Friedman: A business is obligated to maximize shareholder value, nothing more.
Everyone else: That’s crazy! Profit maximizing businesses roll over all sorts of other stakeholders and fail to live up to basic ethical standards.
This relates to a complaint I’ve made before. Markets are good at generating prices that reflect aggregate views on the relative scarcity/importance of various goods. Markets aren’t good at charity. To roll other things in there means a good old fashioned price is now a price plus an obligation to do some moral calculus in how we each interact with the complex adaptive system that is the world economy. It’s a recipe for disaster.
So what do we do? We recognize the gap between a world where Friedman’s advice is reasonable and the world we live in, then we figure out how to close that gap. That Friedman’s doesn’t match our world says more about our world than it does about Friedman’s argument.
Rather than move Friedman’s starting point by trying to juggle competing demands of various stakeholders without markets, we should think about the legal framework these stakeholders are acting in.
If we refine our understanding of who has what rights to make what decisions we’ll see that the reason profit maximizers (and vote maximizers) sometimes do bad things is because it’s the best choice available to them. The answer isn’t to say “businesses lobby business therefore they shouldn’t respond to incentives!” it’s to say “therefore we should restrict opportunities to seek rents!”
Coase wasn’t trying to tell us that spillovers don’t matter. He was trying to tell us that transaction costs do matter and whenever they’re present, we need to be careful in allocating rights that have spillover effects. By the same token, we should think of Friedman’s advice as saying “in a perfect world, corporations should maximize profits, but the world needs work.”
- How the anti-communist alliances of the Cold War have ended David Goodhart, Literary Review
- The end of interest (and capitalism) John Quiggin, Crooked Timber
- The democratic road to socialism Chris Dillow, Stumbling & Mumbling
- Masks, pollution, and implied consent Johnathan Pearce, Samizdata
- Yalta: one of the greatest wrongs of history David Reynolds, New Statesman
- Individualism does not necessarily imply small government Branko Milanovic, globalinequality
- On socially influenced preferences Chris Dillow, Stumbling & Mumbling
- A better defense of capitalism “djf,” askblog (comments)
Steve Jobs, Elon Musk, Bill Gates, John D. Rockefeller, and so forth and so forth. The list of successful entrepreneurs who have become household names is long. To an extent they are the heroes of capitalism, they succeeded, often against all odds, though often with crucial help of far more unknown others, yet they did it and changed whole industries, if not the lives of all people on the globe.
Capitalism is about freedom, to have the liberty to start a business, to start selling a new product or new service. Or if you’re a big company: the freedom to buy somebody’s else’s idea, or to invest huge amounts into research, development, and/or (re)design. It is one of the most important pillars of our civilization, this process built on economic freedom, trade, specialization, barter, openness for odd things or tolerance for people who venture into new directions. Despite many setbacks, opposing ideas and much room for improvement, all around the globe, it still all adds up to what we are now: the richest and most healthy people in the world of all times. And this is not meant teleological, it is certainly not the end of the development, there is more to come, of course.
However, capitalism is built on failure. It is only in a limited number about the success stories, in far more cases it is about hard failure. For every success there are many more failures, people who went bust, companies that did not make it. In the US this is a fact more known and far more accepted than in Europe. Here, if you went broke, you would be indebted for the rest of your life and seen as a social failure as well. Happily, that stigma is not as strong as it used to be, but it is sure not out of existence either.
Therefore, the true heroes of capitalism are those who fail. The men and women who put in their life savings, or take a big loan, to start a business, or take over a franchise, or what have you. Working their ass off, taking risks, without any sight on a certain reward. Also, at least here in The Netherlands and surely elsewhere too, without the social security that employees may count on.
Still, they go for it, they chase their dream, to remain independent, because they hate to work for a boss or manager, because they believe in their great idea, because they want to get rich, or a combination of these elements. And then they fail, have to fire their personnel who depend on them, they can’t pay the bills anymore, file for bankruptcy, and have to accept that their dream is over.
That is hard. I want to congratulate them though. Because without them, our capitalist system would remain static, since no new ideas would drip into the economy. In short: capitalism would grind to a hold. So thank you, all you failed entrepreneurs, for putting in the effort, for trying and working hard. You are true heroes.
Scarcity is merely contempt for that which is easily obtained.
