Milton Friedman Versus Stakeholder Capitalism

Yves here. Jomo Kwame Sundaram continues his takedown of Milton Friedman’s legacy. Note that I’m not keen about the expression “stakeholder capitalism”. However, the prevailing view among economists and even corporate executives themselves prior to the concerted effort to move US values to the right was that companies were responsible to the broader communities in which they lived. This attitude may have resulted in large measure due to the fact that American companies, even public ones, were smaller than they are now. Their top executives were leaders in the towns in which they were headquartered and thus wanted to be respected by other local notables.

The flaw with “corporate social responsibility” as  a way to get companies to behave better, as opposed to the fear of not being admitted to the best country club in town, is that it relies on shareholders to discipline companies. As we’ve written at some length, based on the foundational work of Amar Bhide in his article Efficient Markets, Deficient Governance, the price for liquid and readily tradable stocks is a monster corporate governance. Unhappy shareholders will simply sell and move on rather than do the hard and not profitable work (in terms of return on their effort) of getting companies to shape up. The sole exception is activists who find particularly promising targets and accumulate enough shares to be a credible threat. The overwhelming majority of institutional investors have legal or commercial reasons not to operate that way.

By Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Inter Press News

Milton Friedman was arguably the most influential economist of the second half of the 20th century, associated with promoting ‘neo-liberal’, free-market, shareholder capitalism.

Friedman’s monetarist economics is now widely considered irrelevant, if not wrong, especially with the low inflation associated with ‘unconventional’ monetary policies following the 2008-2009 global financial crisis.

Nevertheless, Friedman’s ‘shareholder capitalism’ doctrine remains influential in most financial markets, especially emerging ones in the developing world.

His doctrine, prioritizing short-term profit maximization, has long dominated Anglo-American corporate governance despite chatter about ‘stakeholder capitalism’ and ‘corporate social responsibility’ (CSR).

Chicago University’s Raghuram Rajan claims that long-term share value maximization can advance almost everybody’s long-term interests.

But even Glenn Hubbard acknowledges that long-term shareholder-value maximization cannot address many problems faced by firms, let alone societies. Having served George W. Bush’s conservative administration, he recognizes the need for public policy interventions.

Friedman’s shareholder primacy principle can also become absurd. Rajan’s former co-author Luigi Zingales argues, “if you take Friedman to an extreme, I should sue a CEO who doesn’t buy off all the members of Congress”.

More importantly, Zingales points out that corporations have duties as public institutions with special privileges granted by the state such as “limited liability, especially with respect to tort claims, is an extraordinary privilege granted by the state”, implying reciprocal obligations.

Friedman’s manifesto insisted that companies focus on making money, leaving ethical matters to individuals and government. US law enshrines shareholder rights as owners able to challenge or replace boards whose members stray from their fiduciary duty.

Stakeholder Capitalism?

Friedman vehemently opposed stakeholder capitalism, whose proponents argue that companies have responsibilities to all stakeholders, not only shareholders, but also employees, customers, society and even nature.

He argued that ‘stakeholders’, typically ill-defined, will insulate directors from shareholders, reduce their accountability, and compromise corporate performance. This would allow executives to pursue their personal priorities or cover up their own failures.

Straying from Friedman’s singular focus on profit maximization would mean that corporate executives are no longer loyally and exclusively serving shareholders, worsening the ‘principal-agent’ problem.

For Friedman, government and other stakeholders should not be allowed to interfere with shareholder corporate governance in any way, or worse, undermine incentives for investors to risk their capital. In his doctrine, profit alone should be corporations’ sole motive.

Joseph Stiglitz has noted that US courts have ruled that firms are obliged to maximize profits and shareholder value, excluding all other objectives. Hence, ‘stakeholder capitalism’ is not rooted in US law as corporate executives are not accountable by law to the communities in which they operate, or even to society at large, let alone to nature.

What a Wonderful World?

Friedman also presumed market imperfections did not exist, or would be fully taken care of by regulation. However, the rule of law has never really been adequate to such challenges.

Thus, he effectively gave companies ‘moral cover’ to be ruthless, free and unregulated to pursue their own interests, at the expense of the public good, while not worrying about society’s larger interests.

