Trashing Milton Friedman

Earlier this year, I took one of Milton Friedman's best-known quotes to task. I received a lot of passionate email on both sides of the argument, but now that our economy is in a tailspin, I feel as if -- sadly enough for all of us -- my point is proven. Here's the quote:

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.

Wrong. We could, of course, argue on and on about the definition of "social responsibility," but many businesses and their managements that did, in fact, increase profits within the rules are now revealed to be guilty of antisocial irresponsibility.

Profit at all costs?
My January article "Where Milton Friedman Was Wrong" admittedly contained a bit of an inflammatory headline. Economically, politically, and philosophically, I agree with Friedman on many, many things.

My position was that I believe the quote has been widely hijacked and misinterpreted by legions of folks looking for an excuse to indulge in a race-to-the-bottom, profit-at-all-costs mentality and cloak it in terms of standard economics or "the free market."

The filter of interpretation can be dangerous, and I believe many individuals and corporate players rationalized that particular quote to justify doing anything and everything to profit, regardless of whether the actions were sound for the long term -- or even particularly ethical.

And there's a whole lot that's unsound now.

Paybacks are hell
Behold the dirge of disaster that has come to pass in an incredibly short period of time:

Bear Stearns was swallowed by JPMorgan Chase (NYSE: JPM  ) (with a government backstop); Fannie Mae and Freddie Mac are in conservatorship; Lehman Brothers has filed Chapter 11; Bank of America (NYSE: BAC  ) is buying Merrill Lynch. AIG (NYSE: AIG  ) has been rescued, with the rather mind-blowing twist that it's now 79.9% owned by the government -- in other words, nationalized. Say what?

These great "heroes" of industry -- people call them capitalists and free marketeers, but don't be fooled -- have let us down in a horrible sense. They took terrible risks and/or made stupid decisions. For many, those strategies appeared to be succeeding during a bubble period, and they profited, all right. Now that their bad decisions are coming home to roost, though, they're whining and crying for help from all of us.

Something smacks almost of blackmail and bullying, too, given the "too big to fail" mantra. Doesn't that sound like, "You'll be OK with saving us, or you and your entire family are going down"? That's how they've dragged our entire society into their mess. Like I said -- antisocial irresponsibility!

This wasn't what Milton Friedman had in mind. The people who make up corporations must have the ethics, intelligence, and backbone to behave responsibly. It's an idealism I share, what all of us free-market proponents want, including the strength to man up and pay the price if one fails.

After all, regulation most certainly seems logical and necessary when people can't keep themselves in check.

So here we are. Thanks, guys.

Greed isn't good
It's too bad our culture seems to have been channeling the fictional Gordon Gekko instead of acting in the prudent fashion that great economic thinkers like Milton Friedman would have been proud of.

For now, at least, we can search for truly good, solid companies with great corporate leaders to invest in, and make our displeasure known to the grasping, craven, self-serving ones who are, in my opinion, endangering everything that's great about our society.

There is still hope
There are still extremely responsible companies run by extremely responsible individuals. They are what make us great, and they promise success for long-term shareholders. And I know David and Tom Gardner, Fool co-founders and co-advisors for Motley Fool Stock Advisor, have by no means given up looking for them.

Warren Buffett is a standout example. In a prescient 2006 memo, he warned his managers never to settle for the all-to-familiar excuse "everyone else is doing it." When assessing the morality of a proposed action, managers should instead ask themselves two questions: (1) Is this legal? And (2) Would I feel comfortable with this printed on the front page of our local paper?

As Buffett has noted before, "It takes 20 years to build a reputation and five minutes to ruin it."

In fact, one of the first questions the Stock Advisor team asks when considering a company is whether it's built to last for the next 100 years or more. That sentiment is most certainly not chasing after short-term profits at the risk of long-term disasters.

Through their Motley Fool Stock Advisor service, the Gardners search for solid companies with bright futures and seek the ones with strong management teams. It's no wonder that Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , with its well-known and wise leader, Warren Buffett, is a Motley Fool Stock Advisor recommendation. 

