How Might Milton Friedman Respond To The COVID-19 Pandemic? (Part 2)

Continued from Part 1

In this age of tribalism, where everybody must be apportioned to a particular tribe with a specific agenda, I am well aware that I will already have been painted as a socialist and\or anti-capitalist. In fact in my earlier blogging for less manipulated and fairer Australian housing markets a decade ago I frequently received angry emails and posts describing me as such.

The truth is that I have a very high regard for many who might be considered business “elites”.

Very early in life I intuitively understood that a system built on little or even no reward for your own individual combination of hard and smart work is not sustainable, and I feel no amount of jealousy towards those who have earned a comfortable living. But note the definitive word is most definitely “earned”. Moreover, I make this statement with a heavy heart in knowing that we live in a massively inequitable world and there are very many who deserve so much more opportunity for a better life than they have and they would have it if the world were a perfect and genuinely equitable meritocracy.

Embedded in my use of the term “earned” is an expectation that a right to the benefits from society have been earned by paying through our taxation systems a fair and proportionate contribution to administering our society.

The elites that I respect, as I explained in “Your Life: Something The Elites Have Always Been Prepared To Sacrifice For Their Ends“:

are those who authentically understand the privilege that they have enjoyed, usually from birth by virtue of the luck of being born in a developed country or into middle class even if they consider themselves ‘self-made’, as well as respect and appreciate relationships with other human beings … 

I do not identify with those who list very wealthy individuals saying that it is obscene that they have accumulated such wealth. If they hurt people, either knowingly or by choosing to remain ignorant to it, in accumulating that wealth, then I would certainly consider them as deplorable. 

Of course I prefer that everybody on this Earth does what they can to assist other people, so obviously I would hope that people of greater means undertake genuinely significant philanthropic activities aimed at making a difference for others (rather than just promoting themselves in social circles, or only engaging in egotistical and vain projects with lesser returns to humanity, or to gain goodwill which will be cashed in later for personal advantage.) I must admit, however, that in my day to day life in the suburbs I regularly encounter people who say that they can not afford to donate to charities or give of their time or in some other capacity.

I believe that giving is relative to what you have, and I have learned many times over through my life and on my travels, especially in developing countries, that one has something to give as soon as one has something, and even before that we have ourselves to give.

While perhaps it is a greater pity that somebody with means to make a more significant difference, whether that is due to their wealth or their public profile or position, declines to do so, I do not care for any mean-spirited person irrespective of their means.

Foremost among the many undeniable elites who I admire would be Warren Buffett and Charlie Munger, Bill Gates, and George Soros. I also know, for certain, that there would be many, many more who I would like and respect if I were to know them personally or observe them often and closely enough to be able to develop an informed opinion.

As I look at that list it strikes me that they are all white American men. There are some Australian men I might include such as John Hewson (I mentioned my admiration before on these pages) and probably Mike Cannon Brookes (but I do not really know that much about him).

Interestingly much of the elite political leadership that I admire presently are women including Jacinda Ardern, Christine Lagarde, Ursula von der Leyen and Kristalina Georgieva – so mostly white European women.

I also have to say that I have been impressed by some more of these individuals, who belong to a very fortunate and privileged group within society, in how they have responded to the outpouring of emotion and drive for societal change through the Black Lives Matter protests following the murder of George Floyd. Here I would make special mention of the African-American businesswoman Ursula Burns, the former CEO of Xerox, who I knew little of before but who I found extremely impressive. But there were also other white men whose response was impressive and suggested that real, durable change is finally possible.

The truth is that I like people, and I want to believe the best in all people, so it fills me with pride when I see good people stand up to be counted and try to be the best version of themselves to the benefit of humanity. And I tend to be fiercely loyal to someone once they have shown themselves to be authentic.

My view is unequivocal that capitalism is the best system that mankind has developed to allocate resources for the betterment of humanity and I do find it difficult to believe that a better system is attainable.

