Today, Explained - Blame Capitalism: Profit over everything

Episode Date: September 15, 2023

Economist Milton Friedman published an essay in 1970 arguing that the job of a corporation was solely to make money for its shareholders. General Electric CEO Jack Welch pushed that idea about as far as it would go — and broke capitalism. This episode was produced by Miles Bryan, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Patrick Boyd with original music by Jon Ehrens, and hosted by Noel King. Additional editorial support from Avishay Artsy, Jolie Myers, and Miranda Kennedy. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Last week on Blame Capitalism, the golden age of capitalism was ending, but what a time it had been. During the golden age in 1960, one of the big companies, Eastman Kodak, would hand out a booklet to new employees. It promised, Wages are fair. Working conditions are safe. Employment is generally steady. Folks get a square deal. Also, tuition, vacation, dividends, cradle-to-grave perks from a company. But Kodak didn't hire Black people. And Black people started to protest. All over America, groups that had been left out of the golden age of capitalism were protesting. And two men with very different ideas of what a capitalist corporation like Kodak should

be and who it should be for were going to wage war over this. One of them would win and change the course of American capitalism. Coming up on Today Explained, the original backlash against woke capitalism. This NFL season, get in on all the hard-hitting action with FanDuel, North America's number one sportsbook. You can bet on anything from money lines to spreads and player props, or combine your bets in a same-game parlay for a shot at an even bigger payout. Plus, with super-simple live betting, lightning-fast bet settlement, and instant withdrawals, FanDuel makes betting on the NFL easier than ever before.

So make the most of this football season and download FanDuel today. 19-plus and physically located in Ontario. Gambling problem? Call 1-866-531-2600 or visit connectsontario.ca. It's Today Explained. I'm Noelle King. So in the late 1960s, it must have seemed like all of the dope and interesting people were out in the streets protesting something. But the two men who were going to change American capitalism were inside writing essays. The first essay was published on March 13th, 1970 in the Michigan Daily. That's a student newspaper. It was titled General Motors, an example of excessive power.

The writer was a 36-year-old activist named Ralph Nader. He still lives in a simple furnished room. He's not a big spender. He neither smokes nor drinks. He has no car, no television. And he uses the communal telephone in the hall of his boarding house home. So, this essay. Corporate imprints, like GM, wrote Nader, do violence to our air, water, and soil. They devour resources. Their products dehumanize and harm users. What to do about that? He bought their stock. He became a GM shareholder. He gave himself a voice, and he urged other people to do the same. I think the critical point is that people have got to develop a new style, a new kind of

citizenship, where they don't just look at it as something you do at election time. You look at it as an obligation, as a day-to-day involvement. Six months later, in the New York Times magazine, which is not a student newspaper, an economist responded to Nader's push for corporate social responsibility.

That economist was Milton Friedman, and his essay was called The Social Responsibility of Business is to Increase Its Profits. Now, he argued that it was not the job of a corporation to worry about air and water and soil and workers and customers. It was the job of a corporation to make money. Friedman was the ultimate free market economist, arguing to privatize national parks and public schools. Why do we have so high an unemployment rate among black teenagers? Because we give them lousy schooling through governmental schools. And second of all, we require employers to discriminate against them

by not hiring them unless their productivity is enough to justify a minimum wage. He even wanted to keep the government out of immigration. Friedman was in favor of open borders. This country did not become great by preventing people from coming here from abroad and buying land and setting up businesses. Quite the other way around. He was a libertarian. He wanted small government, even no government if possible.

And he had an idea about the purpose of a corporation. My name is Milton Friedman. I've got one message for you. If you're a corporation, there's only one thing you need to do. Don't worry about the world outside. Don't think about all the pain and strife. Don't let being nice even cross your mind. You just worry about the bottom line. And everything will be fine. Milton V. Friedman was a very interesting and very influential man. You might know him as a neoliberal baddie, but he started out as an American underdog. His parents immigrated from Eastern Europe, dodging both the Holocaust and later the Soviet terror.

