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CSR - Stockholders v. Stakeholders

Prior to reading Milton Friedman's Capitalism and Freedom, I had read his article denouncing corporate social responsibility and was quite perturbed. Milton Friedman argues that "there is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud" (133). Although he makes a valid argument concerning the stakeholders' wants and that charitable giving should be left up to the individual, not the corporation, I think the times have changed since Milton Friedman's arguments against CSR. Many stakeholders are entering the market of Socially Responsible Investments by looking for investment options that maximize financial returns and social gains. I think Friedman is putting too much emphasis on the stockholders, and not the rest of the stakeholders as he argues against CSR initiatives. Nowadays there are so many stakeholders in business that affect how a business does. Overall, I think that CSR cannot hurt a company in terms of its stakeholders, it can only make a company more popular among more people.

Friedman strengthens his argument by saying, "If businessmen are civil servants rather than the employees of their stockholders then in a democracy they will, sooner or later, be chosen b the public techniques of election and appointment" (134). This is interesting because I have been reading some articles about CSR in developing countries where the political structure is quite weak. Some of the authors argue that if corporations spend a lot of time on initiatives outside of making gains for their stakeholders, they can appear to be stronger than the government which can be detrimental to a society and a political economy.
Overall, though, corporations have a lot of money and affect the citizens of the communities in which they operate. That being said, corporations in the least, have a responsibility to act as a citizen by not making the community any worse off by operating in it. Furthermore, given the emphasis put on social responsible behavior, I think it is beneficial for companies to undertake certain CSR initiatives to be competitive in today's economy. Unfortunately, my dear friend Friedman, CSR has become a part of business and now when measuring a business's success or failures, CSR will be taken into account.

Toward a Charybdis world

Things Milton Friedman is against: detailed regulation of industries, rent control, the FCC, licensing restrictions in local venues, public housing, national parks, toll roads, and social security.

Two of these can be used to illustrate points in Friedman's writing. His opposition of minimum wage laws follows this line: economic freedom is necessary for the greatest good for a free society. Minimum wage laws put employers in a relative bind in that they will be unable to buy as much labor as they might need, or will be more hesitant to buy excess labor unless they actually need it. Minimum wage laws interfere with the natural pricing in the labor market, and the net effect, according to Friedman, is higher unemployment all around, pushing some into even more desperate straights of poverty. So what's the deal then? Maybe the problem is that "the people who are helped are visible" while the people hurt are anonymous. Maybe what we need now in the US isn't higher minimum wage laws to pull people out of poverty, but better ad campaigns about how higher minimum wages are hurting unknown people.

Friedman's oppostion to social security makes far more sense and doesn't set off my liberal rage-o-meter nearly as much as opposing any sort of minimum wage- why should we force people to particpate in a "large-scale invasion into the personal lives of a large faction of the nation", which we can understand as working folk, with no real justification of why we such a particular system geared at such particular results. Having the young pay for the poor is no more intuitively attractive than the young being paid for by the old, or having any other system. Moreover, the system is neccesarily flawed in that we can assume that the government is not really capable of making the most of this gigantic investment.

Milty is basically just not about getting the government's hands in anything, though I wonder if he would hold the same tune today after such massive market failures. If the government is involved, there had better be a damned good reason.

Historical Determinism

First a short rebuttal of a point Marco made:

Friedman specifically attacks medical organizations for limiting entry into the professions through caps on the number of students accepted into medical schools and the number of schools accredited. Personally, while I disagree with caps, I’m not convinced that lowering the standards for doctors is a sound idea, even if it means there’ll be more doctors around. If this were to happen, you would see a stratification of the medical industry where only the richest would have access to decent doctors. While some might argue that the poor currently have no access, period, we can’t overlook government sponsored clinics for the disadvantaged. I feel it’s better and more ethical to have the government subsidize decent medical care for the poor than to have the poor treated by the least qualified individuals, which they can afford.

