I am quite a fan of the fiction and some of the non-fiction of Ayn Rand, but I am the first to concede that some of the people who call themselves Objectivists are an assorted bunch, to put it politely. I have little time for some of the “official” Big-O Objectivists, like Leonard Peikoff, although I enjoy the writings of Tara Smith very much. The group of folk who liked Rand’s broad ideas but detested the narrow-mindedness and paranoia of some of the “official” group broke off, under the leadership of Dr. David Kelley, to form groups like The Objectivist Center. I like the TOC crowd and have corresponded with a few of them. I subscribe to The New Individualist, the monthly journal edited by the great Bob Bidinotto. What is so refreshing about it is that one does not get lots of shrilll lectures or dense philosophical treatises, but an engaging and assertive writing style coupled with an often impish sense of humour and enjoyment of the good things in life. It is a cracking read, in fact. Bob is also addicted to thriller novels, which puts him in the same bracket as me.
Okay, enough creeping from me, now for the nasty part. In the April print edition – the web version does not appear to be up yet – there are two articles that struck some decidedly jarring notes. The first, by Roger Donway, argues that basically, the late Milton Friedman was not a good advocate of capitalism and individualism, and in fact he used arguments that play straight into the hands of socialists. (I am not making this up). The second article, by Bidinotto, includes a defence of the use of torture in ’emergency’ situations, although Bob does not define ’emergencies’ very clearly and leaves begging the question about who gets to decide such matters. But I have pretty much argued on this torture issue before and will not repeat myself here. So I will focus instead on what Roger Donway has to say about Friedman.
To try to make this point, Donway argues that Friedman’s attack on the idea that firms have “social” responsibilities itself rests on a sort of utilitarian basis. Does it?
Friedman argued that the executives of companies have a duty to create the maximum value for their shareholders, and nothing else. Donway thinks this means that Friedman was saying that a CEO must therefore be the cowering servant of his stockholders. Well, Roger, if shareholders own the company and not the CEO, then it does rather look as if the CEO should be bound by the wishes of those shareholders. Does Roger Donway imagine that if, say, the chief executive of BP or Wal-Mart runs these firms badly and is called to account by shareholders, that such a CEO is entitled to tell said shareholders to sod off? Of course not. If the CEO does not want to be a servant of his owners, then the solution is pretty straightforward: organise a management buyout. This is in fact precisely what has been happening in recent years. Emboldened by cheap credit and a strong stock market, firms have been taken off the listed stock market by private equity firms like KKR and Blackstone, and one of the incentives for businessmen is that they no longer are held account by all those frightfully common shareholders. Donway’s argument seems to be an argument against mass shareownership. He seems to be saying that owners of a company should let CEOs run their firms as they see fit and keep their traps shut.
Consider this passage by Donway:
“By Friedman’s standard, Walt Disney was not a creative genius who sold stock so that he would have capital to pursue his vision on a grand scale. He was just somebody who had been hired as an “employee” by his stockholders and thus was obligated to do what the majority of his stockholders wished.”
Wait a minute. If I set up a company and later, decide to issue stock, I dilute my ownership of the firm. Dilution of ownership is the price one pays for tapping the capital market for capital. One hopes that the owners will appreciate that their own financial self-interest rests with letting the creator of the business run it how he or she thinks fit, but if I am investing in someone else’s firm, then I acquire ownership in part of that firm, and a form of control. If a shareholder does not own the firm in any meaningful sense, as in being able to vote at AGMs and object to enormous CEO payouts for crap performance, then Donway is making an extraordinary claim here.
I do agree that Donway might have a point in saying that Friedman tends to make the case for private business and so on in largely consequentialist terms, although judging my Friedman’s passionate advocacy of issues like abolishing military conscription, for example, I find it hard to believe that Chicago University’s most famous academic was not also driven by a deep attachment to liberty and the idea of the sovereign individual. Just because a man makes the case for freedom on utilitarian grounds does not mean he might be blind to the other ways of defending freedom.
