Friedman doctrine’s unintended consequence

Ajay Srivastava | Updated on April 29, 2021

Business No longer about profits   -  istock.com

The singular pursuit of profit as a model of development has hollowed out US’ productive capacity to China’s benefit

Businesses should have no further responsibility than accumulating profit. Introduced in 1970, this idea by Milton Friedman has dramatically influenced American and the world economy in the past 50 years. It has powered significant global outcomes like off-shoring of production, free trade and supported China’s rise.

Big businesses loved the idea that the CEO’s sole task should be to enrich a firm’s shareholders and the corporate should have no social responsibility. As long as they pay taxes, they may ignore the interests of other stakeholders like workers, customers, communities, and the environment.

But, despite big business backing, Friedman’s doctrine, in the early 1970s, was still one of the many competing idea for economic development. Friedman getting the Nobel Prize helped, but the idea still needed a systematic push to give it force. It required an evangelist and funding of millions of dollars.

Enter Lewis Powel, a lawyer from Virginia. Wasting no time, Powel submitted an action plan to the US Chamber of Commerce in 1971. He proposed a campaign to influence think tanks, academia, researchers, media, politics, and legal system. Large business houses, the primary beneficiaries of the ideology, would fund the long campaign.

Soon, thousands of research reports, academic papers, books, news articles, talk shows supporting Friedman’s idea started coming out, influencing political leaders, economists, and everyday people alike. The idea became mainstream with declining corporate profits, deregulation, lower taxes, and relaxed antitrust laws.

The 1987 movie "Wall Street" portrayed the spirit of change. Michael Douglas, as Gordon Gekko, a Wall Street shark, says, “Greed, for lack of a better word, is good”. This spirit dictated the boardroom behaviour since then. The result was a series of profound changes.

Race for profits and everyday gains pushed firms towards stock markets, borrowing, and derivatives. Share prices became the most crucial parameter. Citizens learnt to overspend with the rise in credit card culture. The US gradually changed from a nation that loved making products to a country giving primacy to finance.

Rising wages made local production of apparel, shoes, and toys expensive. Big US firms could further increase profits by shifting production to low-cost countries. But this required a free flow of products across countries. This called for a new approach to trade negotiations at the WTO.

Till the 1980s, the US, the EU, and Japan negotiated among themselves. They carried out most import duty reductions, expecting little reciprocation from developing countries. This made sense as the developing country trade was low. But the negotiations in the 1990s required all countries to reduce import duties.

The freer trade unwittingly benefited most countries. Merchandise trade rose from $2 trillion in 1970 to $19 trillion now. The share of developing countries in global trade increased from 20 per cent to 45 per cent during this period.

Currently, over half the world trade happens at zero import duty. This trade is outside the 300 Free Trade Agreements (FTAs), which account for a quarter of zero or low duty trade. Technology, the internet, and the WTO with Friedman’s doctrine in the background, made this possible. China was the major gainer.

Shifting of production from the West supported China’s rapid industrialisation. The West was initially not bothered with China producing fakes or giving large subsidies. It thought China, with its low-end products, was only eating into the export share of developing countries. The US facilitated China’s entry into the WTO in 2001.

Rising China

China soon became a formidable rival in semiconductors, solar panels, lithium-ion batteries. Export of subsidised Chinese products led to the closure of most solar panel manufacturing facilities in Europe and the US.

The rise of China as the factory of the world altered the global manufacturing landscape. The US and Germany are now competitive only in very high technology and innovative products. Japan and South Korea manufacture steel, complex electronics, and automobiles. Manufacturing in ASEAN, including Vietnam, is primarily an outgrowth of the Chinese value chain. India has gained reasonable expertise in small cars, pharmaceuticals, textiles, and low-end engineering products. China, in contrast, produces almost everything and on scale.

The world depends on China for washing machines, laptops, mobile phones, telecom equipment, and toys. Its monopoly is complete in Solar cells, Lithium-ion cells, and electronic components. Outside of the US, it is the only country with local champions in the digital economy. The rise of China is an unintended but direct consequence of the Friedman doctrine.

Five decades since the introduction of Friedman’s doctrine, the world is gingerly moving to a more inclusive business model. Global firms are incorporating the United Nations’ 17 Sustainable Development Goals (SDGs) into their business strategies.

Local jobs are back in the news and hence focus on technologies like 3D printing to produce most things at home. The new model is better but more complicated to follow, many would argue. Keeping track of profit as the only yardstick was far more straightforward, though not in anyone's long-term interest.

The writer is an Indian Trade Service officer. Views are personal

Published on April 29, 2021

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