[Pen-l] [Fwd: Article by Joel Bakan on free marketeers & Milton Friedman]

[michael a lebowitz <mlebowit@xxxxxx>]

__________________________

by Joel Bakan
Special to the Sun

Friday, October 03, 2008

Watching Wall Street melt down over the past two weeks brought back
memories, fond ones, of an afternoon I spent with Milton Friedman.

It was in 2000, and Friedman had agreed to be interviewed for a book and
film I was working on. During our interview in the lobby of his apartment
building, which sits atop Russian Hill in San Francisco, Friedman pieced
together for me two key elements of his economic theory.

To begin with, he said, corporate firms have one, and only one, obligation
-- to make as much money as they can for their shareholders. "A corporation
is the property of its shareholders," he said. "Its interests are the
interests of its stockholders. Now, beyond that, should it spend the
stockholders' money for purposes which it regards as socially responsible
but which it cannot connect to its bottom line? The answer I would say is
no."

Second, Friedman told me, there is little, if any, legitimate place for
government to regulate what corporations do in their pursuit of profit.
Accordingly, he said, governments should wind up their roles as economic
overseers. They should deregulate.

The meltdown on Wall Street was caused, in part, by the inherent
contradiction between these two ideas. If corporations are designed solely
to make money for their shareholders, and if governments have no place in
regulating what they do, what is to stop them from acting recklessly and
dangerously in their pursuit of profit?

Friedman's answer to this question -- which he borrowed from, and
attributed to, Adam Smith -- was that an "invisible hand" guides markets
to ensure
firms act responsibly to society, consumers and their investors. The
popularity and influence of this idea, spouted by economists with near
mantra-like devotion (at least until the past few weeks), is puzzling.
Would
you want an invisible hand to guide your surgeon's knife, or protect your
neighbourhood from crime?

Why is the economy so special -- how is it that the invisible hand works
there but nowhere else? The Wall Street meltdown suggests that, in fact, it
does not.

Years of Friedman-inspired deregulation, executed by father and son Bush
(with Clinton pitching in), left financial markets in the hands of -- well
-- invisible hands. Now off their regulatory leashes, financial
institutions could create, invest in, and manipulate new, exotic,
unstable, ungrounded,
risky, but highly profitable, financial products -- mainly derivatives and
securitization devices, such as subprime mortgage packages.

These products were built in the air. They were gambles rather than
investments, bets on, or insurance against, the market's ups and downs --
bubbles that would eventually burst, like the South Sea bubble of 1720 and
the dot-com bubble of the 1990s.

History, of course, repeats itself, as does our inability to learn from it.
For the past 30 years the myth of the free market has driven public policy.
Now that the damage is done people are calling for re-regulation and
government bailouts. Whatever the ultimate fix, it will be taxpayers,
workers, and consumers, in the United States and around the world, who pay
the price for the huge profits accumulated by now flailing or failed firms
(the very firms, incidentally, who, over the years, stridently
trumpeted the virtues of free markets, and ferociously fought for
deregulation.)
Socialism for the rich, capitalism for the poor, as George Bernard Shaw
once quipped.

There is, of course, a fairly obvious lesson to be learned from all of
this: In an economy dominated by large firms, for whom creating shareholder
value, usually in a relatively short term, is the primary goal, robust
oversight by governmental agencies is imperative -- as it is imperative
that those
agencies be independent, oriented towards the public interest,
democratically legitimate, and authoritative. This holds true, of course,
not only for the financial sector, but for every other social and
environmental sector.

I only wish Milton Friedman were alive today so that I could ask him
whether this meltdown changed his thinking, as it seems to have for some
of his
economist colleagues.

"Deregulation is still very limited even in places where we boast of it
most," he told me in 2000. "I think we need a great deal more
deregulation." If he stuck by that notion, Friedman would reject my
conclusions
here. Who
knows? Maybe he would have changed his ideas as the world around him proved
them wrong.

Joel Bakan teaches law at the University of British Columbia and is the
author of The Corporation: The Pathological Pursuit of Profit and
Power, and
writer/co-creator of the documentary film The Corporation.
© The Vancouver Sun 2008








--
Michael A. Lebowitz
Professor Emeritus
Economics Department
Simon Fraser University
Burnaby, B.C., Canada V5A 1S6

Director, Programme in 'Transformative Practice and Human Development'
Centro Internacional Miranda, P.H.
Residencias Anauco Suites, Parque Central, final Av. Bolivar
Caracas, Venezuela
fax: 0212 5768274/0212 5777231
www.centrointernacionalmiranda.gob.ve
mlebowit@xxxxxx


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