A few more examples for you
For years, Costco (Nasdaq: COST  ) ignored Wall Street's criticisms of supposed profit drags like low prices and excellent pay and benefits for employees. Mutually beneficial initiatives like these built a loyal following that helped Costco become a nine-bagger since 1995.

Or consider Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , a socially responsible business that has often shown up at or near the top of the Business Ethics/CRO "Best Corporate Citizens" list over the years. Its partnerships with Mexican and Indonesian coffee growers not only improved their living conditions but also allowed them to improve quality and productivity. It's no accident that the stock has risen 3,389% over the past 10 years.

If you're looking for more excellent companies run by forward-thinking and responsible people, Stock Advisor is offering a special free 30-day free trial. Simply click here to learn more.

Once we raise our standards for corporate conduct and behavior and demand -- and get -- better, then we will be able to say Milton Friedman was right.

Alyce Lomax owns no shares of any of the companies mentioned, but the Fool owns shares of Berkshire Hathaway. Costco is a Motley Fool Stock Advisor selection. JPMorgan Chase and Bank of America are Income Investor recommendations. Berkshire Hathaway is both an Inside Value and Stock Advisor pick. The Motley Fool is investors writing for investors.


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  • Report this Comment On October 04, 2008, at 12:09 PM, feryl wrote:

    I still agree with Milton's quote. Your main criticism seems to be that business leaders were shortsighted. Maximizing profits requires that you be in existence long enough to be profitable in the future, as well as this quarter. Taking excessive risks does not maximize profits. Those companies which recognize the need to manage risk as well as immediate income will, in the long term, maximize profits.

  • Report this Comment On October 04, 2008, at 12:21 PM, littliegoldencat wrote:

    This was an excellent article! Greed can destroy free market systems which in turn leads us to the most distasteful of all remedies- political bailouts!

  • Report this Comment On October 04, 2008, at 1:47 PM, dlchasta35 wrote:

    I agree with feryl. Companies that maximize short term profits vs. long term profits will fail in the end.

    Friedman is speaking of long term not short term goals. The goal of any company is the generation of profits. This does not mean maximizing profits at the expense of reputation as that is a long term disaster.

  • Report this Comment On October 04, 2008, at 2:57 PM, alanomaly wrote:

    Definately. Not wrong, just unwise...

    Milton Friedman is like an archery teacher who says, "Aim at the middle of the target".

    He's right, but 9 people out of 10 arrogantly aim squarely at the middle without thinking, miss by a mile because of wind, drag, gravity etc, and try to act like it's not their fault.

    Just like the 9 out of 10 businesses who aim squarely at profit by unthinkingly throwing away the backbone of their business, arrogantly thinking that there won't be any consequences that they can't think of from the comfort of their (or their accountants') office.

  • Report this Comment On October 04, 2008, at 6:19 PM, larubia6901 wrote:

    Rules of the game. Let me zero in right there. Sarbanes Oxley 2002; scores of scholarly work in this area. A gazillion organizations (e.g. UN, OECD, Transparency International, ILO, BSR, GRI, etc.) ALL have HIGH visibility. SOX 2002 was supposed to prevent inappropriate and fraudulent accounting practices. These organizations, scholars and other high profile businesses (Nike, Starbucks, etc) have CSR programs. It's embedded into the societal NORMS. Do not let anyone say that the "rules of the game" are purely legislated, that's plain bull-hockey! We have incorporated ethics and CSR into our B-Schools for several years. Those bad actors KNEW that what they were doing was wrong. Even worse is the uneducated public who signed for all those loans. BASIC literacy or lack thereof plays a part here. Business and consumers who thing, gee, the government will bail me out. And guess what, 50% of my paycheck goes to one government or another. All I'd like is a pension, and MAYBE just maybe some health care in my old age for my trouble in paying my taxes. We got ripped off as taxpayers by the banking companies involved, but also by the benign stupidity of consumers who didn't follow the old adage: "if it's too good to be true, then it must be a scam"

    CSR works, so now instead of trying to keep it unregulated, I would prefer to help get it regulated. Friedman is right, but we best understand that the "rules" include societal norms.