I am in little doubt, however, that the form of capitalism that we practice in this early period of the 21st century has gone too far as I first began to articulate in my post “The Magic Sauce Of American Economic Dynamism Is Not Based On Personal Greed“. I see greed as a deleterious byproduct of wealth which leads to corruption of the capitalist system, and I do not see it as a basic core nature of human beings even though proponents of this extreme form of capitalism have co-opted biological theories, notably the Selfish Gene Theory, to justify its centrality to their preferred form of capitalism. The current form of extreme capitalism based on the centrality of personal greed is exemplified by the theory of Trickle Down Economics which is in reality no different from any other form of sequestering of wealth by the elites practiced down through the ages.

Taking superficially attractive ideas and extrapolating them to extremes is common in financial systems, in fact it is the basis for nearly all speculative bubbles. And I would suggest that the same can be said for the formative ideas of Dr. Milton Friedman who is a hero to the proponents of our current extreme form of capitalism. Reflecting on that recently, after reading his Doctrine  “The Social Responsibility Of Business Is To Increase Its Profits” for the first time, I was left with a ruminating question – How might Dr. Friedman respond to the COVID-19 pandemic?

Dr. Milton Friedman is proclaimed as a key architect of the current American economic paradigm which has been variously described as based on supply-side economics, Reaganomics and trickle-down economics, amongst other descriptors. Dr. Friedman wrote extensively of his views on dealing with economic problems that prevailed in the 1950’s through the 1970’s in western countries, and was awarded the Nobel Prize for economics in 1976. Dr. Friedman was a key economic advisor to President Reagan and to Prime Minister Thatcher in the United Kingdom, and their joint success at reforming their economies out from prolonged periods of low economic growth with high inflation earned Dr. Friedman widespread acclaim.

In reading Dr. Friedman’s words in his famous “Doctrine” I was struck with the perception that I share some views which are central to his doctrine as he expressed it in 1970. I even wondered whether these are so central to his doctrine that it is possible that my own views are more consistent to his, at that time, than are the views of many contemporary elites. As I read I realised just how much the basic premise of the essay had been co-opted by contemporary elites to justify their political motivations to garner more power and influence. I would go as far as to suggest that the man who sat down to write that essay likely would not be supportive of the way capitalism is practiced today even though he is venerated by it’s proponents – those who have prospered so greatly from it – for establishing the roadmap towards it, what President George W Bush described as the “moral vision”, and for being intimately involved in the early stages of reform.

(Obviously this situation is not uncommon, where many can agree on what are important problems and it is the solutions chosen, often with a political agenda in mind, where the problems arise. As one example I would admit that when I have listened to Steve Bannon speak I have been impressed by the way he has set out the issues and grievances of many in contemporary Western society. I even find common ground with some of the causes he identifies. But it is his solutions and especially his politics where we sharply disagree. That is precisely why these are the situations which can prove to be dangerous inflection points for society because the details and nuances are critical.)

The best way to discuss Dr. Friedman’s doctrine is to “reverse engineer” the document, commencing with his conclusion:

the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book “Capitalism and Freedom,” I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “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 fraud.”

Many contemporary readers will immediately seize on the key words here unlike they might have done 50 years ago. Of course these are the final twenty-three words of the document, “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud.”

Everything that is written in this doctrine is from the point of view – no, the assumption – that Government oversight of corporations will always remain robust, powerful, active and diligent.

civil servants… must be selected 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 guide the assessment of taxes and to determine through a political process the objectives to be served.

It does not allow for the regulatory capture that is now so prevalent and pervasive in most of the western world.

Dr. Friedman wrote with a frame of reference of having been immersed in the heavily regulated and unionised 60’s and 70’s. He expressed a disdain for “pure and unadulterated socialism”. His views of the environment in which he had formulated his ideas are summed up in these key quotes:

In the present climate of opinion, with its widespread aversion to “capitalism,” “profits,” the “soulless corporation” and so on

The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends… In fact they are – or would be if they or anyone else took them seriously – preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades

speeches by business men on social responsibility… may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, business men seem to me to reveal a suicidal impulse.

