Читать книгу The New Builders - Seth Levine - Страница 23

On September 13, 1970, economist Milton Friedman published one of the most influential essays in the history of business, “The Social Responsibility of Business Is to Increase Its Profits,” in the New York Times Magazine. It was, as the New York Times' DealBook staff noted in a retrospective published in 2020, “a call to arms for free‐market capitalism that influenced a generation of executives and political leaders, most notably Ronald Reagan and Margaret Thatcher.”⁸

DealBook's retrospective included reflections from Nobel Prize winners, corporate executives, and entrepreneurs who had grown large companies, but not a single small businessperson. This is the nature of reporting about business today. Serious opinions are the purview of those who have size on their side. That in itself is but one influence of Friedman's essay.

A lot of attention has been paid to Friedman lately, but too little has been paid to the effect of his thinking on the small business economy. In 1970, Friedman posited that shareholders were the most important stakeholders in the business world and, in his view, distributing profits to them was the most efficient economic system. At the time, Americans were becoming owners of public companies' stocks in increasing numbers, a trend that peaked in 2007 with about 65 percent of Americans owning public stock according to the polling firm Gallup. Lately this trend has reversed, with just over half of Americans – 55 percent – owning these securities.ⁱⁱ

Friedman's thinking changed the way corporations acted. It was common up until the 1970s for firms to reinvest their profits back into their businesses – into R&D and employee salaries and benefits. In his Harvard Business Review paper, “Profits without Prosperity,” Professor William Lazonick argues, “From the end of World War II until the late 1970s, a retain‐and‐reinvest approach to resource allocation prevailed at major US corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost, in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security.”⁹

After Friedman's seminal paper, the mantra quickly changed to become one that favored reducing costs and distributing the cash gains from those cost reductions to shareholders. Lazonick termed this new management imperative downsize‐and‐distribute.

The new approach favored value extraction over value creation (literally, taking cash out of businesses and putting it into shareholders' pockets). Along with the weakening of the power of labor, the rise of technology, and the increasing use of stock‐based compensation, this approach has contributed to increased income inequality and overall employment instability.

As Friedman famously put it, the only “social responsibility of business is to increase its profits.” Exacerbating this was the increasing use of stock‐based compensation for executives, which, while in theory aligning their interests with those of shareholders more broadly, in practical application served to drive short‐term profit‐seeking behavior. Not surprisingly, the largest component of the income of top earners (the top 0.1 percent) since the 1980s has been driven by stock‐based pay. This has also led to some unwanted market perversions. For example, from 2003 to 2012, the 449 companies of the S&P 500 listed through that entire period of time used the majority – 54 percent – of their earnings (a total of $2.4 trillion) to buy back their own stock. If you include dividends paid out during that period, 91 percent of earnings went to shareholders, leaving little left for reinvestment into these businesses.

This profit seeking behavior also had an effect on small business and the overall dynamism of the economy.