  • Report this Comment On October 04, 2008, at 7:49 PM, thku4grace wrote:

    I will never, ever buy into any idea that consumers were somehow duped into buying homes with sub-prime adjustable rate homes. Perhaps, some dolt out there somewhere may have been duped, but virtually everyone else made their decision on desperation to own in a rising real estate market. It was about greed. They likely reasoned that either they would qualify later to refinance with a fixed rate after their equity rose with the market or they would just sell it into a great real estate market and make a tidy profit. The no downside reasoning. Its not unlike the many stock investors who have watched the market rise steadily for an extended period in a bull market only to finally step into the market when its time to turn over and correct lower.

  • Report this Comment On October 04, 2008, at 10:38 PM, gary55981 wrote:

    I agree with thku4grace and also add that the Democrats helped promote this activity by reducing the lending requirements at Fredde Mac and Fannie Mae (SP?) with the good intensions to promote home ownership by the poor and minorities. This has proven once again that good intentions can and does lead to stupid actions that lead to terrible results.

  • Report this Comment On October 05, 2008, at 3:01 AM, jordy99 wrote:

    Funny thing about all you "social responsibility" people: you're the people who disliked the power the church had in the past because it rammed its morals down our throats--just like you're doing here. If I'm in business, I can do anything and make as much money LEGALLY and honestly as I want and I don't have to apologize for anything or to anybody. These people didn't always do it legally, rarely honestly but the biggest thing is they didn't do it intelligently and neither did the borrowers. Other than that, if you don't like it, too bad. Friedman was right. BTW, God bless Phillip Morris.

  • Report this Comment On October 05, 2008, at 1:24 PM, jbs1234 wrote:

    TIME OUT!!!!

    How profitable is Bear Stearns today? I'll help you -- they aren't. Even by MF's definition they were not socially responsible. Hey author... you are in agreement with MF...

    This is not a question of profits vs social responsibility. This is a question of Long v. Short Term. Any sustainably profitable company necessarily addresses social responsibility.

  • Report this Comment On October 06, 2008, at 1:28 PM, Richard233 wrote:

    I guess it all depends on what you consider the rules of the game.

    The reality is, Wallstreet decided to issue paper that said it was backed by mortgages, but failed to disclose the true quality of those mortgages. Couple this with the insurance issued (but not called insurance to avoid regulations) without retaining the reserves needed to pay, and you are clearly violating the rules of the game.

    Which is, provide what you say you are selling.

    Issue a mortgage to someone so they can stay in a house for less than the cost of rent, with the ability to profit if the house rises in value, and the ability to walk away if it doesn't, then you should not act surprised to see what happened, happens.

    I'm waiting for a lot of people to go to jail here. I also expect a lot of lawyers to get rich attempting to extract money out of the overpaid CEO's, CFO's and members of the various boards who let this happen.

  • Report this Comment On October 06, 2008, at 3:38 PM, rootdown42 wrote:

    The apologists for Friendman on here are doing a good job of blurring the original quote and the point that the author was making. The quoted statement says nothing more than "social responsiblity of businesses" = "legal profits", and nothing else. It does not distinguish between long term and short term profits, nor does it care about reputation (as if businesses with terrible ethics are always exposed for their wrongs). As with most of Friedman's theories, its junk, because "the rules" are defined by law. And so if there is no law or regulation regarding something, it must be OK to do, because after all, being profitable is the most important thing. Hence you get worthless credit default swaps because Phil Gramm made sure it was unregulated, so in this backwards fantasy world, you'd be socially irresponsible if you didn't attempt to secure profits from these junk assets. Friedman's work has always been used to justify letting capitalism run rampant, and the results are always the same; few are enriched, many suffer.

