Rejoinder to Appelbaum on Friedman

By John P. Mackey and Walter E. Block

 

In his September 18, 2020 New York Times column, Binyamin Appelbaum appeared to be highly critical of Milton Friedman.

The former started out by calling the latter “a free-market ideologue,” and he did not mean this as a compliment. He ended on this note: “After 50 years of listening to Friedman, it’s time to do something about the flaws (in the views of this Nobel Prize winning economist).” In between, he maintained we should no longer wait for, or rely on, businessmen to renounce “selfishness portrayed as a principled stand,” as he purported Friedman would have it. It is now time- it is past time, in his view, to get the government involved in compelling the wealthy in effect to support social justice.

It would appear at the outset to be a 180 degree difference between these two writers. Not so, not so, at least not when it comes to goals. Both seek an end to poverty, favor prosperity, freedom and economic development. Appelbaum supports egalitarianism, Friedman did not, but even here it is possible to at least partially reconcile their differences. The journalist favors heavy taxation of the rich and financial support for the poor; the economist would go part way in that direction with his negative income tax (those at the bottom end of the income distribution pay a negative tax; e.g., receive a subsidy). Moreover, Friedman would attest that economic growth disproportionately helps the impoverished. 200 years ago, 94% of everyone alive on Planet Earth lived on less than $2.00 per day. Today it is only 10%.  The average lifespan in 1820 was 30, today it is 72.6 (which is higher than in any country in 1950).  In 1820, illiteracy rates were 88%, while today they have shrunk to only 14%.

No, the gigantic, stupendous, difference between the two scholars concerns means, not ends. And here we side completely with the University of Chicago professor who was the most prominent dismal scientist of the 20th century (many scholars would argue that Keynes was), and should continue that position in the present one.

What are the specifics?

Appelbaum wants to leave off “the public shaming of restaurants that refuse to give paid leave to sick employees” and have a law enacted compelling them to do just that. But what determines employee well-being is total wages, the monetary plus the non-monetary (health care, safety on the job, and other fringe benefits). The firm cares not one whit about the proportions; its eye is only on the cost of the total compensation package. It has every incentive to allocate remuneration in accord with worker preferences. Mr. Appelbaum does not realize that if paid family leave is given, and total compensation (based on productivity) does not change, then something else will be reduced, presumably take home pay. Most workers would rather have higher take home pay than paid family leave if this means to an agreed-upon end is implemented. This is basic economics 101, and there are few people who have contributed more to it than Milton Friedman.

Similarly, the New York Times editorialist avers: “Instead of pleading with McDonald’s to raise wages, raise the federal minimum wage.” But as Professor Friedman would explain, this legislative enactment does not raise compensation, certainly not in the long run; rather, it serves as a barrier over which an employee’s productivity must rise, if he is to obtain and keep a job. When compensation is legislatively raised above what the labor productivity of the low-skilled worker is contributing, the firm will either be forced to make an investment in new technology and/or take on more highly skilled employees, so as to substitute for the displaced workers.  Keep raising it, and more and more less-skilled workers will be legislatively consigned to permanent unemployment. Again, neither man wants that. They disagree on means, not ends.

Also on Applebaum’s wish list is that our society “combat discrimination … reduce pollution (and) maintain community institutions.” Friedman was certainly a world class economist, and his legacy also includes many of his students. Gary Becker, Thomas Sowell and Walter Williams would be the first to reply to Appelbaum that different wage levels, whether between whites and blacks or men and women, do not necessarily indicate discrimination. Friedman would have no problem with a law reducing pollution (he supported his colleague Ronald Coase’s solution in this regard), but he would insist that if any one firm carried out this policy, it would court bankruptcy. He also had no problem with supporting charitable organizations; he only insisted that people do this with their own money, not that of others (such as CEOs on behalf of stockholders).

States Mr. Appelbaum: “Friedman’s negative vision of government has helped to obscure the ways the public sector can help the private sector, for example by investing in education, infrastructure and research.” But a careful perusal of his famous book, Capitalism and Freedom will demonstrate that Friedman’s concept of “neighborhood effects” supported precisely these three policies. He saw a market failure in what most economists would call positive externalities: we all benefit from the education of others, infrastructure that we need not use directly and general research. Therefore, the government should subsidize these efforts, lest resources be misallocated.

