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Friedman's unethical rot made wrongs into a right

Sun, 3rd Dec 2006

SUMMING UP his own achievement, Milton Friedman, the celebrated Chicago economist who died last month, wrote: 'Judged by practice, we have been, despite some successes, mostly on the losing side. Judged by ideas, we have been on the winning side.'

He was too modest. Friedman was regretting his limited, as he saw it, influence on macroeconomic and social policies. But in today's most pervasively experienced social-science discipline - management - his triumph is pretty much complete.

Indirectly, Friedman's doctrines, and those of the Chicago school in general, have worked themselves to the heart of management theory (and many of the social sciences), and thence into every cranny of practice. Every chief executive who claims that ethics and morality have no place in business and that their only job is to maximise shareholder wealth every business school teaching courses in corporate governance based on agency theory or organisation design based on transaction cost economics every City firm shrugging off the break-up of a company as the inevitable consequence of globalising capital markets, is practising Milton Friedman. And is practising, moreover, an ideology, not a science.

Friedman himself made no bones about this. He called the ideology 'liberalism' (which sounded more 'radical' than conservatism), and as the late Sumantra Ghoshal noted, it rested on two fundamental convictions. First that social theory had no place for ethics, which should be left to the individual. And second that, humans being imperfect, the problem of social organisation was as much a negative one 'of preventing bad people from doing harm as of enabling good people to do good'.

To repeat, there is no 'evidence' for these propositions: they are philosophical, not scientific, positions. But this 'ideology-based gloomy vision' has come to dominate economics and other social sciences, especially management, with incalculable consequences.

Just as the course of economics has been shaped by what has been termed 'physics envy' (the desire to become a 'hard', testable science), so management's cultural cringe is to economics. By adopting Friedman's liberalism, with its exclusion of ethics and intention and assumptions of self-interest as the basis of human behaviour, as its starting point, management at a stroke could present itself as a science: a kind of deterministic mechanics emphasizing command and hierarchy to squeeze efficiencies from reluctant workers, and sharp incentives to align managers' with shareholders' interests.

No matter that the underlying view of human nature is at best grotesquely partial nor that the liberal management model doesn't seem to work (Enron yawning inequalities ever-increasing work intensification the ransacking of the planet). If enough people believe and act on the underpinning propositions, self-fulfilling prophecy ensures they become 'right'. Far from losing the battle of practice, via management, Friedman's shivery achievement is to realign human behaviour with his own pessimistic assumptions - thus making the ideas come out 'right' too.

This is bad enough. But another consequence of using opportunistic individuals as the unit of management analysis is the undertheorising of the organisation. Pace Adam Smith, wealth in today's societies is created not by the invisible hand - individuals transacting in the market - but by the visible hand of co-ordination in organisations acting, in Ghoshal's description, as 'marshalling yards' for society's resources. We live in an organisational rather than a market economy, so the quality of that co-ordination is critical: management matters.

Tell that to Gordon Brown. The reason the Treasury still puzzles over lagging UK productivity, and the public sector refuses to improve in line with the billions thrown at it, is that he persists in treating these as economic rather than organisational problems. A good example is the application of crude incentive pay to public-sector professions, where any gains in individual effort are more than offset by demoralisation of those less well treated, destruction of teamwork and other unintended consequences. Obvious in economic terms, in management this is just illiterate. Management is not that deterministic.

Even in areas such as corporate social responsibility, all isn't as it looks. For instance, at a recent international conference celebrating CSR, participants crowed that Friedman's well-known objection to it as incompatible with capitalism 'is being overtaken by events'. Yeah, right. It so happens there's just one instance where Friedman is happy to admit the case for CSR: where it's used as a PR stunt under cover of which management can get on with its real job of making money for shareholders. Most CSR, alas, is just that.

Thanks largely to Friedman's influence, it's not economics but management that is - literally - the most dismal discipline. He may have had the last laugh but it's no joke for the rest of us.

The Observer, 3 December 2006


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