Marco's basic argument that the current level of competition to get into medical school and make new doctors is absolutely necessary to maintain quality in the medical profession is completely misguided. Unfortunately, Marco too has succumbed to the propaganda of the doctoring guilds (the American Medical Association and the American Association of Medical Colleges). While the United States population has basically doubled in the last 50 years--from 150 million in the 1950s to 300 million today--not a single new medical school has been founded since the 1950s, and the medical schools have expanded their enrollment very little. To explain, if Marco's argument basically means only the top 5 percent of our population is smart enough to become good doctors, and we had sufficient medical schools in 1950 to educate them all. Then by definition, today, we must not be letting some people into medical school that are smart enough to be good doctors. I suppose it would also be possible to argue that the top 5 percent of the population today is not as smart as the top 5 percent in 1950--only the top 2.5 percent today are that smart--but that argument seems unlikely, unless you buy Hernstein's argument that there is a systematic dumbing of society.

In any case, the quality argument does not even play out in practice. Today, one third of all new doctors come from overseas. If restricting the number of people coming out of US Medical Schools is so important for quality control, then why are we so willing to pick up doctors from abroad of lower quality? Maybe it is because there is a shortage of doctors. Oh wait, it because there is a shortage of doctors. Marco says, "we can't overlook government sponsored clinics for the disadvantaged." Well guess what Marco? No one did overlook it. It is just that now, because there are not enough doctors, government agencies have to raise and raise the salaries offered for doctor positions to attract them to the work. This drives up the prices in the market as a whole, creating an ever-ballooning price bubble in which doctors get paid more and more, but the country receives less and less care, eventually driving the United States to the state we are in today, where we have by far the highest prices in health care in the world, and certainly not the best care. This is not to mention that, as I explained earlier, the rigidly limited U.S. doctor licensures and the massive price incentives that result from them are drawing the best doctors away from the poorest country of the world where they are needed most. In Infections and Inequalities, Paul Farmer explains that while Haiti has a medical school, less than ten percent of its graduates in the last 50 years have actually stayed working in Haiti--the rest have gone to Europe and the U.S. where salaries are higher and there is demand due to rigid licensure structures.

Although, I suppose in retrospect this rant is not so much against the idea of licensure for doctors overall. Plenty of other countries have licensure, but have pricing problems that are not as bad as the U.S.. The rant is really against letting professions control their own licensure processes, as they work for the benefit of those in the profession--as Friedman argues--rather than the public as a whole.

Turning away from Marco, I want to say that the kind of historical determinism in The Road to Serfdom for some reason reminded me of Cannibals and Kings from last year. You know, in C & K, Harris argues that cultural structures are a necessary result of the need to control population in a given environment. Hayek argues that totalitarianism is the necessary result of socialism--more or less. I suppose they aren't that similar except in the fact that they are both deterministic--although they both claim to not be deterministic, citing their own desires that someone will read their books of genius and break these horrid cycles.

In any case, reading Hayek is a little funny from the prospective of today. As a book written in 1944, it has the totalitarian fears of 1984 and Brave New World written all over it. I remember reading these books in high school, and asking my Dad, "so why did totalitarianism never take over?" I remember him distinctly saying, "Well, no one really anticipated the 60s."

While my Dad may have had a point, I am not sure that is the main point in regards to why centrally planned economies failed to prevail and eventually yield to totalitarian dictatorships. In the end, it seems Milton Friedman has the true answer as to why totalitarianism did not take hold: the power of market competition. As Hayek points out, the United States was at a different stage in this determined developmental cycle than the USSR or Germany. While centrally planned services were rising in the United States, it was nowhere near the levels in these other countries. As a result, when it came to it, and the world was divided into two great superpowers, by luck of history--I suppose--the United States found itself less centrally planned than the USSR. This meant that the United States was able to adapt to market considerations and develop economically in a much more effective way than the USSR. In the end, the USSR simply could not compete with the United States under the centrally planned totalitarian model, and it fell in a cold war of soft power. The fall of the USSR fortuitously led the world to realize the pitfalls that Hayek warns us of 40 years earlier. Not so much that socialism inevitably leads to totalitarianism--but that socialism is simply less effective than capitalism and thus should not be pursued.

One last note: it is interesting to think about whether Hayek would view the more socialist countries of Europe today as walking down "the road to serfdom," or whether in light of our current historical situation, he would see the possibility of a fully planned economy eliminated in the wake of the fall of the Soviet Union--any ideas anyone?

Solitary, nasty, brutish, and short.

