By Mike Archer. Steve Denning has written a devastating critique of what some business people still consider to be the great mantra of the last 50 years in business, the big truth of Milton Friedman.
Friedman has been the guru of modern business since leading the ‘Chicago’ school of economic theory and single-handedly transforming business from an endeavour devoted to gaining and keeping customers into an animal devoted to maximizing shareholder and CEO value.
The fact the theory has lead to three disastrous, two economic downturns and one complete meltdown has still not convinced some, but Forbes Magazine contributor makes a very compelling case for the fact that Friedman’s theory may just be ‘The World’s Dumbest Idea’.
Those who still agree with Friedman are going the way of GE which has lost 60 percent of its value since 2001. Denning demonstrates that, “The rate of return on assets and on invested capital of US firms declined from 1965 to 2009 by three-quarters.”
The silver lining … the best of the new (many of them internet-based) companies such as Apple, Amazon, Toyota … understand that business is about customers … not shareholders.
Read on. It will change the way you look at business.
The Origin Of ‘The World’s Dumbest Idea’: Milton Friedman
[excerpt] By Steve Denning. 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.
As the leader of the Chicago school of economics, and the winner of Nobel Prize in Economics in 1976, Friedman has been described by The Economist as “the most influential economist of the second half of the 20th century…possibly of all of it”. The impact of the NYT article contributed to George Will calling him “the most consequential public intellectual of the 20th century.”
Friedman’s article was ferocious. Any business executives who pursued a goal other than making money were, he said, “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” They were guilty of “analytical looseness and lack of rigor.” They had even turned themselves into “unelected government officials” who were illegally taxing employers and customers.
How did the Nobel-prize winner arrive at these conclusions? It’s curious that a paper which accuses others of “analytical looseness and lack of rigor” assumes its conclusion before it begins. “In a free-enterprise, private-property system,” the article states flatly at the outset as an obvious truth requiring no justification or proof, “a corporate executive is an employee of the owners of the business,” namely the shareholders.
My most recent books are the Leader’s Guide to Radical Management (2010), The Leader’s Guide to Storytelling (2nd ed, 2011) and The Secret Language of Leadership (2007). I consult with organizations around the world on leadership, innovation, management and business narrative. At the World Bank, I held many management positions, including director of knowledge management (1996-2000). I am currently a director of the Scrum Alliance, an Amazon Affiliate and a fellow of the Lean Software Society. You can follow me on Twitter at @stevedenning. My website is at www.stevedenning.com.