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The Case Against Milton Friedman's Capitalism

The free market is a theoretical fiction, with enormous social costs.
Milton Friedman.

Milton Friedman.

While the most popular answer to the "how would you help the world if you had a time machine?" parlor game is going back to kill baby Hitler, don't sleep on going back to 1962 to stop economist Milton Friedman from publishing Capitalism and Freedom.

This series of essays codified his life's work formulating the idea that corporations shouldn't concern themselves with being "socially responsible" to people or society, but rather focus entirely on their profits. Most succinctly, this idea was put forth by Friedman in the 1970 New York Times Magazine piece, "The Social Responsibility of Business Is to Increase Its Profits." As he writes:

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.

It's a fun idea, and predictably popular in the business sector, as it removed the pesky hindrance of moral culpability in its ever-seductive pursuit of profits. But now, 50 years later, does the world that Friedman examined have any relationship to the one in which we live? Can there even be an "open and free competition without deception or fraud?"

"It's a theoretical fiction, especially in today's age," says Lisa Sachs, the director of the Columbia Center on Sustainable Investment. "There is absolutely no alignment of market prices to societal costs and benefits at all."

A whole lot has changed since Friedman was the toast of the economic town: for starters, the drastic rise in global income inequality and growing evidence that climate change is wreaking havoc on the planet. "A market will not correct itself for carbon emissions," Sachs says.

Since the 1980s, the financial industry has completely revolutionized the economy, putting the maximization of short-term profits above all else. "That was exacerbated by executives whose incentive packages now often correlate, or are tied to, short-term performance," Sachs says.

That focus on short-term gains has meant everything else—jobs, worker benefits, long-term growth, environmental concerns—was, at best, tied for second. (It seems problematic to weigh quarterly earnings against the devastation of the environment for future generations.)

Another thing missing from Friedman's framework of corporations playing "within the rules of the game" was the outsized role that the corporate lobbyists have had in the creation of those rules. As Sachs points out, "[i]n 2016, special interests spent $3.15 billion to employ 11,166 lobbyists in the U.S." If Friedman's theoretical world was based on the ability of outside actors—like government regulators—keeping societal rules intact, then that world has long been compromised.

"The real world is too far from the idealized world of Friedman," Sachs writes.

How can we change the profits-above-all-else mindset that's still so ingrained in the corporate sphere? The first step, like any problem, is admitting you have one. "There is a growing amount of awareness and public debate about these issues," Sachs says.

One straightforward possibility—that I've written about before—involves tweaking executive contracts to no longer incentive short-term profits at the expense of everything else. Perhaps this involves getting rid of stock options entirely, but that's a tough proposition in an environment where executives sit on one another's boards, essentially determining their own compensation packages.

Another possibility is government regulations that dictate how boards are composed, like in Germany, where laws require worker representation. Involving multiple viewpoints in decisions—union representatives, community members, consumers, elected officials—can counter the current profit-first ideology.

Consumers are another set of pressure points, either through boycotts, when corporations act legally but morally wrong, or class-action lawsuits, when they act illegally. Employees can also apply pressure simply by being mindful of where they choose to work, forcing corporations to adapt their priorities or risk a brain drain. Another option is a shareholder divestiture campaign, where investments are withdrawn if companies don't pass certain environmental or social thresholds.

How realistic are any of the structural changes, particularly in the deregulation-friendly Trump government? "It's bleak right now," Sachs says. "But I'm hopeful."