Shareholder capitalism’s ugly legacy By Jomo Kwame Sundaram September 29, 2020 – IPS

Milton Friedman’s libertarian economics assumptions, certainly much more than the advocating shareholder capitalism has Austrian School advocacy and defence of influenced generations trying to understand the capitalism. economy, not only in the US, but all over the Thus, Friedman conveniently ignored ‘market world. imperfections’ in the real world, although or He was not just an academic economist, but an perhaps because they undermined the enormously influential celebrity conservative empirical bases for his reasoning. So, even if ideologue who legitimized ideas for the like- Friedman’s logic was true, reality prevents minded, including the belief that ‘greed is profit-maximizing firm behaviour from good’. Now, shareholder capitalism’s maximizing societal welfare, if not cause the consequences haunt the world and threaten converse. humanity with stagnation and self-destruction. Meanwhile, Friedman’s monetarist economics Friedman’s lasting influence has been discredited, and has little practical In 1962, Friedman published his most influence anymore, especially with the turn to influential book, Capitalism and Freedom. In ‘unconventional monetary policies’, September 1970, the New York Times particularly after the 2008-2009 global Magazine published his essay, The Social financial crisis. Yet, his ideological sway Responsibility of Business is to Increase Its remains strong, as it serves powerful interests. Profits. Greed is good The article — reiterating the Friedman Hence, Friedman’s 1970 essay remains Doctrine, presuming perfectly functioning influential in the world, and has long served as markets that only exist in the minds and the mainstream manifesto on corporate writings of some economists — is a manifesto governance. Even then, Friedman denounced for American shareholder capitalism. It dissenting CEOs as “unwitting puppets of the inspired the counter-revolution against intellectual forces that have been undermining Keynesianism, development economics and the basis of a free society”. other state interventions. Generations of Friedmanites have insisted that The word ‘competition’ appears only once, in ‘the only business of business is business’, and the last sentence. Yet, some supporters insist their sole responsibility to society is to make that Friedman was not ‘pro-business’, but money. He emphasized, ‘‘there is one and only rather ‘pro-market’. But, unlike capitalism, the one social responsibility of business — to use market has been with us for several millennia its resources and engage in activities designed and has happily co-existed with unfreedoms of to increase its profits so long as it stays within various types. the rules of the game, which is to say, engages Perfect competition rarely exists due to in open and free competition without deception or fraud.’’ inherent tendencies undermining it. Hence, various challenges to Friedmanite wisdom. For When Friedman insisted “make as much half a century, information and behavioural money as possible while conforming to the economics have challenged his many basic rules of the society”, he may have 2 presumed that market imperfections do not corporate profits. This type of capitalism has exist, or were fully addressed by the ‘minimal’ spread throughout the world with the state, although it is well-known that the rule of ‘neoliberal’ counter-revolution since the law has never been adequate to the challenge. 1980s. His singular focus on maximizing profits for ‘Getting government out of the way’, the shareholders justified ignoring all problems neoliberal ‘free market’ mantra, was supposed due to corporate practices. The doctrine thus to boost private investments. But more absolved the firm of social responsibility. It handsome corporate profits due to cost savings justified and encouraged generations of – from weaker anti-trust and other regulations, corporate leaders committed to the primacy of lower wages and taxes – have not significantly ‘shareholder value’. Almost like religion, this increased real investments in the US. thinking became the hegemonic ideology, The 2007-2009 US financial crisis exposed legitimizing ‘greed-is-good’ behaviour. some problems of short-termism, particularly Government the problem? related to financialization and ‘shareholder Friedman’s ideology spread throughout the value extraction’. The crisis cast doubt on world with the ‘neoliberal’ counter-revolution Friedman’s legacy and its implications, from the 1980s. encouraging new challenges to corporate governance norms and regulations. Unsurprisingly, neoliberal economists’ claims have been discredited by their policies’ failure Business and politics to significantly increase investments in the real Friedman would have us believe that power economy in recent decades. and politics are not exercised in free markets. And without sufficient investments to enhance But this ostensible insulation of politics from productivity, growth has declined, if not supposedly power-free markets is a fiction stagnated, while dimming future economic which thoughtful Friedmanites knew only too prospects. With labour incomes declining well, not least from their own advocacy, relatively, if not absolutely, consumer behaviour and conduct. spending has declined, reducing aggregate All markets are shaped by various historical demand while feeding a vicious circle of and contemporary influences, economic, stagnation. cultural, social and political. These are often Meanwhile, deregulatory initiatives have not driven by business and other lobbies. Thus, increased real investments and output growth. politics, collective action and advocacy shape Market finance ideology claims that the stock policies, in terms of design, implementation market can best allocate investment resources and enforcement. among companies. But share buybacks imply To be fair, Friedman’s view of politics and that US corporations have no better investment business seems contradictory. His writings options than to further raise already high, over- argue that business should stay out of politics, valued financial asset prices, thus reducing and not use shareholder money to influence resources for real investments and future politics. But he is remarkably understanding growth. when it happens: The Friedman doctrine also celebrated and “I can’t blame a businessman who goes to justified short-termism, and undermining Washington and tries to get special privileges protection for employees and the environment for his company”. “If the rules of the game are to maximize shareholder value by increasing that you go to Washington to get a special 3 privilege, I can’t blame him for doing that. With the Citizens United ruling in the new Blame the rest of us for being so foolish as to century, the US Supreme Court has legally let him get away with it.” enabled powerful corporate interests to lobby politically. Unsurprisingly, corporate taxation Neoliberal inequality has been dramatically reduced, while social Former Clinton Labor Secretary Robert protection and public investments, e.g., in Reich has argued that larger US corporations health and education, have declined further. have acquired so much influence over government, undermining US democracy. Instead of gains being shared by top executives Instead, he argues for public financing of and shareholders with workers, as during the electoral campaigns while curbing corporate post-Second World War Golden Age, benefits influence, e.g., via lobbying and campaign have become increasingly skewed to the very spending. wealthy in the past four decades, thanks to Friedman’s increased influence. He cites an old study of 1,779 policy issues From 1948 to 1979, US worker productivity during 1981-2002 which found lawmakers acceding to the demands of big businesses with more than doubled while wages fell slightly the most lobbying capabilities while the behind as the stock market grew over six-fold. average American had “only a miniscule, near- But from 1979 to 2018, worker productivity zero, statistically nonsignificant impact upon rose 70 per cent, as worker pay rose by only public policy”. 11.6 per cent, while CEO compensation rose almost ten-fold and the stock market 22-fold!