  • Report this Comment On October 06, 2008, at 6:16 PM, jse17 wrote:

    Before anyone at anytime and anywhere states a scintilla of positive thought regarding Friedman, the detailed reading of Naomi Klein’s, “Shock Doctrine - Disaster Capitalism” is mandated.

    Freidman, an intellectual of means, is the architect of more deaths than perhaps any other individual in history via his Chicago School of Economics thugs and their evil message. Milton is the Charles Manson of economics having the capacity to empower others to perform dastardly deeds while Milton sips tea with the Nobel Laureate Committee.

    Again, without reading “Shock,” one cannot possibly be aware of “why we are where we are” as a society especially before the upcoming US election and a potential remedy. Hey, do not blame me for the message conveyed in “Shock” as I am simply an objective and now enlightened reporter!

    Best of luck to all and defend yourself at all times!

  • Report this Comment On October 06, 2008, at 6:17 PM, YRDOG wrote:

    Yes, you have gotten to where a large part of this mess began; when Milton Friedman and his Chicago Boys started their free market globalized deregulated privatized spin on capitalism. Bush senior made fun of this nonsense when he ran against Regan in 1980, called it Voodoo economics. Trickle down economics has proven in the last 30 years what its name implies, namely that very little ever trickles down to the 80% of the population that needs it. If you want to start pointing fingers, go to the universities and start removing economic books that have taught this toxic waste for the last 30 years. Everyone in this country is guilty of the financial meltdown, from the economists who started to sell the industrialized base of this country down the river to the financial geniuses who threw meat in front of the poor and got everyone in debt beyond their wildest dreams, to the poor who just had to have the biggest SUV on the block and buy a house way beyond their means. The politicians from both parties have been in on the frenzy, starting with Regan getting the ball rolling, Clinton allowing CPI indexes to be fudged and fraudsters like Gramm to help his wife loot Enron into the ground and his (Clinton) secretary of Treasury Rubin to undo the Glass-Stiegel bill so he could slip out the back door and take over CitiBank and put his handwork to good use. This has been going on for 30 years and the Ponzi scheme is falling apart. And of course, lets not forget Sir Alan Bubbles Greenspan, whose bubbles gave the illusion of wealth to so many. And now right at the end of the game, the SEC changes marked to market to marked to model so that King Henry can start buying the financial lumps of sh*& from banks at retail price with taxpayer money instead of fire sale price. The banks are still feeding from the system (taxpayers) on their way down and out. And our sage, George Bush just might be the one who is right when he pronounced, "This sucker could go down." Enough finger pointing, we are all in on this, And remember, a nasty part of privatized capitalism al la Friedman, is that there is no safety net, no health insurance for the citizen. Bush and the neocons tried to privatize social security, imagine watching your social security vaporize every day along with your 401. Somehow, in all of this, I doubt that Milton Friedman’s family cares too much about what is going on or that they are hurting so much. A very good quote about September 2008 is "Innocent people are losing their jobs while the fraudsters are still on their yachts."

  • Report this Comment On October 06, 2008, at 9:33 PM, maiday2000 wrote:

    Wow, three socialist comments in a row...I thought this was an investor site. There is no problem with the Friedman quote, there is a problem with government interference into the free market that has lost its soul due to the government dictating the terms of transactions. Let's face it, there is no free market, especially in finance. When government entities like Fannie Mae go out of their way to purchase mortgages that have little chance of being paid back, how can that be called free market? There used to be a thing called responsibility in this country, and you didn't just blame your failures and shortcomings on someone else. As soon as the government stepped in and started playing the role of "parent" for everyone, we stopped functioning as a free market.

  • Report this Comment On October 06, 2008, at 10:23 PM, lowfiron wrote:

    Friedman has always been a jerk. Finally the investor class has seen the light. Yes there is no 'free market'.

