits, they all compete fairly with each other and also take into account the “externalities”; ie. the social consequences of their activities.

This critique assumes that competitive capitalism is a ‘good thing’ and works.  But would competitive capitalism, if it existed or were imposed by governmental rules, deliver a ‘fair and just society’?  In the days when ‘competitive capitalism’ supposedly existed, namely in the early 19th century, Friedrich Engels pointed out that free trade and competition in no way provided an equitable and harmonious development of production for the benefit of all.  As Engels argued, while the classical economists offer competition and free trade against the evils of monopoly, they fail to recognise the biggest monopoly of all: the ownership of private property for a few and lack of it for the rest. (See my book, Engels 200). Competitive capitalism did not avoid increased inequality, damage to the environment, extreme exploitation of its workers and regular and recurring crises in investment and production. That was precisely because the capitalist mode of production is for profit (as Friedman says) – and from that, all else flows.

Yes, said, Engels, “competition is based on self-interest and self-interest breeds monopoly.  In short competition passes over into monopoly.”  But that does not mean monopoly is the evil that must be banished and that a return to free markets and competition (within the rules set) would work. This is the trap that some left economists fall into when they talk of the evils of ‘state monopoly capitalism’. It is not monopolies as such, or their ‘capture’ of the state, that is at the heart of the argument against Friedman’s doctrine.  It is capitalism as such: the private ownership of the means of production for profit. This is the strongest critique of Friedman’s justification of the corporation.

Instead, the likes of Martin Wolf or Joseph Stiglitz just want to correct the ‘rules of the game’.  Wolf wants what he calls a good game’ where “companies would not promote junk science on climate and the environment; it is one in which companies would not kill hundreds of thousands of people, by promoting addiction to opiates; it is one in which companies would not lobby for tax systems that let them park vast proportions of their profits in tax havens; it is one in which the financial sector would not lobby for the inadequate capitalisation that causes huge crises; it is one in which copyright would not be extended and extended and extended; it is one in which companies would not seek to neuter an effective competition policy; it is one in which companies would not lobby hard against efforts to limit the adverse social consequences of precarious work; and so on and so forth.”  For Wolf, the task is “how to create good rules of the game on competition, labour, the environment, taxation and so forth.”

This is not only a wrong analysis of modern capitalism; it is utopian in the extreme.  How can any of the above inequities described by Wolf be ended while preserving capitalism and the corporations?  We only have to consider the never-ending story of banking folk and their connivance with the corporations to hide their profits from national governments.  According to the Tax Justice Network, multinational firms shifted more than $700billion in profits to tax havens in 2017 and this shifting reduced global corporate tax receipts for national governments by close to 10%.

Carbon-emitting fossil fuel corporations have shifted billions of profits into various tax havens. In 2018 and 2019, Shell earned more than $2.7 billion – about 7% of its total income in those years – tax-free by reporting profits in companies located in Bermuda and the Bahamas that employed just 39 people and generated the bulk of their revenue from other Shell entities. If this oil-and-gas major had booked the profits through its headquarters in the Netherlands, it could have faced a tax bill of about $700 million based on the Dutch corporate tax rate of 25%.

And then there are the FAANGS, the big tech corporations which have amassed huge profits during the COVID-19 pandemic while many small companies go to the wall.  They dominate software and distribution technology through intellectual property copyrights and suck up any competition.  Governments around the world are now considering how to regulate these giants and bring them under the “rules of the game”. The talk is of breaking up these ‘monopolies’ into smaller competitive units.  I’m sure that Friedman would have approved of this solution as part of his ‘doctrine’.

But would it solve anything really? More than a century ago, US antitrust regulators ordered the break-up of Standard Oil. The company had grown into an industrial empire that produced more than 90 per cent of America’s refined oil output.  The company was broken up into 34 ‘smaller’ companies.  They still exist today.  They are named Exxon Mobil, BP and Chevron.  Do Wolf, Stiglitz and opponents of ‘monopoly capitalism’ really reckon that the ‘Standard Oil’ solution has ended the ‘irregularities’ of the oil corporations, improved their ‘social responsibilities’ and environmental safeguards globally?  Do they really think ‘stakeholder capitalism’ can replace the corporation and do the trick? Regulation and the restoration of competition won’t work because all it means is that Friedman’s doctrine continues to operate.

12 thoughts on “The Friedman doctrine in the 21st century

  1. Hi Mike, I know that in the past you have written at least one article with suggestions/proposals for a transition to a socialist Europe. So I want to ask you, if it is easy for you, to mail it to me because I do not find it in my files.Thanks alot Kostas Kalloniatis from Athens

  2. «It is not monopolies as such, or their ‘capture’ of the state, that is at the heart of the argument against Friedman’s doctrine. It is capitalism as such: the private ownership of the means of production for profit.»

    That’s a bit simplistic, and I’ll try to explain the marxian view, which is more subtle than that, as I understand it (and I am not arguing whether it is right or wrong, just trying to summarise it):

    * In order to run an industrial system of production some form of capitalism is *inevitable*.

    * The capitalism corporations that run the industrial system are a strongly progressive social force, superseding feudalism and creating wonders of ingenuity and productivity.

    * In private ownership capitalism both capitalists and free workers have private property: the capitalists of the means of production but not labour, and free workers of labour but not the means of production.