Friedman also criticized business leaders for straying from maximizing profits and worrying about their public image, the social good and public welfare.

While dismissing talk of stakeholders as attempts by company directors to be free to run companies as they like, and for public relations, Friedman approved of companies that “generate good will as a by-product of expenditures that are entirely justified in its own self-interest”.

But he was conspicuously silent about business interests lobbying, rigging elections, making campaign contributions, compromising research and public discourse, while reputation laundering with philanthropy and public relations.

Friedman’s world view is remarkably simplistic, typically ignoring broader, ‘longer term’ consequences. For him, business efficiency — due to shareholder primacy, not undermined by company directors, managers, government taxes and regulations — can and will solve all problems.

Stakeholderism Challenged

Friedman’s neoliberal ‘doctrine’ shaped major economic reforms the world over from the 1980s until the 2008-2009 global financial crisis. Lacklustre growth since then has given rise to various new challenges to shareholder capitalism, not least in the name of other stakeholders, and appeals for corporate governance reform and CSR.

Multi-millionaires, even some billionaires and chief executive officers (CEOs), have joined the dissent, whom influential businessman writer Andrew Ross Sorkin would have us believe represent the future.

To be sure, many have undoubtedly turned away from Friedman’s thinking in recent years.

In 2019, the influential Business Roundtable, which had long advocated shareholder primacy, issued a pro-stakeholder statement. It replaced its Friedmanite Statement on the Purpose of a Corporation with “a fundamental commitment to all of our stakeholders”.

A few months later, the World Economic Forum issued a similar 2020 Davos Manifesto, embracing stakeholder as well as environment, social and governance (ESG) principles.

Nevertheless, legendary investor Warren Buffett remains sceptical of ‘purpose-over-profit’ stakeholder advocacy. “In representing your interests, business-savvy directors [will] seek managers whose goals include delighting their customers, cherishing their associates and acting as good citizens of both their communities and our country.”

Meanwhile, most advocating a stakeholder approach to corporate governance argue that considering the interests of employees or other stakeholders is good for company profits and shareholders. Yet, they privately acknowledge that profits must come first, even if they feel constrained to say so in public.

Corporate Social Responsibility?

Some argue they are defending capitalist free enterprise in the long term by having a ‘social conscience’ and taking responsibility for providing employment, avoiding pollution and pursuing other trendy CSR reforms, ostensibly in companies’ ‘enlightened self-interest’.

Others insist that many contemporary problems are too urgent for slowly meandering political processes. Instead, they argue, CSR “is a quicker and surer way to solve pressing current problems”.

CSR is said to be a useful, if not necessary complement to government policy and regulation. Friedmanite critics object that CSR involves spending shareholder money for a typically vague public interest, reducing company returns and spending ‘other people’s money’.

Friedman warned that the doctrine of ‘social responsibility’ would take over if not checked. But the converse is more true today as ‘greed is good’ and the ‘short-termist’ shareholder mentality is clearly hegemonic.

Others object that CSR involves the ‘socialist’ view that political, not market mechanisms are better for allocating scarce resources to alternative uses. But CSR has also been invoked to justify wage curbs against trade union demands, ostensibly for some higher public purpose.

CSR has also been invoked when philanthropy and charity have been abused to minimize tax liability, and for public relations and marketing, e.g., by ‘greenwashing’ products and services.

W(h)ither Capitalism?

Embarrassingly, US corporations that signed the ‘stakeholder capitalism’ statement have been more likely to lay off workers in response to the COVID-19 pandemic, and less likely to donate to relief efforts.

With growing opposition to neoliberal capitalism, ‘stakeholderism’ and CSR have been invoked to save capitalism by offering a more sensitive ‘human’ face.

As capitalism may well be the only ‘show in town’ for some time to come, popular demands for more thoroughgoing reforms, checks and balances are likely to grow as the realities of stakeholder capitalism and CSR become increasingly apparent.

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34 comments

    1. Yoghurt

      Yes. And mutual funds and ETFs (and any other “emboxing” of shares) do not have you vote the individual shares therein. Also, even if you own some ordinary shares of some company, the vote options are very limited. Setting the questions is important and most shareholders have no say in that either.

