Stakeholder Capitalism & Woke-Consumerism

Why Friedman’s Famous Essay Was Correct

[This post is an excerpt from my book manuscript that is currently a work-in-progress.]

Photo by Antoine GIRET on Unsplash

If we can think of land value tax, the progressive income tax, and value-added tax as the holy trinity of taxes, then we can think of various Pigouvian taxes as being like little angels or like the divine energies radiating from the trinity. The first three taxes are necessary for a just society but various other taxes are also needed to correct market failures and guard against negative externalities. A Pigouvian tax is a tax that aims to discourage individuals and businesses from engaging in socially harmful behaviors. Most taxes are actually Pigouvian taxes of some sort or another. In a certain sense, the progressive income tax and land value tax are both Pigouvian taxes, aimed at discouraging excessive speculation, rent-seeking, and accumulation/hoarding of wealth and income. There are also smaller Pigouvian taxes that are also very important. For instance, an emissions tax can be used to discourage air pollution. The goal of the tax is to raise the cost of pollution, effectively embedding the social costs into the price via taxation so that people and corporations engaging in the practice can actually feel the cost on their checkbooks rather than privatizing the profits while socializing the costs. This sort of tax can be used to discourage excessive and unnecessary use of plastics, which leads to microplastic pollution that could potentially become a major problem in the near future. We could also tax factory-farmed meat and animal products that are produced in ecologically destructive ways in order to encourage farms to engage in sustainable agriculture. We could even tax animal meat to subsidize lab-grown meat — if we wanted to encourage a transition to a future in which eating meat does not entail harming animals.

If, however, we want to rely on tax policy to encourage best practices, we need to be wary of the trendy “stakeholder capitalism” ideology. Milton Friedman strongly criticized this idea in his essay The Social Responsibility of Business is to Increase its Profits. There has been much criticism of Friedman on this point but I remain convinced that Friedman’s thesis was actually correct. Moreover, I would argue that the philosophies of liberal-socialists and social democrats like James Meade, Abba Lerner, Olof Palme, and Anthony Crosland really only work if businesses act exactly how Milton Friedman suggests that they ought to. The idea here is that businesses ought to seek to maximize their profits, while the government ought to regulate in a way that prohibits (or increases the cost of) socially irresponsible decisions. I would argue that government regulation and Pigouvian taxes, such as a carbon tax, will only work within a framework where companies try to maximize profits.

This idea that businesses ought to seek to maximize profits is a central tenet not just of neoliberalism but also of market-socialism. Abba Lerner’s Economics of Control: Principles of Welfare Economics fundamentally assumes that private businesses will behave this way. In fact, the recommendations that Lerner gives (recommendations for how the government ought to attempt to fine-tune the economy in order to ensure the optimal allocation of resources) won’t work if you replace profit-maximizing shareholder capitalism with stakeholder capitalism. We really want companies to watch price signals and seek to maximize profits because, under ideal conditions, this tends to lead to the most efficient allocation of resources. However, laissez-faire does not entail ideal conditions, so we need the government to impose rules that create a more ideal situation. Classical neoliberalism, as espoused by F. A. Hayek and Milton Friedman, rejected the idea of laissez-faire. You really need the government to create the framework within which liberty can lead to optimal results. The condition of “pure competition” must be manufactured by the State.

This, of course, means that we need anti-trust laws to help maintain “pure competition,” EPA regulations to prevent companies from creating externalities by dumping toxic waste into rivers, and Pigouvian taxes to imbed the social costs of bad behaviors into prices (e.g. carbon taxes and emissions pricing). Classical neoliberalism and liberal-socialism found themselves in fundamental agreement on this point. It is strong government and good regulations that create the framework that allows markets to function optimally and beneficially. Under such conditions, when you have what Abba Lerner called a “controlled economy,” then the maximization of profits through the price mechanism will lead to the most efficient, just, and acceptable distribution of resources. The problem today is not so much that corporations seek to maximize profits as it is that the government does not impose the right regulations and taxes to force corporations to behave ethically in order to maximize their profits.

The classical neoliberal and liberal-socialist frameworks both assume that the goal of businesses really ought to be to maximize profits. That’s the responsibility of the business. The responsibility of the government is to regulate and tax properly so that the profit-motive does not end up leading companies to engage in destructive activities. The progressive idea of “stakeholder capitalism” is actually a bad idea. It is not a good idea to encourage businessmen to do what they think is in the best interest of the public because they aren’t likely to know what is best. It is the role of scientists and economists to determine what is best and for policymakers to enact legislation accordingly.

