... beyond the particular galvanizing effect of the Powell Memo, it and the earlier, virtually unknown Powell speech clearly show the state of mind of the rich right and a lot of the capitalist Establishment at the time--frightened, angry, and motivated to resist before it was too late. Ignored for decades, the memo is now an uncanny artifact of the early 1970s for making sense of the remaking of our system that began at that moment.
Evil Geniuses: the Unmaking of America, a Recent History, Andersen, Kurt, Random House, p. 60
Sept. 13 is the 50th anniversary of a seminal moment in the world of business: the publication of Milton Friedman’s essay in The New York Times Magazine entitled “The Social Responsibility of Business Is to Increase Its Profits.”I first learned of the Powell Memo in Frances Causey's documentary, Heist: Who Stole the American Dream. (embedded at the end of this post)
The New York Times invited several people--economists, journalists, CEOs and others to reflect on Friedman's essay. The opinions shared today are diverse. Please read the entire article, but I provide here a few excerpts. Text in red is from Friedman's original essay.
‘This is the basic reason why the doctrine of “social responsibility” involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses.’
JOSEPH STIGLITZ, professor of economics at Columbia University, was awarded a Nobel Prize in 2001
Friedman’s essay and his other writings on this subject were, unfortunately, enormously influential. They helped change not only the mind-set of the business community but also laws and norms on corporate governance. Courts have ruled that firms are obligated to maximize profits and shareholder value, to the exclusion of other objectives. In short, Friedman, through his various writings, promoted the idea of “shareholder capitalism,” in which the sole objective of corporations is to maximize the welfare of their shareholders. He didn’t originate the idea, of course, and if it hadn’t reflected the zeitgeist of the time, his arguments would have fallen on deaf ears.
By the time he wrote this essay, Friedman, who had done distinguished analytic and empirical work in economics, had become largely a conservative ideologue. I gave a talk at the University of Chicago around this time, presenting an early version of my research establishing that in the presence of imperfect risk markets and incomplete information — that is, always — firms pursuing profit maximization did not lead to the maximization of societal welfare. I explained what was wrong with Adam Smith’s invisible-hand conjecture, which said that the pursuit of self-interest would lead, as if by an invisible hand, to the well-being of society. During the seminar, and in extensive conversations afterward, Friedman simply couldn’t or wouldn’t accept the result; but neither, of course, could he refute the analysis — it has been a half-century, and my analysis has stood the test of time. His conclusion, as influential as it was, has not.
The absurdity of his analysis is seen most clearly by an example. Assume, in our imperfect democracy, that coal-mining companies use campaign contributions to block laws restricting pollution. Assume you’re a manager of one of the host of other companies that could spend a little bit of money to reduce pollution. You care about your children, your family, your community, but also about your business. Would you be irresponsible, as Friedman suggests, to curb your company’s pollution, because in doing so you reduce its profits? Would it be irresponsible for you to persuade others in your industry to do the same, even if you weren’t able to persuade Congress to pass a bill to compel you to do so? I think not. If you and others like you acted in this manner, societal welfare would be increased.
Friedman’s position is based on a misconception of both economics and the democratic political process. Yes, in an ideal world, Congress would pass legislation to ensure that one way or another private returns and social returns to any corporate activity were perfectly aligned. But in a democracy where money matters — clearly true in this country — it is in the private interest of corporations to do what they can to make sure that the rules of the game serve their interests and not the interests of the public at large. And they often succeed.
Today the downside of Friedman’s perspective is even darker: Is it Mark Zuckerberg’s social responsibility to allow wanton disinformation to roam over his social media platform? Is it Zuckerberg’s responsibility to lobby to get rid of a pesky foreign competitor while fighting for his company to be free from anti-competitive restraints and any accountability, so long as it increases his bottom line? Friedman would say yes. Economic theory, common sense and historical experience suggest otherwise. It is good that the business community has awakened. Now let’s see whether they practice what they preach.
