The "one and only social responsibility of business," economist Milton Friedman wrote back in 1970 in a New York Times Magazine essay that launched a thousand arguments, is "to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game ..." Friedman contrasted this with the multiple responsibilities that an individual — such as a corporate executive — might have "to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country."
His point was that CEOs shouldn't go around imposing their own notions of social responsibility on corporations that were owned by others. Since the only interest that could possibly unite the disparate shareholders of a large corporation was making money, that was what executives should focus on during their working hours.
Now think about this argument in the context of the Supreme Court's decision (pdf) last week to strike down all restrictions on political spending by corporations. During the oral arguments, Solicitor General Elena Kagan hinted at the Friedmanite line that corporate executives who spent shareholders' money on political causes might not really be looking out for shareholders' interests. To which Chief Justice John Roberts retorted:
Isn't it extraordinarily paternalistic for the government to take the position that shareholders are too stupid to keep track of what their corporations are doing and can't sell their shares or object in the corporate context if they don't like it?...
Read More: Justin Fox--Harvard Business Review2. This Is Such a Disaster in the Making II
The Economist: "I understand the arguments from supporters... this is a political gambit... it won't actually amount to much... a tool with which to co-opt the president's moderate antagonists.... If this is the best the president can do, Democrats, and the country, are in for a very long few years":...
3. Moral Hazard and the Crisis
One of the more remarkable moments in yesterday’s Financial Crisis Inquiry Commission came when Jamie Dimon, the C.E.O. of J.P. Morgan, said that his bank had never tested its portfolio against the possibility that housing prices would fall.This was especially telling when you consider that J.P. Morgan was, of all the big banks, the one that was least enmeshed in the subprime market, which suggests that if it didn’t contemplate the chance that the housing market would crash, it’s unlikely any of the other banks did, either. Over at Free Exchange, Ryan Avent mused on what this means for the oft-heard argument that one of the engines of the financial crisis was moral hazard: big banks’ assumption that if things went horribly wrong, they would end up bailed out. He writes, “If the financial sector couldn’t conceive of a world in which house prices fell, they might also have struggled to conceive of a world in which the financial sector was troubled enough that even relatively small banks would be shielded from collapse, as was the case after Lehman’s failure.”...
Read more:New Yorker-James Surowiecki
Read more:New Yorker-James Surowiecki
4. Stupidest Thing I have Read Today: "Obama Seeks Partial Three-Year Spending Freeze"
I think this was mistakenly filed under news:
President Obama, after approving billions of dollars in spending increases in his first year in office, now is seeking a three-year federal spending freeze that would reduce budgets by less than 1 percent. President Obama, after spending hundreds of billions his first year, now is seeking a partial three-year federal spending freeze that would reduce budgets by less than 1 percent.
The drop-in-the-bucket nature of the president's proposal was underscored Tuesday by a Congressional Budget Office estimate projecting the 2010 federal deficit to hit $1.35 trillion -- Obama's spending freeze would be expected to save up to $15 billion the first year.
The president will propose the congressional freeze on "non-security" spending in his State of the Union address Wednesday night, senior administration officials said. The freeze, which would apply to annual spending on day-to-day government, appears to be an attempt to answer widespread voter concern about rising deficits and debt.
But the scope of Obama's proposal is being met with skepticism on Capitol Hill, as Republicans say that any freeze will be small in the context of federal spending under Obama's watch.
"Given Washington Democrats' unprecedented spending binge, this is like announcing you're going on a diet after winning a pie-eating contest," said Michael Steel, spokesman for House Minority Leader John Boehner....
I think this was mistakenly filed under news:
President Obama, after approving billions of dollars in spending increases in his first year in office, now is seeking a three-year federal spending freeze that would reduce budgets by less than 1 percent. President Obama, after spending hundreds of billions his first year, now is seeking a partial three-year federal spending freeze that would reduce budgets by less than 1 percent.
The drop-in-the-bucket nature of the president's proposal was underscored Tuesday by a Congressional Budget Office estimate projecting the 2010 federal deficit to hit $1.35 trillion -- Obama's spending freeze would be expected to save up to $15 billion the first year.
The president will propose the congressional freeze on "non-security" spending in his State of the Union address Wednesday night, senior administration officials said. The freeze, which would apply to annual spending on day-to-day government, appears to be an attempt to answer widespread voter concern about rising deficits and debt.
But the scope of Obama's proposal is being met with skepticism on Capitol Hill, as Republicans say that any freeze will be small in the context of federal spending under Obama's watch.
"Given Washington Democrats' unprecedented spending binge, this is like announcing you're going on a diet after winning a pie-eating contest," said Michael Steel, spokesman for House Minority Leader John Boehner....
5. Funniest thing I have read today:
"A December National Public Radio report noted that fake houseflies have begun appearing in urinals around the world based apparently on research showing that men are more likely to aim at the flies, thus leaving the area surrounding the urinal cleaner. Another commentator wondered how such "research" was conducted (other than by the obvious method of paper-wiping floors around urinals and then comparing the wipes). [KPCC Radio (Pasadena, Calif.), 12-25-09]"
More Stupid News: News of the Weird
Joe, the moral hazard question is always interesting in its complexity. Housing is a special good, poeple have to live somewhere (although the street is also an option as we have learned in Berkeley) which should support prices nationwide. What banks did not conceive of is the correlation of housing prices between far away markets, say California and New York. They disregarded poor markets such as Las Vegas in the hope that they would not affect good ones. Obviosuly a mistake. The houseflies comment is really funny. I wonder if they conducted a double-blind experiment with a large enough sample. Most importantly, I'm impressed by your ability to get up this early and digest and comment on news. I can't even focus on talking heads on CNN in the morning... Good luck, Adam
ReplyDeleteThanks, Adam. I think the housing market was a failure on multiple levels. Somehow, people became convinced that buying a house is something other than leveraging yourself five to ten times. They were probably misled the classic flaw of using the past to predict the future. As the article points out though, apparently banks fell victim to the same flaw. My biggest problem with the fallout though is that somehow, the American people got stuck footing the bill with little in terms of mortgage relief in return. Finally, there has been little in the way of reforming the "Too Big to Fail" banks, nor has there been the implementation of a regulated derivatives exchange that would at least monitor these outlandish financial creations.
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