Clearly Dr. Friedman considered that he was in an intellectual struggle against a foe, which perhaps he feared was in an entrenched ascendant epoch, but which, in no small part due to his own efforts, was on the cusp of terminal decline.

One has to wonder what that man would think if the minute he finished the final version of that doctrine he entered a wormhole and emerged from it any time over the twenty-tens, with the major developed economies having undergone continual deregulation – with only minor and temporary tracebacks – for half a century, and with the cold war having been won over two decades earlier, and with China having been welcomed to become so deeply enmeshed in the Global economy (even if that is currently undergoing adjustment – which I have previously stated was both necessary and overdue – but perhaps soon to be managed by more intelligent and adept hands.)

While the “iron fist of Government bureaucrats” and powerful labour unions have largely been relegated to historical accounts of nearly all western society, there are other ways in which economies have been managed which are antithetical to libertarian ideals.

Certainly fresh from exiting a worm hole a 1970 Dr. Friedman would question where are “free markets”, with Government institutions globally – the central banks – being the main purchasers of the main funding instruments of Governments (bonds), and increasingly of private business debt, and even stocks of publicly traded companies already in some countries and foreshadowed in others. Most developed countries have engaged in this in one form or another. In my own country, the distortions away from free markets are perhaps best exemplified by the continual “management” (i.e. manipulation) of our residential property markets given the extreme level of household debt based on this one asset class.

The reality is that markets have been increasingly manipulated in the first two decades of this millenium, and those manipulations have had the effect of benefitting the elites.

Dr. Friedman’s views on taxation are linked to the assumption of enduring robust Government oversight based on public values. But his views on taxation extend to improper or sub-optimal usage of funds for and by those who are not in a position to make such decisions.

In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his “social responsibility” reduce returns to stock holders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employes, he is spending their money….

But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.

This process raises political questions on two levels: principle and consequences. On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public— after all, “taxation without representation” was one of the battle cries of the American Revolution. We have a system of checks and balances to separate the legislative function of imposing taxes and enacting expenditures from the executive function of collecting taxes and administering expenditure programs and from the judicial function of mediating disputes and interpreting the law.

The difficulty of exercising “social responsibility” illustrates, of course, the great virtue of private competitive enterprise — it forces people to be responsible for their own actions and makes it difficult for them to “exploit” other people for either selfish or unselfish purposes. They can do good—but only at their own expense.

On the first point of taxation by Government I shall leave it to a Republican who was “present at the creation” of the current American economic paradigm, working for both President Reagan and President George HW Bush, Bruce Bartlett writing in 2007 in The New York Times:

Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances… [it’s advocates in Congress] support even the most gimmicky, economically dubious tax cuts with the same intensity.

…today it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue

Critically, Mr. Bartlett goes on to explain the context into which the present economic paradigm was spawned, and he was strident in his disapproval of these reforms being continued almost without boundaries. Essentially his point was that the ideas had become so embedded as to almost be redundant, and that continuing reforms on those same lines – in that case, relating to taxation – had become deleterious. (Sound familiar?)

The second point flows from the first. To borrow Dr. Friedman’s words, when the businessperson uses their political power to reduce taxes on businesses and the wealthy, they are in fact taxing the remainder of society, and then the businessperson is deciding where those proceeds will be spent.

Even when the businessperson uses some of those funds charitably, Dr. Friedman has already spelt out that it is not their right to make those decisions as they are society-wide decisions, and often such endeavours performed by individuals are done with additional objectives in mind including vanity or creating good will which elicits potential for extraction of favour at a later point in time.

Thus the “good” that they do is not genuinely at their own expense.

(And yes, in an Australian context, you can bet I have in mind the watering down of the resources rent tax and at the same time deposing of a sitting Prime Minister as a particularly poignant example.)

Thus there should be little doubt that a 1970 Dr. Friedman, too, would not look favourably upon businesspeople seeking to, disproportionately to the remainder of society, reduce their Government taxation obligations either directly or indirectly.

