On Capitalism - Part 1 (Why are Profits King?)

Recently, Vox ran an article on Elizabeth Warren’s plan to save capitalism.  This might seem strange given the push by many on the left, notably Bernie Sanders, for what is often called democratic socialism.  Warren herself is no stranger to the progressive wing of the Democratic Party and has often championed many of the proposals put forth by Sanders and others.  Yet, here she is with a plan to keep government out of the running of a business (a play towards conservatives) and work for a more equitable distribution of wealth (a play towards the progressive left).  At its core, Warren’s plan is an attempt to return corporate America to a place where it recognizes responsibilities to not only shareholders, but also employees, customers, and the community.

I’ve often wondered what caused corporate America to become singularly devoted to profits and shareholder equity.  Thankfully Vox pointed me in the direction of Milton Friedman’s 1970 article “The Social Responsibility of Business is to Increase its Profits.”  In it Friedman lays out the argument that business, and the executives running it, should pursue the goals set forth by the owners “which generally will be to make as much money as possible while conforming to the basic rules of the society.”   Friedman does constrain his comments to the corporate executive and removes the individual small business owner from consideration.    However, Friedman is arguing that executives running corporate America should be strictly interested in making money for the owners.  He is making the assumption that the only reason someone owns a business is to make money.  Admittedly, no one starts a business with a plan to lose money.  Investors buy stock to earn dividends and, eventually, sell it at a profit.  Obviously a business needs to turn a profit in order to be successful.  But, Friedman is arguing that profit should be the ONLY goal of the business.  What the owners do with their money is up to them, but that’s after it’s paid out to the owners.

Friedman’s real issue lies in how money is utilized before it’s paid out to the owners.  He goes on for several paragraphs regarding the executive’s use of funds that diverges from ways in which consumers, employees, and owners would use the funds.

        “What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire "hardcore" unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.”

Friedman describes this use of funds as “imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.”  Since this is a form of taxation, it should be subject to political processes, he argues.  Since business should be controlled by market forces, and not political ones, requiring the executive to exercise some “social responsibility” is antithetical to a capitalist economy.

Here’s the rub – using Friedman’s own examples, corporate executives across the United States are engaged in taxation every day.  In working to maximize the profits going toward the owners, the executive is regularly engaging in actions that spend the customers’ money and the employees’ money.  Raising prices and keeping wages down are two great ways to increase profits.  Corporate America does this quite regularly.  Capitalists are going to argue that consumers can take their business elsewhere if the price gets too high and employees can find new employment if wages are too low.  They’re going to say that these are market forces at work.  The only problem is that employees are being shut out of the conversation. 

Wage growth has stagnated even as the absolute wealth in this country continues to skyrocket.  The vast majority of the wealth created right now is being directed into the hands of the wealthiest individuals.  Money is being spent by the corporate executive in a way that is different from how the employees would spend it.  The bottom end of the corporate structure is being taxed so that the top end can grow even richer than it already is. 

This is why I find Friedman's argument wrong.  By single-mindedly pursuing profits, corporate executives are engaging in a political action.  An action in which not all parties have a vote.  If employees had an actual say in decisions made by the board, if they had representation as Warren proposes, then there would be a more equitable balance of the responsibilities of the corporate executive(s).