~ Seneca (attributed)
While I am aware that many of the NOL writers do not agree with Jordan Peterson, I think he is correct when he says that many of the contemporary problems faced by society are the product of prosperity. The essence of his argument is that in an evolutionary sense mankind has two sets of priorities: 1) necessities of life and 2) social standing attached to life meaning. For the first time in history, we are living at a point where the necessities of physically staying alive, e.g. housing, food, medical care, etc. are obtainable and now people are free to fixate on the second set of priorities. The point where I personally diverge from Peterson and those of a traditional “conservative” inclination is that I do not think it is incumbent upon broader society to provide a sense of meaning or status for others.
In an interview with Christina Hoff Sommers and Danielle Crittenden of AEI for their Femsplainers podcast, Peterson illustrated his argument with an anecdote from his childhood on the Canadian plains. He described how, despite college being free in Canada at the time, he was the only one from his high school class to go onto tertiary education. Some but not all of the cause, he said, was ignorance. He observed that much of the reasoning related to an inability to delay gratification. At the time, his hometown was an oil center and was flush with money from the boom of the 1980s. Consequently, going to work immediately and making a lot of money was more attractive for high school seniors than was attending university. For the next decade this strategy worked. But, as Peterson recounted, when he was in the final year of his PhD, two things happened: 1) the wells supporting the town ran dry and 2) the oil bubble burst.
Unsurprisingly, what were a blip on the radar and a minor hiccup in the global and historical scope were disastrous for Peterson’s hometown. What became apparent in the fallout was a softening of character and mind. Counterintuitively, men who had no problem rising at 4:00 AM and working in subzero temperatures for sixteen hours were shown to be fragile in the face of greater adversity. Having manufactured an identity that emphasized the pointlessness of skill acquisition but also placed great importance upon high income, these beneficiaries of the oil bubble were devastated when their incomes disappeared and their lack of relevant skills left them unemployable and consequently without status. In the following decades, the town became one of many others of the rustbelt variety, plagued by unemployment, substance abuse, and apathy. It was this sequence that Peterson said caused him to start thinking in terms of the evolutionary stages of development. For us, the most relevant takeaway is the limitations of money on conferring status.
As Alvin Saunders Johnson (1874 – 1971) wrote in his article “Influences affecting the development of thrift (1907)” in which he lamented the loss of capitalist mentality among the American people,
It is obvious that the more closely society is knit together, the greater the influence of social standards upon economic conduct. The solitary frontiersman shapes his economic conduct with very little regard for the opinion of other frontiersmen with whom he may occasionally associate. The one rich man in a community of poor men is scarcely at all under the dominance of social economic standards.
Saunders ultimately concluded that increased status anxiety or social dissatisfaction was, however counterintuitively, a sign of progress. After all, the real life of a frontiersman was quite different from that romanticized in Zane Grey books. Therefore, assuming that no one really wants to live a subsistence existence, a world in which people are materially comfortable, even if subjected to social pressures, is inherently better.
The concerns induced by social pressure are external to material wellbeing since a positive environment for the latter ensures that people can live above subsistence without difficulty. Social pressure is hardly objective, and because of its variable nature, symbolized in Johnson’s essay by a “suburbanite touring car,” which was both unproductive and quickly superseded by newer vehicles, sweeping claims about feelings of social pressure must be denied validity. Johnson presented the thirst, which he observed in 1907, for status symbols as both positive and negative. Positive because it indicated greater prosperity; Negative because it created a different set of societal problems. As society became increasingly removed from a subsistence existence, the human cycle of craving and acquisition – which in a hunter-gatherer environment meant survival of winter – developed into an obstacle, rather than a necessary tool. The contemporary extension to Johnson’s line of reasoning correlates to Peterson’s assertion that the fixation of broader society on status is a natural sequitur to achieving a level of prosperity sufficient for the basic needs of all to be addressed.
While the topic of interest to Johnson was thrift and capitalist mentality, or rather the lack of it, on the part of the American people, his essay contained an interesting and pertinent observation regarding land practices. Remembering that he wrote this particular essay in 1907, he remarked on an agricultural real estate bubble existing in the Midwest, his native region. The reason he thought it was important was that he maintained it demonstrated two points in the spending-thrift, status- (genuine) capitalist paradigm. Property prices and valuations had risen, he argued, past the productive potential and therefore market value of the real estate in question. This rise was driven, he said, by the farmers themselves who spent lavishly on land because of an association of ownership with status, even if they were then unable to use the land effectively and therefore unable to recoup the investment. He predicted that land purchased under these circumstances was not a good investment. Further he added that when the bubble collapsed, not only would there be monetary loses, there would also be ego and identity crises as those farmers who saw the value of their holdings diminish would feel as though they had lost social standing, even if they didn’t lose a single acre. However since, Johnson observed that many of the farmers he knew, and upon whom he based his hypotheses, had repeatedly mortgaged their current holdings in order to buy additional pieces, the economist predicted property forfeiture as well.