One last example. The editorialist wants “to convince banks to steal less money from customers.” This is presumably a misprint. Obviously, he wants savings institutions to engage in no robbery at all. Does anyone doubt that the economist would enthusiastically support this?

There are deep dark chasms between Freidman and Appelbaum concerning means to an end, but less so, far less so, regarding goals they both share.


John P. Mackey is Co-Founder and CEO of Whole Foods Market

Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans

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Sir Samuel Brittan RIP

Tyler Cowen, over at Marginal Revolution, quite rightly laments the death of British economic journalist, the aptly named Samuel Brittan.

Like Tyler, I first heard of Brittan’s Capitalism and the Permissive Society from the late Roy A. Childs, Jr. You might think that “Permissive” in the title is used negatively. No. One of the things Brittan liked about capitalism was that it is permissive. I’m going from memory here; my copy was destroyed in my 2007 office fire.

It was either in that book or in something else that Roy Childs told me from another Samuel Brittan writing that Brittan told the story about how Milton Friedman, with one view on one issue, got him respecting free market views more: it was that Friedman was such an outspoken advocate of a free market in military labor–that is, Friedman opposed the draft.

Here’s another Brittan/Friedman story, from Wikipedia, that I hadn’t known:

[Friedman] mentioned to me a letter he had received from Arthur Burns saying that Eisenhower was turning out well as President. I expressed surprise, to which Friedman responded: “First, Burns has much better knowledge of Eisenhower. Second, given equal knowledge I would prefer his opinion to yours.” Against The Flow (2005)

 

 

 

 

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A Straight Line from Friedman to the White House?

I’ve missed this article by Martin Wolf, hosted by Pro Market in the context of the debate over the 50th anniversary of Milton Friedman’s New York Times piece on corporate social responsibility. Wolf starts by saying that he “used to think Milton Friedman was right. But I have changed my mind.” That he changed his mind is no big surprise, as he moved from being a free trader in the early 2000s to being a staunch proponent of whatever kind of government interventionism in recent years.

What is interesting, however, is Wolf’s argument. He changed his mind, he writes, because he doesn’t “believe in the contractarian view of the firm” any more. Corporations, writes Wolf, “are powerful entities able to exercise immense influence within society. Since corporations have been told that their only responsibility is to make profits and this has been internalized within their operations, the result is that society, including in particular its notionally democratic politics, is dominated by feral institutions.”

For the British journalist, Friedman’s point that corporations should play within the rules of the game is naive, as they contribute to writing the rules of the game and they do so by lobbying governments and their regulators so that they act in their interest. This is why, Wolf maintains, “there is a direct line from Milton Friedman to Donald Trump.”

Here comes this astonishing way of reasoning:

Why is this? Consider how one goes about persuading people to accept Milton Friedman’s libertarian economic ideas when, in practice, they shift economic rents upwards and desperation downwards. In a universal-suffrage democracy, it is impossible. Such libertarians are a minority. To win, they have to embrace ancillary causes such as culture wars, racism, misogyny, nativism, xenophobia, and that good old standby: nationalism. Much of this has of course been sotto voce and so plausibly deniable: “No, we are not in favor of discrimination, but your precious freedom does indeed include the right to discriminate.”

The financial crisis and bailout of those whose behavior caused it made selling the deregulated free-market even harder, as Mitt Romney’s 2012 failure showed. Afterward, it became politically necessary for libertarians embedded within the Republican Party to double down on those ancillary causes. Trump was simply the political entrepreneur best suited to do this. A natural demagogue, he was perfectly comfortable saying out loud what his predecessors had said quietly or let others say for them. This is why his supporters claim that “he says it like it is.” Those desperately-needed voters loved him for it because he respects their rage. Of course, his nativism, nationalism, protectionism, demagoguery, lying and now open assault on the notion of a fair election is a bit uncomfortable for corporate elites. But, if he gives them lower taxes and sweeping de-regulation, how many really care? If the result is to poison democratic politics forever, again, who cares?

So, to return to my main point: one cannot get away with stating that corporations should play by the rules when they create the rules they play by. The system for creating the rules of the game is corrupt.

