BA 4981 MUIS Milton Friedmans Shareholder Theory Was Wrong Questions

ASSIGNMENT: WRITTEN RESPONSE MILTON FRIEDMAN’S SHAREHOLDER THEORY WAS WRONGPart of your grade in this class is short Written Responses to various articles, questions, or other
materials.
As indicated in the syllabus, these will be worth 10% of your final grade. Grading will consist of
whether you answered the question/followed the assignment; whether your written response is
coherent, thoughtful, and uses complete sentences and whether it follows the assignment. I will not
be focusing on your grammar per se, but of course proper grammar and spelling helps any written
assignment to be coherent.
Assignment:
•
•
Write a response to the article Milton Friedman’s Shareholder Theory Was Wrong (posted
on Worldclass).
You do not need to do any additional research; your response should be based on your
thoughtful reaction
to the article.
•
•
•
•
Submit your response by the start of your class on Tuesday, February 21, 2023.
Submit it via the assignment tab on World Class.
Your response should be typed, single spaced, and contain a minimum of 200 words.
At the end of your assignment, please indicate how many words are in the assignment (not
counting any
identifying information).
•
•
Do not forget to put identifying information at the top of your assignment.
If your assignment is submitted up to 2 hours late (i.e. up to 2 hours after your class has
started), you will
receive a 25% deduction on your grade on the assignment. If you submit your assignment
more than 2 hours late but less than 4 hours late, you will receive a 50% deduction on your
grade on the assignment. Anything more than 4 hours late will receive a zero on the
assignment.
Written Response Assignment:
•
•
Read the posted article – Milton Friedman’s Shareholder Theory Was Wrong. (Posted
in World-class under Written Response Assignments in Content)
React to the posted article. To guide your response, you can answer one of the
following questions, but you do not have to; you can also describe your reaction to the
article (or one aspect of the article) in a coherent, relevant response. These questions are
meant to get you thinking, if you need the help.
o What do you think about what the author is saying? Is he right? Was Milton
Friedman’s shareholder theory wrong?
o Does a stakeholder theory solve the problems he addresses? Is a stakeholder theory the
salve for corporate wrongs?
o Or does it take legislation – as he proposes at the end – to make corporations behave?
8/22/2019
Milton Friedman’s “Shareholder” Theory Was Wrong – The Atlantic
IDEAS
Milton Friedman Was Wrong
The famed economist’s “shareholder theory” provides corporations with too
much room to violate consumers’ rights and trust.
6:00 AM ET
Eric Posner
Professor at the University of Chicago Law School
ALEX WONG / GETTY IMAGES
On Monday, the Business Roundtable, a group that represents CEOs of big
corporations, declared that it had changed its mind about the “purpose of a
corporation.” That purpose is no longer to maximize profits for shareholders, but
to benefit other “stakeholders” as well, including employees, customers, and
citizens.
While the statement is a welcome repudiation of a highly influential but spurious
theory of corporate responsibility, this new philosophy will not likely change the
way corporations behave. The only way to force corporations to act in the public
interest is to subject them to legal regulation.
https://www.theatlantic.com/ideas/archive/2019/08/milton-friedman-shareholder-wrong/596545/
1/7
8/22/2019
Milton Friedman’s “Shareholder” Theory Was Wrong – The Atlantic
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.
[ Read: The inadequacy of corporate social-responsibility programs ]
Friedman’s theory was wildly popular because it seemed to absolve corporations of
difficult moral choices and to protect them from public criticism as long as they
made profits. At the same time, it took CEOs down a peg—yes, they were resented
even in 1970—by denying that they were visionaries with public responsibilities.
And Wall Street saw dollar signs in the single-minded devotion to corporate profits.
But Friedman’s argument contained a contradiction that should have been evident
even to readers back in 1970. He complained that business executives supported
wage and price controls—a policy that President Richard Nixon would later
implement. Friedman believed (with some justice) that wage and price controls
would harm the economy. Thus, he claimed that the business executives, although
“extremely far-sighted and clear-headed in matters that are internal to their
business,” evidently became “short-sighted and muddle-headed” in matters of
public import.
However, there is a simpler explanation for their behavior that does not require
such a dubious theory of their psychology. Many business executives realized that
wage and price controls would serve their business interest (no doubt by holding
down the cost of labor and other inputs) and didn’t care whether they harmed the
economy at large.
Friedman should have been, and probably was, aware of this possibility. 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
https://www.theatlantic.com/ideas/archive/2019/08/milton-friedman-shareholder-wrong/596545/
2/7
8/22/2019
Milton Friedman’s “Shareholder” Theory Was Wrong – The Atlantic
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.
[ Read: What GOP economists don’t understand about Milton Friedman ]
Indeed, the notion that the big public corporations are tribunes for the free market
is quixotic. Big corporations are islands of socialism within our market economy:
Their bigness protects them from competition for customers and workers. Because
investors of capital benefit when product and labor markets are monopolized,
CEOs are only too happy to accommodate them.
There are other, all-too-familiar ways that Friedmanesque businesses can
maximize their profits. They can (like Facebook) break promises to respect their
customers’ privacy. They can (like Twitter and Google) generate ad revenue by
facilitating the transmission of hate speech. They can (as Exxon used to do)
propagandize against climate science. They can (like Jimmy John’s) use illegal
contract terms to deter their low-skill workers from quitting low-paying jobs. They
can (like the tobacco companies and now the tech companies) push addictive
products onto children, or (like Purdue Pharma) create a generation of drug
addicts. And they can engage in corporate lobbying. The biggest problem with
Friedman’s theory is that corporations can—and, according to his theory, should—
use their influence in Congress to block laws that stop corporations from causing
such harms.
Nor was Friedman correct that business executives are the employees of the
shareholders. Legally, business executives are employees of the corporation, which
—crucially—they, not the shareholders, control. The shareholders have a
contractual relationship with the corporation that entitles them to a share of its
profits and a vote on certain major corporate decisions. Time and again, CEOs
have used their power over the corporation to bat away shareholders when they
propose that the corporation should act in a socially responsible way. When an
employer says “jump” to an employee, the employee jumps. When shareholders
say “jump” to the CEO, the CEO sues them.
https://www.theatlantic.com/ideas/archive/2019/08/milton-friedman-shareholder-wrong/596545/
3/7
8/22/2019
Milton Friedman’s “Shareholder” Theory Was Wrong – The Atlantic
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.
We want to hear what you think about this article. Submit a letter to the editor or write
to letters@theatlantic.com.
https://www.theatlantic.com/ideas/archive/2019/08/milton-friedman-shareholder-wrong/596545/
4/7