Was Friedman right?

Milton Friedman is given a rather severe critique in The Rise and Fall of Management, especially over his malign influence on industrial management, how it is taught and how it is done. The Friedmanism which best captures his contribution to that endeavour is the one which tells the world that ‘corporate officials’ have no ‘social responsibility other than to make as much money for their stockholders as possible’.

It has been argued the attack on Friedman was unjustified for two reasons. Firstly, because his brand of neo-classical economic theory has surely brought the world great economic success since it began to be introduced in the 1980s by Ronald Reagan in the United States and Margaret Thatcher in Britain. And secondly, because Friedman was not alone, but was in the esteemed company of Mises, Hayek and others from the Austrian school, and was not exactly in isolation at Chicago. It has to be conceded that both points are largely true. Nevertheless the attack may still seem justified.

To deal with the second point first. He was certainly not alone, but among his colleagues he was more … some might say fearless and clinical, others might say crude and simplistic. For example the argument for privatisation was made on several occasions on the grounds, for which only the flimsiest evidence was ever offered, that it cost a public organisation twice as much as a private corporation to do anything. Or, on progressive taxation – which had been supported by the classical economists from Adam Smith on – Friedman said simply that he could not see any justification for it – ‘The personal income tax structure which seems best to me is a flat rate (23.5%) on income above an exemption.’ The crude and simplistic nature is what turns these ideas into sound-bites with a populist appeal.

Nor was he alone outside of economics. Ted Levitt, for example, argued that corporate managers should concentrate their energies on making money, not ‘sweet music’, and that the business of business was business. But Levitt, for all his editorship of the Harvard Business Review, didn’t have the pervasive impact of the top economics guru. Their influence affects what is taught in university research departments and business schools across the globe and through them to future generations of political and business leaders.

Friedman and colleagues led the economics profession down the path that has been labelled ‘the New Classical economics’. Others, recognising a fertile field when they see one, have developed extensive supportive theory and sophisticated mathematical models. Areas such as transaction cost analysis, the competitive market in corporate managements, and the adoption of the legal concept of agency as a “theory” that places company directors as the agents of shareholders, have all nurtured the careers of academic theorists, even when the whole field of enquiry is demonstrably false. Agency “theory” is one clear example. Directors cannot be the agents of shareholders since they have no such contract, formal or informal. Both parties are contracted to the legal entity which is the company, and should be concerned only with the best interests of that entity. Despite everything that the New Classical economics suggests, they have no contract with each other.

The first argument, that the theory has brought great economic success, is surely undeniable. But it is equally true that it was exactly that same theoretical approach which brought the world economy to its current parlous state.

Was Friedman right? The answer must be that that much of what he argued is demonstrably wrong. That much can be said with certainty.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s