A prototype Austrian economist, though born and raised on the Nebraska plains, Johnson made no moral judgements about the acquisitive instinct or the needless purchase of property. The pettiness exemplified by Thorstein Veblen (1857 – 1929) and his claim that curved driveways was a pointless display of wealth and status because they used space that might be put to better use (The Theory of the Leisure Class, 1899) was simply not a factor in Johnson’s works. Johnson’s conclusion on improper land acquisition and use was based purely on dollars and cents: for a farmer, unprofitable land was not an investment, and no amount of wishful thinking would make it into one. Johnson’s predictions about an impending time of property price collapse and hurt egos came to pass in the 1920s with the agricultural depression, which was in full swing by 1924. The bubble burst was possibly delayed by World War I. The Dust Bowl and Great Depression of John Steinbeck’s The Grapes of Wrath was an epilogue to a situation that had begun many decades before.
In 1922, shortly before the agricultural bubble burst spectacularly, Johnson wrote another article, “The Promotion of Thrift in America,” in which he warned, again, that the American land-owning farmer was overleveraged. He also identified the existence of a tenant farmer class whose status was due to lending policies which encouraged current owners to become overleveraged through easy mortgages, thereby inflating property prices, but prevented first-time buyers from entering the market. The dispute between NIMBY and YIMBY is hardly new. To further exacerbate the situation, the agricultural sector had begun to receive federal subsidies as part of the war effort. While Johnson didn’t mention this in his article, the subsidies further distorted the connected real estate market as they made farming appear more profitable than it was. In response to criticism for his decision to refuse to subsidize agriculture in any way, Calvin Coolidge, who was desperately trying to salvage the American economy and took a firm anti-subsidy, anti-price control approach, said, “well, farmers never have made much money.” Johnson’s predictions from 1907 came true, but Coolidge’s 1926 decision on subsidies received the blame.
What relevance, one might reasonably ask, has a set of observations from 1907 on the investment attitudes of, primarily Midwestern, American farmers have today? Why should these observations be combined with comments on status, work, and society made by a controversial academic? The reason is best exemplified by Sen. Marco Rubio’s article in the National Review titled “The case for common good capitalism.” It was an apology of soft socialism swaddled in pseudo-religious sanctimony culled piecemeal from various Catholic encyclicals. Since Kevin Williamson already dissected the article and its flaws, there is no need to rebut Rubio at this juncture. The overarching thesis to Rubio’s piece is that society has robbed the working man of dignity. The logic is tangled, to say the least, and it crescendos to the conclusion that a shadowy, disembodied society has mugged the working man and taken his dignity (or sense of status). The basic equations appear to be as follows:
- burst property bubble = conspiracy to deny ownership, at least dignified ownership, to average Joe
- loss of jobs for unskilled labor = denial of right to work;
- lack of workforce-owned corporations = some vague travesty that is tied to denial of ownership.
For this last, Johnson in “The Promotion of Thrift in America” specifically mentioned such corporate arrangements as complete failures because they created hostility between employers and employees, and in fact reduced employee-loyalty, since the latter believed that such arrangements were intended to defraud them of their wages.
In his two articles, Johnson frankly
argued that only the middle-classes and up practiced thrift and engaged in
capital acquisition and investment. He dedicated most of “The Promotion of
Thrift in America” to expounding upon the ways that the “wage earners (polite
speak for working class back in the 1920s),” farmers, and the lower-middle
class not refused to pursue capitalist behavior but would respond with active
hostility when thrift campaigners (yes, there was an save-and-be-a-capitalist
campaign in the aftermath of World War I, right up there with the temperance
movement!) suggested that they should. The crux of the issue, one which Rubio’s
article refuses to recognize, is that, like in the 1920s, the roots of broader
societal complaints lie decades in the past. The efforts to create a quick fix
are therefore both futile and infantile. Every couple of decades a specific
subgroup, be it the overleveraged farmers of the early twentieth century or the
unskilled oil workers of Peterson’s youth, discovers that its values are defective
and that the signs its members believed to be markers of status are
liabilities. Eventually the price of the decisions built on these misplaced
values and symbols must be paid. In order for the payment to occur in a way
that does not unjustly burden the rest of society, we must recognize that the
scarcity experienced by the indebted subgroup lies more in their contempt for
the genuine capitalist way of life than in any wrong society has inflicted upon
 Despite attribution to Seneca, I have been unable to find this aphorism among his works currently in my library, and I would be very appreciative if someone could tell me in which work he wrote this phrase (if indeed he did).
