I once participated in a comment thread concerning the relative impacts of competition vs. cooperation within free-market capitalism. Specifically, the main issue revolved around whether capitalism nurtured or inhibited social cooperation. This led to discussion about theories purported by the late economist Milton Friedman. A debate ensued about Friedman’s suggestion that the prime directive of managers is to maximize shareholder value, known as the Friedman Doctrine, and whether it has enhanced or degraded the social condition. Or in other words, was Friedman right or wrong? My personal opinion is that he was partially right in the short-run, but mostly wrong in the long-term. In this post I’ll explain my reasoning. But first some historical context will be helpful.

When America was formed we were mostly an agrarian society. Although the economy evolved over the next 70 or so years leading up to the Civil War, we remained largely agrarian. However, after the Civil War, the fall of slavery combined with a massive post-war rebuilding effort spawned the Gilded Age. The result was America’s first elite class of ultra rich. This new social class greatly magnified the gulf between the “haves” and the “have nots.”

In response to this and other factors the Progressive Era emerged and society acted to balance social resources, although this didn’t really take hold until the next major social shock, the Great Depression. First, the New Deal set the stage for a more equal social order. This was followed by the next great shock, WWII, an event that marked both the end of the depression and the start of multi-decade, global growth as the world repaired the damage of the war.

Then in the late 60’s and early 70’s society was shocked again by the one-two punch of the Vietnam War and the Oil Embargo. This created an environment ripe for new economic models. It was into this economic upheaval that the ideas of Milton Friedman rose to prominence.

Milton Friedman (1912 – 2006) was arguably the most influential economist of the late 20th Century. During his career he was best known for rejecting Keynesian economic theory and proposing models focused on the supply-side of the economy. These theories gained traction as both President Ronald Reagan and British Prime Minister Margaret Thatcher launched the supply-side revolution, an event that has impacted society’s economic choices ever since.

Milton Friedman was also a huge proponent for “free-markets.” Although he supported a number of positions, such as a negative income tax (a form of Universal Basic Income) and opposed the war on drugs, arguably his most well-known and controversial hypothesis was the Friedman Doctrine.

The Friedman Doctrine asserts that the primary goal of corporations is to maximize shareholder value. Or as Friedman himself stated; “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.”(Although in the last part of this quote Friedman seems to recognize an inherent weakness in the doctrine, history has shown that his admonition “without deception or fraud” was largely wishful thinking.)

Which begs the question: “is the Friedman model sustainable; economically, socially or politically?” Because if it is not then the theories underpinning the supply-side movement, including the Friedman Doctrine itself, were at best dangerously misguided and at worst just plain wrong. In other words, was Friedman wrong?

My main issue with Friedman’s Doctrine is that it “speaks” almost exclusively to traditional supplier capitalism. Although the widely-held view of capitalism starts and ends with the capitalist – the sources of capital and the suppliers they fund – in reality market economies encompass many deeply-vested participants who make substantial contributions and have sizable interests in outcomes.

And yet Friedman’s “maximize shareholder value” mantra not only ignores these vast segments of economies, but provides moral cover under which supply-side capitalists can openly justify, perpetuate and exacerbate market inequalities. The result is that so-called free markets are anything but free, resulting in an economic environment where market “freedom” is a purchasable commodity only available to those players able to pay the price, which is invariably the economic supply-side.

So here’s the part Friedman misses. In the free-market model, capital is organized into companies that convert this capital into sources of economic supply. We call this process capitalism, to which we attribute many virtues and afford all sorts of political and social concessions. And there is little argument, certainly not from me, that capitalism has in many ways had a tremendous positive social impact. As a result, society has largely tolerated, and often outright supported, the preferential treatment given to traditional supplier capitalism.

And yet capital, the currency of capitalism, is only one side of an economy. Because for capitalism to thrive it must have consumers to buy products and employees to make them. This consumer-side of the economy is every bit as important as capital, arguably even more so as capital investment follows market demand. In other words, in market economies, capital is the dependent variable that adjusts according to the independent variable of consumption. This implies that consumption drives capital (supply), not the other way around as suggested by supply-side theories.

