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A University of Chicago Law Professor Says Milton Friedman Was Wrong

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Via Economic Policy Journal

By Robert Wenzel

University of Chicago Law School Professor Eric Posner in an essay at The Atlantic says Milton Friedman was wrong when he argued that CEOs of corporations should be focused solely on shareholder gains and not so-called “stakeholder” gains.

Posner correctly outlines Friedman’s position:

The shareholder theory is usually credited to Milton Friedman, the University of Chicago economist and Nobel laureate. In a famous 1970 New York Times article, Friedman argued that because the CEO is an “employee” of the shareholders, he or she must act in their interest, which is to give them the highest return possible. Friedman pointed out that if a CEO acts otherwise—let’s say, donates corporate funds to an environmental cause or to an anti-poverty program—the CEO must get those funds from customers (through higher prices), workers (through lower wages), or shareholders (through lower returns). But then the CEO is just imposing a “tax” on other people, and using the funds for a social cause that he or she has no particular expertise in. It would be better to let customers, workers, or investors use that money to make their own charitable contributions if they wish to.

He objects to this view by arguing that CEOs can act in a manner that goes against general economic gain by getting government to hamper competitors:

An established business will make the most profits by eliminating competition; the tried-and-true method for doing that is to persuade the government to pass a law that discourages new firms from entering its market, or that in some other way reduces its costs. And if the purpose of a business is to “increase its profits,” as Friedman argued, then it is not only “clear-headed,” but also justifiable for a business to use its political influence to dismantle the free market that Friedman cherished.

 Posner then argues that the only solution is more government:

Friedman’s strongest point was that business leaders are rarely qualified to determine the best public use for corporate funds. And that is why the switch to a “stakeholder” theory is hardly a guarantee that corporations will now act responsibly. The only proven way to stop corporations from polluting, defrauding, and monopolizing is to punish them through the law.

This is an odd turn for Posner to take. At first, he seems to acknowledge that businesses can influence government but then he argues that more government (law) will keep corporations under control.

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It appears that Posner’s position is as contradictory as Friedman’s, perhaps even more so. (Friedman would probably make the case that he was aguing from a given free-market environment).

But if corporate influence over government is the problem, well then maybe the solution is to shrink government so that there are fewer points where government can be influenced. Taken to its logical conclusion this would be the Private Property Society, not more governmental laws.


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