https://www.gsb.stanford.edu/insights/anat-admati-milton-friedman-justice?sf131463165=1
In this article, Anat Admati criticizes one of the most popular tenets of Milton Friedman: that corporations should be solely concerned with maximizing shareholder’s wealth. While this approach is not inherently immoral, Admati argues that Friedman’s argument rests on the assumption that “businesses operate in an environment of ‘open and free competition without deception and fraud’” (Admati, 2020, para. 2). This position presupposes that governments are able to fairly monitor and control corporate corruption and that businesses intend to act in the best interest of society. Admati highlights the ease in which corporations can be formed, often for immoral purposes such as to instigate money laundering schemes. Once these corporations are formed, there is often limited government regulation. For instance, Admati notes a lawsuit where PG&E only paid $4 million in legal penalties for committing 84 cases of manslaughter, due to their role in a California fire. Similarly, despite several fraud charges against Purdue Pharma, for aiding in the illegal sale of opioids, no individual from the company was sent to jail. While it is easy to point to these and other examples as merely a few instances of corporate wrongdoing, Admati notes the difficulty that the U.S. Department of Justice faces in combating corporate crimes.
These problems raise a question central to this class: how much should the government be involved in an economy’s operations? Given that corporations have been able to get away with an array of crimes, Admati argues that Friedman’s view of limited government is not able to handle a society that can truly maximize shareholder wealth. It is possible that the American public’s hostility toward government intervention is ultimately backfiring, as corporate misconduct that hurts those we assume it will protect. With a less binary view of government as something that should either be completely absent (advocated by Friedman) or completely controlling (as found in socialism), it will be easier to regulate corporations and ensure they are truly working on behalf of their shareholders.
4 comments:
This was a good blog post, Max. The question you raised is in fact essential and central to this class. The government's involvement in the economy is to help correct market failures or situations in which private markets cannot maximize the value they could create for society, but should this role be expanded given the problems that arise as mentioned in your articles? I think yes. Beyond ensuring that economic growth is generated, and regulating the economy as well as its agents (in this specific case the corporations), the government should also find a balance between interventions that have negative consequences on the market and those that have the intent to prohibit corporations' misconduct and ensure they are in fact working on behalf of their shareholders.
I do believe that the government has a responsibility to punish and regulate large corporations when there actions harm the public and shareholders. In the US it seems many times that on the road to maximizing shareholders wealth, companies lose sight of moral or ethical duty to society. In recent years, following the recession in 2008, the SEC and financial regulatory agencies have improved, though they still can't catch everything. That is why when the government does catch companies committing whatever crime, the punishment must be severe. Something that will deter them or other companies from doing similar things in the future. This is obviously easier said than done, but I do firmly believe the government has to play their role in keeping large corporations in check.
I also agree that one of the pillars for solid democracy, and a successful banking system, is public trust in financial corporations. Given this, laws need to be put in place in order for the public to feel they are placing their money in banks that will handle their retirement funds and general money in an honest way. When scandals, like the one at Wells Fargo, are uncovered, the public is less likely to utilize financial services, which are necessary for a country's economic prosperity. In my opinion, the government should intervene as much as possible to insure the public feels banks are incentivized not to engage in fraudulence.
This was a very interesting post Max. It boggles my mind sometimes that large entities can get away with such atrocities. However, it doesn't surprise me either as many of these entities have ties to government officials and regulators. Some of these problems go way beyond what the public knows, and I believe that is reflected in some of the very leneant penalties companies like Purdue Pharma faced. In regards to the idea that firms sole focus should be to maximize shareholder profit, I believe that this now has a different meaning in society than it did when Friedman came out with it. As today's society becomes more socially aware, companies are being forced to engage in corporate social responsibilty. Although the gov has not proven to people that it hands out appropriate punishments to large entities, we as a society have a larger voice now then ever. Now, maximizing shareholder wealth may include being as socially responsible as you can in an effort to not lose any profits from a scandal. For example, if we take a look at what happened to CrossFit over this past summer, their CEO's poor response to Black Lives Matter caused a large portion of their followers to leave the brand behind and ultimately forced the CEO to step down.
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