I believe that Milton Friedman is one of the greatest defenders of liberty in our modern times, just as Rand is, in a very different way. I think parsing a few sentences to detect some apparently socialistic or, horrors, ‘altruistic’ tendencies in Friedman is scholasticism gone mad. I don’t doubt that Friedman admired the heroism, skill and creativity of entrepreneurs, but he also realised that businessmen best achieve their goals by persuading people to buy their products and invest in their firms. To persuade, you have to consider what people want. Sometimes, objectivists give the impression that this process is rather demeaning. Actually trying to figure out what people want is often quite difficult. That does not mean that those wants are admirable, of course. A brilliantly successful maker of soap opera TV is still producing what I regard as junk. Not all the products of capitalism are admirable. The point is that what is admirable and what is not does not get decided by the state. And no-where do I think that Friedman argued otherwise.
FWIW, Rand herself evidently believed this. Thought she never (to my knowledge) mentioned Friedman by name, in Capitalism, The Unknown Ideal she attacked the concept of a negative income tax as being the worst kind of compromise with statism. The main proponent of the negative income tax at the time she was writing was none other than Milton Friedman.
Statism exists, and it ain’t gonna fade away. What is the best kind of compromise with it?
Not sure about negative income tax, but Friedman admitted that his work in the early 40s in developing the payroll tax withholding system was enormously damaging to the cause of liberty, enabling the state to fund its expansion far more effectively.
He conceded that he was a Keynesian at the time, of course.
In legal terms, surely the ideal is that the relationship between shareholders and executives can be whatever they agree it is. There are no a priori ethical duties either way.
Economically speaking, I would argue an ownership structure consisting of disintegrated minority shareholders and disinterested pension fund managers is a particularly weak form of control.
[quote]If I set up a company and later, decide to issue stock, I dilute my ownership of the firm. Dilution of ownership is the price one pays for tapping the capital market for capital. One hopes that the owners will appreciate that their own financial self-interest rests with letting the creator of the business run it how he or she thinks fit, but if I am investing in someone else’s firm, then I acquire ownership in part of that firm, and a form of control.[/quote]
There are indeed many cases where people have founded businesses, attracted external shareholders, and then been turfed out when the shareholders became dissatisfied with the founder’s conduct of the business. Other peoples money comes with strings attached – if you don’t want the strings, don’t take the money !
Apart from the case of golden shares, of course.
Control usually goes with ownership, but it doesn’t actually have to be that way, any more than ownership goes with control. (You have to do what your employer tells you, but she doesn’t own you.) Clearly ownership of something without control is less valuable, and you’ll be able to raise less money issueing stocks, but if the business is believed to be well-run already then the share of the profits may be sufficiently valuable to be worth buying. Control is a separate asset from a share of the profits, and they may be sold separately.
The CEO is obliged to do whatever his employment contract tells him to – and that is usually to make as much money for the shareholders as possible. But if a CEO can get his shareholders to agree to a different sort of contract, anything goes. It’s up to both parties, of course.
Social responsibilities may be considered to be terms that either have to be or cannot be written into contracts, irrespective of the intentions of the contractors. For example, you might say that nobody can be subject to a contract tantamount to slavery. That limits a person’s ability to raise capital by selling themselves (or their family, in jurisdictions where one family member can make binding contracts for another) and is therefore a restriction on free trade. States are often the source of such implicit contractual terms, but not the only possible ones.
Pa, indeed. If a firm issues shares that stipulate certain voting rights, etc, then that is obviously just a matter between the shareholders and the issuing firm. I do not doubt that different firms can sort out their own governance/ownership structures to suit their needs. A lot depends of course on what sort of business it is, how hungry it is for capital and so on. A firm that needs a big injection of funds to keep going may have to be willing to negotiate terms. A firm that needs little capital and has lots of cashflow can presumably not need to dilute ownership control.
Roger Donway isn’t the first to accuse Milton Friedman of promoting ideas that play into the hands of Socialists. I remember reading that Von Mises himself chided Friedman for his proposal of a “Negative Income Tax”. That issue is still discussed in Austrian circles.
Basically, the proposed Negative Income Tax establishes a principle – i.e., that it is the place of government to provide sustenance, under whatever name they choose, from funds appropriated from private individuals. Once that principle is accepted, then there is no end to potential demands on the public purse. The list of “good causes” and “crises” is limited only by the fertile imaginations of emotional social crusaders. We see the evidence in the demands of activists, and the actions of government officials, every day. Though the promoters of these ideas no longer call themselves Socialists, they are cut from the same cloth.