      Reply
  1. timbers

    “…the prevailing view among economists and even corporate executives themselves prior to the concerted effort to move US values to the right was that companies were responsible to the broader communities in which they lived.”

    Companies like State Street and Johnson&Johnson have corporate credos that promise to be a good member in the community in which they work and live. They are very proud of these “credos” and make a big deal about them.

    Except if they don’t like the profit margin in that community, they pack up and move to low wage community like India. Exactly how it that being a good member of the community?

    Probably they would reply they are good corporate citizens in their new low wage communities. Except if that’s true, why do we never see J&J HR making training modules teaching us that is war is wrong and violates CREDO, that selling arms for profits to foreign nations fighting each is wrong, that spending trillions on weapons not for defense but to kill people, is wrong? That imposing trade embargoes on Venezuela, Iran, Iraq that kill millions of children and people, is wrong? That J&J spending every year many billions of dollars on stock buy backs to enrich their top management while we have (60 millions?) folks with no access to healthcare, is wrong? Because it’s bad for the community in which we live and work?

    Is teaching employees that war and killing and illegal sanctions that kill people in the communities that we work or may work is wrong, really so controversial that it’s off limits to CREDO and HR?

    State Street has outsourced and transferred every department they possibly could out of Boston and Quincy, Ma, to low wages nations like Poland and India – but NOT the customer service side dealing with American clients. They kept that domestic, at least so that they had enough Americans with American accents to interact with American clients with American accents.

    Because that’s “being a good corporate citizen in the community in which you work and live.” Or rather it’s good for profits.

    And not just State Street, the entire industry. Mellon, Fidelity, JPMorgan. Mellon has a cavernous office building located in Medford, Ma with many dark and empty long and deep aisles of desks because they decided to become good corporate citizens in other cheap labor nations like all the rest in their business..

    Johnson&Johnson has come to rely heavily on contractors, and treats them like 2nd class citizens. We often watched as the Johnson&Johnson direct hires walked off saying nothing to us into their secret cult meetings to discuss secret things like their CREDO and what else we don’t know because they don’t talk to us about it and we’re not allowed or even invited to these meetings. They just all start disappearing and going somewhere and we’re left behind like in a horror movie or something wondering if we offended someone so as not to invited to the party everyone is going to in front of our faces. The contractors have similar/same titles and job functions as many of the J&J direct hires, but lower pay and fewer benefits.

    J&J also has a training module on tolerance. It includes someone making jokes about a co worker with a Turban. It teaches how this is wrong and we must not that. J&J has a good number of Indian contractors in the U.S. Is that all they can come up with?

    Yet, I never see HR making training modules teaching is war is wrong, that selling arms for profits to foreign nations fighting each is wrong, that imposing trade embargoes on Venezuela, Iran, Iraq that kill millions of children and people, is wrong.

    Why is that? Could it be companies like State Street and J&J is a actually harming it’s stated goal by being hypocrite promoting a CREDO is doesn’t even pretend to follow?

    Reply
    1. Big Tap

      Worked at J&J for decades and as a full time employee. Once the Credo meant something and they did follow it like in the 1982 Tynenol cyanide tamperings but now it no better than used toilet paper. It purpose now is to impress job recruits how ethical they are and get favorable business articles written.

      You’re right in that they don’t treat their temps properly. I saw that myself but they’re probably like any other company. J&J is not in the military arms business that I’m aware of.