‘Many a reader who has followed the argument this far may be tempted to remonstrate that it is all well and good to speak of government’s having the responsibility to impose taxes and determine expenditures for such “social” purposes as controlling pollution or training the hard-core unemployed, but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.’
ROBERT REICH, professor of public policy at Berkeley and a former secretary of labor
At the time this was written, Friedman’s argument seemed unassailable. But there was a flaw in it that he couldn’t have anticipated. In the last half-century, big corporations have gained so much influence over government that they’ve overwhelmed our democracy.
According to a 2014 study by the Princeton professor Martin Gilens and the Northwestern professor Benjamin Page, the preferences of the typical American have little or no influence at all on government policymaking. The study analyzed 1,779 policy issues in detail, determining the relative influence of economic elites, business-oriented and mass-based interest groups and average citizens. Their conclusion: “The preferences of the average American appear to have only a minuscule, near-zero, statistically nonsignificant impact upon public policy.” Lawmakers listen to the demands of big businesses, which have the most lobbying prowess. Note that Gilens and Page’s data come from the period 1981 to 2002 — before the Supreme Court opened the floodgates to big money in the Citizens United case.
Largely because of this surge of corporate money into politics, taxes on corporations have been slashed, safety nets for the poor have begun to unravel and public investments in education and infrastructure have waned. The “free market” has been taken over by corporate bailouts and corporate welfare. Shareholders and top executives have done extremely well, but almost no one else has.
If today’s C.E.O.s were serious about social responsibility, they’d use their formidable political clout to push for public financing of campaigns and would seek a constitutional amendment limiting corporate lobbying and campaign spending, so big corporations could never again become so politically powerful. Presumably Friedman would approve of this because it follows logically from his argument. But don’t hold your breath.
‘It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundations of a free society.’
ANAND GIRIDHARADAS, author of “Winners Take All: The Elite Charade of Changing the World”
Today in America someone will be laid off right after his or her company announced record earnings. Someone’s hours will be cut without notice. Someone’s water will be poisoned by fracking. And among the pantheon of villains they can thank is Milton Friedman.Looking to the near future, the most urgent need to address these societal and cultural problems is regime change in Washington, DC. There's no question that the chief executive of the American federal government is a mentally ill lunatic. Beyond that, this is a time that warrants increasingly active engagement of the people in self-determination, exercising their lawful, rightful citizenship.
In this essay, Friedman criticizes businesspeople for straying from their lane — making money — and worrying about the social good, the so-called “window-dressing.” Businesspeople should not assume “governmental functions” of tending to the public welfare. And on that point, actually, I agree.
But here’s the thing. Friedman militantly condemns the businessperson who enters the public realm to be charitable, to be kind to employees, to invest in the commons because he wants all of these functions to be left to government. Tragically, Friedman neglects to condemn the other, more significant way in which businesspeople enter into the public sphere: not in the spirit of charity, but in the spirit of rigging through lobbying, campaign contributions, thought-leader patronage, philanthropic reputational laundering and penance by naming rights. In fact, he endorses this intrusion. He speaks of how a company can “generate good will as a byproduct of expenditures that are entirely justified in its own self-interest” — a.k.a. neoliberal do-gooding — and says it would “be inconsistent of me to call on corporate executives to refrain.”
Friedman’s vision could have worked if companies actually stayed in their lanes, leaving robust public and civic sectors free to create rules that harness the energies of private enterprise to the maximum good of all. Instead he gave companies moral cover to be ruthless and not worry about the public good — while leaving them scot-free to meddle in the public sphere for the sake of rewriting the rules.
Communication and digital technology is advancing so rapidly that it's difficult to NOT imagine state legislatures as totally anachronistic. Congress, being a lawmaking body with representation from all 50 states is perhaps a bit more of a challenge. Nevertheless, the human species is nothing if not all about creative adaptation to overcome current and future challenges.
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