Hobbes depicted the life of man as solitary, nasty, brutish, and short, referring to the violent forms of coercion used by man in the absence of organized societal law. Basic freedom in such a state is limited merely by fear of vengeful actions perpetrated by the victims of your actions. Friedman's hails capitalism and the open market as the harbinger of individual freedom as long as governing bodies provide insurance that contracts are upheld, monopolies are checked, and exchange occurs free of coercion. But is this all that is required for individual freedom? Friedman notes that a socialist society does not permit the freedom to voice a dissenting view because to campaign such a view requires funding and the only members of society with adequate funds for such an endeavor are those who directly benefit from the existing system and therefore hold no incentive to support dissent. Hence, the control of individual wealth appears to be a prerequisite for freedom of action. We can then accept that there will be variance in various persons abilities to acquire such wealth, and even given all transactions are voluntary and informed, it is possible to enter into such agreements so that the end result leaves one group of individuals incredibly wealthy while another lives without enough to garner food and shelter on a daily basis. This can occur in the free market system when individuals are truly allowed to engage and compete freely. So while Friedman's vision does not include clubs and broken bones he still verges on depicting a world with the potential to be solitary, nasty, brutish, and short.

Occupational Licensure- why we need it

`Often times, I find it’s hard to find points of contention with the authors of the books assigned to us given their authority and recognition within their field. As Nina would say, who am I to have an opinion when I have barely begun to explore the subject? These people are acclaimed for a reason and their ideas are obviously based on some deep considerations. Likewise, while reading Friedman I found myself agreeing with some points (especially regarding capitalisms capacity to promote diversity in thought in news media when compared socialism), but also not disagreeing with others because I didn’t know enough about the matter to make an opinion. This time, however, I was relieved to find something I could unashamedly disagree with, that being Friedman’s view on mandated licensing for professions.

Friedman notes how proponents of licensing argue on the grounds that without regulations, the interests of the public are at stake. On the other hand, Friedman contends that it is not the customers that demand the licensing but rather, the suppliers themselves who seek to keep competition low and do so by creating unnecessary barriers to entry. He notes how those heading the licensing boards are licensed members of the occupation, but questions the legitimacy of the qualifications and merits they set as requirements for entry into the field. He tries to show the absurdity of their requirements recalling how in 1952, a Texan statute mandated that pharmacists take an oath swearing they did not support communism. Should a person’s political views determine their ability to sell drugs? Of course not, but this isn’t a good example. Friedman should not forget his discussion on the Hollywood blacklist and remember that the market would find good pharmacists jobs even if they had to do it under different names.
I think certification, registration, and licensing are important for several reasons as it provides for 1) safety, both for the customer and for the professional; 2) uniformity in services and quality 3) observance of best practices; and 4) ethical guidelines. It would upset Friedman to know that I believe such licensing is needed for professions including restaurants, taxi cabs, pest controllers, potato growers, and hypertrichologists. I mention these lower skilled professions and not the more obvious examples where we all might agree licensing is necessary: medicine, dentistry, etc, to make a point. Personally, I feel it’s quiet clear why we need licensing in these professionals – you want restaurants owners to abide by some health regulations, you should have record of who’s driving people around the city (it protects against pirate taxis and kidnappings), you should expect the pest controller you hired to know what chemicals not to use around your children or pets, you’d like the potato growers to know that the industry mandates against the use of a cheaper pesticides because they causes hemorrhages, and you want your hypertrichologist to know it’s unethical to sell your hair to doll manufacturers.

Friedman specifically attacks medical organizations for limiting entry into the professions through caps on the number of students accepted into medical schools and the number of schools accredited. Personally, while I disagree with caps, I’m not convinced that lowering the standards for doctors is a sound idea, even if it means there’ll be more doctors around. If this were to happen, you would see a stratification of the medical industry where only the richest would have access to decent doctors. While some might argue that the poor currently have no access, period, we can’t overlook government sponsored clinics for the disadvantaged. I feel it’s better and more ethical to have the government subsidize decent medical care for the poor than to have the poor treated by the least qualified individuals, which they can afford.

On a lighter note, Friedman seems offended at the training barbers must go through and calls it “ a serious infringement on the freedom of individuals to pursue activities of their own choice”. Milty, you have to forgive me if I expect the person twirling sharp objects around my head to know how a little something about “barbering, hygiene… and sterilization”.