When Friedman was referring to the “rules of the game,” he was likely thinking of the broader and more general principles of a liberal polity and of free competition: don’t hurt people and don’t steal their stuff, to quote the effective title of a book by Matt Kibbe. He was certainly not thinking of legislation à la cart and special privileges, that Friedman vehemently opposed. Moreover, in Capitalism and Freedom, where Friedman further elaborates his argument against the notion that corporations ought to have any “social responsibility” duty, he argues clearly that “if economic power is joined to political power, concentration seems almost inevitable. On the other hand, if economic power is kept in separate hands from political power, it can serve as a check and a counter to political power.”

Friedman, and libertarians at large, argue for a separation of government and business as clear as the separation between the church and the state. I’d like to have the reaction of some American friends, but I find the description of libertarians jumping on the Trump bandwagon quite laughable. If anything, perhaps the opposite has happened: that libertarians have emphasized their differences with the current US administration, focusing on matters that alienated them Republican support. Think about Cato’s top-notch work on immigration. Protectionism is a red flag for libertarians and that brought them to strongly distance themselves from the Trump camp. If you google Donald Trump and Milton Friedman, other than Wolf’s piece you’ll see things like this popping up.

In short, Wolf accuses Friedman of being blind to the issue of crony capitalism and to have a following which includes people eager to compromise for the sake of immediate political goals. The second claim would be an interesting matter of investigation. The first is plainly wrong.

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Enriques on Friedman

Fifty years have passed since Milton Friedman’s article in the New York Times Magazine on “The Social Responsibility of Business.” This anniversary has been widely remembered- though perhaps more vilified than celebrated ( David Henderson was among those celebrating it, here).

 

As Friedman is considered such a champion of “shareholder value”, I found very interesting that Luca Enriques, on Promarket, comments that ‘Friedman’s essay assigned a totally passive role to what he calls the corporation’s “owners” or “the employers”—that is, the shareholders. They are merely the beneficiaries of directors’ duty to increase profits, but they have no role to play in pursuing that very goal other than (as he notes in passing) when they elect the board.’Friedman’s article (actually, he was restating ideas he had put forward before in Capitalism and Freedom) is supposed to be at the heart of a theory of “shareholder value” which many, on the left and also the corporatist right, nowadays oppose. Friedman’s point was mainly that businesses should focus on making profit for their shareholders. The main reason for that is what I’d call transparency: assessing the performance of a business’ managers in reaching this goal is a much more straightforward affair. Other standards tend to be more opaque, and more difficult to assess, giving managers more latitude vis-à-vis the owners of the company. Of course Friedman is often misinterpreted as if he maintained that corporations should be focused on making profits regardless of the law, of basic human rights, et cetera. He did not. Friedman claimed that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.” He never thought companies could do anything beyond the rules of the game.

Instead, as Enriques writes:

When Friedman wrote his piece, the shareholders of US companies were mostly individuals and rarely voted at annual meetings other than to rubber-stamp managers’ proposals. Today, a large majority of listed firms’ shares are held by institutional investors—that is, managers of other people’s funds. Institutions have become key players at US (as well as non-US) listed corporations (e.g., this OECD study with data from across the world), because they regularly vote portfolio shares at shareholder meetings. And their pro-management vote is nowadays anything but certain.

Read the whole thing. Though the corporate world has changed in the last fifty years, significantly, Enriques maintains that Friedman’s paper ‘still provides a useful framework for understanding the implications of managing companies for one purpose or another. And perhaps also for answering the reframed question of whether corporate managers should cater to the preferences of their portfolio-value-maximizing indexing investors when making decisions on behalf of their corporations.”

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A Partial Defense of Milton Friedman’s 1970 NYT Essay

To understand my story, you first need to understand Friedman’s basic point. Here it is in a nutshell: Managers are employees of corporations. In the decisions they make with corporate resources, they should be responsible to the corporation. That means being responsible to the stockholders, who, after all, are the corporation’s owners. The vast majority of stockholders want the corporation to, in Friedman’s words, “make as much money as possible.” Thus Friedman’s claim that the social responsibility of a corporation is to make money. Friedman was clear that he wasn’t advocating breaking the rules. He stated that the managers should conform “to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

I learned Friedman’s point in a personal way when I was eleven. My mother had raised us to help others. I liked doing that and didn’t see it as a heavy obligation. But when I was eleven, my brother, Paul, who was fourteen, bought a cheap set of golf clubs and hired me to caddy for him. When we were on the eighth hole of a nine-hole course near our summer cottage in Minaki, Ontario, we saw a golfer hunting in the rough for his lost golf ball. I thought I should stop and help, so I did.

