The suicidal impulse of the business community - Adam Smith Address

Business Economics, Jan, 1990 by Milton Friedman

Corporations often promote policies adverse to their own best interests. In the political arena, business has a short time horizon that differs from its approach in long-term corporate planning. Examples are given of business attitudes toward protectionist tariffs, and regulatory policy, fixed exchange rates, corporate contributions, and budget and trade deficits. Corporations, acting in a climate that considers government action a cure for all problems, are contributing to the destruction of a free market economy rather than shoring up its foundations.

AS BUSINESS ECONOMISTS, you straddle two fields: economics and business. Those two fields are not synonymous by any manner of means, as Adam Smith, whose name has been given to this series of lectures, clearly recognized. Adam Smith is correctly and properly regarded as the father of modern economics and particularly of the idea that a free, private market society is capable of combining material prosperity with human freedom. Although that idea has been expressed by others before and since, Adam Smith's two great books, The Theory of Moral Sentiments and The Wealth of Nations, are the classical works on that theme.

One of Adam Smith's most often quoted statements is, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public." Another of his comments is, I believe, even more relevant to the doctrine that has come to be called "the social responsibility of business." It is brief, pithy and definite: "I have never known much good done by those who profess to trade for the public good." That sentence follows immediately after his famous remark about the "invisible hand."

As a disciple of Adam Smith, who believes that the pursuit of self-interest can be in the national interest, I'm not going to bash business for pursuing its self-interest. A corporate executive who goes to Washington seeking a tariff for his company's product is pursuing his stockholders' self-interest, and I cannot blame him for doing so. As an employee of the stockholders, he has a fiduciary responsibility to promote their interest. If he's made a valid, accurate judgment that a tariff will be in the self-interest of his enterprise, he is justified in lobbying for such a tariff. If he is a principled free trader, his proper recourse is to resign and seek a job where his principles do not conflict with his fiduciary interests. So I don't blame corporate executives who lobby for tariffs. I blame the rest of us for being such fools as to let them exploit us. We're to blame, not them. We're the ones who enact the tariffs.

EVALUATING CORPORATE SELF-INTEREST

My complaint about the business community is very different. It was recently expressed in a book by Paul Weaver called The Suicidal Corporation. That book, published a year or so ago, is devoted "to the corporation's war against its own best interest," and that's exactly what I intend to discuss. I am going to argue that corporations, and especially large corporations, seeking to pursue through political means what they regard as their own interests, do not do a good job of evaluating their interest. The policies they pursue and promote are very often adverse to their own interests. That's what I mean by my title, The Suicidal Impulse of the Business Community.

The activities involved are not only those of individual corporations and, although less often, of individual businessmen, but equally of their trade associations, which supposedly represent the interest of a broader group and not of individual enterprises within that group. I'm not going to try to demonstrate this on an a priori basis. I'm just going to cite some examples that I regard as fairly typical. My general conclusion from observing the way businessmen behave is that they are schizophrenic with respect to time. Corporate officials who consider expanding their own enterprises -- putting up a new factory, making new investments in developing trade -- tend to look a long time ahead. They plan for 5, 10, 15, or 20 years and take into account the long-run consequences of their behavior. However, when they come into the political arena, the only two groups that are more shortsighted than the business community are Wall Street and Washington. On Wall Street, it's a matter of two hours. In Washington, it's a matter of at most two years between congressional elections, and that's an overstatement. The business community is just about as short-sighted. They tend to look at the short-term impact of what they promote and not at the long-term impact.

I have no satisfactory explanation for why the business community behaves in this suicidal fashion. What I'm stating is an empirical observation that is in need of an explanation. Before I finish, I'll try to suggest some tentative explanations, but I have little confidence that they are satisfactory. Let us proceed to some examples.

Tariffs

I mentioned tariffs. The business community has long promoted protectionism. Yet, I challenge you to name any industry in the United States that over a long period has benefitted from protection. The industry in the United States that has the longest record of protectionism is probably the steel industry. Already in 1791, Alexander Hamilton recommended protection of infant industries, of which the iron and steel industry became one of the earliest to receive protection. His famous Report on Manufactures is a brilliant example of sophistry. Hamilton praises Adam Smith to the sky, but argues that his principles do not apply to the United States: the United States is different and it needs protection -- a pattern of special pleading that has since been repeated ad nauseam. The steel industry, to judge from the continued protection it receives, is apparently still an infant industry. Has the steel industry benefitted from protection? Some decades ago, the steel industry asserted that it was being overwhelmed by a flood of foreign imports and asked for additional protection. They received it, at first in the form of a "target price," and then in the form of import quotas. The main effect was higher wages for their workers, higher costs for the industry, and a continued influx of foreign steel. The firms that benefitted from the tariffs, and are saving the industry, are small mini-mills which in the main have not sought protection. More important, perhaps one can understand U.S. Steel seeking protection. But what about the backing it received from the National Association of Manufacturers? Their members include many users of steel, such as the automobile manufacturers, the manufacturers of home appliances, the machine tool industry, and so on and on. There's little doubt that the restrictions on steel imports harmed the users of steel to a far greater extent than they benefitted the steel producers. Why has NAM typically promoted protectionism? The Chamber of Commerce has occasionally shown more sense, but it is far from guiltless.