This was a bit of luck that Friedman always seemed to remember. One example, he lauded American sweatshops in a 1980 TV series. This is exactly the same kind of a factory that my mother worked in when she came to this country for the first time at the age of 14, almost 90 years ago. And if there had not been factories like this here then, at which she could have started to work and earned a little money, she wouldn't have been able to come. And if I existed at all, I'd be a Russian or a Hungarian today instead of American.

Friedman was a star student at Rutgers, and during the Depression, he went on to graduate school at the University of Chicago, which is where he famously learned and then became the leading exporter of free market ideals. He influenced presidents, he influenced policymakers, and he influenced the American people a lot. Along the way, he made many ideological enemies, and one of them was Ralph Nader. Friedman just could not with this guy. What is it that troubles you about him?

I think he troubles me about him is that he wants to run my life for me instead of letting me run my life. So in the 1970s, there is a move to draw corporations into these political concerns and to use them to address various social goals. Jennifer Burns is a historian and author of this year's hottest book. It's called Milton Friedman, The Last Conservative. Ralph Nader, we know him as a consumer advocate, but he really targeted General Motors. It was called Campaign GM, and it was an effort at the annual shareholders meeting to get an endorsement of, you know, various planks committing to environmental causes, racial justice causes, consumer causes, and so a real push and a pressure on corporations to take up these causes as part of their mission. So I think that's probably why Friedman thought a

restatement of this is apropos and probably why it was seen as intriguing and interesting to publish in the New York Times. What is Milton interesting to publish in The New York Times. What is Milton Friedman arguing in this New York Times essay? So he's arguing that the role of the corporation is as a profit-making entity and that he's really focused on the corporate executive. The CEO. And his or her responsibility is to shepherd the corporation. It is not his or her responsibility to use the corporation as a vehicle to advance

political or social causes. Bud Light, just sell me terrible beer. Doritos, I don't actually need your thoughts about Black Lives. Target, your employees are welcome at Pride, but you can't come. You're a company, brah. It works on two levels. On his reading, on the one hand, if corporations actually were acting socially responsibly as opposed to in the service of their bottom line, that would be undemocratic in a way.

It would result in excessive politicization of society. Because your definition of what's socially responsible might not be the same as mine. So why should a corporation be deciding which of us is right, taking sides? Yet on the other hand, he argues that, you know, it's really a fiction or it's a kind of cloak, this idea of social responsibility, because, hey, donating to a charity, you actually get a tax deduction for that. So is that really social responsibility or is that smart business? Or for a corporation to be a good citizen, say, a company that is a significant presence in a small town and sponsoring the Little League and it's having an annual picnic. That's creating goodwill. It's leading to good relationships with the political leaders.

It's making it seem an attractive place to work. That's also in the service of the company's interests. So on the one hand, it's almost as if corporate social responsibility can't exist. And on the other hand, if it did, that would be problematic. So this essay appears in 1970 in the New York Times. And then is there any public reaction whatsoever to it? You know, I think there's some people who say, oh, this makes sense. There's some who argue back. My sense is that this is kind of a blip in Friedman's life at that time. It's obviously prestigious to publish in the New York Times

magazine, but he's got profiles of him in the magazines. He's on the cover of Time magazine. He and his ideas are well known. It, in the one hand, encapsulates this very standard understanding of business. On the other hand, it pushes back against a sort of elite discourse of corporations as social actors. It's really not until the 80s and 90s that it is seen as a canonical work or a work that summarizes changes in economic life and economic practice. Coming up, the 80s. Greed has gotten real good, and a CEO is going to remake the way corporations work and the way capitalism works with a little inspiration. Everything about the way he ran GE was reflective of Milton Friedman's priorities. And in fact, it's almost undeniable that he was familiar with the essay itself and

the work. Because in Jack Welch's own autobiography, there is a line where he essentially says, the social responsibility of a business is to make money. And everything will be fine picture frames. They were named the number one digital photo frame by Wirecutter. Aura frames make it easy to share unlimited photos and videos directly from your phone to the frame. When you give an aura frame as a gift, you can personalize it, you can preload it with a thoughtful message, maybe your favorite photos. Our colleague Andrew tried an aura frame for himself. So setup was super simple. In my case, we were celebrating my grandmother's birthday, and she's very fortunate. She's got 10 grandkids, and so we wanted to surprise her with the AuraFrame. And because she's a little bit older, it was just easier for us to source all the images together and have them uploaded to the frame itself.

