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Milton Friedman's Profit Fiction: Part 4

This is the fourth of a six-blog series that simply and in plain language explains the dangerous fallacy of Milton Friedman’s “maximize profit” business ethic. Here, we discuss the first of three egregious consequences of that ethic.

Consequence 1: All for One, but Not One for All

Words matter. In that light, let’s distinguish between the words ‘shareholder’ and ‘stakeholder’ because they’re frequently confused.

A shareholder can be defined as one who owns a share or shares of a company or investment fund. So, a shareholder can be understood as an owner-entity that simply seeks a financial reward for its financial investment in a corporation (or in a fund that holds ownership in multiple corporations). A stakeholder is a broader concept and can be defined as one who has a stake or an interest in an enterprise. So, a stakeholder can be understood as an entity of any kind that has an interest in the activity of the corporation. A stakeholder can be a shareholder of course, but not necessarily and frequently is not.

In Part 2 of this blog series we included a personal story of an employer corporation and one of its mills. Those who owned the corporation’s stock at that time, but with no other interest in what was happening at that mill, are fairly characterized as shareholders. Stakeholders, on the other hand, include all the players in the story (seen and unseen) who may or may not have a financial investment but do have an interest in what that corporation does. Those stakeholders range from the residents living near the mill forced to breathe the mill’s polluted air, to the externalizing plant manager, to later employees who risk being mischaracterized as not caring for the environment because of events decades earlier. Whether or not employees’ retirement savings are tied to the corporation’s stock, which would make them shareholders, employees are stakeholders because of the influence and impact of the corporation on their lives as employees. With that basic distinction between shareholder and stakeholder, let’s move toward exploring corporate influence and impact.

The influence of corporations in contemporary American society probably can't be overstated. As a snapshot of corporate heft, in 2008 (before the disruptions of the Great Recession and COVID-19 pandemic) 5.8 million corporations filed income tax returns with the Internal Revenue Service. These corporations controlled $76.8 trillion of assets and generated $28.6 trillion in revenue. To put these numbers in perspective, consider that the population of the United States in 2008 was 304 million. This means that for every person in the U.S. in 2008 corporations controlled assets of $253,000 dollars. Also recognize that the 2008 Gross Domestic Product (GDP) for the U.S. in 2008 was $14.2 trillion—half the amount of corporate revenue.

Since 2008 the values of corporations’ revenues and assets have only risen, some by leaps of billions and tens of billions of dollars. On the first trading day of 2022, Apple was the first U.S. corporation to be (briefly) valued at $3 trillion dollars. Meanwhile, at relatively the same time, the 2021 fourth quarter (4Q21) GDP for the U.S. was $23.19 trillion. Imagine, a single American corporation valued at slightly under 1/8th of the rest of the entire U.S. GDP!

Illustration Credit Stu Rees

The vast economic size of corporations has significant implications. One is that corporations affect far more than just their shareholders. They also have many millions of employees working with their massive assets and many millions of customers delivering the huge revenue stream. Because U.S. corporations paid $698 billion in taxes in 2008, they both influence and are influenced by government policies. Finally, much of corporations’ $76.8 trillion of assets consists of natural resources, meaning that corporations have significant influence over earth’s life-sustaining environment.

This all reveals the first major problem with the current corporate ethic of prioritizing profit maximization for shareholders. Shareholders simply are not the only party with something at stake in corporations. Every corporate employee, every corporate customer, everyone under government’s influence, and everyone living in the environment—all people, present and future—are impacted by corporations. And frankly, the bigger the corporation the bigger the impact, for better or worse. Bottom line: Fifty-plus years after Friedman’s maximize profit ethic launched, it's now beyond reasonable debate that a corporate economic ethic must consider all stakeholders, not merely shareholders.

The “too big to fail” false dilemma that led to government bailouts in the 2008 economic crisis should serve as a cogent reminder that corporate influence (or malfeasance) does not stop at shareholders. Indeed, the losses that the shareholders of banks and other financial institutions in 2008 should have accepted and borne as their risk of being proud capitalists, were instead shifted and forced upon American taxpayer stakeholders in the form of additional debt added to the federal deficit. Like a page from the Dr. Jekyll / Mr. Hyde playbook the maximize profit ethic is a duplicity, myopic in sharing benefits and profits yet virtually unfettered in shifting risk and consequences. This forces us to recognize:

True capitalists accept the benefit and risk;

True plantationists accept the benefit and externalize risk.

And therein lies an irony our predecessors were forced to learn in the Great Depression (1929), we were forced to relearn in the Great Recession (2008), and we are presently being taught again by the COVID-19 pandemic and related economic fallout: Our beloved America has an illusory construct that capitalism involves competing, without connecting the reality that inherent in all competing are the interdependence and mutual responsibilities that are the very foundation of that competition.

Think of an economy or marketplace like any other system, your body or your car or your business for examples. If only a part of the system is maintained but the rest is ignored (you exercise your upper body but not your lower; you shine your car’s paint job but don’t maintain its engine; you overfeed the business owner but starve the business worker) eventually the system suffers enough that it fails. "All for one, and one for all" as popularized in The Three Musketeers, by Alexandre Dumas makes sense and works. Problem is, when we divide and reduce that wisdom to "All for one," as Milton Friedman's maximize profit ethic has, it no longer makes sense. It fails.

In the next Part 5 we continue our critique of Friedman’s maximize profit ethic by exploring the questions of “For Whom? and “When?” Meanwhile, we invite you to ask yourself just as we have asked ourselves, "How and where am I living Friedman's maximize profit ethic?"

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