Gordon Gekko’s greed is good speech in the 1987 movie Wall Street succinctly sums up the Friedman doctrine. The doctrine, simply put, is that the purpose of a corporation is to serve the interests of its shareholders. Sensible liberals reflexively think this sounds like a recipe for civilizational collapse, but I’m willing to acknowledge that the Gekko/Friedman thinking1 contains at least a tiny crumb of a valid argument. In this post, I argue that if a company’s employees own a majority of its shares then the crumb miraculously becomes a whole loaf.
A problem with investors is that they’re free to buy and sell shares at the drop of a hat. This empowers them to pursue short-term profits along the same lines as the smash and grab schemes Gekko perpetrated in Wall Street. It enables situations like Boeing, where investor-shareholders used bloated CEO compensation to extract quarterly stock buybacks instead of investing a sensible share of company revenues into long-term quality-control systems on the factory floor. Shortsighted greed that leads to planes falling out of the sky isn’t good.
One can imagine complex tax and regulatory schemes that would force investors to focus on long-term profits and externalities, but Milton Friedman’s original argument makes the broader point that the heavy hand of government is a clumsy tool that’s vulnerable to corruption and often produces unintended consequences. This aspect of Friedman’s argument has more than just a tiny crumb of truth to it.
Fortunately, there’s a better way. A growing number of competitive private companies of various sizes have demonstrated that loan-based leveraged buyouts can be used to transfer ownership of a company’s shares to its employees. Employees, by nature, are motivated to focus on the long-term success of the company as a place that pays a decent wage and offers a sense of pride in the goods and services the company produces. If Shannon Mulcahy had been a Rexnord shareholder, she wouldn’t have voted to send her own job to Mexico in service of short-term profit.
Friedman’s original argument went beyond merely arguing that corporations should serve shareholder interests and instead narrowly construed monetary profit as investors’ only meaningful interest. This part of Friedman’s argument is stupid. Even Gordon Gekko understood the list should include “greed for life, money, love, knowledge.” Awhile back, I loaned my cousins some money that had been languishing in my savings account. I charged my cousins a 2.5% interest rate, but only because federal law doesn’t allow zero-interest interpersonal loans. Profit wasn’t the point of the investment. Greed for love was the point of the investment. The point of my investment in the current Substack community round is greed for knowledge. Kiss my ass, Uncle Miltie.
Gekko and Friedman argue that dog-eat-dog competition can ultimately be a powerful force for improving the lot of humankind, but this part of their argument ignores the fact that the highest aim of many modern investors is finding a unicorn that can eventually make obscene amounts of profit by exploiting a monopoly. You can’t argue that greed is good because competition promotes human flourishing and then countenance having a single monopolist making aircraft. Greed that leads to anti-competitive practices isn’t good.
This stuff roughly falls in the wheelhouse of my vaccine development work. My direct experience with greed-is-good is that if monopoly windfall profits are in the offing then investors start to see things that earn merely ordinary profits as opportunity costs. Licenses for a vaccine that looks to be on track to make a 30x initial return on investment get left on the table while investors chow down on overpriced insulin at the monopoly snack bar.
All of these problems are automatically solved if employees own the company. Public capitalism can make that happen.
Word of the day: it’s too bad the proposed neologism “iniquitist” never caught on.
"federal law doesn’t allow zero-interest interpersonal loans"
This was news to me. I believe you could lawfully evade this IRS requirement by claiming the loan as a religious obligation ("Christian charity"), and the usurious charging of interest a sin. RFRA for the win.