    * Because there the means of production are relatively scarcer than labour, capitalists can exploit free workers, that is free workers are price takers (“like one who is bringing his own hide to market and has nothing to expect but — a hiding”, “Big industry constantly requires a reserve army of unemployed workers”, “the general movements of wages are exclusively regulated by the expansion and contraction of the industrial reserve army”, “Relative surplus-population is therefore the pivot upon which the law of demand and supply of labour works”, which all are similar to the earlier arguments by Bernard de Mandeville).

    * If there labour were relatively scarcer than the means of production (which has happened in history e.g. after plagues) then free workers would be able to exploit the capitalists.

    * Because as a rule (with exceptions) the means of production are relatively scarcer than labour, the only way to prevent the exploitation of free workers is to ensure that the means of production are owned by the free workers collectively, so the rent from their own exploitation goes to themselves.

    * Capitalism where free workers have the private property of their labour and the shared property of the means of production is called “socialism”.

    The crucial point of the marxian argument is that while in abstract capitalists and free workers could both be price takers (and sometimes it happens that free workers are price makers and capitalists price takers), that happens so rarely that it can be disregarded. The rule is that the owners of the means of production are price makers and therefore the private ownership of the means of production by a few is as a rule exploitative.

    The argument that I often make to die hard “marxists” (and K Marx explicitly denied being a “marxist”) is then:

    * Given that private ownership capitalism is the current system, and according to marxian insights (“historical materialism”) that is the inevitable result of the current system of production, what should free workers do while waiting for the equally inevitable transition to a different system of production that will give rise to the shared ownership of the means of production?

    * Related to that, given that in private ownership capitalism the exploitation of workers is pretty much the norm, isn’t it quite important the *degree* of exploitation?

    * Isn’t the degree of exploitation related to how much the capitalists are price takers, and therefore isn’t in the interests of free workers for as much competition between capitalists as possible to reduce the degree of that exploitation?

  3. If legacy is everything, which it is, then the million strong demonstrations in Chile in 2019 (Estallido social) were the nails in the coffin for Friedman and his fellow thieves masquerading as economists. We need to understand monopolies from the point of view of the working class. Bring on the monopolies. It is easier and more efficient to expropriate handfuls of large corporations than it is to expropriate and convert hundreds of smaller enterprises. One point to note. The more developed financial markets the quicker start ups can emerge as large scale monopolies. This is the story of high tech which now dominates the stock markets, and they did so without having to blow up their competitors, as standard oil once did.

    1. The ease with murderous economic creeps like Friedman (whose economics is really the violent economics of imperialism) is esposed, really exposes the meandering left’s disconnect–not only from the mass of working people in the West, who are cooly being digitalized into penury, but from the masses of the Global South, whose miserably paid and unpaid labor made (and still makes) the whole bloddy business possible.

  4. “companies would not promote junk science on climate and the environment; it is one in which companies would not kill hundreds of thousands of people”

    Martin Wolf another worthless talking head, Immediately disqualified with that statement.
    These crooks are so infuriating with how confidently wrong they are about everything.

    The oil industry knew about climate change since the mid-late 70s.

    Indeed the history of climate change science goes back at least to the early 20th century. Nobody should pretend this is all a result of “capitalism gone bad” unless they are also willing to accept capitalism was “bad” right from the beginning.,_1896

    If 20th century capitalism didn’t care then, why would 21st century capitalism care now or ever?
    Right they’ll only care, some of them anyway, when it becomes a catastrophe far too late to do anything about.

  5. The great insight – from Engels via Roberts above – which is getting more and more evident here in Sweden is that privatizing is a way to move a business over the border to a monopolistic society of competitiors. All of them “engage in activities designed to increase its profits”. And as those firms control more and more of the political parties agendas the small remaining part of the business which is directly controlled by some sort of democratic society only keep the taxes up. Without inciting the privateers to keep up to standard. Not even by being an example. The number of elderly people that has died in Covid proved that.

  6. Friedman, Hadas Thier and the ‘’ McGoogleAmazon ’’
    ‘’The talk is of breaking up these‘ monopolies ’into smaller competitive units. I’m sure that Friedman would have approved of this solution as part of his ‘doctrine’. ’’
    Friedman and all liberals today would support this type of measure, right. Without realizing that by doing so they would simply be burying their model of markets in free competition by admitting that their model, which supposedly gives a growing number of bidding companies, needs the presence of an external regulator, the State, to stop the real monopolization of the markets. But Friedman do not realize that states are already quintessential monopolists. That the State is already a growing monopolist derived and emerged from a historical market in free competition. And that without the existence of the current State, another company, the 1st of today’s capitalists, would take its place. The dominant private monopoly ‘McGoogleAmazon’ that Hadas Thier fears in his book‘ ’Popular Guide to Capitalism’ ’is no distant fiction. That is to say, the economy tends just the opposite of Friedman’s model. It tends to the concentration of capital. Friedman and the Chicago School were ultimately just unscientific advocates of a utopia. Of a utopia, in which, in addition, labor exploitation would be allowed.

  7. There are those of us right here in the US who have never forgotten Friedman’s “Chicago Boys” alliance with Pinochet. Some of us anticipated it, recognizing the ideology of “free markets” simply as the cover for murderous assaults on workers.

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