In the fall of 1970, economist Milton Friedman wrote a now-famous article for the New York Times Magazine in which he argued that the sole responsibility of a corporation is to increase its profits.
If going viral on social media had been a possibility in that era, that piece would have.
What had happened, critics wondered: How could one of the best-known economists in the world empower businesses to treat employees and customers badly? While the argument itself was more nuanced and complicated than Friedman was usually given credit for, many viewed the implications as damning.
Nearly 50 years later, another economist, Tyler Cowen, has written a book responding to the furor. In Big Business: A Love Letter to an American Anti-Hero, the George Mason, free market contrarian blogger attempts to craft a new way of understanding the social responsibility of business.
Cowen, who is pro-business, agrees with Friedman that corporations are too often assumed to have the same values as individuals. He differs, however, in his belief that business at its best boosts both profits and social benefits. Friedman argued that corporations must choose one or the other.
Cowen starts by examining distrust of big business and its causes, including the Friedman piece. As of 2016, 51% of 18- to 29-year-olds didn’t support capitalism and ranked business the second-lowest entity in terms of trust.
Such skepticism, Cowen argues, fails to appreciate that big business “makes most of the stuff we enjoy” and “gives most of us jobs.” Large companies represent some of society’s most virtuous organizations, he said, because their international brands give them a financial incentive to act in society’s best interests as well as their own.
The author does a terrific job of simplifying and defining the dilemma, but the rest of the book misses multiple opportunities to address it.
Instead of building a thesis around how businesses fulfill their social responsibilities, Cowen organizes his arguments around American complaints about corporations, with chapters such as “Is Work Fun?” or “What is Wall Street Good For, Anyway?”
Some work better than others. In a chapter about technology, he glosses over a debate about how Silicon Valley firms gather and leverage user data. Those that care about user-privacy concerns ultimately will outlast their rivals that don’t, Cowen maintains.
His argument that “our friends, relatives, colleagues, and acquaintances,” pose a “bigger privacy risk” than Big Tech is particularly weak. Where gossip can expose your personal drama to your inner circle, the internet can reveal secrets you hoped to conceal to a much wider audience, sell it to others, and preserve it for posterity.
While judging which is “scarier” is inherently subjective, I find it hard to believe that gossip can damage you more than pools of data that follow you for a lifetime.
Cowen’s most problematic chapter, however, is about CEO pay. To back up his position that CEOs aren’t overpaid, he says their roles are similar to those of lawyers in that they must attract clients and create wealth, despite the fact that most lawyers bill by the hour, while many CEOs often start with a seven-figure base salary.
When I asked him to clarify, he said that incentive pay for CEOs includes equity and options that are linked to the stock markets, so corporate titans are, in essence, paid for performance.
That fails to acknowledge just how much CEO pay has risen in comparison with average employees. In 2017 alone, CEO compensation climbed 18.9%, while wages for average employees grew just 0.3%, which in my eyes is very troubling.
He also argued that CEOs are increasingly hired from outside a company and boards have to pay more to attract them. Still, only 26.5% of top managers are outside hires, which is far from the majority.
Regardless of its flaws, the book is very well written. Cowen’s prose is clear and understandable even to people who have no background in economics, but the simplification necessary to achieve that means he doesn’t fully explore some important ideas and misses others altogether.
At one point, for instance, he casually asserts that certain “gentrification” is a good thing. While I would agree to some extent, gentrification is a hotly debated issue for many, particularly apartment-dwellers and small businesses who lose homes and storefronts to rising rents.
Simplification also causes Cowen to contradict himself. In chapters regarding monopolies, he advocates less regulation, maintaining that excessive rule-making serves as a barrier to entry for new companies.
That’s not an unreasonable argument, but it’s weakened by its juxtaposition with sections examining how to empower the biggest companies to do their best work, a goal that might justify supporting monopolies via regulation.
It’s clear that’s not what Cowen wants, but the tension is left completely unaddressed.
Ultimately, the structure of the book weakens Cowen’s thesis, and he fails to differentiate himself much from Friedman. His final conclusion is that the social responsibility of businesses is to “come up with new and better conceptions of the social responsibility of a business.”
In other words, businesses have to come up with better ways to sell themselves. It’s not a very interesting or satisfactory answer, and it’s particularly frustrating in light of the book’s potential.
Providing a counterpoint to Friedman might have been incredibly insightful. Instead, the book attempts to poke holes in people’s understanding of business, rather than advance it. For these reasons and more, Cowen’s latest effort is a disappointment.
