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Milton Friedman's "Shareholder" Theory Was Wrong

theatlantic.com

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Re: Milton Friedman's "Shareholder" Theory Was Wrong

#21

Post by 18pfsmt »

dredmorbius wrote: post #15
Simulacra wrote: post #5

I'm not an economist, but I disagree. The purpose of a corporation is to make money. Money benefits the shareholders. If its purpose was to benefit the "stakeholders" then it would be a nonprofit. Stakeholder sounds good for public relations, but I don't see it truly occurring in practice.

Incorporation, and the legal protections extending from it, are extended by the state, to provide value, ultimately to the state as a whole (e.g., not just the government, but the people). You'll find a form of this expressed in Adam Smith's Wealth of Nations , though he speaks here in terms of the entire field of political economy: POLITICAL œconomy, considered as a branch of the science of a statesman or legislator…

Smith wasn't some prophet. He got some things right, and some things wrong. He was trying to imagine a world he couldln't possibly imagine from a point in time when slavery was rampant across the world, there were nobles and monarchs, and power was as centralized as the technology would allow. Free enterprise is not intuitive because tribes were so small and the world was so sparsely populated, they never had the issue.

Edit: spelling.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#22

Post by dredmorbius »

michael_j_ward wrote: post #11

Matt Levine has an worthwhile take on the new "stakeholder" mission statement: """ It is productive—not 100% accurate, but a useful heuristic—to assume that all corporate governance debates in the U.S. are about whether shareholders or managers should have more power to control the corporation. There are other stakeholders, sure, but they are mostly tools in the shareholder/manager fight, not power centers in themsel…

Levine's focus on the principle-agent and manifest vs. covert aspects of short-term vs. long-term returns hits on a theme of risk in economic activity that I've been noodling at.

In one sense, Levine's argument is for better tools for making, and costing / pricing in risks and rewards of future activities. Or perhaps he's observing that a bird in the hand wins over two, or four, or four hundred, in the bush, no matter what.

Given that risk, uncertainty, imperfect, and nonuniformly unveiled and available information are givens in the real world, this is a bit of a stumper for economics.

Alternatively, imposing obligatory constraints through other mechanisms -- say, competing and equally-considered stakeholder demands from employees, business partners, government, and community -- might be an alternate approach. Effectively removing some of the near-exclusive power now claimed by shareholders.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#23

Post by dredmorbius »

18pfsmt wrote: post #21
dredmorbius wrote: post #15

Earlier quoted context omitted.

Incorporation, and the legal protections extending from it, are extended by the state, to provide value, ultimately to the state as a whole (e.g., not just the government, but the people). You'll find a form of this expressed in Adam Smith's Wealth of Nations , though he speaks here in terms of the entire field of political economy: POLITICAL œconomy, considered as a branch of the science of a statesman or legislator…

Smith wasn't some prophet. He got some things right, and some things wrong. He was trying to imagine a world he couldln't possibly imagine from a point in time when slavery was rampant across the world, there were nobles and monarchs, and power was as centralized as the technology would allow. Free enterprise is not intuitive because tribes were so small and the world was so sparsely populated, they never had the iss…

You're saying he was ... a loss?

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#24

Post by phkahler »

Simulacra wrote: post #5

I'm not an economist, but I disagree. The purpose of a corporation is to make money. Money benefits the shareholders. If its purpose was to benefit the "stakeholders" then it would be a nonprofit. Stakeholder sounds good for public relations, but I don't see it truly occurring in practice.

>> The purpose of a corporation is to make money.

I dont agree. Most of them that is probably true. I think the purpose is whatever the founder wants it to be, and after they're gone its whatever the person in charge says it is. Perhaps they've agreed to follow the founders vision too. I think it's up to the one in charge to tell shareholders what the purpose of the company is and if an investor wants to buy in, that would be their informed choice.

