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July 3, 2013

Trickle-Down Economics Not!

Patrick W. Allen

For those who continue to push for trickle-down economics, September 13, 1970, is a date which lives in history.


It was on that day which The New York Times published “The Social Responsibility of Business is to Increase its Profits” by Milton Friedman. This piece has been held up by so-called “free market” advocates as the foundation of their beliefs. Of course, their belief falls apart when presented with reality.


Milton Friedman was one of the first people to argue that the corporate leadership does not work for the company, but for the shareholders. He went so far as to call the shareholders the employers, and that the company itself held no meaning. When describing the role of a company executive, he said:


“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”.


He further went on to claim that any behavior which was not at the pure goal of maximizing profits, even if such profits were at the expense of the company, specifically stating that any idea of social responsibility was anti-capitalism. He argued that the company itself was a mere “legal fiction” and its health could be safely ignored as unimportant. The only thing of importance is the shareholders, and the money pipe-lined straight into their pockets.


He brings up examples, of companies reinvesting in the community, in education, and eviscerated the very concept. He calls such actions theft, denouncing them as “nonsense” and that “there is one and only one social responsibility of business – to use it 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.” This, of course, ignores that when profit pools, it enables the enriched to manipulate the rules of the game, to distort it, and therefore – what is against the rules – changes.  Behavior which was criminal becomes legal. What once was fraud is now accepted. Deception becomes propaganda.


Even their greatest “free market” ally, Forbes magazine, has admitted the abstract failure. On June 26th, Forbes released “The Origin of ‘The World’s Dumbest Idea:’ Milton Friedman,” by Steve Denning, a veritable renaissance man schooled in economics, leadership, and even a published poet. His piece breaks down the origins of the trickle-down theory, and its origin in a single article and the man who wrote it.


Companies which embrace Mr. Friedman’s model are now dependent on billions of taxpayer subsidies while those who follow the responsible corporate model turn out record profits and have high return on their shareholder investments. In addition, the companies have a higher employee morale, resulting in higher productivity, which again produces higher profits.


The problem with Milton Friedman’s premise is that its focus on profits as the immediate end of any action leaves little room for growth or development. The actions which he dismisses as a “suicidal impulse” are instead the actions by which a company ensures its long-term viability.  Companies which reinvest in the enterprise, through higher wages, better training, or regional infrastructure, are not stealing from their shareholders; they are ensuring their shareholders investments. As established in Dodge v. Ford Motor Company, by Henry Ford giving his employees an above-average wage for the industry, he ensured his shareholders long-term value, therefore secured their investment.


At the time, workers could count on about $2.25 per day, for which they worked nine-hour shifts. It was pretty good money in those days, but the toll was too much for many to bear. Mr. Ford’s turnover rate was very high.  In 1913, Ford hired more than 52,000 men to keep a workforce of only 14,000. New workers required a costly break-in period, making matters worse for the company. Also, some men simply walked away from the line to quit and look for a job elsewhere. Then the line stopped and production of cars halted. The increased cost and delayed production kept Mr. Ford from selling his cars at the low price he wanted. Drastic measures were necessary if he was to keep up this production.


By raising his salary, Henry Ford could lower his prices while raising his profits. This is the foundation of business growth, which Milton Friedman threw out the window. To small-brained thinkers like Mr. Friedman, profits must be short term; there is no viability in long-term growth. So long as they got theirs, it does not matter what happens afterwards. His dismissal of the company, and the leap to believe that the shareholders are the employer, undermines his argument which has held sway for over 40 years. Even one-time advocates for Milton Friedman’s model are rejecting it outright and embracing the older model which gave our nation its great strength.


Isn’t it about time we abandoned the failed idea that companies only serve to maximize profits in the short term, and embrace the notion that by serving the public good, profits will come? It has worked whenever we have done it before, and ever since Milton Friedman began pushing his ideas, companies, and our nation, have suffered. While in the short term, it can look decent, over the longer period, only collapse is shown.


If we do not halt this idea, and bury it alongside its creator, then we shall pass as a nation, great no more and just a faded memory.




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