The Origin Of 'The World's Dumbest Idea': Milton Friedman

[zeos3]

http://www.forbes.com/sites/stevedenning/2013/06/26/the-origin-of-the-worlds-dumbest-idea-milton-friedman/

Friedman’s article was ferocious. Any business executives who pursued a goal other than making money were, he said, “unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.” They were guilty of “analytical looseness and lack of rigor.” They had even turned themselves into “unelected government officials” who were illegally taxing employers and customers.

How did the Nobel-prize winner arrive at these conclusions? It’s curious that a paper which accuses others of “analytical looseness and lack of rigor” assumes its conclusion before it begins. “In a free-enterprise, private-property sys­tem,” the article states flatly at the outset as an obvious truth requiring no justification or proof, “a corporate executive is an employee of the owners of the business,” namely the shareholders.

Very interesting article. It's worth a read.

Not everyone agreed with the shareholder value theory, even in the early years. In 1973, Peter Drucker made a sustained argument against shareholder value in his classic book, Management. In his view, “There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. . . . The customer is the foundation of a business and keeps it in existence.”

Similarly in 1979, Quaker Oats president Kenneth Mason, writing in Business Week, declared Friedman’s profits-are-everything philosophy “a dreary and demeaning view of the role of business and business leaders in our society… Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life’s purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit.”

[arcane1]

1. Kick!!

[JVS]

2. I thought the earliest proponents of the idea were the Dodge brothers and the Michigan supreme court

http://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Company

[zeos3]

3. Wow! Thanks for the link.

By 1916, the Ford Motor Company had accumulated a capital surplus of $60 million. The price of the Model T, Ford's mainstay product, had been successively cut over the years while the cost of the workers had dramatically, and quite publicly, increased. The company's president and majority stockholder, Henry Ford, sought to end special dividends for shareholders in favor of massive investments in new plants that would enable Ford to dramatically increase production, and the number of people employed at his plants, while continuing to cut the costs and prices of his cars. In public defense of this strategy, Ford declared:

"My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business."

From this, it seems, Ford had a long term view for the company and was interested in the "greater good" that would come of his decisions. The judgement came in favor of the Dodge brothers who were the biggest shareholders behind Ford.

The Court held that a business corporation is organized primarily for the profit of the stockholders, as opposed to the community or its employees. The discretion of the directors is to be exercised in the choice of means to attain that end, and does not extend to the reduction of profits or the nondistribution of profits among stockholders in order to benefit the public, making the profits of the stockholders incidental thereto.

His actions were also thought to be an effort to get rid of the Dodge brothers because he suspected they were using their Ford dividends to build a rival car manufacturer. He was correct.

Here is more about "shareholder profits".

"Among non-experts, conventional wisdom holds that corporate law requires boards of directors to maximize shareholder wealth. This common but mistaken belief is almost invariably supported by reference to the Michigan Supreme Court's 1919 opinion in Dodge v. Ford Motor Co."[1]

"Dodge is often misread or mistaught as setting a legal rule of shareholder wealth maximization. This was not and is not the law. Shareholder wealth maximization is a standard of conduct for officers and directors, not a legal mandate. The business judgment rule [which was also upheld in this decision] protects many decisions that deviate from this standard. This is one reading of Dodge. If this is all the case is about, however, it isn’t that interesting."[2]

Here are the cited articles:

Why We Should Stop Teaching Dodge v. Ford
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1013744

Everything Old is New Again: Lessons from Dodge v. Ford Motor Company
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1070284

[Mojorabbit]

4. Great piece! This idea of business has brought the planet to it's knees.nt