Why Not Spoons?
We can and should honor the contributions of Milton Friedman and his University of Chicago colleagues. At the same time, we must now lay to rest a theory that has outlived its usefulness and place it in its appropriate historical context, giving room for a new, more complex paradigm to emerge.
There is a famous story of the University of Chicago economist and Nobel Prize winner Milton Friedman that goes something like this. Friedman was visiting a dam construction site in China when he was shocked to see that the workers were using shovels instead of modern machinery. When he asked his government hosts why more powerful equipment wasn’t being used, they replied, “this is a jobs creation program.” In his characteristically sharp-witted way, Freidman responded, “If the purpose is more jobs, instead of shovels, why not spoons?” It was in college that I first heard this story and learned that Milton Friedman was almost single-handedly responsible for the idea that the sole purpose of a business is to make a profit for its shareholders – a theory he posited in a 1970 New York Times article and defended for the rest of his life.
As a young professional entering the world of business, I loved the simplicity and elegance of his theory. It appealed to my black and white way of thinking back then, and its logic seemed unassailable. It shaped my worldview and guided the way I helped companies in my late twenties at McKinsey & Company and the decade of my thirties as a private equity investor. It wasn’t until I turned forty that I first began to seriously question the underlying premise of an economic theory that had shaped and continues to shape much of the world’s thinking. Developmentally, I began to see more shades of grey, more nuance. For some time now, I have seen clearly that human beings and economic systems are incredibly complex, and deserving of a guiding philosophy that attends to this complexity.
The banking crisis of the last couple of weeks illustrates the highly interconnected, complex nature of our systems and institutions. More than that, recent events have once again revealed that Friedman’s theory and the worldview that contains it are outdated and in desperate need of upgrading. The current model for starting and building companies – growth at all costs, winner takes all, profits above all else – isn’t working. It is a worldview that will lead to systemic and ecological collapse. As I argued recently, we need a new paradigm, one that appreciates the inherent and healthy tensions that must be reconciled – profit and planet, shareholders and all stakeholders, short-term profit and long-term health, growth and stability.
The good news is that there are green shoots all over the place that suggest a new paradigm is emerging. In business, Paul Polman, the former CEO of Unilever, demonstrated that it is possible to outperform the market over multiple years at scale while producing a net positive impact in the world. Larry Fink, Chairman and CEO of Blackrock, the world’s largest asset manager, has dedicated his last five annual Letters to CEOs to a request that all businesses discard the outdated Friedman theory in place of a focus on purpose and what he calls “stakeholder capitalism.” Hemant Taneja, CEO of the global venture capital firm General Catalyst, has been leading the call for founders to build their startups on a foundation of “responsible innovation.” My firm, The Trium Group, has long been a stand for the role of the CEO and business in changing the world, believing that it’s not only possible but essential for companies to focus on both profitability and positively impacting the world.
We can and should honor the contributions of Friedman and his University of Chicago colleagues. The focus on shareholder value has sharpened thinking, focused management teams on their fiduciary duties, exposed the downsides of state-controlled economies, and driven much-needed innovation. There is no need to demonize the unintended consequences of the theory. At the same time, we must now lay to rest a model that has outlived its usefulness and place it in its appropriate historical context, giving room for a new, more complex paradigm to emerge. It is no exaggeration to say that the future of the world depends on this.
It’s hard to fault depositors for fleeing a failing bank. Yet, Hemant Taneja makes a convincing and important argument that the VC community could and should have done better in the midst of the Silicon Valley Bank (SVB) collapse. If you don’t have access to The Information, here is an important excerpt: “The run on SVB was a textbook result of the myopia and egoism that has swallowed the venture capital industry whole. Its addiction to growth at all costs, disruption first, winner takes all, and moving fast and breaking things has created a false belief that individuals can operate above the ecosystem they inhabit. This past week has proven how incorrect this thinking is. The truth is that we are interconnected and interdependent, no matter what the competitive ethos and cult of personalities may suggest. No member of this community is immune from the impact of other stakeholders, and we have to weave this reality into every decision we make.”
“Noam Chomsky: The False Promise of ChatGPT,” in the New York Times is worth reading.
With the rise of generative AI tools to help people write, I loved reading the recent Farnam Street blog, “Why Write?” As a writer myself, it really resonated: “Writing is the process by which you realize that you do not understand what you are talking about. Importantly, writing is also the process by which you figure it out. Writing about something teaches you about what you know, what you don’t know, and how to think. Writing about something is one of the best ways to learn about it. Writing is not just a vehicle to share ideas with others but also a way to understand them better yourself.”