One of our greatest shared views is our belief in the power of human specialisation which is central to his 1970 doctrine. My favourite quote is this:

WHETHER blameworthy or not, the use of the cloak of social responsibility, and the nonsense spoken in its name by influential and prestigious businessmen, does clearly harm the foundations of a free society. I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely far‐sighted and clear‐headed in matters that are internal to their businesses. They are incredibly short sighted and muddle‐headed in matters that are outside their businesses but affect the possible survival of business in general.

Dr. Friedman’s main argument against anybody else other than Government and eleemosynary organisations involvement in decisions around social responsibility are that they are not equipped to do so.

That has patent relevancy to the COVID-19 pandemic where the collective voice of business people works to undermine measures to protect life. While business people have a clear view of what are the impacts of stringent social isolation measures on their businesses, they are not capable of understanding the broad complexity of issues of relevance to society and thus how that mix of issues will ultimately affect their businesses. That has already been proven in this pandemic where businesspeople have allowed their visceral fears – which we human beings have all felt at times this year – to advocate, with their disproportionately loud voices, for policies which have been more deleterious to their businesses than swift and stringent measures to protect human life.

None of that would surprise 1970 Dr. Friedman, clearly, and if he were consistent he would be exalting all to ignore the short-sighted muddle-headed rantings of the business elite on what Governments should be doing to respond to the COVID-19 pandemic.

Importantly, Dr. Friedman also clearly endorses that in some human endeavours the profit imperative must be usurped by other objectives.

A group of persons might establish a corporation for an eleemosynary purpose—for example, a hospital or school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.

Health is an area where the profit imperative has penetrated especially in the last half century, in this pandemic leaving Americans at the point of being intubated in the battle to save their life concerningly asking who will pay for their treatment.

Clearly for many Americans there is indeed a fate worse than death – living to pay for the medical costs incurred.

From the Wikipedia page on Dr. Friedman I followed a link to an interview with Friedman on the Phil Donahue show in 1979 where he was pressed on whether the military could ever be privatised given the vast sums spent annually. He said “Very likely, if you could turn that over to private enterprise [an aircraft carrier] would cost half [what it currently costs], but we have to have a strong military” (his emphasis).

Clearly his view then was that some things were just too important to turn over to the private sector, with it’s profit imperative before all else.

Thus there is a line to be drawn in the sand, but where one draws that line will necessarily be subjective and thus will ultimately be politicised.

I do not think that it is at all controversial to suggest the severe impacts that COVID-19 has had on Americans and their society have shown that, where this line was drawn on health, it did not provide sufficient protection to the American people. Many will argue that this has been apparent for a long time and I certainly expressed early in the COVID-19 pandemic, on March 4, that I feared “all of these deficiencies of the US health system… [would] be revealed in a truly terrible manner”.

What Dr. Friedman failed to realise as he wrote in 1970 – so focused on arguing for his ideas in the face of his socialist foes, “monopolistic unions” and “iron fisted Government bureaucrats” – was how the balance of political power would shift as his reforms took effect. A cycle between reducing political power and increasing inequality caused a hollowed-out and precarious middle class with less political influence. The increasing political influence garnered by the increasingly wealthy elites, unsurprisingly, has not been driven by altruism seeking a reversal of these multi-decade trends – collectively, ironically, the political influence that this weight of wealth has bought has sought to entrench their advantage for subsequent generations as has been the pattern of human society through the ages.

I truly wonder whether the man who argued passionately in that doctrine, but before he became quite so acclaimed for his work as to receive a Nobel Prize and be taken in by the political elite to usher in a prolonged period of economic reform and societal change, writing the words quoted above, would wish to stake claim to the view that the system that so comprehensively failed so many people was based on his doctrine and views which together formed his “moral vision… which has changed America and it is changing the world”.

Part 3 – Conclusion – follows…

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© Copyright Brett Edgerton 2020

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