So given that both sides of the equation are critical to market economies we’d expect free markets to result in an economic environment in which both the forces of capital and the forces of consumption are on level ground, or at least relatively so. In fact, a persuasive argument could be made that consumer and labor markets should receive preferential treatment in relation to capital markets.

But that’s not what we see. Because from the earliest accumulations of capital and power, these forces have used their unequal influence to create political, regulatory and legal environments that benefit the interests of capital over the interests of consumers and employees. This behavior fits nicely with Friedman’s Doctrine of “maximize shareholder value.” Because by releasing capitalists from any obligation other than profits, we can expect them to engage in these activities without regard for other market participants. Unsurprisingly, this is precisely what has occurred.

Furthermore, not only must consumers and employees function in an environment in which they’re at a political disadvantage, one that was purposefully created by capital and supplier markets, and then justified by the Friedman Doctrine, but they face an insurmountable structural disadvantage as well.

Consider that companies not only concentrate capital, but they exist indefinitely during which they can also accumulate knowledge and other assets to further protect their relative standing and influence in economies. On top of this, political, economic and academic (Friedman) elites have created a narrative in which traditional, supplier-centric capitalism has acquired a God-like status.

Yet the consumption-side of economies receives no such recognition. In fact consumers, be they of products or jobs, are pretty much taken for granted in economies. This is understandable.

Consider that markets are formed by groups of people making buying decisions. And yet unlike concentrations of capital, consumers largely make consumption decisions independent of each other. As a result, product markets and labor markets, including the consumers and employees who comprise them, are largely unable to concentrate and leverage their needs, their behaviors or their capital. On top of this, individual consumers are mortal, and as such, unlike corporations, are far less able to accumulate assets which might level the playing field. As a result, this puts consumer and labor markets at a structural, permanent disadvantage to capital markets.

So of course we should expect the many prophets of “free-marketism” to recognize this inequity and aggressively seek new economic models and/or policies to make the economy fully free? But of course we don’t see that at all. In fact, history has shown us that their reaction is actually opposite to the free market theory they espouse.

So whenever there are attempts at organizing markets, be they consumption or employment, we hear how such practices are evil, subversive, socialist, unpatriotic and anti-American. As a result, market economies are not so much guided by an Invisible Hand, but rather an Invisible Fist, at least when it comes to the treatment of consumer and labor markets.

Yet this too is entirely understandable. Because capitalists know that if and when product markets and labor markets get organized, and do so on par with the organization of suppliers & capitalists, it will fundamentally and permanently transform their profit models. In doing so it will result in a massive equalization of economic resources across the economy. It’s hard to imagine any social, political or economic shift more terrifying to capitalists than this. So it’s no surprise that they fight like hell to perpetrate, and whenever possible expand, this state of market inequality.

So is Friedman’s argument irrelevant? Actually he’s only partly wrong, and that’s because he ignored the other side of the economy. In fact it’s entirely possible that his self-interest-centric model could work. What this would require is that the idea of free markets be extended beyond the supply-side to include consumers and labor. Consider the following scenario.

In this hypothetical scenario capital markets function as they always have and continue to pursue Friedman’s directive. What changes is that consumer and labor markets become similarly organized so they can negotiate on equal footing. They accomplish this either through government policy, as a result of new economic models, or both.

If this were to occur then the self-interest model of capitalism could be applied fairly in an environment of universally free markets where all parties in the economy are competing on an even playing field. In this way Friedman’s directive starts to make sense. Of course we know this won’t ever happen, at least not until society demands it.

So while Friedman was right that his doctrine would encourage economic activity that optimizes profits, and thus shareholder value, at least in the short-run, it’s far less socially, politically and economically sustainable in the long-term. And as this is turning out to be the case, then Friedman’s Doctrine has become merely a euphemistic platitude to make capitalists feel better about exploiting systemic inequalities, combined with an academic rationale that allows them to pretend otherwise. So yes, I contend Friedman was wrong.