  • Report this Comment On October 06, 2008, at 10:28 PM, dadyer wrote:

    Maiday2000 is correct, in my opinion. Reading through this thread just before Maiday2000's post appeared I was struck by the same thought: Nobody here, including Alyce Lomax, had even mentioned government involvement in this mess. And, make no mistake, government is the primary culprit here.

    People like Charles Schumer and Barney Frank encouraged Fannie Mae and Freddie Mac to disregard normal due diligence and loan money to anyone and everyone who stuck their hand out. This provided the incentive for borrowers to borrow for a home or speculate on a house they could not afford. It provided incentives for real estate agents and mortgage brokers to drive every warm body they could find to a closing. Why? Because they are in the business of putting buyers and sellers and borrowers and lenders together.

    It provided further incentives for lenders to make more loans (often under threat from government because of CRA), package them and sell them to Fannie Mae and Freddie Mac. Why? Because that's how they make their living.

    It provided incentives for the guys on Wall Street to take these CMO's and create tranches to sell to investors. Why? Because that's how they make their living.

    If you were in this business at any level you were faced with two realities: either get in the game, now redefined by government, or sit on the sidelines and take heat from your shareholders, and maybe lose your job for non-performance on the bottom line.

    This meltdown could have been prevented, or the damage severely diminished, if the Congress had heeded those who saw this coming and taken action. Repeatedly, those people were ignored and dismissed by key legislators like Dodd, Frank, and Schumer.

    Friedman was correct. All of this in no way reflects on the wisdom of one of the twentieth century's finest economists.

  • Report this Comment On October 06, 2008, at 11:10 PM, YRDOG wrote:

    For maiday and dadyer, read your history from 1929 to 1945. That was the last time the financial meltdown of free market capitalism occurred and it was massive government intervention that kept people from starving. Hoovers free market approach achieved nothing, his campaigne speechs in 1932 kept asking people to wait, the market was just about to turn... FDR came in with massive moves like nationalizing all the banks and providing government programs to help main street, not Wall street. Milton Friedman was determined to try and wipe FDR and the New Deal from the history books. Apparently he was successful with you people. Wake up, Milton Friedman is going to become a dirty word.

  • Report this Comment On October 06, 2008, at 11:50 PM, dadyer wrote:

    Well, YRDOG, massive government intervention that kept people from starving? As John Stossel is wont to say: Give me a break!

    The Fed failed its responsibility during and after the recession beginning in 1929 leading to the closure of thousands of banks across the country and deflation. The Congress then passed the Smoot-Hawley Tariff. Together, these turned what would probably have been an ordinary recession into The Great Depression, first by drying up the money supply when businesses and farmers needed it to provide jobs, second by destroying trade, and with it, our exporting industries, creating even more unemployment.

    FDR then proceeded to implement a Socialist agenda with the blessings (ignorance?) of the American people. If you find that hard to believe just google the Socialist Party of America political platform from fifteen to twenty years previous: minimum wage laws, social security, favored laws and status for labor unions, universal healthcare, etc., most of which has been achieved despite the fact that Americans have never elected a Socialist candidate to national office.

    Ludwig Von Mises predicted the eventual failure of socialism as early as 1921. It has already failed in the USSR. It is gradually failing in China and India as both are moving toward, and embracing, capitalism as the road to prosperity.

    I'm sorry, sir, but Milton Friedman and Frederich Von Hayak (The Road to Serfdom) were both correct.

  • Report this Comment On October 07, 2008, at 3:04 AM, YRDOG wrote:

    Dadyer

    My comments about FDR saving people from starvation are based on personal family stories, not some right wing revision of history. I am not sure if you are aware of some of Milton Friedman’s clients whom he tried to guide to deregulated privatization. His first big breakthrough was with the Fascist Augusto Pinochet. Several of his "Chicago Boys" (students of his from the University of Chicago) helped with the coup of the democratically elected President in 1973 and Milton flew down to meet Augusto in March 1975 to try and help with the economic mess they had created. Donald Rumsfeld was a convert in the 1960s, but lost favor with Milton when he went to work for Nixon. Friedman thought Nixon was the most socialist president the country ever had, after of course FDR. Milton went to China to teach the Chinese free market capitalism in 1980 and again in 1988. Milton basically taught these dictators that they could best carry out reforms after shocking the population with a crisis. Now it looks like this is what is happening here in the USA.

