Friedman’s Feedback Loop and 25 Years of Corporate Delay on Climate Change

Published January 4, 2021

2021-01-04 09:39:53

September 16th, 2020 may have marked an important milestone in the effort to respond to climate change. In a break from the past, the US Business Roundtable of 200 leading US CEOs announced support for market-based policies, including carbon prices. The CEOs acknowledged that the response to the ‘real’ problem of climate change ‘will require collective global action [by] business and government’.[1]

One must always be cautious of such mass-signed statements, but it is noteworthy in reversing both short-term and long-term positions of US business.

Short-term reversal

The short-term reversal is that this announcement repairs a statement put out by the same group in August 2019. Then, the Business Roundtable surprised many observers by pledging to manage their companies for all stakeholders and not just shareholders, as had been their default position.[2]

Though an eye-catching announcement, it was undermined by denying that government had any role to play in addressing stakeholder issues. Hence, it perpetuated the notion that competitive corporations were still the sufficient institutions to solve major problems facing society. This month’s statement substantially changes that position.

Long-term reversal

Much more noteworthy is that this new stance might mark the end of the hugely damaging 25-year period in which corporations’ opposition to climate policy has significantly delayed a meaningful global response to climate change.

In the mid-1990s, at a critical moment in the response to climate change, US companies were united in near-monolithic opposition to climate policies. Under the – highly misleadingly-named – Global Climate Coalition (GCC), US corporations mounted an effective campaign based on denial of climate science that prevented any meaningful outcome of the Kyoto Protocol in 1997. The opposition of leading US – effectively, international – companies at a time when the US exercised undisputed global leadership proved decisive.

This 1990s corporate opposition to environmental policy forced us into a second best strategy of ‘market environmentalism’ by which a ‘sustainable business’ community has tried to green the economy, but under the hugely limiting constraint that their actions be profitable – denying any tension between profit and planet.

Narrative Loops

How did we let this happen?

In a nutshell, we privileged market institutions over non-market institutions, particularly government, greatly unbalancing our socio-economic self-organization and leaving us ill-equipped to handle public goods problems of unprecedented magnitude. The new Roundtable statement is part of a bigger awakening to the damage of this imbalance.

We are realizing that we told ourselves a faulty story. At the heart of the story has been a powerful, self-fulfilling ‘market-is-the-solution/government-is-the-problem’ narrative. It is constructed of two complementary but opposing messages with identifiable anchors.

Friedman’s Feedback Loop

The ‘market is the solution’ narrative received its clearest boost in Milton Friedman’s famous 1970 op-ed declaring ‘the social responsibility of business is to increase its profits’. This statement effectively licensed companies to obstruct any costly social or environmental policy.

For, if the financial benefits of influencing regulations exceed the costs, and if lobbying against regulations is permitted under the ‘rules of the game’, then the notion that companies have a social responsibility to maximize profits equates to firms having a social responsibility to resist any regulation that appears costly. Not all companies may choose to act this way, but enough companies will, and over a long enough period, that will change the nature of the socio-economic system.

Friedman’s op-ed sanctions the development of a positive feedback loop from corporations to the policymaking arena, in which a portion of corporate profits are invested into shaping laws and rules to enable higher future profits, which in turn creates more funds to reinvest into shaping future laws and so on. One might call it Friedman’s Feedback Loop. It has propelled a succession of regulatory and legal changes that has bolstered corporate influence over politics and so shifted a more balanced earlier form of capitalism towards today’s runaway corporatism.

Reagan’s ‘Government-is-the-Problem’ Feedback Loop

Logically consistent with Friedman’s Feedback Loop is a ‘government is the problem’ feedback loop, effectively labelled by Ronald Reagan moments after being inaugurated as the 40th President of the US government!

This also became a self-fulfilling narrative, that paved the way for a whole series of corporate- and market-favouring regulatory and legal changes, and inexorably eroded the capability and competence of government and its ability to attract and retain society’s best talent.

And so, at least regarding environmental and social issues, the free market has secured the government it wanted, which is to say one that does the market’s bidding and not much else. Unfortunately, the grander timing could not be worse: we diminished public sector capacity, just as we identified, in the global ecological crisis, the greatest public goods problem of all time.

The need for rebalancing

Ultimately, a healthy human system rests upon healthy relationships between its institutions, which requires balance. From where we are today, after four decades of neoliberalism, the argument for balance takes the form of arguing to revitalize and re-legitimize government to offset a default market primacy. It is not lost on me, writing in 2020, that the repair job is substantial, but in its call for government-led action on climate change, the Business Roundtable statement indicates that we need to summon ourselves to that task..

Where next?

So, a potentially significant moment. Of course, there is a long way to go. The Roundtable statement has its weak points. The inescapable tension between economic and environmental goals appears, inevitably, in the qualifier that a carbon price ‘be environmentally and economically effective’. Yet, the environmental effectiveness of a carbon price increases as a function of its economic ineffectiveness. That is intrinsic. We would not be in this position if that were not the case.

So, there is much to do, but that should not detract from recognizing this latest Business Roundtable statement as a potentially significant milestone. People interested in protecting our climate and ecology should be rushing to hold US businesses to their new word and to take advantage of the opportunity of this moment.

[Parts of this essay appeared in an article published by Responsible Investor, September 14th, 2020]

For more on Friedman’s Feedback Loop, see ‘Milton Friedman’s hazardous feedback loop’ here: https://www.responsible-investor.com/articles/duncan-austin-milton-friedman-s-destabilising-feedback-loop

[1] https://www.businessroundtable.org/business-roundtable-market-based-solutions-best-approach-to-combat-climate-change

[2] https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans

 

 

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