      Reply
  2. TomDority

    The de-regulation of the fire sector, the fictional economy’s favored tax treatments is where the big money is pushed to the top via the much vaunted shareholder value.
    Given that the captured political class, has for years, been pushing pro-rentier, pro-financial legislation (which IMHO is the fictional economy) via vehichles like ALEC and various other Oligarch funded research and policy institutes – It is no wonder that the real economy, in which humans live, has been decimated – along with the planet upon which all life and work occurs.
    Deregulation and pro-financial legislation boil down to lower taxes – less fussing around with pollution controls, worker safety, fiduciary resposibility etc. means less money spent there – less money spent is equvalent to a tax break. —- fees, penalties, tolls, required health insurance premiums, credit card fees and hundreds of other nibbles are all taxes…. taxes imposed by private or public entities and given a different name.
    I do believe that individuals, businesses and corporations that work and produce tangible goods should be taxed less – and that individuals, businesses and corporations whos income is derived via activities that impose tolls upon the economy should be taxed more.
    A tax should be used as it’s name implies. Impose a burden/tax upon activities that are unwanted by a majority of the population.
    Laborers knowing that science and invention have increased enormously the power of labor, cannot understand why they do not receive more of the increased product, and accuse capital of withholding it. The employer, finding it increasingly difficult to make both ends meet, accuses labor of shirking. Thus suspicion is aroused, distrust follows, and soon both are angry and struggling for mastery.
    It is not the man who gives employment to labor that does harm. The mischief comes from the man who does not give employment. Every factory, every store, every building, every bit of wealth in any shape requires labor in its creation. The more wealth created the more labor employed, the higher wages and lower prices.
    But while some men employ labor and produce wealth, others speculate in lands and resources required for production, and without employing labor or producing wealth they secure a large part of the wealth others produce. What they get without producing, labor and capital produce without getting. That is why labor and capital quarrel. But the quarrel should not be between labor and capital, but between the non-producing speculator on the one hand and labor and capital on the other.
    Co-operation between employer and employee will lead to more friendly relations and a better understanding, and will hasten the day when they will see that their interests are mutual. As long as they stand apart and permit the non-producing, non-employing exploiter to make each think the other is his enemy, the speculator will prey upon both.
    Co-operating friends, when they fully realize the source of their troubles will find at hand a simple and effective cure: The removal of taxes from industry, and the taxing of privilege and monopoly. Remove the heavy burdens of government from those who employ labor and produce wealth, and lay them upon those who enrich themselves without employing labor or producing wealth.

    If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
    Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.

    Written around 1925

    Reply
      1. TomDority

        Quote begins at — Laborers knowing that science and invention..
        Second quote at — If part of the speculator’s income…..
        Author not named
        From title:
        Tax Facts
        Published in the Interest of Sound Economics and American Ideals

        avail on google books and scanned from the University of California Library – Berkley

        Reply
  3. GlassHammer

    “However, the prevailing view among economists and even corporate executives themselves prior to the concerted effort to move US values to the right was that companies were responsible to the broader communities in which they lived.”

    That sentiment never matched the reality of our nation’s extremely violent history of conflict between workers/communities and employers/corporations.

    Reply
    1. Procopius

      GlassHammer: Please note that the quotation only applies to economists and corporate executives. It seems to me to imply that they now hold the opposite view.

      Dean Baker, at CEPR/Beat the Press, often points out that “shareholder value maximization” is actually, in practice “CEO compensation maximization.”

      Reply
  4. Sound of the Suburbs

    Why have our neoliberal policymakers led us blindly into a financial crisis?
    That always happens with neoclassical economics.

    Milton Freidman rehashed 1920s neoclassical economics, but didn’t fix any of its major problems.
    Neoliberal policymakers kept driving economies into financial crises because they had no idea what they were doing.

    What’s wrong with neoclassical economics?
    1) It makes you think you are creating wealth by inflating asset prices
    2) Bank credit flows into inflating asset prices, debt rises faster than GDP and you eventually get a financial crisis.
    3) No one notices the private debt building up in the economy (apart from the Chinese) as neoclassical economics doesn’t consider debt.

    As you head towards the financial crisis, the economy booms due to the money creation of bank loans.
    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
    The financial crisis appears to come out of a clear blue sky when you use an economics that doesn’t consider debt, like neoclassical economics.

    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
    https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
    Policymakers set a course for a financial crisis because they have no idea what they are doing with this dire economics.
    1929 – US
    1991 – Japan
    2008 – US, UK and Euro-zone
    The PBoC saw the Chinese Minsky Moment coming and you can too by looking at the chart above.

    Reply
    1. Dirk77

      Granted all that you say is true, what does it have to do with the article topic about a need for something better than shareholder primacy in corporate decision making?

      Reply
    2. Synoia

      Neoliberal policymakers kept driving economies into financial crises because they had no idea what they were doing.

