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Friday, November 13, 2020 Leer en Español

Revisiting the Legacy of the Friedman Doctrine 50 Years Later

Fifty years after Milton Friedman's famous essay, the debate continues.

On September 13, 1970, the New York Times published an essay by economist Milton Friedman titled “A Friedman Doctrine- The Social Responsibility of Business is to Increase its Profits.”

For the past fifty years this essay has been debated, analyzed, and discussed to the point where we now have essays that debate debates about the original work. Its main legacy in academia and pop culture is that it is considered the foundation for Shareholder Theory, the idea that a business’s main responsibility is to increase the wealth of its shareholders (owners) by raising the price of the individual stock.

Top Management vs Shareholders

After rereading the essay a few times, I have to admit that a case for shareholder theory was not the takeaway I received from Friedman’s writing. This work is a critique of corporate executives using company resources for social justice causes that they feel personally passionate about without any benefit to the company.

“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business,” Friedman wrote. “He has direct responsibility to the employers.”

While the CEOs of large companies might make millions of dollars, they are still employees at the end of the day, and they need to do what is best for the company owners that hired them. Yes, it’s very important for the company to make the most money possible at the moment, but it is also equally important for corporate executives to make decisions for the future so that these profits continue to come in. Any CEO that is willing to burn tomorrow for the sake of today should not be in their position.

It’s interesting that for an essay that’s credited with founding the ideas for shareholder theory, company shareholders and owners are only mentioned twelve times—and in half of those references, their interests are lumped in with the shared interests of customers and employees.

The Trinity of Business

While my resume is currently missing a stint as an executive at a worldwide corporation, I have been a small business owner for six years. From my personal experience, Friedman is correct when he lumps owner, employee, and customer interest together because if a business is to succeed and continue its success, all three of these parties must be satisfied.

An owner needs to have a vision, capital, and leadership to start their company and run it. As the business grows, they need to hire employees. These employees need to be well trained and they should care about doing their jobs well. Excellent employees are essential because they are the ones interacting the most with the customers, and if a customer isn’t happy with your business then you won’t have revenue and will quickly be closing your doors.

A customer needs a business that will solve a specific problem they have which ranges from getting lunch or needing a new car. The business needs the customer because they need revenue. Employees need the business in order to have personal income, while businesses need them to help the customers. Customers need the employees so that they can have guidance for solving their problems.

Increasing Profits Benefits Everyone

Friedman’s essay says that a businesses’ social responsibility is to increase profits. There is a social stigma that profits are evil, but anyone who says or believes that is misguided about how businesses work. As Thomas Sowell pointed out in Basic Economics, profits are the price paid for efficiency. Which scenario is better for society as a whole?

Company A makes a widget that costs them 80 cents. They sell it for 90 cents. They also employ 20 people.

Company B makes an almost identical widget that costs them one dollar. They sell it for one dollar and five cents while employing four people.

Through the idea that profit is bad, Company B would be seen as the less evil company because its profit is smaller. That’s an ignorant view which ignores the fact that consumers benefit more with Company A’s lower price and employees benefit more as well with more jobs. At the same time, the owners of Company A benefit with higher profits. Everyone in society benefits from this.

Friedman’s Actual Criticism

“What does it mean to say that the corporate executive has a ‘social responsibility’ in his capacity as a businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers”

Friedman is critical of corporate executives that use or misuse company resources to support causes that have no benefit to the company they work for.

“…the corporate executive would be spending someone else’s money for general social interest,” Friedman observed. “Insofar as his actions are in accord with his ‘social responsibility’ reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customer’s money. Insofar as his actions lower the wages of some employees, he is spending their money.”

If a CEO felt particularly passionate about a cause or charity that does not benefit the company, there is nothing stopping them from donating their own money instead of the company’s, employees’, or customers.’ Likewise, the corporate executive is an expert in their business but that might not be the case when it comes to particular social responsibility causes.

As Friedman points out, the executive might keep prices low at the expense of profit in the name of fighting inflation, but they have no way to know if what they are doing actually helps society, but it is certain that this is hurting the company.

“And, whether he wants to or nor, can he get away with spending his stockholders, customers’, or employees’ money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have reduced the corporation’s profits and the price of its stock). His customers and his employees can desert him for other producers and employers less scrupulous in exercising their social responsibilities.”

Exceptions to the Rule

“it may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.”

Because corporate executives need to look out for what is best for the company does not mean that they are banned from activities that can be classified as socially responsible. They just need to choose activities that will have either a direct or indirect benefit to the business. For example, a restaurant located near a tourist attraction on public land could donate funds or send workers as volunteers to help maintain the tourist site because a large part of their revenues comes from tourists.

Companies can also take actions that are socially responsible and then benefit through free publicity. A charitable donation that is publicized on the internet, television, and in newspapers can have the potential to reach more people than a paid advertisement. It can also help promote the desired image that the company wants the public to have of their brand.

Business Should Focus on Business

“I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely far-sighted and clear-headed in matters that are internal to their businesses. They are incredibly short sighted and muddle-headed in matters that are outside their businesses but affect the possible survival of business in general. This short sightedness is strikingly exemplified in the calls from many businessmen for wage and price guidelines or controls or income policies.”

Fifty years after this essay we are still seeing many businesses veering outside of their lanes of expertise to promote social messages or agendas. This has become extremely visible in the world of professional sports where political messaging during games is turning off viewers and driving down the audience, which in turn decreases the value of franchises and organizations.

Organizations that allow employees to promote political messages during work are also creating environments where co-workers can find themselves being treated as enemies due to political views rather than members of the same team while they’re at work. Likewise, in today’s hyper-partisan world, airing political and social messages might drive away customers who were otherwise happy spending their hard-earned money on the company’s product or service.

“…there is one and only one social responsibility of business,” Friedman wrote, “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud.”

  • Daniel Kowalski is an American businessman with interests in the USA and developing markets of Africa.