As of today, I write for Time, and the Curious Capitalist is back. I’m finding it a very strange experience to start work at an actual news organization after being immersed for weeks in the (re)writing of a book. I haven’t been reading newspapers, I’ve barely touched the telephone, and the only places on the Web I’ve been going to regularly have been sports sites (there’s nothing like being stuck in the middle of the fourth draft of Chapter 14 to make a man check the Liverpool-Chelsea score every three minutes). I’m completely out of it.
I do know a lot, though, about the history of the efficient market hypothesis and the path that it and some related ideas out of the University of Chicago took as they wended their way into the economic mainstream (because that’s what my book is about). One of the landmarks of that history, in my telling, was a famous article that Chicago economist Milton Friedman wrote for the New York Times magazine in 1970. “The Social Responsibility of Business Is to Increase its Profits,” was the headline. Argued Friedman:
In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has a direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.
As sifted through the ideas of Michael Jensen and William Meckling, who proposed that a company’s stock price was a near-perfect measure of whether its executives were doing the work Friedman laid out for them, this became the doctrine of “shareholder value” that business executives across the land purported to embrace in the 1990s.
So far, so good. I’m a big Friedman fan, and I agree that corporations that put other goals above long-run profits are looking for trouble. But long-run profits are hard to pin down in the here and now, and while stock prices (because they reflect investors’ estimates of future profits) are the best single gauge, they’re beset by error and noise. In the last years of the 1990s boom, lots of corporate executives did enormously destructive things in pursuit of higher stock prices.
Which brings me back to Friedman, and his line about making “as much money as possible while conforming to the basic rules of the society.” He treats those “basic rules” as exogenously determined. They’re a given, and executives have to live with them.
But that’s not the way it works at all. Corporations fund massive lobbying efforts in Washington. They hold great sway with the setters of accounting standards. They influence our very customs. And so relying on the relentless pursuit of profitability “within the rules of the game,” as Friedman put it elsewhere, is not a reliable route to economic nirvana. The rules of the game have to be part of the discussion as well.
I know I’m not the first person to realize this. Come to think of it, Jack Bogle recently wrote an entire book more or less on the topic, The Battle for the Soul of Capitalism. Perhaps it’s time for me to take it off the shelf and read more than just the one page where Bogle recalls being asked a question by a “young journalist” named Justin Fox. But first, I’m going to read a newspaper.