As for Friedman, well, nobody is perfect. Friedman was indeed one of the greatest promoters of Liberty of the 20th century. I think we can forgive one bad idea. If we can not do that, then the Austrians, the Objectivists (of whatever variety) and any other faction that pops up will not escape without criticism either.
The best approach to all the bickering among the variety of Libertarians is surely to try and pick out the good bits, learn from the bad bits, and avoid the temptation to adopt a rigid “ideology” approach. The world is a dynamic place. Ideologues and religious fanatics we have in plenty.
CFM, I could not agree with you more, especially the final paragraph. I tend to shamelessly pick and mix ideas of all the various schools of thought. In combination, their strengths make up for the weaknesses. I read Friedman for his peerless grasp of how markets work; I read Hayek for his insights into the dispersion of information in a complex world; I read Rand for her celebration of the the right of man to pursue the happy life, etc, etc.
There are many good attacks one could make on Milton Friedman (who, in spite of his weak areas, remains a great man – who achieved a lot more than any of us have).
But you are correct J.P. – this attack is a weak one. It is the moral duty of a manager to live up to his contract (unless the contract violates the nonaggression principle).
If people have bought shares on the basis that the manager of a firm will maximise profits (rather than give the money to the poor or whatever) then that is what the manager should do.
However, there may be a difference of opinion between the manager and shareholders on (for example) whether one should be maximising short or long term profits – and what is the best way to either.
Now in the United States courts have got into the habit of second guessing managers.
This goes all the way back to cases against Henry Ford in the 1920’s.
Henry Ford owed most of the stock – but minority shareholders went to court to force him to run the company differently from the way that he wanted to do.
The courts sided with them – in my view wrongly.
Henry Ford replied by buying every share – so that there were no minority shareholders to tell him what to do.
Someone who could have done with reading up on this case in history (in spite of Henry Ford’s own “history is mostly bunk” comment) is Conrad Black.
Conrad Black held (and still holds) that he had the right to pay himself anything the board agreed to – after all he founded the company and still owned most (or at least a very large part) of the shares – and the company would not prosper without him.
However, American courts (in civil actions) sided with minority shareholders (even forbidding Mr Black from selling the Telegraph group of newspapers – and then selling them at lower price).
And now Mr Black finds himself facing a criminal trial. Even though (as he predicted) the move against him cost the minority shareholders hundreds of times more (due to the damage to the company) than the money he was paid.
All this shows that the corporate form has problems. But Milton Friedman held (I think rightly) that such disputes should be decided by a vote of the shareholders (with the majority of shares winning) – not by the courts.
The real problem with the corporate form is the very regulations that governments have brought in – and it is not true that “government created the corporate form so it can regulate it as it sees fit” (the limited liabilty statutes may be 19th century – but the corporate form and limited liability are ancient concepts).
The regualtions (such as the Williams Act of 1967 in the United States or the whole S.E.C. mess since the 1930’s) tend to protect corporate managers (especially ones who really are employees – rather than big owners of stock) from shareholders. By (for example) making takeovers difficult and expensive.
Also the taxes (such as capital gains tax and inheritance tax) that hit individual shareholders tend to concentrate stock in corportate hands (such as pension funds).
This leads to the “hired managers in charge of other hired managers” problem – with no real owners.
Almost needless to say this problem must NOT be dealt with by imposing new taxes or institutional investors (to “counter balance” the taxes on individal share owners) – that thinking leads to things like the Gordon Brown, Maxwell type raid on the pension funds.
It is the capital gains tax and and inheritance tax that must be ablished (in order to restore real owners) along with removing the various regulations (and regulatory agencies) that (whatever they are supposed to do in theory) in practice protect corporate managers from shareholder (even majority shareholder) control (or at least make it difficult).
The difficulty with trying to avoid “ideology” is the “why?” factor.
For example “why” is liberty (i.e. in the “negative” sense of not aggressing against people) a good policy?
Like his son David, Milton Friedman tended to produce utilitarian arguments (i.e. if people are not aggressed against, economic living standards will tend to be higher), but (again like his son) Milton Friedman was not really a utilitarian (of either the “act” or the “rule” variety), in that if people could have proved to him that socialism produced 10% higher economic living standards he still would not have supported it.
Some people argue that liberty is to be upheld, simply because it should be (this “Common Sense” school view is not as crude as it sounds, but I will not examine it here – even though it is the view I hold).