Paul had a different view: he wanted to play through and I was working for him and so I should do what he asked. We had a big argument and I finally gave in. When we got home, my brother complained to my mother that I hadn’t kept my side of the bargain. I was sure my mother would support me. She didn’t. “When Paul hired you,” she said, “you were working for him. When you’re on your own you can stop and help someone find his ball, but when you’re working for someone, he has the right to decide whether to let you.”

The lesson stung, but I ended up agreeing. That’s why the most important part of Friedman’s essay spoke to me. It’s simply wrong, when you’re working for someone, to use his resources for your ends when they don’t promote his ends. In the case with my brother, I was using my time to help others but my time was really his time: he was paying for it. In the case of corporations, managers might be using both their time and the corporation’s resources to help others even though shareholders own those resources and own the manager’s time that they are paying for.

This is from David R. Henderson, “Friedman’s Critics Miss the Mark,” Defining Ideas, September 24, 2020.

I was one of the 20 people asked to comment on passages of Friedman’s famous 1970 NY Times essay, “The Social Responsibility of Business Is to Increase Its Profits. Hoover colleague and EconTalk host Russ Roberts was another.

One of the strangest comments was by Felicia Wong. I write:

Commenter Felicia Wong, president and CEO of the Roosevelt Institute, notes that Friedman wrote when America’s “overwhelmingly white” fears were about Watts, Detroit, Vietnam, Kent State, Jackson State, and the assassinations of Martin Luther King Jr. and Robert Kennedy. Hmm. I recall that when King and Kennedy were murdered a lot of black people were upset, too, particularly by King’s murder.

I did note an irony in Friedman’s original essay though:

I’ll end by noting an ironic argument in Friedman’s essay that I don’t agree with and I wonder if even he would agree with today. Fortunately, it doesn’t undercut his case against corporate social responsibility. In stating that managers shouldn’t use corporate resources at the expense of shareholders, even for purposes that a huge percentage of us would agree are good, Friedman argued that we should leave those functions to the government. He wrote:

On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary, and judicial provisions to assure that taxes are imposed so far as possible in accordance with the desires of the public—after all, “taxation without representation” was one of the battle cries of the American Revolution.

That ignores what we have learned, and Friedman learned, from the “Public Choice” school of economics, led by James Buchanan and Gordon Tullock. Government’s incentives are usually perverse and we see the bad results almost daily. There’s much more hope, and I think Friedman shared that hope, for private voluntary activity.

Read the whole thing.

 

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EconTalk with Bob Chitester

The latest EconTalk interview is with one of my favorite people, Bob Chitester. It’s well worth listening to, especially his story about how he, a manager of a small-city PBS station, decided to make the series that made him famous and made Milton Friedman even more famous than he was: Free to Choose.

He talks briefly, by the way, about the students who spend a week at Capitaf at Vermont working through Milton’s Capitalism and Freedom. I was the discussion leader the first time they did this, and afterwards I recommended that the next time, we drop a few chapters of Capitalism and Freedom and add a few chapters of Milton and Rose Friedman’s Free to Choose. We did that the next summer. Each book is special in its own way, something that Russ Roberts and Bob agree with each other on.

Both Russ and Bob talk about the importance of Friedman’s smile. I agree. The word I would use to explain it is “warmth.” Milton Friedman was a warm man and thus the smile.

Near the end Bob talks about the power of poetry and then recites a poem. I agree about its power. Here’s one of my favorites, which I read aloud at an event on war at California State University, Monterey Bay about 10 years ago.

Hate
by James Stephens

My enemy came nigh,
And I
Stared fiercely in his face.
My lips went writhing back in a grimace,
And stern I watched him with a narrow eye.
Then, as I turned away, my enemy,
That bitter heart and savage, said to me:
“Some day, when this is past,
When all the arrows that we have are cast,
We may ask one another why we hate,
And fail to find a story to relate.
It may seem then to us a mystery
That we should hate each other.”

Thus said he,
And did not turn away,
Waiting to hear what I might have to say,
But I fled quickly, fearing had I stayed
I might have kissed him as I would a maid.