      Actually, finical crises, lurching to destruction, are expected in a system with little or no Governors, Or little or no Governance, aka positive feedback.

      Friedman advocated uncontrolled system. He did not know, and probably did not want to know, control theory.

      The most sophisticated use of control theory is used in Rockets. If I recall correctly it requires up to the 4th differential as feedback of motion to travel as wished.

      Reply
  5. Temporarily Sane

    Yup, it’s just more lipstick on the same old greedy pig. The WEF call their transhumanist techno-totalitarian dystopia “stakeholder capitalism” but Klaus Schwab, Mr. Davos himself, is one seriously crazy mofo.

    As capitalism may well be the only ‘show in town’ for some time to come, popular demands for more thoroughgoing reforms, checks and balances are likely to grow as the realities of stakeholder capitalism and CSR become increasingly apparent.

    Didn’t we just go through this?

    Popular demand tried to get Sanders elected but a combination of personal incompetence and aggressive neoliberal pushback prevented him from coming anywhere near power, while celebrated establishment “leftists” like AOC are all talk (and more talk) but no action.

    The left is a spent force and has been all but absorbed by the deranged clown show that is Woke liberalism.

    Getting used to the idea that we are in the midst of civilizational collapse and preparing accordingly is probably a more sensible way of facing present reality than passively waiting for a thoroughly corrupted and broken system to magically repair itself.

    Reply
    1. fwe'zy

      Thanks for this link. It has brought clarity to some ideas I was muddling. “Agile governance,” nanoparticles spying on us and modifying us from within our own meatbags, drones, “private regulators” acting through the market, fewer laws … don’t tread on private capital accumulation!

      Reply
  6. Susan the other

    Since capitalism will likely be with us for years to come? What a meaningless idea. Not unless the Fed aggressively supports it. The Fed and other central banks are actually now taking demand more seriously than supply. No doubt because putting corporations on life support is too dumb for words. So that changes everything, doesn’t it? Economists might still want to call it Capitalism – but it looks like it has morphed into Demandism to me. And with that in mind, can’t we anticipate a federalized social equity “for years to come?” If that’s not a new form of socialism, I don’t know what is. But just for old-time’s-sake we’ll all agree to call it capitalism.

    Reply
  7. Charles Yaker

    It’s all a crock of S…. With Narcissistic greedy possibly still immature people like Zuckerberg and Bezos only government regulation including jail time and loss of corporate certification will control bad actors and serve the public. Unfortunately regulatory capture and a Government that works for the few not the many is what we have and it does not look like it will change anytime soon. will it change in time to save the earth’s human population? It may but probably not the current civilization.

    Reply
  8. flora

    Thanks for this post.

    about Friedman’s argument:

    Friedman also presumed market imperfections did not exist, or would be fully taken care of by regulation. ….

    But he was conspicuously silent about business interests lobbying, rigging elections, making campaign contributions, compromising research and public discourse, while reputation laundering with philanthropy and public relations.

    Yes, indeed.

    I’m glad to see that change in what is considered ‘sound’ economic thinking is starting. It’s still in a half-in half-out stage: ‘the market can correct itself’ voluntarily vs. the market needs more external, democratically decided, impartial regulations.

    (I disagree with the author that the law has never been equal to the task of regulating corporations in the public interest. The first half of the 20th century showed US govt, at least, was up to the task. The next 20 years til 1970 included.)

    All changes have mid-way or half-way stages. This is at least trending in a better direction than Friedman’s market absolutism. imo.

    Reply
    1. flora

      Adding: the US tax code was changed, beginning in the 1980’s, to accommodate outsourcing and offshoring (eliminating US manufacturing jobs), accommodate profits taking over reinvesting in productive expansions onshore, and privilege capital gains profits over earned wages.

      Changes in the tax code are worth looking at, imo.

      Reply
      1. flora

        note: this is not about “soaking the rich”. It’s about changing the tax code so it doesn’t encourage US job destruction and looting the real wealth of corporations built up over decades, e.g. stock buybacks to pump up the stock price was illegal until the 1980s.

        Reply
      2. Procopius

        Paul Volcker raising interest rates above 20% (briefly) had something to do with making manufacturing in the United States uncompetitive. It also had something to do with breaking the unions, but that’s off topic for this post.