But other people base their support for liberty on Aristotelian nature of man and the universe grounds.
Ayn Rand was one of these people.
I suppose the point is to follow Rand’s arguments (if one judges them to be correct), but to avoid becomming part of the Rand “cult”.
This is a bit more than picking than mixing – as a line of reasoning tends to lead to a system of thought (and this is not a bad thing) that effects how one looks at various (not just one or two) politican and moral issues.
However, I agree that trying to be “pure” (to follow a line of thought to whatever conclusions it leads to) can lead, at times, away from reason (not toward it).
Nor is this mistake confined to “cultists”. For example, I would argue that Murry Rothbard (a man who totally broke with the cult) still allowed his desire to follow a particular line to lead him (on some matters) away from reason. Indeed further away from it than the “cultists” themselves.
For example, the Rand people have never been accused of supporting the enemies of the United States in time of war.
Whereas Murry Rothbard allowed the following points to do just that.
“War is bad” (it leads to the loss of innocent life and destruction of property, and means greater government spending and so on).
The Federal government of the United States is bad (it depends on vast taxes and so on, and produced endless regulations, and also creates credit-money boom-busts).
Therefore (and here was the mistake) it is correct for the United States never to go to war, or if it does for its enemy to defeat it as quickly as possible – for in this way the evil thing (war) will come to an end, and the evil power (Washington D.C.) be defeated.
The folly is (of course) not understanding that there are worse powers than Washington D.C. in the world and that it might sometimes be right to go to war to defeat these powers.
When such a war is the correct policy is a matter of judgement based upon the situation at the time – but such a fuzzy reply is not what Rothbard was looking for so he rejects it – thinking he is (in this) supporting reason, when he is (in reality) moving away from it.
As for Milton Friendman and such things as the negative income tax:
This shows the other type of mistake – refusing to follow a line of thought when such a line of thought leads to conculsions that are true (not false as Rothbard’s were above), but unpleasant.
For example, economic reasoning leads to the conculsion that government (especially central government) should not support the poor, but such a conculsion puts one outside normal political debate (and Milton Friedman always wished to be relevant to political debate).
So Milton Friednman supported a different form of government support for the poor – the negative income tax.
Of course when one examines this idea it falls apart. Many (most?) people hate their jobs (work is “Adam’s curse” after all) so if one offers them a decent standard of life even if they are not working (which is what the negative income tax is supposed to do) they will not work.
The “but for every Pound they earn the government will only remove 50 pence of the negative income tax” does not make much difference (at least not enough to save the negative income tax).
Reasoning shows the above without much difficulty – but only if one does not care about one’s conclusions not being “relevant” politically.
Such a desire to be politically relevant even influenced Milton Friedman’s basic economic theory work.
The basic example being the following.
The doctrines of Lord Keynes (as expressed in the “General Theory….” of 1936 and in the vast numbers of works by his various schools of followers sicne then) are false – not flawed in some way, just false (they are rubbish).
But “modern economics” has accepted some of these doctrines – so (to remain “relevant”) one must look for such-and-such a problem with how these dectrines have been applied (or some detailed problem within the context of the doctrines), not explain that the doctines are false and utterly worthless.
This is a game that Milton Friedman was willing to play (perhaps even to convince himself that he was not playing a game) in order to remain “relevant”, but someone like Ludwig Von Mises was not willing to play.
Any Rand had many philosophical differences with Ludwig Von Mises, but she clearly understood that he was a similar type of person – i.e. a person who would tell what they believed to be the truth regardless of how popular this was, or whether they could remain in the academic mainstream by doing so.
In the end it is as matter of character. Between people who are prepared to “play the game” to remain within the system (although understood to be a critic within the system) like Milton Friedman, and people who are not.
Again I must stress this is not like Murry Rothbard with his practice of following a line of thought even if it leads away from reason. This is a matter of support for reason (of rejecting a line of thought if it leads away from reason), but refusing to compromise reason in the hope of “influence”.
I have just watched an episode from Series 2 of South Park (entitled Chicken Fucker). During the episode, the local cop has to learn to read to solve a crime.
The episode ends with these lines:
It might not be entirely in keeping with this post. I’m not sure it’s entirely in keeping with that South Park discussion from last year. But I thought I’d share it.