    Like Jse17 said, you really need to read The Shock Doctrine to get a inner view of just what kind of man Milton Friedman was.

  • Report this Comment On October 07, 2008, at 4:47 PM, TMFLomax wrote:

    OK, I think I need to chime in here, as the author. Thanks to everybody for reading and commenting, I'm glad to see some conversation. But I would like to clarify a few points: as I said in the article, I agree with Milton Friedman on many things including my economic beliefs. My problem with Friedman's quote is, I feel that too many people have backed away from basic ethics and perverted that quote into something that only serves them, for the short term.

    I am pro-free markets. When I stated that people are calling for regulation, it is the logical outcome to the kind of abuses we have seen from corporations and individuals these days. (Also agreed with the commenter who points out that just because something is technically legal, does not make it right, and that societal norms do count as rules.) However, no, I do not believe regulators are free of any blame (or form a very good solution going forward, frankly). I believe regulators are just as vulnerable to incompetence, causing unintended consequences by tinkering with economies, and downright corruption. And unfortunately, when the government tries to soften blows from economic realities, sometimes economic distortions occur and/or very bad incentives are put into place.

    When I wrote my last article discussing Milton Friedman, I was told I should read "The Shock Doctrine," and I was initially interested just for the POV, but the truth is, I decided not to -- it just didn't add up that what Klein describes has anything to do with Friedman, the premise sounded kind of shoddy to me. Here is a good article debunking a lot of her claims on Friedman: http://www.reason.com/news/show/128903.html

    The article points out what didn't add up for me as pertaining to Friedman; there is a huge difference between classical liberalism and what Klein seems to be railing against, which sounds more like corporatism. From what I have read of Milton Friedman and other similar thinkers, this is just a bizarre connection to make. There may be some corporatists who call themselves libertarians or free market proponents (in fact, these days, I suspect there are a lot of them) but just because somebody says they're something doesn't mean they are. Anybody who is a proponent of government favoritism and corporate welfare isn't anywhere close to my impression of Friedman's philosophy. Although another current problem may be people calling all sorts of things things that they're not for their own ends.

    Furthermore -- I have no doubt "shock doctrines" have existed in history, but more likely to scare people into *giving up* freedom in totalitarian regimes; it's outlandish to think that would be a policy to bring about true free market policy. I'm sure you could call the Iraq War, Katrina, etc., something, but "Friedmanite" doesn't spring to mind for me.

    Anyway, all due respect, but I felt I needed to address some of these comments if only to further clarify where I stand (and just underline my main takeaway -- if ethics and personal responsibility have gone out of style, we need to get them back for a free market to work).

    And next time I beat up on some element of economic theory and how it gets interpreted by people, I think I'll choose Keynes. ;)

  • Report this Comment On October 07, 2008, at 5:37 PM, dadyer wrote:

    Good choice, Alyce! The philosophy of J. M. Keynes played a large part in getting us to where we are today - economically and politically.

    Keynes was certainly a brilliant and competent economist. The problem with Keynes was he was also an aristocrat, a socialist, and an elitist. Evidently he really didn't understand politicians and/or chose to believe they were altruistic and would "do the right thing".

    His argument for deficit spending to stimulate the economy was, as Friedman would have said, probably well-intentioned. Friedman also said "the road to hell is paved with good intentions".

    In fairness to Keynes he did specify that the deficits should be repaid when tax revenues again increased. Unfortunately, since then, poiliticians have used deficit spending to try and bail us out of recessions but, once out, have used the higher tax revenues to engage in entitlement spending to get re-elected. Thus, the deficits accumulated throughout the years to produce the $10 Trillion debt we owe today.