        Reply
  9. Barking Cat

    “Friedman’s world view is remarkably simplistic . . . .”

    That’s about all that needs to be said. I got an MBA in 1972. Not one of my classmates, not one, believed or supported Friedman’s nonsense.

    “Friedman warned that the doctrine of ‘social responsibility’ would take over if not checked.”

    Indeed one of my MBA classes was called “Business Ethics and Trends” and it covered the subject that Friedman was so torqued about. Friedman is the reason I always attach the adjective “soulless” to the word “libertarian”.

    Reply
    1. John Wright

      Here is what Dave Packard, founder of HP wrote:

      “I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so they are able to accomplish something collectively which they could not accomplish separately. They are able to do something worthwhile— they make a contribution to society (a phrase which sounds trite but is fundamental).”

      There was a different mindset at some corporations before the “always maximize profit” goal became prominent.

      I have related before that Hewlett and Packard were not quick to IPO their stock.

      The company was founded on January 1, 1939, but did not IPO their stock until November 6, 1957.

      Imagine, waiting more than 18 years to do an IPO in today’s financial environment.

      Reply
  10. Mike Furlan

    “Milton Friedman’s legacy.”

    Free to Choose.

    Unless you choose wrongly, then we will send our goons to kill you.

    “In the first months after the coup d’état, the military killed thousands of Chilean leftists, both real and suspected, or forced their “disappearance”. The military imprisoned 40,000 political enemies in the National Stadium of Chile; among the tortured and killed desaparecidos (disappeared) were the U.S. citizens Charles Horman, and Frank Teruggi.”

    https://en.wikipedia.org/wiki/1973_Chilean_coup_d%27%C3%A9tat#Casualties

    Reply
  11. Carolinian

    John Kenneth Galbraith supposedly said of Friedman, “the problem with his ideas is that they have been tried” and indeed I’m reading a book about the robber baron railroad era in the late 19th cent. Many small railroads then were little more than get rich quick schemes by financiers meaning that “shareholder value” was not only the main thing but also the only thing (if you were the right shareholders.) Strange that somebody at the prestigious U of Chicago should be as ignorant of history as, say, Donald Trump. And yet Friedman’s ideas rule our world for the last few decades. Econned indeed?

    Reply
    1. John Wright

      As I believe it is unfolding, the financial industry and the economics profession will have a lot of explaining to do when the big externality of climate change manifests itself.

      Both big finance and the economics profession suggest they are critical (“God’s Work” – per Goldman Sachs) for the wise allocation of society’s resources.

      What will happen if their summed wisdom is viewed as fatally flawed?

      Reply
      1. WobblyTelomeres

        Ilsa, I’m no good at being noble, but it doesn’t take much to see that the summed wisdom of economists doesn’t amount to a hill of beans in this crazy world. Someday you’ll understand that.

        Reply
  12. Chauncey Gardiner

    A small but important part of this is financial accounting of social costs and disinvestment that are not presently included in accounting for corporate losses or profits in the financial statements rather than being relegated to a contingencies footnote gamed by management, corporate legal counsel, and their accountants if they’re reported at all. Besides overturning the Supreme Court’s Citizens United case decision and those of related cases that enable corporations to basically buy favorable legislation through their campaign contributions and revolving doors, change the financial accounting standards to require accounting for social costs by independent third parties, and prohibit corporate stock buybacks and cash dividend payouts in instances where net losses would result from including those social costs.

    From a recent NC post:

    …”So the Patent Office report came out with an idea saying if you’re going to measure national output, you have to measure the cleanup costs, the costs of replenishing the soil, the cost of replenishing the environment for all this. And the whole idea of environmentalism and ecology was developed by the Americans in the 19th century.

    It’s not in the textbooks now. Literally, all of this has been expurgated. But obviously if you included in the national statistics, disease and destruction and the costs of oil pollution, you’d see that to make just a few million dollars for an oil company, they’ll cause environmental pollution that will cost billions of dollars to clean up, global warming, rising sea levels, and all of this. If you took to account for what economists call externalities, you’d find that indeed the world’s getting worse.