Even under that concept, I think most companies would say their purpose is to make money. But what if the purpose of SpaceX really is to colonize Mars? Is that a problem? I think not.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#25

Post by bassman9000 »

uknowmejoe wrote: post #3

How does this prove it was wrong? The end goal is still to maintain long term profits. Once a company becomes unprofitable it dies. Friedman gets credited with it, but it's basic econ.

This. Plus, if the way to be long term profitable is to be more socially and ecologically responsible, because that's what the market is asking for, then corporations will adapt or die.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#26

Post by bassman9000 »

mikedilger wrote: post #10

I thought you couldn't maximize for more than one variable, and so if society wants other outcomes such as low pollution laws need to tie high fines to it.

laws need to tie high fines to it.

Which Hayek was fine with (as shown in The Road To Serfdom).

https://www.dailykos.com/stories/2013/09/27/1241729/-The-Roa...

I don't know if I buy the whole social program thing, but the quote is correct. Reader's Digest: https://mises-media.s3.amazonaws.com/Road%20to%20serfdom.pdf

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#27

Post by dragonwriter »

> On Monday, the Business Roundtable, a group that represents CEOs of big corporations, declared that it had changed its mind about the “purpose of a corporation.” That purpose is no longer to maximize profits for shareholders, but to benefit other “stakeholders” as well, including employees, customers, and citizens.

CEOs are employees. A group of employees just voted that they aren't responsible to the people that pay their salary, but to their impression of the interests of other people who don't.

You can bet if it was a group of middle managers at any of the firms those CEOs run that made that declaration, they’d very concretely stop being responsible to their employers before the ink was dry.

Which isn't too say that corporations, which are publicly chartered and granted public privileges, shouldn’t be answerable to someone other than the shareholders: they clearly should be accountable to the public by way of the chartering government. But that's not what these CEOs are saying, which is just “We shouldn't be responsible to the only people who are positioned to hold us accountable, to be vague amorphous interests that we interpret for ourselves, and which have no accountability mechanisms.”

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#28

Post by 18pfsmt »

dredmorbius wrote: post #23
18pfsmt wrote: post #21

Earlier quoted context omitted.

Smith wasn't some prophet. He got some things right, and some things wrong. He was trying to imagine a world he couldln't possibly imagine from a point in time when slavery was rampant across the world, there were nobles and monarchs, and power was as centralized as the technology would allow. Free enterprise is not intuitive because tribes were so small and the world was so sparsely populated, they never had the iss…

You're saying he was ... a loss?

Care to address the substance? HN rules say to respond to the strongest possible argument. You are failing to comply.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#29

Post by manicdee »

dragonwriter wrote: post #27

> On Monday, the Business Roundtable, a group that represents CEOs of big corporations, declared that it had changed its mind about the “purpose of a corporation.” That purpose is no longer to maximize profits for shareholders, but to benefit other “stakeholders” as well, including employees, customers, and citizens. CEOs are employees. A group of employees just voted that they aren't responsible to the people that p…

This was not about responsibility and accountability, but mission and direction.

A company should be able to state that its mission is (for example) to deliver the best electric cars in the world, and be able to do so without pressure from shareholders to fire the CEO when the CEO focuses on building production capacity instead of maximising quarterly profits.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#30

Post by dredmorbius »

18pfsmt wrote: post #28
dredmorbius wrote: post #23

Earlier quoted context omitted.

You're saying he was ... a loss?

Care to address the substance? HN rules say to respond to the strongest possible argument. You are failing to comply.

Sure: Smith was responding to, and opposing, concentrations of wealth and power and their negative, distortionary and discriminatory impacts on the economy.

His harshest criticisms were against those concentrations and abuses of power. His strongest and most heartfelt arguments were for the common man. He wasn't some wealth gospel preacher, despite often being portrayed as such. And his attacks on the power and dangers of corporations were well taken.

J.K. Galbraith's The Age of Uncertainty explores this in depth. As does much of the writing of Emma Rothschild. Among many others.

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