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and available just in time for the holidays. Terms and conditions do apply. It's Today Explained. I'm Noelle King. Milton Friedman's 1970 essay said the responsibility of a corporation was to make money for its stockholders. Today, we more commonly hear the word shareholders, shareholder capitalism. Friedman in that essay was talking directly to CEOs, and one American CEO took the idea and ran with it. That was Jack Welch, the CEO of General Electric. Do you have social responsibility? Is your heart, is Jack Welch's heart in making GE

a socially responsible organization? Social responsibility means win. David Gellis wrote a book about Jack Welch called The Man Who Broke Capitalism. He got obsessed with Welch while he was reporting for The New York Times on business, and he noticed something. After interviewing hundreds of CEOs as a reporter for The New York Times, one name kept coming up, and it was Jack Welch. And that just bugged me. He hadn't been a CEO for 15 years at this time. And I just didn't understand why this one chief executive seemed to be living rent-free in the minds of today's leaders. So David started to research, and he realized that when Jack Welch took over as CEO in 1981,

he really did change American capitalism. Capitalism was never perfect. But I do contend that in the years after World War II, this sort of halcyon days of the 50s and 60s in the United States, capitalism was working pretty well for a lot of people. There were still inequities. Minorities and women did not participate. And yet, the way corporations were distributing the wealth they created was fundamentally different than the way it is today. More money was going to workers,

more money was getting to Main Street, and investors and CEOs were just taking a much smaller slice of the pie. All of that changed with Jack Welch. At the very moment he took over, all these things diverged. Suddenly workers started to get less and less of the profits generated by corporations. Unions, which had been such an important part of building up the American manufacturing base in the 20th century, suddenly start to be on the back foot. We start to see less regulation. We start to see more financialization, more complexity on Wall Street. And critically, investors and CEOs start to get paid unbelievable amounts of money. All of those trend lines, which I contend have fundamentally reshaped this country for

the worse, can be traced back to the legacy of one man, and that's Jack Welch. From the day he took the reins, and that, by the way, was April Fool's Day in 1981, Mr. Welch went to work, fixing a company no one knew was broken. Back then, GE's net income was up 9% on revenues of nearly $2 billion. So what was wrong with that? According to Welch, just about everything was wrong with that. According to Welsh, just about everything was wrong with that. In your book, you reference this 1953 report where it's very clear that GE is a different kind of company than what we're used to today. Can you tell me about the report? They start by talking about how this was their biggest payroll ever and how proud they were

to be paying their workers so much. They go on to talk about how much money they are paying their suppliers and what a great thing it is that their suppliers, that these other small businesses and communities around the country are having more money so that they can make even better products and services that will make GE's products and services even better. It even went on to talk about how proud it was to have paid its taxes. When companies went looking for guidance, for an indication of how they ought to comport themselves, General Electric was really the company that they looked to. Its CEOs were regarded as almost royalty inside corporate America.

And so when GE was out there talking about how proud it was to take good care of its workers, to take good care of its people and its suppliers and to pay its taxes, other companies took note and followed suit. All right. So Jack Welch would end up making some very big changes. When did Welch read Milton Friedman's essay? I was never able to identify the moment when was reflective of Milton Friedman's priorities. And in fact, it's almost undeniable that he was familiar with the essay itself and the work.

