The Devil and Mr. Friedman
The Morning Call looks at the glorious myth of stakeholder capitalism
For most of our lives, we could not have cared less what Milton Friedman did or did not say, write, whatever. We agreed with him, to be sure, or at least we thought we did. But not being economists ourselves and preferring history, philosophy, and sociology to economics, we really didn’t know for certain. It – he – wasn’t our cup of tea.
About a year-and-a-half ago, all of that started to change, and we started to take a considerably greater interest in what Friedman said, what it meant, and why it was so important. The impetus for our newfound interest in Friedman was our similar newfound interest in the efforts to politicize and thus to manipulate capital markets. Wherever we looked – social investing, ESG, “stakeholder capitalism,” etc. – Friedman’s named popped up. The guy was everywhere. And everywhere, he was the villain, the man responsible for all the ills that plague contemporary society, and the embodiment of the “evils” of unfettered capitalism.
This makes a certain amount of sense, of course. Friedman had, after all, written about the primacy of shareholders in capital markets and has rightly earned the reputation as a powerful advocate for a hands-off approach to most financial and economic matters. If you’re trying to pitch a vision of business and markets that advocates planned, top-down social and political engineering rather than bottom-up free-enterprise, then Friedman is a significant bump in your road.
Just yesterday, a friend (and brilliant economist in his own right) sent us a recent piece by Saijel Kichan, a markets reporter for Bloomberg News. The topic of the article is what you might call the next evolutionary phase in social investing, a new, much broader social-impact model of business evaluation that is being pushed by Harvard business professor George Serafeim. That model is, in and of itself, worth discussing in detail, and we will discuss it at some point. What interested us most, however, was the use of Friedman’s name in the headline (How Wrong Was Milton Friedman?) and then the mandatory-but-pointless attack on Friedman’s work in the second half of the article.
Friedman, you see, has become the catch-all boogie-man for those who wish to extend the reach of politics into capital markets. The invocation of his name is perfunctory virtue signaling in the “socially responsible” world. He is the Emmanuel Goldstein of the ESG-Stakeholder movement. Or, as we put it in the fifth chapter of our new book, a chapter titled “Friedman, Sorel, and the Heroic Myth”:
Among the great pantheon of pragmatic thinkers, there are a few whom most pragmatists would prefer not to discuss in any great detail, one of whom was a French engineer named Georges Sorel….
Sorel is probably best known for his ideas about how best to create the conditions that he and the workers sought. Sorel described the fundamentals of a revolutionary movement that could convincingly wield the threat of a violent “general strike,” which, he believed, could bring all production to a halt and result in the takeover of the means of production.
But Sorel wasn’t necessarily interested in a general strike, per se, which might be complicated and unpredictable. Rather, he was more interested in the idea of a general strike, in a glorious “myth” of the general strike….
Sorel’s theory of revolution, and particularly his premise of the glorious myth, became one of the most important weapons in the Leftist arsenal from that point on. Sorel argued that the creation and promotion of myths was much more persuasive in motivating people than truth, reason, economic theories, or obtuse philosophical discussions….
In the context of advancing the stakeholder theory of the corporation, it doesn’t matter one whit what Milton Friedman actually said. It doesn’t matter that his model is normative and not descriptive or instrumental. It doesn’t matter that his notion of shareholder supremacy is perfectly compatible with any number of stakeholder plans. It doesn’t matter that he didn’t push the “shareholder value” proposition, that he didn’t say that it was important to align management interests with shareholder interests by making managers minority owners of the company, that he didn’t promote the greed or the venality that came to be associated with capital markets in the 1980s, that he didn’t say that quarterly results were the standards by which executives should be judged. None of this matters at all. The only thing that matters is the myth of Friedman, the myth of the greedy shareholder and the rapacious capitalists, the myth that shareholders and stakeholders must, always and everywhere, be opposed to one another.
In his “Épître à l'Auteur du Livre des Trois Imposteurs,” Voltaire famously wrote that “If God did not exist, it would be necessary to invent him.” We don’t disagree, necessarily, but we think it is far more accurate to say the same about the devil. It is the existence of evil, of the “great corrupter,” that makes proactive moral action necessary, or at least justifiable. It was the serpent, after all, who tempted Adam and Eve, who destroyed paradise, and who loosed sin and death upon the world. And therefore, it is the serpent against whom the righteous fight.
And for the ESG/Stakeholder crowd, Friedman is the perfect manifestation of the serpent, of the devil himself. Or at least he is in the way that they have “created” him.
Know this one thing for sure: anything you read, you hear, or you see that cites Milton Friedman or the “Friedman model” as the outdated or incomplete or mistaken interpretation of capital markets is ideological propaganda. Anyone who purports to be able to remedy the shortcomings of the Freidman model is, in truth, selling you something. Any investment trend promises to save the world from Friedman-ite greed is advancing a religious doctrine. And any intellectual theory that promises to “revolutionize the way businesses calculate their success” by fixing Freidman’s errors is advancing the merely glorious myth.
Take it all with a Lot’s wife-sized grain of salt.
Milton Friedman wasn’t right about everything, obviously. No one is. But those who perpetually and unfailingly cite him as their foil are far more likely to be wrong about the “purpose of a corporation” than Friedman was about anything, ever.