This article first appeared in Forum, The Edge Malaysia Weekly on October 5, 2020 - October 11, 2020

Milton Friedman’s libertarian economics advocating shareholder capitalism has influenced generations trying to understand the economy, not only in the US, but all over the world.

He was not just an academic economist, but an enormously influential celebrity conservative ideologue who legitimised ideas for the like-minded, including the belief that “greed is good”. Now, shareholder capitalism’s consequences haunt the world and threaten humanity with stagnation and self-destruction.

In 1962, Friedman published his most influential book, Capitalism and Freedom. In September 1970, The New York Times Magazine published his essay, “The Social Responsibility of Business is to Increase Its Profits”. The 50th anniversary of its publication has triggered an international debate of its contemporary significance, especially with the resurgence of ethno-populist jingoism embracing his neoliberal economic agenda.

The article, reiterating the Friedman Doctrine, presuming perfectly functioning markets that only exist in the minds and writings of some economists, is a manifesto for American shareholder capitalism. It inspired the counter-revolution against Keynesianism, development economics and other state interventions.

The word “competition” appears only once, in the last sentence. Yet, some supporters insist that Friedman was not “pro-business” but, rather, “pro-market”. But, unlike capitalism, the market has been with us for several millennia and has happily co-existed with unfreedoms of various types.

Perfect competition rarely exists due to inherent tendencies undermining it. Hence, the various challenges to Friedmanite wisdom. For half a century, information and behavioural economics have challenged his many assumptions, certainly much more than the Austrian School advocacy and defence of capitalism.

Thus, Friedman conveniently ignored “market imperfections” in the real world, although — or perhaps because — they undermined the empirical bases for his reasoning. So, even if Friedman’s logic was true, reality prevents profit-maximising firm behaviour from maximising societal welfare, if not cause the converse.

Meanwhile, Friedman’s monetarist economics has been discredited, and has little practical influence anymore, especially with the turn to unconventional monetary policies, particularly after the 2008-2009 global financial crisis. Yet, his ideological sway remains strong as it serves powerful interests.

Friedman’s 1970 essay remains influential in the world, and has long served as the mainstream manifesto on corporate governance. Even then, Friedman denounced dissenting CEOs as “unwitting puppets of the intellectual forces that have been undermining the basis of a free society”.

Generations of Friedmanites have insisted that “the only business of business is business” and their sole responsibility to society is to make money. He emphasised: ‘‘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.’’

When Friedman insisted “make as much money as possible while conforming to the basic rules of the society”, he may have presumed that market imperfections do not exist, or were fully addressed by the “minimal” state, although it is well-known that the rule of law has never been adequate to the challenge.

His singular focus on maximising profits for shareholders justified ignoring all problems due to corporate practices. The doctrine thus absolved the firm of social responsibility. It justified and encouraged generations of corporate leaders committed to the primacy of “shareholder value”. Almost like religion, this thinking became the hegemonic ideology, legitimising “greed is good” behaviour.

Friedman’s ideology spread throughout the world with the neoliberal counter-revolution from the 1980s.

Unsurprisingly, the neoliberal economists’ claims have been discredited by the failure of their policies to significantly increase investments in the real economy in recent decades. And without sufficient investments to enhance productivity, growth has declined, if not stagnated, while dimming future economic prospects. With labour incomes declining relatively, if not absolutely, consumer spending has declined, reducing aggregate demand while feeding a vicious circle of stagnation.

Meanwhile, deregulatory initiatives have not increased real investments and output growth. Market finance ideology claims that the stock market can best allocate investment resources among companies. But share buybacks imply that US corporations have no better investment options than to further raise already high, over-valued financial asset prices, thus reducing resources for real investments and future growth.

The Friedman doctrine also celebrated and justified short-termism, and undermining protection for employees and the environment to maximise shareholder value by increasing corporate profits. This type of capitalism has spread throughout the world with the neoliberal counter-revolution since the 1980s.

“Getting government out of the way”, the neoliberal free market mantra, was supposed to boost private investments. But more handsome corporate profits due to cost savings — from weaker anti-trust and other regulations, lower wages and taxes — have not significantly increased real investments in the US.

The 2007-2009 US financial crisis exposed some problems of short-termism, particularly related to financialisation and shareholder value extraction. The crisis cast doubt on Friedman’s legacy and its implications, encouraging new challenges to corporate governance norms and regulations.

Friedman would have us believe that power and politics are not exercised in free markets. But this ostensible insulation of politics from supposedly power-free markets is a fiction which thoughtful Friedmanites knew only too well, not least from their own advocacy, behaviour and conduct.

All markets are shaped by various historical and contemporary influences — economic, cultural, social and political. These are often driven by business and other lobbies. Thus, politics, collective action and advocacy shape policies in terms of design, implementation and enforcement.

To be fair, Friedman’s view of politics and business seems contradictory. His writings argue that business should stay out of politics, and not use shareholder money to influence politics. But he is remarkably understanding when it happens.

“I can’t blame a businessman who goes to Washington and tries to get special privileges for his company. If the rules of the game are that you go to Washington to get a special privilege, I can’t blame him for doing that. Blame the rest of us for being so foolish as to let him get away with it.”

Former president Bill Clinton’s labour secretary Robert Reich has argued that larger US corporations have acquired so much influence over government that it is undermining US democracy. Instead, he argues for public financing of electoral campaigns while curbing corporate influence, for example, lobbying and campaign spending.

He cites an old study of 1,779 policy issues during 1981-2002 which found lawmakers acceding to the demands of big businesses with the most lobbying capabilities while the average American had “only a miniscule, near-zero, statistically non-significant impact upon public policy”.

With the Citizens United ruling in the new century, the US Supreme Court has legally enabled powerful corporate interests to lobby politically. Unsurprisingly, corporate taxation has been dramatically reduced, while social protection and public investments, for example, in health and education, have declined further.

Instead of gains being shared by top executives and shareholders with workers, as during the post-Second World War Golden Age, benefits have become increasingly skewed to the very wealthy in the past four decades, thanks to Friedman’s increased influence.

From 1948 to 1979, US worker productivity more than doubled while wages fell slightly behind as the stock market grew over six-fold. But from 1979 to 2018, worker productivity rose 70%, as worker pay rose by only 11.6%, while CEO compensation rose almost ten-fold, and the stock market 22-fold!

Jomo Kwame Sundaram, a former economics professor, was United Nations assistant secretary-general for economic development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.