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Skidelsky on Economics

On our sister website, Law and Liberty, I have a review of Robert Skidelsky’s last book, What’s Wrong With Economics. I was unimpressed by the book. It looks to me like an attempt to build a straw man out of modern economics, which is blamed by Skidelsky for, of course, “neoliberal” policies.

The book is strongly idoelogical but, leaving ideology aside for a minute, I was amazed by the view of the social sciences Lord Skidelsky proposes.

He

is apparently incapable of understanding the pursuit of social science as something different from policy punditry. It is revealing that Skidelsky is puzzled by a quote from Milton Friedman, who charmingly described himself as “somewhat of a schizophrenic”: “On the one hand, I was interested in science qua science, and I have tried—successfully, I hope—not to let my ideological viewpoints contaminate my scientific work. On the other, I felt deeply concerned with the course of events and I wanted to influence them so as to enhance human freedom.” Some economists, political scientists, or philosophers may enter their fields because of their political vision of how the world should be improved. Yet it does not mean that they do not try to challenge their own opinions about the facts. Nor does it mean that they may not be, in pursuing their studies, interested merely in understanding how or why a particular phenomenon happened. Friedman honestly described a difficult navigation which is hardly exclusive to the economist. (Consider a Democratic reporter at the Republican National Convention, for instance.)

The review is here.

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Keynes, Friedman and champagne

Zachary Carter has written a biography of John Maynard Keynes that has been widely reviewed.

He is not – as opposed to Robert Skidelsky, Keynes’s master biographer – an economist and a scholar- but a journalist (a senior reporter at HuffPost). His work has received positive reviews. In the Wall Street Journal, Benn Steil pointed out that Carter’s book is at the same time a biography of Keynes (and he liked it as such) and a rant against neoliberalism (with few if any original ideas). He writes: “Mr. Carter seems to believe that Keynes, were he alive today, would be advising Sen. Bernie Sanders.”

Carter has an interview in the Washington Post. The interview is dense and interesting, but I was particularly struck by this passage:

I think we lose track of the fact that Friedman and Keynes had different social visions. They weren’t just arguing across the generations about which policies would best create the same desired result. They were arguing about what kind of world they wanted to live in. And the mathematicization of economics in the 20th century really obscures this deeper ideological conflict, often by design. Keynes wanted everyone to live in the Bloomsbury of 1913, having their hair cut by Virginia Woolf while drinking champagne and debating post-impressionism with Lytton Strachey. Friedman wanted to preserve these activities as the exclusive domain of the wealthy. Why be rich if you can’t live a better life than the masses? To which Keynes would counter: Who cares about the masses when you are drinking champagne with Virginia Woolf?

Carter is spot on on Keynes, but not so much on Friedman. For one thing, from what I know about Milton Friedman (David Henderson can certainly correct me if I’m wrong), I cannot see him particularly enjoying debating post-impressionism with Lytton Strachey. The more important point is that under Milton Friedman’s social vision you do not have a *right* way to live, to which people should aim to adhere. Keynes thought that a life worth living was a life spent having champagne with Virginia Woolf; Friedman thought that some people simply prefer fish and chips and there’s no problem with that.
This does not mean that Friedman wanted to keep something “the exclusive domain of the wealthy” nor that he was indifferent to education as a means to climb the social ladder. He was not. Actually Friedman wanted the poor to get the best education they could and, precisely for that reason, he wanted market-like mechanisms in education too (the school voucher). But Friedman did not assume that people want to enroll in universities to read Catullus, Shakespeare, or for that matter Keynes or Friedman. Some of us appreciate and value these things, but others do not. Most people indeed care for a degree in order to be able to find a better paid job.

I suppose Friedman would defend basic literacy and numeracy also as part of a healthier democratic life (“people who can read the daily paper are less likely to be fooled by government” is a standard classical liberal argument, though I am afraid a more dubious one than our forerunners thought). But he would not like to turn everybody into an intellectual because, guess what, most people do not want to become one.
I think this is a clear cut difference between the sort of attitude Friedman personifies and the sort of attitude Keynes personifies. One is happy with human beings as they are; the other is not. This pre-political understanding of people can explain lots of differences in the nuts and bolts of public policy.

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