Benjamin Applebaum is a member of the New York Times editorial board and author of “The Economists Hour”, a 2019 history of the American economics profession, and a re-evaluation of its role in America’s government and its impact on our society. Following is his editorial this week, making the basic point that our society, through the democratic process, must establish the parameters for our competitive market economic system, maintaining its benefits, in balance with other societal goals. Friedman’s belief that corporations’ goals are properly and solely to maximize profits and shareholder wealth is precisely why those corporations cannot be allowed to establish their own rules. Doing so has led to a decline in the stability of our society, and, now, of our democracy itself. This is a gross malfunction of our system of government, at the hands of our new aristocratic class. Like our parents and grandparents, we have the opportunity in the upcoming election to take back our democracy.
Stop Begging Corporations to Behave
Liberals love to blame Milton Friedman for the misbehavior of American corporations. Fifty years after Milton Friedman blessed corporate greed, liberals are still trying to rebut his arguments. They’re fighting the wrong battle.
Friedman, a free-market ideologue, published an essay 50 years ago this week in The Times Magazine in which he argued that corporations should not go beyond the letter of the law to combat discrimination or reduce pollution or maintain community institutions. Corporations, he said, have no social responsibilities except the sacred responsibility to make money.
The essay was a big hit with the executive class. Rich people were only too delighted to see selfishness portrayed as a principled stand. Friedman’s creed became the standard justification for corporate callousness. The Business Roundtable, a leading lobby for large companies, declared in 1997 that maximizing profit was the purpose of a corporation.
Critics have been fighting ever since to get corporations to acknowledge broader responsibilities. It’s the wrong battle. Instead of redefining the role of the corporation, we need to redefine the role of the state.
Friedman’s essay was part of his broader campaign to revive faith in the power of markets. He and his intellectual allies argued that if corporations focused on making money, and government got out of the way, the economy would grow and everyone would benefit.
For decades, policymakers have embraced his advice. They have slashed taxes, sought to undermine unions and reduced some kinds of regulation, notably in financial markets. Regulators made it easier for companies to shovel money to shareholders by repurchasing their own shares, and companies increasingly compensated their executives with shares of company stock, aligning their financial interests with those of the company’s other shareholders.
It’s been an experiment on a grand scale, and the results are depressingly clear. Growth has slowed, and much of the available gains have been pocketed by a small minority of very wealthy Americans. The shareholding class keeps getting richer; the rest of the nation is falling behind.
There is an air of desperation about the incessant efforts to address these problems by jawboning corporations to be better citizens: the pleading with Facebook to take responsibility for the filth it publishes; the campaigns to convince banks to steal less money from customers; the public shaming of restaurants that refuse to give paid leave to sick employees.
There may be some value in challenging executives who are careful to tip their waiters handsomely, who reliably put water bottles into recycling bins, who think of themselves as committed to social justice, to bring those values to the office.
But promises are cheap, and corporations are particularly likely to abandon benevolence during downturns — just when it’s needed most. Last August, with great fanfare, the Business Roundtable revised its statement about the purpose of corporations, acknowledging obligations to employees, suppliers and the broader community. But Tyler Wry, a professor at the University of Pennsylvania, found companies that signed the Business Roundtable statement were more likely than other big companies to announce layoffs in the early months of the coronavirus pandemic — even as they paid out more money to shareholders.
Government remains the most powerful means to express our collective will. The necessary solution is to create stronger incentives for good behavior and laws against bad behavior. Instead of urging power companies to burn less fossil fuel, tax carbon emissions. Instead of pleading with McDonald’s to raise wages, raise the federal minimum wage. Instead of shaming Amazon for squeezing small business, enforce antitrust laws.
Government also needs to do more to support economic growth. Friedman’s negative vision of government has helped to obscure the ways the public sector can help the private sector, for example by investing in education, infrastructure and research.
The outsize political influence of corporations — and those made wealthy by corporations — is certainly one reason for the widening gap between what the law requires and what many Americans would like the law to require. But there is no sense in waiting for corporations to disarm voluntarily. The rules must be changed, and the process begins at the ballot box.
Corporations have a valuable role to play in American society, and they contribute primarily by trying to make money. Friedman’s narrow point is mostly correct. The missing part is the role of government in ensuring those profits do not come at the expense of society.
The economist Robert Solow once observed that when he listened to his liberal colleague John Kenneth Galbraith complaining about the flaws of markets, he found himself reminded of the virtues. When he listened to Friedman, by contrast, he was reminded of the flaws.
After 50 years of listening to Friedman, it’s time to do something about the flaws.