The Purpose of the Corporation Isn’t Lobbying

(Bloomberg Opinion) -- If you were out to depict Milton Friedman-style free-market economics as a matter of faith more than reason, you couldn’t do much better than have a choir called Friedmans Apostlar (Friedman’s Apostles, or just the Milton Friedman Choir) sing a hymn that begins:

Milton Friedman

On corporations says

Corporations have no social duty

Except to those who own their stock

Here’s the whole thing:

The video was included in the DVD extras of the 2003 Canadian documentary “The Corporation,” a highly critical look at the institution’s societal role, and when I first came across it this week on YouTube I thought it must have been intended as satire. But no, it appears to have been a friendly if surely somewhat tongue-in-cheek homage from the student choir at the Stockholm School of Economics, which took on Friedman’s name after singing to him at a Nobel Prize luncheon not long after its founding in 1989.

The hymn is also a reasonably faithful, if not always felicitously phrased, rendition of Friedman’s famous argument, expressed first in his 1962 book “Capitalism and Freedom” and then in an oft-cited 1970 article in the New York Times magazine, that:

There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

The first half of this “Friedman doctrine,” while widely accepted in the 1980s and 1990s, has come under increasing attack since the corporate scandals of the early 2000s and the global financial crisis of a decade ago. The notion that corporations might have some other responsibilities besides making a profit and turning it over to shareholders (whom Friedman mentioned as the corporation’s ultimate beneficiaries but whose role subsequently became even more central in the theory of the firm advanced by his disciples Michael Jensen and William Meckling) has become increasingly popular, even among chief executive officers.

One problem with such alternative visions of the purpose of the corporation — most of which can be bundled under the title “stakeholder capitalism” — is that they lack the straightforward elegance of Friedman’s statement. Another is that CEOs’ claims to be acting in the public interest are often humbug. “I have never known much good done by those who affected to trade for the public good,” Adam Smith wrote in the same passage of “The Wealth of Nations” where he described how an individual who “intends only his own gain” could be “led by an invisible hand to promote an end which was no part of his intention.”

A better critique, less of Friedman’s argument itself than of how it has been interpreted by many executives and investors over the years, is that it can be awfully hard to tell what behavior will generate the most profit over time, and that explicitly trying to maximize profit or shareholder return can often lead to the opposite outcome.

But the really problematic aspect of the “Friedman doctrine” may actually be the second half, the “so long as it stays within the rules of the game” part. Those rules aren’t fixed, of course, and corporations and other businesses play a significant — some might say decisive — role in shaping them. So what does staying within the rules of the game even mean?

This was the focus of a conference I attended at the University of Oxford’s Blavatnik School of Government over the weekend, which is what set me on the path that led to watching a YouTube video of Friedmans Apostlar singing about corporations. Organizers Rebecca Henderson and David Moss of Harvard Business School, Luigi Zingales of the University of Chicago’s Booth School of Business, and Karthik Ramanna of the Blavatnik School held the first of these “Crisis in the Economic Theory of the Firm” conferences at Harvard in 2015. The second took place in Chicago in 2017, and this year’s third edition featured a bunch of papers about corporate influence on government, panel discussions on the role of judges and of journalists (I was on that one), and exhortations to search for better ways to think about the appropriate relationship between businesses and government.

It’s not that Friedman didn’t worry about this relationship, or the lengths business executives might go to to avoid “open and free competition.” As he put it in a response to an audience question during a 1978 visit to Kansas State University:

You must distinguish sharply between being pro-free-enterprise, which I am, and being pro-business, which I am not. Those are two different things.

The answer to concerns about the political influence of big business, Friedman continued, was to “reduce the scope of government.” The less government could do to help or harm businesses, the less reason businesses would have to try to influence the government. There’s logic to that. But since the late 1970s, despite a “Reagan revolution” inspired in part by Friedman, the scope of the U.S. government has arguably increased, while business’s influence over it has surely grown.

The academic study of this influence has over the years focused largely on campaign donations and lobbying expenditures, and it has not come to particularly strong conclusions. But some of the most dramatic examples of increased corporate sway aren’t directly linked to such spending. The U.S. Supreme Court, for example, has since the 1970s used a novel interpretation of the First Amendment to assert ever-stronger protections for business, as John Coates of Harvard Law School described in an impassioned 2015 essay. The Financial Accounting Standards Board has allowed corporate and financial interests to game the rules of accounting, Ramanna argued in his 2017 book “Political Standards.” And in a draft paper presented at last weekend’s conference, Pepper Culpepper of the Blavatnik School and Kathleen Thelen of the Massachusetts Institute of Technology argued that “platform companies” such as Google and Uber are developing new forms of political influence by enlisting consumers en masse as lobbyists.

When I talked to him at the close of the conference, Ramanna said part of the goal was to come up with arguments and evidence that might conceivably have persuaded Friedman, who died in 2006, that conditions had changed so much as to render his assumption of reliable rules of the game obsolete. I talked to Friedman from time to time during the last decade of his life, and while he was a charming and thoughtful interlocutor, he seemed pretty much done with changing his mind. It’s more likely, of course, that younger economists of a Friedmanite bent would be persuadable (conference co-organizer and Chicago economist Zingales certainly fits that description).

Still, I have the feeling that a new or revised theory of the firm isn’t going to really catch on until it can be packaged as a hymn. Some ideas in economics pack the most clout when they can be taken on faith.

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