The government must utilize Pigouvian taxes in order to make antisocial behaviors expensive for businesses to engage in. If businesses, in general, were to stop pursuing the profit motive, it would make it impossible for the government to direct them through price signals using tax policy. Suddenly, imposing taxes and fines as penalties on things that you don’t want them to do won’t deter businesses from doing them since the businesses are no longer trying to maximize profits but rather trying to do what they think is best for everyone. Some proponents of stakeholder capitalism have proposed standardized metrics to tell people if businesses are behaving well or not. Even if you create standardized metrics, that does little good unless you can convince both businessmen and consumers that the metrics are reliable. When a substantial portion of the populace, including both consumers and businessmen, are global warming deniers, stakeholder capitalism cannot save us! We need the government to take action. What is needed is a little more “socialism” or “control.” The government should penalize bad behavior, prohibit certain activities, tax other activities in order to discourage them, etc. Stakeholder capitalism and progressive rhetoric does more harm than good. Benevolent businessmen cannot be our saviors.

The idea of the “rational consumer” is largely a myth. The consumer can only be rational if you can imbed all social costs into prices and create a more egalitarian distribution of incomes so that price signals are not pushing people to support bad things. The sustainably-produced food items are more expensive and the poor man will buy the products that are destroying our planet simply because those are the products that he can afford. When there’s a scientific consensus that something is extremely harmful to the environment, policymakers ought to tax that thing (or ban it) and they ought to call in the economists and wonks to help determine how much tax to impose upon it. Neither businessmen nor consumers can be trusted to do the right thing. The stakeholder capitalism mindset generally leads to the opposite of the intended result. Those consumers that do have enough money to buy the more expensive, “environmentally-friendly” versions of products are not fully informed. As a result, this encourages corporations to posture as being environmentally-friendly rather than actually becoming environmentally-friendly. It’s the companies that spend the most money on advertising to convince us that they are doing good things that get rewarded by woke consumerism. Meanwhile, most of the companies that successfully do progressive eco-friendly posturing to convince us that they are doing great things are actually doing a lot less than they ought to be. In fact, they are often doing worse things than they were doing before they started posturing as eco-friendly.

That big store that is in every town in America, for instance, may have raised the wages of its employees but they still continue to engage in wage theft, forcing employees to work overtime without pay in small towns across America. And that other big company that is investing a bunch in green energy, well they are actually investing several hundred times more than that into preserving the fossil industry while their ads highlight the little bits of “eco-friendly” activities they engage in for PR purposes. And their conspiracy is working! Their profits increase when they behave this way. Stakeholder capitalism and woke-consumerism don’t reward the companies that actually do good things but, rather, reward those companies that spend enough on PR and advertising to convince us that they are doing good things. Meanwhile, the companies that are doing the right thing are losing money and going out of business because doing the right thing costs more — and they can’t afford to spend more to do the right thing and to spend billions on ads to show off the good things they are doing.

So, yes, I agree with Milton Friedman’s thesis that the duty of the businessman should be to maximize profits. If that is not the duty of the businessman, then social-democratic and liberal policies aimed at controlling or regulating the economy simply will not work. The alternative to the profit-motive that progressives and woke people are offering now is the same old alternative that the hippies were offering when Friedman first wrote his famous essay. I’m sorry but hippie-consumerism wasn’t the answer then and woke-consumerism isn’t the answer now. The answer is, and always has been, strong government and good regulations.

Although there is a lot of agreement here between Friedman and Lerner, there is a big difference between the classical neoliberal approach and the liberal-socialist approach overall. Both James Meade and Abba Lerner, the liberal-socialist economists, recognized that excessive inequality has a social cost. The price mechanism, according to them, does not function optimally if there is rampant inequality. The democracy of the market does not work if some people have way more dollars with which to vote than others do. The system needs to be relatively egalitarian, though people must be allowed to have more income than their neighbors if they are willing to work more for it. So, liberal-socialism recommends a framework that leads to a broadly egalitarian, but not purely egalitarian, society. The framework necessary to make markets work optimally requires a lot of taxation, redistribution, and cash transfers. The dangers of too much inequality are not, however, taken as seriously by neoliberals.

Friedman’s objection to stakeholder capitalism is that it makes the businessman into a legislator rather than an employee of the shareholders. We should not be expecting businessmen to do what legislators have failed to do. Instead, we should be pressuring legislators to do their goddamned job! If we can’t get our legislators to impose the right rules to guide companies down the correct path, then we certainly are not going to be able to push companies to do the right thing. The market system, as it actually exists, with all its inequalities and injustices, is far less democratic than our republic is, flawed as it may be. If we want to mobilize our energy towards changing things, we need to change public opinion and push our politicians to do the right thing.

“Here the businessman — self-selected or appointed directly or indirectly by stockholders — is to be simultaneously legislator, executive and jurist. He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds — all this guided only by general exhortations from on high to restrain inflation, improve the environment, fight poverty and so on and on.
“The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for ‘social’ purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil servants — insofar as their actions in the name of social responsibility are real and not just window-dressing — should be selected as they are now. If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expenditures to foster ‘social’ objectives, then political machinery must be set up to make the assessment of taxes and to determine through a political process the objectives to be served.” — Milton Friedman, The Social Responsibility of Business is to Increase its Profits

What is needed is a political solution. We are headed in the wrong direction if we think that woke-consumerism is going to make things better. Let’s stop placing blame on businessmen for being businessmen and start placing blame on legislators and politicians for these failures.