Suppose, as the chief executive of a corporation, you realize that your company’s income is destined to rise. As a result of increased efficiency in production, lower costs for materials, improvements in products and services, and increased demand, you anticipate seeing an influx of new money. As chief executive, you have the happy problem of deciding what to do with that new money. In the traditional terminology, how should you slice up the pieces of that pie?
Fifty years ago, economist Milton Friedman wrote an influential article in the New York Times Magazine, in which he proposed that the executive did not need to slice the pie at all. Just give it all to the investors. The executive has a fiduciary responsibility towards the owners, and no such responsibility towards customers, workers, neighbors, or the general public. The interests of the owners, according to Friedman, are “generally to make as much money as possible.” So the executive should just give it all to them.
I think Friedman was enough of a realist to understand that if the executive had to hand the pie to the investors, the executive would also take a healthy slice for himself (or, less often, herself).
And in the ensuing fifty years, America has seemed to have lived in Friedman’s world. The Gross National Product has gone up substantially, but wages have stagnated. The federal minimum wage has not gone up in decades. Other programs to help the poor have weakened. Tax rates for the wealthy have fallen sharply. All, or nearly all, of the increased wealth has gone to investors. That seems like Friedman’s ideal recommendation, but it is not. It is worse.
Friedman, in that article, imagined that a relatively strong government would take care of public goods that the free market could not accommodate. Someone in government would have to maintain the safety net, so that people would not starve if they could not work because of their own illnesses, or disabilities, or the need to care for others with disabilities. Someone would have to pay for health care for those who need medical attention. Someone would have to regulate the markets, to give new companies the opportunity to compete with established companies. Someone would have to regulate corporations to protect the public from fraud, and from pollution. Someone, in the words of Michigan Governor Whitmer, would have to “fix the damn roads.” We could not expect private corporations to take on these tasks.
Friedman envisioned executives who would run corporations to the satisfaction of the investors, in “accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.”
What we have seen in America since Friedman wrote his article goes beyond this vision. Executives discovered that they could make even more money for themselves and their investors if they worked to change the “basic rules of society . . . embodied in law.” The law is not immutable. Legislators, who write the laws, could write laws to accommodate corporations more thoroughly. A campaign donation from the corporation, or a personal favor from the executive, could earn many multiples of its value in reduced taxes or relaxed regulatory oversight. A gift to help elect a judge could result in standards of evidence for bribery cases that ensure that no one ever gets convicted of that offense.
Friedman also wanted to see corporations limit their activities to conform with the standards “embodied in ethical custom.” Ethical custom is not immutable. People would certainly consider it unethical to sell baby powder if they knew it was contaminated with asbestos. Johnson and Johnson could conceal the evidence about asbestos contamination and its health effects just long enough to keep selling the baby powder for 49 years. People would consider it unethical to burn unlimited amounts of fossil fuels if they knew about climate change, but the fossil fuel companies launched secret campaigns to convince the public that there exists a scientific debate about fossil fuels and climate change.
In the current covid-19 pandemic, as in the economic downturn of 2008, the economy stumbles, so the government bails out the investor class, and then, as an afterthought, might do something for the rest of us. Whenever the economy chugs along, nearly all the wealth goes to wealthy investors, as Friedman foresaw.
The Irish politician Sean Lemass coined an aphorism (and President John Kennedy made it popular) that “a rising tide lifts all boats.” Prosperity, the aphorism maintains, will be widely, if unevenly, shared by rich and poor. Since Kennedy’s day, the American economy has not worked that way. Instead, prosperity accrues to the wealthy, and hardly helps the vast majority of American. In effect, “a rising tide lifts all yachts.”
The daily newscast usually features falling life expectancy in America again this year, wildfires on the West Coast, hurricanes in the Southeast, rising death-tolls from another wave of the pandemic, a grand jury decision not to prosecute the police officers who killed a Black woman; the report ends, as usual, with the reassuring news that the stock market is up again today.