The Free Market
The Free Market
The Wealth of Nations, Milton Friedman, and the primary responsibility of a business.
What is the point of a business? What is the point of the free market? Why do we hold free-market capitalism with such high praise in the United States?
In 1970, Milton Friedman wrote an essay about the primary duty of a business. He stated:
“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires ... the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation ... and his primary responsibility is to them.”
What is a business for?
Whatever happened to the idea that a business should solve problems or create value for others? Whatever happened to the idea that a business would offer you something because it would make a difference in your life? When did this become about the growth of the business for the sake of those who want to see it grow and not about the benefit of the customer?
When Adam Smith wrote The Wealth of Nations, he framed the idea of market competition. The concept was that companies who compete with each other by offering better and better goods/services would drive down prices for consumers. This market pressure was to be theoretically amplified in a country like the United States, where capitalism and business growth were seen as primary values. In a “free” country, where anyone could start a business, we would have an outrageously diverse free market, right?
Of course, that’s not what happened. What we have now is a situation where a few companies own most of the market. Some companies, like Verizon and Comcast, even create false monopolies where they control the price and limit the competition. They do this by using their wealth to influence legislation so that they can own territories and maintain their status quo without having to answer to the customer. This is the opposite of Adam Smith’s vision. This is the opposite of a free market.
Walmart will walk into a new market and take a loss on their stores for years—just so they can snuff out all the competition. Once their competition dies, they can control the territory. They can survive because of their size. This is not the vision for a diverse economy that serves the people.
Should we break up big tech?
In an Esquire article, Scott Galloway, professor of NYU Stern School of Business makes a huge point about why we must break up large companies like Facebook, Amazon, Apple, and Google:
“Why should we break up big tech? Not because the Four are evil and we’re good. It’s because we understand that the only way to ensure competition is to sometimes cut the tops off trees, just as we did with railroads and Ma Bell. This isn’t an indictment of the Four, or retribution, but recognition that a key part of a healthy economic cycle is pruning firms when they become invasive, cause premature death, and won’t let other firms emerge. The breakup of big tech should and will happen, because we’re capitalists. It’s time.”
The productivity-pay gap for the American worker
It didn’t all start this way. Some companies started out with a mission to deliver lower prices and better products to consumers. In fact, the whole basis of a business offering an IPO (Initial Public Offering) was to give more people access to long-term investment opportunities. In the past, you had to know the right people to invest in a private company. When a company opened up shares to the public, the system became much more democratic.
So, if that’s true, how did this break?
Let’s go back to Milton Friedman. At some point after Friedman’s publication, businesses started to believe him. Companies started making small but powerful changes that would alter their purpose. For instance: tying a CEO’s compensation to the growth of the company. Instead of having a company that was focused on the customer, the company was now focused on growth—which was sometimes at the expense of the customer. It meant that employees needed to work harder and it meant that all profits went to the shareholders instead of being reinvested in the business.
Here’s a graph of what I mean:
What this graph shows is that American workers were doing a great job at creating and sustaining new value for American businesses. The only trouble is that they stopped getting paid for their work somewhere in the 70s, right around the time Friedman was convincing businesses to focus on growth.
Companies are for the people.
I think we can all agree that when companies do things that benefit us, our values, or our work, we like them better. We end up developing a relationship with those companies. We want them to succeed and grow. We love companies that make great products. We love companies that have great customer service.
Years ago, Patagonia ran a full-page ad in the New York Times telling consumers not to buy their new jacket.
What they were actually trying to say was “if you need it, it’s here and it’s an amazing jacket. If you already have a jacket, do the planet a favor and don’t buy a new one.”
This resonated with consumers and brought new, lifetime customers to their business. A company with a conscience? A company that wants to sell products to people who need them? How novel!
The point of a business is to solve problems and serve others.
The point of the free market was always to serve the customer. The point of all this was to solve problems and serve others. In order to solve more problems and serve more people, sometimes growth is important. Sometimes, it’s harmful and can cheapen a company’s value or service.