Because in Jack Welch's own autobiography, there is a line where he essentially says the social responsibility of a business is to make money. Bleeding hearts are not socially responsible. They don't have anything. So having a winning company is what your job is. He's echoing Milton Friedman there and leaving no doubt in my mind that he was deeply familiar with this philosophy and that it had a profound impact on the way he ran the company. You have to imagine that Welch sort of saw a roadmap, something that he could translate into the beginnings of a strategy that he would use to transform GE over the next 20 years. Well, let's talk about those 20 years, starting in 1981. How does Jack Welch begin to maximize value for shareholders? Well, he starts with a bang. In the first couple years that he is CEO,

he unleashes a wave of factory closures and mass layoffs, really the likes of which America has never seen before. Welch trimmed about 170,000 jobs, more than 40% of the workforce. Then he ranked employees annually with the bottom 10% getting pink slips. Even in divisions that seemed to be doing well, even at factories that seemed to be doing well, if they weren't the most productive, the most profitable ones in their division, they were shut down.

You know what surprises me? How many businesses you sold off that were GE? You sold off toasters. Irons. Irons. You had to get out of those businesses. They were yesterday's businesses. He wanted every division in the company to be number one or number two.

He didn't want to be coming in third place. He wanted more money to be made with fewer people. That is, he wanted a leaner workforce. And in doing so, he was happy to rely on outsourcing and offshoring. And he wanted to reduce the overall costs. In doing so, freeing up more of the profits that GE generated for its shareholders, which in turn, of course, would drive the share price up. Did it work? Did it lead to success for GE shareholders? It sure did. By the mid-80s, GE share price starts to tick up and really continues market capitalization and stays there for the majority of the rest of Jack Welch's tenure as CEO.

When Welch retired in September 2001, General Electric was the world's most valuable company in terms of market capitalization. And it's easy to look at that and say, well, like, then what did he do wrong? Right? Like, isn't the point, if you believe Milton Friedman, to make money? So he was doing what he was supposed to do. And in my book, I document instance after instance of how his protégés went to 3M, to Home Depot, to Chrysler, to Albertsons, to Boeing, and to so many other companies, and did the exact same thing he did at GE, with almost identical results. The stock price might go up for a little, they might enjoy some short-term profits, but before long, whether it was a couple months, or a couple quarters, or maybe a couple years, things went south. So the short-term profit, the high stock price, was masking problems.

What are those problems? I think most importantly, what was lost as Jack Welch pursued short-term profits above all else was really the soul of GE, which is to say this was a company that for most of the 20th century pursued excellence in everything it did. It didn't just want to be the biggest company in a given market. It wanted to make the best products and services. But that ethos got lost along the way when he started pursuing profits at all costs. Instead, it became a race to find the most profitable way to do something, which often meant cutting corners. Often, it meant using inferior materials. It often meant skimping on research and development so that 5 and 10 and 15 years later,

a division that might have had success in one area suddenly had no new products to offer and was on an irrevocable downward decline. But it wasn't just GE that he led astray. Jack Welch retired in 2001, but for decades he'd been influencing CEOs of the most influential and profitable companies in the world. These companies financialized, they globalized, they sent jobs overseas, and they made shareholders a lot of money. But Jack Welch's acolytes ended up turning on him. In 2019, leaders of the Business Roundtable, a group of the most profitable and influential CEOs in the country, issued a statement on the purpose of a corporation. Now, Milton Friedman's essay had since the late 1990s explicitly served as their guiding principle, but not anymore. is to serve all of its stakeholders. Because in the very long run, you can't take care of your shareholders unless you've taken care of your customers,

employees, and communities as well. So what happened? Well, there's been a reckoning over Jack Welch. Because you see, as he'd been changing what GE was and who it was for, he'd also been doing something that nobody was paying very much attention to. Welch had invested heavily in GE's

financial arm. He'd gotten into the subprime mortgage game, and he was running what was more or less an unregulated bank. When the financial crisis came, GE was left holding a huge pile of worthless mortgages. It buckled under them, and it collapsed, as did everything else. Next time on Today Explained, blame capitalism, the collapse, and what it wrought. Today's episode was produced by Miles Bryan. We had original music by John Ahrens. We were edited by Matthew Collette and had additional editing from Jolie Myers and Miranda Kennedy. Our fact checker is Laura Bullard and our engineer is Patrick Boyd. I'm Noelle King. video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for the long video, I'm sorry for They say that we're made in the late protestant debate

That all love really is bad Thank you.