World's Dumbest Idea

The title of this post stems from an article on Forbes by Steve Denning who writes about "radical management, leadership, and innovation"

Denning says Milton Friedman is the The Origin Of 'The World's Dumbest Idea'.

No popular idea ever has a single origin. But the idea that the sole purpose of a firm is to make money for its shareholders got going in a major way with an article by Milton Friedman in the New York Times on September 13, 1970.

emphasis mine

For starters, the actual title of Friedman's article is "The Social Responsibility of Business is to Increase its Profits".

Denning substituted the word "sole" for "social". I did a search of the article and the word "sole" was not to be found.

Regardless if it is the "social" or "sole" responsibility, it is preposterous to propose anything other than "The primary goal of a for-profit corporation is to make money for shareholders".

To state otherwise may not be the "world's dumbest idea" but it sure is inane.

Via email exchange, my friend Pater Tenebrarum at the Acting Man Blog stated "I don't often agree with Friedmann, but on this point I do agree with him. A company's profits are the outward sign that it has successfully served consumers. If not the profit/loss system, by what system should it be determined?"

"These screeds all want to replace the plans of consumers and producers with THEIR plan. In the end it always comes down to even more government control over our lives. We know how that has worked out so far."

Precisely.

Ironies Abound

The first irony in Denning's ramblings is precisely the fact that corporations frequently do not put shareholders' interests first, but they should.

Instead, corporations frequently put the interests of the CEO and top executives first. One look at the astronomical pay and stock options of executives proves the point.

Another problem is corporations frequently buy favors from government to gain unfair advantages over their competition. The second irony is GE, a company Denning praises, is one of the worst offenders you can find.

Denning concludes "Shareholder value is obsolete. What we are seeing is a paradigm shift in management, in the strict sense laid down by Thomas Kuhn: a different mental model of how the world works."

No Paradigm Shift

Denning praises Apple as an example of a paradigm shift. I contend that Apple succeeds precisely because it puts shareholder interest first, the rest follows.

For high-tech companies like Apple and Google, that means (as Denning states) "a different way of treating people: a shift from a world in which people are manipulated as things (resources, eyeballs, demand) to a world in which people are interacted with as human beings."

High Tech vs. Manufacturing 

What applies to certain high-tech companies does not apply to the vast majority of manufacturing and retail sales businesses.

Consider a typical drive-up fast-food restaurant. Does it matter if a human passes you a sandwich instead of a robot?

If the robot was attractive, friendly and lowered the cost of the sandwich, nearly everyone would choose the robot.

And I can point to far more examples of robots replacing humans than Denning can of corporations treating employees a "different way".

Shareholders Best Served by Robots

The unfortunate fact is shareholders are frequently best served by getting rid of employees and replacing them with robots. The second unfortunate fact is Bernanke exacerbates the problem by holding interest rates so low that it's easy for corporations to make a software or hardware robotic decision.

The idea of a "paradigm shift" is in Denning's head. Making money for shareholders is the goal. How companies achieve that goal varies from company to company.

Denning cherry picks the examples that suit his misguided model.

Robots Don't Complain About Being Mistreated

There is no new paradigm, and there won't be one. Making money is the reason companies exist. In some high-tech instances, corporations may treat employees nicer, but in most situations, the profit motive means replacing humans with robots that have no feelings whatsoever about being mistreated.

Corporations won't mistreat robots (or people they don't employ). And that is the biggest irony of all in Denning's new paradigm theory that treating people better, not profit, is how the corporate model works.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com