Companies with a purpose now focus on the triple bottom line:
Financial
Social
Environmental
The organization B Lab created a set of standards for companies like this. When they pass some rigorous criteria, they’re called B Corps (short for Benefit Corporations). You can see the whole list of B Corps, here. You’ll find companies like Patagonia, Coursera, Ben & Jerry’s, Cabot, and Etsy. You’ll see that they range anywhere from cheesemakers to breweries to financial planners. Anyone can do this.
For some of you, this is all old news. You’re already in the game. For others, you might find that you knew this in your heart but couldn’t articulate it.
I hope that no matter where you are in your journey, that you see an opportunity to impact others with your work. In fact, I hope that you see that impacting others is the primary purpose of work!
This capitalism thing isn’t working. This idea that anyone can and should be rich at the expense of others is careless, toxic, and also untrue. We already proved that working harder doesn’t equate to higher compensation—just revisit the graph above.
We need to change policy and unfortunately, the government just isn’t going to do that. It’s up to businesses. Businesses have the power to change policy in the United States and with that power comes tremendous responsibility.
Post Script:
I know I threw a lot at you, today. I’m starting to get a little deeper in my writing and I hope that’s a good thing for you.
If you like these deeper posts, let me know. If you like shorter, more digestible posts, I’d like to hear that too. Basically, I’m considering getting out of the “tips and tricks” business and writing deeper, more thoughtful posts like this but with less frequency. No one can read this stuff every day.
I’m looking forward to hearing your thoughts on how I can better serve you with my writing!
Hi Chris, you touched on so many important points and I'm blown away by your prolific, high quality output. Deeper posts are great, yet I enjoy your punchy ones just as much. Maybe mix things up from time to time?
I totally agree with your assessment “This capitalism thing isn’t working. This idea that anyone can and should be rich at the expense of others is careless, toxic, and also untrue.”
Instead of striving for material riches, I see more and more people striving to become rich in a myriad ways our humanity find expression in this soul factory called planet Earth.
I'm currently working my way through two books, and think they are relevant to your topic:
1. The Corporation by Joel Bakan
The author goes into the history of these entities called corporations and discusses in depth how in the 21st century corporations have evolved and adopted language and public “personas” that can be seen to be doing and saying things like caring for the environment and society. But that, in fact, it's only in as far as it makes business sense and not one inch further, that capitalism "allows" this type of social / environmental responsibility to drive business agendas. It’s a sophisticated marketing ploy, basically.
2. Days of Destruction, Days of Revolt by Chris Hedges
I'll leave you with two thought provoking quotes from this highly recommended book. The first is from the author himself, at the end of Chapter 1 discussing the decimation of American Indian society and culture in context of the “corporate state”. He says: “The old conflict between Indians and Euro-Americans, between colonisers and colonised, between masters and serfs, is the template for the last act of the corporate state. The tyranny we imposed on others is now being imposed upon us. We too are wage slaves. We, too, no longer know how to sustain ourselves. We, too, do not grow our own food or make our own clothes. We are as dependent on the corporate state as the Indians who were herded into the agencies and stripped of their self-sufficiency. Once trapped on reservations, once the buffalo herds no longer existed, once Indians could no longer move bands to gather wild potatoes, wild turnips, berries, medicines, and cottonwood bark for their horses in the middle of winter, once they could no longer hunt in different places to prevent exhausting the game supply, they became what most of us have become — prisoners.”
The second quote from the same book, is from a letter “Poor Bear” wrote shortly before his death: “The white male hurries because of money. Do not allow that influence of male inside your heart because they have already influenced your mind. The male-influenced world is based on money. Our world is not. We come form the other side. That word is not based on money. There are two senses. One is in this dimension. That one is your flesh. The one in our dimension is our heart. It gives life in a different way. That is real strength. The absolute gift is the warming of the heart not of the flesh. I give you that gift. That is the way we are going to live as a people — not as individuals, but as a people, the people of earth. We all come from our great mother and she is the earth, a child of Tunkasila [Our Grandfather]”