The world’s dumbest idea

Forbes.com is known for their over-the-top articles (with link-bait headlines). That’s the website, not the magazine itself.

This one is worth reading though: The Origin Of ‘The World’s Dumbest Idea’: Milton Friedman.

For close to 50 years, we’ve been told repeatedly that just like the rational economic agent (consumer) optimizes for his/her UTILITY, a corporation (or rather, the CEO) optimizes for one thing only – profits to shareholders.

You see, it’s not the corporation’s money, it’s the shareholders’ money. And when you have customer’s paying for a product, it’s their money too. Finally, if you are paying salaries (and everyone is), the money is also the employee’s money. So it’s anyone’s and everyone’s money but the corporation itself.

Now, I know that the none of these is an actual discovery, while the Corporation is. How? I play Civilization, that’s how. There’s no Milton Friedman great person either.

Go read it. Once you’re done, go back to Peter Drucker (I have his books in hardcover). His focus and eloquence is undiminished by 70 years of economic theory:

There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. . . . The customer is the foundation of a business and keeps it in existence.

Forget shareholders, embrace customers. It was a dumb idea and it doesn’t work.

The rate of return on assets and on invested capital of US firms declined from 1965 to 2009 by 75%.

The rate of return on assets and on invested capital declined from 1965 to 2009 by 75%.

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