 Interesting which of the two movements gained enough political clout to have its agenda inscribed in the Constitution.
In these times of increasing criticism on capitalism, all around the world, it might be wise to read this Cato essay, written by Robert Nozick.
- The moral economists and the critique of capitalism Katrina Navickas, London Review of Books
- Can you step in the same river twice? David Egan, Aeon
- Don’t forget about the indigenous populations Vincent Geloso, NOL
- Anthropology and the problem of the archives Morgan Greeen, JHIBlog
Paul Collier, the controversial Oxford professor famous for his development work and his acclaimed books Exodus and The Bottom Billion, is back. But the author of Exodus and The Bottom Billion is long gone. The compelling writing and carefully reasoned world that made Bottom Billion impossible to put down has somehow disappeared. In The Future of Capitalism, Collier is tired. He is bitter. And he is sometimes quite mad – so mad that his disdain for this or that group of thinkers or actors in society consumes his otherwise brilliant analytical mind.
Instead of having his editors moderate those of his worst impulses, he doubles down on his polemic conviction. Indeed, he takes pride in offending people in all political camps, believing that it supports the book’s main intellectual point: ideologues of every persuasion are dangerous, one-size-fits-all too constricted for a modern society and we should rather turn to a communitarian social democratic version of pragmatism – by which he means some confused mixture of ideas that seem to advocate “what works” on a case-by-case basis.
Yes, it’s about as nutty as it sounds. And he is all over the place, dabbling in all kinds of topics for which he is uniquely unqualified to offer advice: ethics, finance, education, family, social policy and on and on and on.
One reason The Future of Capitalism went awry might have been the remarkable scope: capturing all the West’s so-called ‘Anxieties’ – and their solutions – in little over 200 pages of non-academic prose. Given the topic, a very unfitting sort of hubris.
Apart from the feeble attempt at portraying a modern society that has “come apart at the seams,” there’s no visible story, no connection between the contents of one paragraph and the next and hardly any connection between one chapter and another. Rather, it’s a bedlam of foregone conclusions, appeals to pragmatism, dire stings to ideological ‘extremists’ on either side and a hubris unfitting for someone like Collier. I guess this is a risk that established academics run at the end of their careers, desperately trying to assemble all their work into One Grand Theory.
The most charitable thing I can say about Collier’s attempt is that it offers a lot of policy prescriptions – tax unearned land rents, tax-and-redistribute productivity increases, expand housing supply through local governments, have governments direct the Silicon Valley-clusters of tomorrow, cap mortgage finance, benefits for families, expand ethical responsibilities of firms, encourage marriage, create a new G6 (EU, US, Russia, India, Japan, China) that could overcome the global collective action problem (good luck with that!), expand Germanic vocational training and workers’ representation on company boards, embrace patriotism but never nationalism, detach ownership from control and place control with stakeholders (workers, suppliers, local homeowners).
The common denominator seems to be an imperative to do all these things that seem to have worked well in some time or place or utopia, conveniently ignore institutional or cultural reasons, while espousing all ideological positioning and political capture.
Just voicing the suggestions ought to spark at least some fruitful conversations.
Chapter 8, ostensibly concerned with the Class Divide, is an illuminating case study. It takes Collier about 36 pages (out of 37) to mention ‘class’ (not that I blame him: the concept is way too nebulous and politically infected to be meaningfully dealt with in such short space). Instead, Collier discusses all kinds of topics whose relevance to class is quite unclear: public policy for single mothers, German vocational training, lawyers and the rule of law, a Yorkshire project to encourage reading in school kids – not to mention a ten-page digression into the institution of marriage for stable families.
When his polemics, dry writing, unsupported analysis or incomprehensive treatment of a topic hasn’t put me off (I gave up on the book at least four times during the last couple of months), some of the picture Collier paints does resonate with me. There is a social and geographical divide in Britain: the economically flourishing South-East, dominated by the well-educated English and the cosmopolitan accents of almost every language on the planet, is posited against the collapsing towns of the backward Midlands or the North. If this divide is real – in support of which Collier offers next-to-no evidence – it is not clear to me that it wasn’t already captured in, say, David Goodhart’s The Road to Somewhere or Branko Milanovic’s Global Inequality, or for that matter the countless of magazine articles trying to outline the fractures that Brexit unearthed about British society. Considering the effort those authors put into mapping their divides, Collier’s attempt seems frivolous.
He can do better. Much better.
My fellow Notewriter Rick is organising a summer reading group around Feyerabend’s Against Method. The equivalent Collier reading group could be aptly named Against Ideology.