    The 19th century economist and statesman Frederic Bastiat pointed out the difference between good and bad economists: the bad economist looks at the immediate, short-term consequences of a policy or action; the good economist looks at not only the immediate consequences but the unseen and long-term consequences of a policy or action.

    In his essay titled The Law (www.bastiat.org), Bastiat used logic and humor to destroy the arguments of the Socialists in the French Assembly. In the essay he pointed out the glaring differences between the French and American systems (in 1850) in terms of socialism versus capitalism and the prosperity in each country.

    Reading it today, one quickly can conclude that the U. S. Congress of the late twentieth and early twenty-first centuries has become the mid-eighteenth century French Assembly.

  • Report this Comment On October 07, 2008, at 6:36 PM, dadyer wrote:

    YRDOG

    "My comments about FDR saving people from starvation are based on personal family stories, not some right wing revision of history."

    To what "right wing revision of history" are you referring? The actions of the Fed and the Congress, and the eventual consequences, are rather difficult to "re-write".

    "Like Jse17 said, you really need to read The Shock Doctrine to get a inner view of just what kind of man Milton Friedman was."

    Actually, reading the works of the man himself gives one a much better insight into the man than reading Naomi Kleins distorted liberal rantings. You might try it.

    At the least, you should seek some alternative perspectives such as http://www.cato.org/pressroom.php?display=news&id=150 or http://www.tnr.com/story_print.html?id=69067f1c-d089-474b-a8...

  • Report this Comment On October 12, 2008, at 1:06 PM, Longanimous wrote:

    There is a tremendous difference between "unrestrained capitalism" and the Keynesian interventionism we still operate under.

    Buffet's comment that "It takes 20 years to build a reputation and five minutes to ruin it." implies there are negative consequences to negative greedy actions. Either to the corporate bottom line, civil litigation with monetary penalties, or criminal charges.

    Government bailouts and golden parachutes with no penalty clauses simply sustain the belief that there are no consequences.

  • Report this Comment On October 13, 2008, at 7:48 PM, flash3780 wrote:

    While I agree with you that many businesses have acted poorly of late, I cannot disagree with Mr. Freidman. His whole point here is that you cannot expect businesses to do anything but conduct business in a transparent way.

    That being said, I think many people would agree that a lack of transparency regarding credit-default-swaps is a major part of what's hurting the banking industry. We’re still not entirely sure who has how much money tied up in these things. In that sense, business leaders have not acting in line with Milton Friedman’s statement at all. What the leaders of theses businesses have done is at best poor management, and in my opinion, the companies should be allowed to succeed or fail on their own in the wake. However, poor management is not the same as a lack of ethics.

    You mentioned a “too big to fail” mantra. It seems to me that most of that talk has been coming from economic analysts (who have an uncanny ability to get things absolutely wrong) and your friendly government officials (who are in the midst of an election year and don’t want to be seen as unwilling to act in a time of crisis). Of course, you can expect that banks would be more than willing to receive a handout, but perhaps we should blame them less for taking it and blame government officials more for handing out so much of our money (over $3500 per working American).

    However, as for company ethics, there's a famous lecture by Milton Friedman in which a student questions the ethics of an electric company that turns off an elderly person's electric bill because he did not pay. Milton Friedman points out that it is not the electric company's fault for the tragedy, but rather the fault of the friends and neighbors of the man who let him fall into such dire straights.

    The point is that companies are non-human entities. They act (and rightly so) in a manner that will increase their value to the shareholders. In doing so, they provide goods or services to customers. That's it. If they act differently, they fail.

    Hence, our only expectation of businesses is to "use it's resources to increase profits so long as it stays within the rules of the game, which is to say engages in free and open competition without deception or fraud".

    Milton Friedman had it right; he was a proponent of freedom and capitalism. I’m pretty sure that Adam Smith, Thomas Jefferson, and James Madison would have agreed with him.

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