The Dangerous Legacy of Milton Friedman

Robert McGarvey
September 14, 2020

Today marks the fiftieth anniversary of Milton Friedman’s landmark New York Times article: “The Social Responsibility of Business is to Increase its Profits.”

Friedman used his Times article to reinforce the radical antisocial ideology of Ayn Rand. He gave an establishment voice to her central idea that ‘society does not exist’ when he stated that social responsibility was a “fundamentally subversive doctrine.”

“Businessmen, who talk this way (about social responsibility) are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”

He set the stage for the moral crisis in modern capitalism by maintaining: “…there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits…”

Under Friedman’s guidance, Rand’s disruptive ideas began to form the unspoken assumptions behind monetarist economics, and subsequently when monetarism rose to prominence in the ‘70s it unintentionally institutionalised many of Rand’s hurtful dogmas at the very heart of the economic and political establishment.

With these central biases in the driver’s seat, the greater good would no longer be the starting point or the strategic goal for economics. The science of economics under monetarism soon began to assume a firmer belief in the purity of markets (supporting Rand’s belief that any restraint on capital is bad) while adopting the principle of individualism: that is, the proposition that all large-scale economic problems can be explained by aggregating over the behaviour of individual agents. It is no surprise that both the Thatcher and Reagan revolutions in the ‘80s were deeply influenced by this monetarist ideology; their common mission centering on Rand’s desire to unleash capital from the dead hand of government regulation.

Dumbing Down Society

Monetarists assume for a variety of reasons that markets are frictionless. In the minds of strict monetarists, markets are assumed to perform so perfectly and so efficiently that they sustain themselves in equilibrium. In other words, market signals can be considered essentially objective realities. And given the parallel assumption that all relevant phenomena are ultimately translatable into market signals, it follows that identifying and controlling a few key financial variables constitutes the best way to manage complex human systems—especially the economy.

Like many theoretical innovations, monetarism was controversial; it was applied carefully within the economics profession. Outside, in the world of government policymaking, finance, and business, the ideology of monetarism was swallowed whole; hook, line, and sinker. Starting with these assumptions, there began a great simplification in economic thought. It amounted to nothing less than a financialisation revolution.

For instance, it became commonplace for central bankers to believe that simple manipulation of interest rates held the key to managing the boom and bust cycles in the economy. Meanwhile, the general public was encouraged by monetarists to judge the health of the economy from numbers generated in the stock market. In the corporate context, monetarism manifested itself in a belief that a business enterprise is best managed through manipulating key variables on the financial statements: cash flow, generally in the form of earnings before interest, tax, and amortisation (EBITA), bottom-line profits, and (indirectly) the company’s stock price.

The effects of monetarism were deep-seated. At a stroke, it reduced our most important social dialogues to a debate about numbers. The problem is that the numbers don’t tell the whole story. Market signals are, at best, highly questionable and modern financial statements don’t come close to quantifying the ‘guts’ of a business, a community, or a national economy. There are a host of non-quantifiable factors that are critical to success and that don’t appear on the financial statements; as a result, key governing factors tend to get lost in the shuffle. More importantly, financialisation diverted everyone’s attention from the things that really matter.

Friedman will be remembered for many things, including his critique of Keynesian economics and his seminal work on how monetary mistakes contributed significantly to the Great Depression in the 1930’s.

However, his experiment in extreme laisser-faire economics has led to both ethical erosion and the financial crisis we’re experiencing today. 50 years is enough, perhaps it is time for some new thinking.

Robert McGarvey

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