notes on Friedman

another book extract

Hi everyone - I’m told that preorders for “The Unaccountability Machine” are going “pretty well”, and there might be some advance reviews in the weekend press. As I’m at the beach this week, here’s another extract - the first half of my discussion of what I think might have been the most important ideological document of the postwar era and certainly one of the foundational texts of neoliberalism. That’s “The Social Responsibility Of A Business Is To Increase Its Profits” by Milton Friedman.

This has been cut and pasted from my original draft - the version in the book is edited. It’s also only about the first half of the argument, mainly for reasons of length. If you want to really find out what’s wrong with Friedman, buy the book …

Friedman’s essay is worth studying in detail; it’s a masterpiece of persuasive writing and thoroughly deserving of the big fifty-year retrospective that the New York Times did for it in 2020.  What’s interesting, though, is that most of the specifically political and philosophical content – the libertarian contention that market exchanges are uniquely valuable because they lack coercion, and that any attempt to use private business assets and workers to achieve political goals is an “attempt to have collectivist ends without using collectivist means” – comes surprisingly late in the essay, almost as an afterthought. 

The really gripping, interesting and persuasive case is made much earlier, as an address to the self-interest and self-image of “corporate executives”, and is highly practical in nature – even in the middle of a peroration about the difficulty of the calculation problem and the impossibility of knowing the true “social good”, Friedman takes a break to remind executives that they might get fired.

Although it’s often supposed that the doctrine of shareholder value maximisation has its roots in libertarian philosophy, the Friedman doctrine seems to put things the other way round – it’s libertarianism that gains credibility from its association with the idea that corporate managers’ true responsibility is to increase their profits.

The argument is effectively complete in the first ten paragraphs of the essay – everything after that is made up of Friedman anticipating objections, adding extra benefits and (as he admits late on in the essay) extrapolating outward to talk about the case for laissez-faire capitalism in general.  And these ten paragraphs are based on Friedman’s setting out an entirely different view from the management cyberneticians, one where the organisation doesn’t really exist at all.

Friedman describes the company as an “artificial person”, giving a flicker of excitement to readers like me.  But this is only for the purpose of describing its responsibilities as “artificial responsibilities” and making the point that if the company’s responsibilities are artificial, then “the business community” as a whole (which, unlike the corporation, doesn’t have the legal aspect of personhood – the ability to sue and be sued[1]) certainly can’t have any. 

In the Friedman doctrine – and although that phrase has been applied over the years to everything from monetary policy to privatisation, the only example I can find of Milton Friedman using that specific phrase himself is in the title of this essay – the only possible locus of responsibility and accountability is the individual corporate manager.  For the purposes of that doctrine, he notes that he is referring to the manager as employee rather than a manager-proprietor; further down the essay he admits that proprietors can do what they like with their own money if they feel socially responsible themselves. 

So the protagonist of “The Social Responsibility of Business” is the same as the hero of Burnham’s “Managerialism” – the large and significant social class which developed in the twentieth century and which is distinguished by the fact that it exercises factual and operational control over capital assets without necessarily owning them.  These people were there in Karl Marx’s day, and they show up every now and then in “Capital” as “supervisory labour”, but there weren’t so many of them, so they never got their full analytical treatment.  Interestingly, though, Friedman absolutely agrees with Marx on the status of the executive – they are proletarians, whose relationship to the owners of capital is simply that of employment.

This is the whole theory of the firm, according to the Friedman doctrine.  There is no analysis of the company as a decision making system, just individuals making decisions.  Not even entire individuals; while modern HR people might talk about “bringing your whole self to work”, Milton Friedman explicitly tells executives that they have to divide their moral selves into their judgements “as a person in his own right” and their decisions “in his capacity as a businessman”.

The moral justification, when it comes, is quite surprising.  One might have expected Friedman to portray the socially conscious executive as a pickpocket, stealing the marginal profits which the shareholders (some of them widows, orphans and pensioners) might have relied on for their dividends.  That’s not the line he takes at all.  If you want to speak to the deep fears in the soul of modern management, you can’t throw around common abuse; they aren’t thieves and they know it.  You need to force them to face the thing that they’ve scared of, and raise the charge that will really trouble them because they think it might be valid.  The greatest fear of the manager, considered as a manager, is, of course, management.

And so the crux of Friedman’s doctrine is that when companies act in the interests of society instead of their shareholders, they are taking on the role of government.  The public benefit that accrues when a boss fails to make sufficiently aggressive redundancies, or keeps the price of life-saving drugs affordable, or allows the employees a day off to vote in an election – this is the moral equivalent of taxation.  If the appointed agents of the owners of capital do anything other than promote the interests of their principals, they are taking on themselves the decision to spend other people’s money, entering into the “political mechanism” of control and coercion rather than the “market mechanism” of free and voluntary exchange.

In other words, the Friedman Doctrine is specifically a doctrine of capitalism, versus managerialism. 

In the essay, he explicitly argues that there is no such thing as “society”, only voluntary associations of sovereign individuals.  But what he doesn’t say out loud is that the same argument requires that there are no such things as corporations, either, that organisations have no independent existence or status and should be looked through as if they were transparent, as if all their staff and management were in a direct relationship with the individual owners of the underlying shares.

---

[1] As you learn in business school courses, the second of those privileges is more valuable than the first – the ability to sue others is occasionally useful, but the ability to be sued means that the company can make binding legal agreements which the courts will enforce.  Limited liability wouldn’t really be very useful at all if it referred to an entity that nobody would lend money to or sign contracts with.