Nozick: The Remix

While reading Capitalism and Freedom, I was reminded of reading in the Philosophy section of PPE. In Anarchy, State, and Utopia, Robert Nozick categorizes theories of justice as either end-result principles or historical principles. Perhaps less-clearly, Friedman espouses his own version of the same argument: “To deny that the end justifies the means is indirectly to assert that the end in question is not the ultimate end, that the ultimate end is itself the use of the proper means.” (20) Nozick claims that a correct account of distributive justice does not require a particular distribution and cannot be of the end-result variety. Through the Wilt Chamberlain example Nozick posits that a transfer is just if it is voluntary. The Milton Friedman example: “The possibility of co-ordination through voluntary co-operation rests on the elementary-yet-frequently denied-proposition that both parties benefit from it, provided the transaction is bi-laterally voluntary and informed.” (13, emphasis in the original)

Friedman’s analysis falls on a hard liberal line. He goes beyond the claim that the government is not good and extends the argument to include the negative impact of the government on man’s freedom. How many times does he mention that the government’s power must be dispersed, that the scope of government must be limited? E would be so proud. And his argument is pretty clear, and hard to argue with (am I really saying that?). In the discussion of the education system, however, it is not quite clear to me how his system would remove the advantage of the rich in providing their children with better education. Sure there would be competition among schools to provide quality education at decent prices but something tells me that the student population at Exeter and Andover (and even La Jolla Country Day for that matter) will still be pretty homogeneous when it comes to socioeconomic diversity.

Friedman is convincing but at some point the “liberal” in me starts wincing. The fact that he grounds his arguments in policy prescriptions that are tangible (albeit slightly infeasible) strengthens his position. Again WE would be proud of Friedman’s take on population control. He explains: “imposing the costs [of education] would tend to equalize the social and private costs of having children and so promote a better distribution of families by size.” (87)

Ending Discrimination

Capitalism has done more to end discrimination than any law, act or bill ever has.  How?  It makes the bigot pay... literally.

Hiring less efficient workers because they are of a preferred race means that firms will automatically lose money in relation to hiring a more efficient worker of a "less desirable race."  Because the rational decision is to hire the best workers, it will cost the firm money to hire underperforming workers.

Friedman explains how capitalism undermines discrimination, but his broader message is more important: capitalism ensures a more egalitarian society.

Birth control, communism & vegetarianism (52)

Though I'm not writing on Friedman's chapter, "The Control of Money," I thought it was interesting that he brought up vegetarianism as one of the 3 things that a man may want to defend on a street corner in his argument for free speech [translation: 3 things Friedman doesn't agree with]. I suppose he was a meatarian...

Similar to Sarah's experience, I found myself not necessarily agreeing with, but rather understanding and perhaps even sympathizing with Friedman's way of thinking on many occasions. I remember having a similar reaction when we read Friedman's + his wife's book in Hurley's class two semesters ago. However, one chapter that I particularly did not relate to was Chapter VI: The Role of Government in Education. Friedman gives way to a certain level of public education, stating that "the separation of a child from a parent who cannot pay for the minimum required schooling is clearl inconsistent with our reliance on the family as the basic social unit and our belief in the freedom of the individial" (87). However, he suggests implementing subsidies for those who cannot afford private education, in order for the invisible hand to work its magic and achieve reform in the (private) educational system. He even throws in the fact that allowing education to be costly would provide a disincentive for high fecundity (Elliott's kind of man). However, Friedman's policy suggestions essentially encourages members of different socio-economic classes to live in different areas, so that the costs of subsidizing education would be a regional policy as opposed to a federal policy in order to "eliminate the governmental machinery now required to collect tax funds from all residents during the whole of their lives" (87). Furthermore, the funding for subsidies would presumably come from public funding as well, thus not completely eliminating the need to spend tax-payer dollars on education.

Friedman makes it clear that the positive externality rationale behind public school is valid only for the "kind" of schooling that provides for "better social and political leadership" (88). Once again, way to embrace all that is CMC, Friedman. Nevertheless, it is unclear to me why externalities justify leadership training but not vocational training. Wouldn't having more efficient and specialized workers be good for any liberal economy?