    But economists call that externality. And of course it’s not really an externality, because it’s real. It should be internal.” —Michael Hudson, transcript of interview with Steve Grumbine titled “Macro N Cheese: Debt Deflation and the Neofeudal Empire”; Naked Capitalism, October 5, 2020

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  13. Upwithfiat

    Joseph Stiglitz has noted that US courts have ruled that firms are obliged to maximize profits and shareholder value, excluding all other objectives.

    And that’s just wrong since a jointly owned company should do the will of its owners (within the law), not “maximize profits and shareholder value, excluding all other objectives.”

    But then one has to accept that share owners are (gasp!) co-owners of the company and not just residual claim owners.

    Then let’s aim for the broadest ownership of companies if we believe in democracy.

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  14. Sound of the Suburbs

    The classical economists could observe the world of small state, unregulated capitalism in the world around them.
    Today’s economists worked up from micro foundations and got very confused.

    How different is classical economics?

    Adam Smith on Profit:
    “But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin.”

    Exactly the opposite of today’s thinking, what does he mean?
    When rates of profit are high, capitalism is cannibalising itself by:
    1) Not engaging in long term investment for the future
    2) Paying insufficient wages to maintain demand for its products and services
    Today’s problems with growth and demand.
    Amazon didn’t suck its profits out as dividends and look how big it’s grown (not so good on the wages).

    In fact, Amazon is maximising growth.
    The wealth generated by companies can go in three different direct directions:
    1) Down to workers in wages
    2) Up to shareholders in dividends
    3) Re-invested back into the company
    Amazon is passing as little as possible down in wages.
    Amazon isn’t passing anything up to shareholders in dividends.
    Amazon is re-investing as much as it can back into the company for growth.
    It works.

    They do have to hope other companies are paying high enough wages to buy lots of stuff from Amazon.

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  15. Sound of the Suburbs

    Why is the US going down the pan?
    I have been studying the history of neoliberalism and this reveals the Mont Pelerin Society went round in a circle and got back to where they started.
    Western liberalism failed miserably in the 1930s and new ideas took hold, but those in favour of Western liberalism looked to bring it back in a different form.
    They were initially well aware of past failings and sought to address these problems, but as time went on, they moved further and further to the right and got back to pretty much the old form of Western liberalism, with its old problems.
    A close inspection reveals the US is just repeating the mistakes of the 1920s and this is why it’s going down the pan.

    At the end of the 1920s, the US was a ponzi scheme of inflated asset prices.
    The use of neoclassical economics and the belief in free markets, made them think that inflated asset prices represented real wealth accumulation.
    That’s the problem; they still think inflated asset prices represent real wealth accumulation even after the 1987 stock market crash, the S&L crisis, the dot.com bust and 2008.

    Luckily the Chinese are keeping their eye on the ball.

    Davos 2018 – The Chinese know financial crises come from the private debt-to-GDP ratio and inflated asset prices
    https://www.youtube.com/watch?v=1WOs6S0VrlA
    The black swan flies in under our policymakers’ radar.
    They are looking at public debt and consumer price inflation, while the problems are developing in private debt and asset price inflation.
    The PBoC knew how to spot a Minsky Moment coming, unlike the FED, BoE, ECB and BoJ.

    The Chinese know what to look out for to spot a financial crisis coming.
    This nice Chinese chap tried to warn the Americans the US stock markets was at 1929 levels at Davos 2018.
    https://www.youtube.com/watch?v=1WOs6S0VrlA
    The West’s experts couldn’t change the subject fast enough (49 mins.)
    He was trying to help, but they wouldn’t listen

    As a CEO, I can use the company’s money to do share buybacks, to boost the share price; get my bonus and top dollar for my shares.
    What is there not to like?
    Share buybacks were found to be a cause of the 1929 crash and made illegal in the 1930s.

    What lifted US stocks to 1929 levels in 1929?
    Margin lending and share buybacks.
    What lifted US stocks to 1929 levels in 2019?
    Margin lending and share buybacks.
    A former US congressman has been looking at the data.
    https://www.youtube.com/watch?v=7zu3SgXx3q4

    Like I said, they are repeating 1920s mistakes.

    Reply

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