Successive governments from Thatcher on, have been committed to free market capitalism with minimised regulation. That was the bad theory that got us into this mess. But the prescriptions for what will get us out of it, permanently, have so far been piecemeal and fragmentary. The pragmatic response of the British government may restore confidence short term and get the wheels turning again, but it does not offer a coherent long term alternative to the erstwhile orthodox wisdom propounded by the late Nobel laureate Milton Friedman and colleagues.
The Friedman version of capitalism may have been shredded during this financial and economic crisis, but City, leading corporate bosses and the financial media, all refuse to accept that simple factit. As Simon Caulkin put it in his Observer column (29.3.09), when the current crisis is over they will be determined to return to “business as usual”.
Friedmanite economics, reviewed in The Rise and Fall of Management, isn’t simply about free markets. It takes the simple Adam Smith assertion about economic growth depending on the self interest of ‘the butcher, the brewer and the baker” and turns into the bald assertion that private greed is good. Friedman argues that fundamentally public provision is bad and should be eliminated where possible; that all taxation is bad and should be levied so as not to inhibit the well off in their pursuit of greed, that pursuit being, for Friedmanites, the way the capitalist economy works. And, of course, any interference with markets is extremely bad: ‘the business of business is business’.
Friedman argued that ‘corporate officials’ must accept no other social responsibility than to make as much money for their stockholders as possible. Support for this was formalised in agency theory which argued that company directors responsibility was solely to shareholders, rather than to the company itself.
Friedmanite theory has become ubiquitous over the past thirty years. He may be forgiven for not recognising some of its ill effects, some of which were not so apparent early on. This is the bad theory which justifies the actions which have led us into this current crisis. And unless it is reversed it will prevent us from avoiding the far greater crisis of resource depletion and global warming. It is now clear that nothing could be more damaging to life on this planet than acceptance of his injunction to focus on maximising shareholder wealth ignoring all other considerations.
Yet his argument could survive even this melt down. It has established custom and practice which clearly flouts company law, and will be extremely difficult to replace. Especially, that is, when alternative theories appear to have been tried and found wanting. Only when governments reinforce the legal requirement on companies to balance the interests of all stakeholders including, as specified in the 2006 Companies Act, the environment.