He makes the point that denationalizing education would "widen the range of choice available to parents" (91), but only the parents of those who can afford to make choices without subsidy considerations would be allowed this luxury. On the other hand, I agree with the fact that more competition in the educational institutions would allow for better teachers because if wages better reflected teacher effort and outcomes (I am not endorsing No Child Left Behind here...), teachers' incentives would shift in a manner that encourages better education. However, teachers would also require incentives to choose an inner-city school on the South Side of Chicago as opposed to Lake Forest High (no offense Hillary), incentives that would most likely not be created by the free market. Thank goodness for Teach for America.

LEARN MIND MOTIF (an anagram!)

Fear of over-generalizing, too much simplification, or trite response to what many consider one of the most important books in the latter half of the twentieth century compels me to focus on one specific aspect among many of the timeless argumentative claims which seem to leap out of these chapters and dance in tickling circles around the mind (or something).
One main claim by Friedman throughout is that economic freedom negates or stomps out coercion by nature of the competition and alternative choices which all people have. The criticism of this lies in the notion that economic freedom creates enormous opportunity for unequal and perhaps even egregious distribution which then allows for coercion through economic power. The necessity for certain market limitations such as anti-monopoly laws are apparent in this sense. As one critique of Friedman states, “Professor Friedman does not see this as any threat to political freedom because he does not see that the capitalist market necessarily gives coercive power to those who succeed in amassing capital” (C.B. MacPherson).
In Friedman’s defense, he puts forward a solution to certain distribution problems by suggesting a reformation of the tax system. He explains that much of the inequality which pervades America is due to inheritance and property issues. In other words, we do not all start on the same level in life (I am sorry to pronounce and obvious truism). He states that the progressive income tax is “much less taxes on being wealthy than on becoming wealthy” (173) and he prefers a flat rate tax. Though radical in many ways, an interview with Friedman in The Times Herald in1978 sheds light on some more moderate inclinations. Although he states a view that tax is an opposing force to free enterprise—it is necessary good/evil for the purpose of “essential government functions” such as defense, police, etc. So, for him, “the question is, which are the least bad taxes?” This is a funny way of putting it, but it seems right—for that is how many moral considerations are weighed as well. Though we may not ever be able to get to the truth, and the formula to a perfect world in which people make choices that help others and promote the good for all perpetually evades us, we can justify small actions and promote certain lines of reasoning and motifs which will work toward an unattainable perfection without frustrating itself half way there.

The road to serfdom illustrated

Cute:
The Road to Serfdom illustrated

Crisis?

Food for thought from Milton Friedman: "Only a crisis--actual or perceived--produces real change."

Free Markets Didn't Create the Financial Mess

If you turn on CNN, you might think that the financial crisis was caused by the free market and "corporate greed" - not poor economic policy.  "Corporate greed" is a great catch-phrase for slimy politicians: they create an "evil side" (in this case, corporate executives) and promise to be the candidate who will fight for the "good side" (the government) against these manipulative corporate fat-cats who are responsible for everything bad in the world.  Think I'm over exaggerating?  Check out this YouTube video (along with the YouTube link above).  

But thankfully, not all politicians are political opportunists.  Some actually know a thing or two about economic policy - and those that do understand economic policy also recognize that this financial mess was caused by government policy, not the free market  Don't believe me?  Click here.  

Dr. Paul's argument is that Wall St. shouldn't be bailed out, but his explanation of the meltdown is more important: he shows how poor monetary policy and artificially low interest rates created unsustainable practices in the (unfree, over-regulated) market.  What's more, is he does so using easy-to-understand terms and concepts.  Heck, even I understood his argument.

I'll probably be criticized for using a "right-wing" source for my explanation of the financial situation, but last time I checked, the market actually depends in part on monetary policy and not corporate greed.

Burn After Reading

It is amazingly hilarious. A departure from earlier Coen brothers works but everyone is so spectacular in it. A MUST SEE! In fact, I would totally see it again if anyone wants to go with me.

...And this is the GOP's fault because?

I am not a Republican, but I do find it disturbing that just about everything that goes wrong seems to be blamed on the GOP.  Our latest "financial crisis" is no exception.  

I don't think the Republicans alone are responsible for this "meltdown" - Democrats should shoulder much of the blame too, given how they control both the House and Senate.  But perhaps Democrats should take the majority of the responsibility in light of this gem of an article.

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