Fifty years have passed since Milton Friedman’s article in the New York Times Magazine on “The Social Responsibility of Business.” This anniversary has been widely remembered- though perhaps more vilified than celebrated ( David Henderson was among those celebrating it, here).
As Friedman is considered such a champion of “shareholder value”, I found very interesting that Luca Enriques, on Promarket, comments that ‘Friedman’s essay assigned a totally passive role to what he calls the corporation’s “owners” or “the employers”—that is, the shareholders. They are merely the beneficiaries of directors’ duty to increase profits, but they have no role to play in pursuing that very goal other than (as he notes in passing) when they elect the board.’Friedman’s article (actually, he was restating ideas he had put forward before in Capitalism and Freedom) is supposed to be at the heart of a theory of “shareholder value” which many, on the left and also the corporatist right, nowadays oppose. Friedman’s point was mainly that businesses should focus on making profit for their shareholders. The main reason for that is what I’d call transparency: assessing the performance of a business’ managers in reaching this goal is a much more straightforward affair. Other standards tend to be more opaque, and more difficult to assess, giving managers more latitude vis-à-vis the owners of the company. Of course Friedman is often misinterpreted as if he maintained that corporations should be focused on making profits regardless of the law, of basic human rights, et cetera. He did not. Friedman claimed that “there is one and only one social responsibility of business—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 or fraud.” He never thought companies could do anything beyond the rules of the game.
Instead, as Enriques writes:
When Friedman wrote his piece, the shareholders of US companies were mostly individuals and rarely voted at annual meetings other than to rubber-stamp managers’ proposals. Today, a large majority of listed firms’ shares are held by institutional investors—that is, managers of other people’s funds. Institutions have become key players at US (as well as non-US) listed corporations (e.g., this OECD study with data from across the world), because they regularly vote portfolio shares at shareholder meetings. And their pro-management vote is nowadays anything but certain.
Read the whole thing. Though the corporate world has changed in the last fifty years, significantly, Enriques maintains that Friedman’s paper ‘still provides a useful framework for understanding the implications of managing companies for one purpose or another. And perhaps also for answering the reframed question of whether corporate managers should cater to the preferences of their portfolio-value-maximizing indexing investors when making decisions on behalf of their corporations.”
READER COMMENTS
Thomas Hutcheson
Sep 26 2020 at 5:05pm
The obligation to maximize profits subject to legal constraints is pretty simple for a firm operating in perfect competition. What is the obligation of a monopoly? What about the purchase of a rival that will reduce competition? What about a misleading but not false advertising claim? What about lobbying for a preferential tax rate or exemption from a tariff or a regulation? Political contributions?
Michael Pettengill
Sep 27 2020 at 5:23pm
It seems as if monopoly is more common, competition less, so has policy been influenced by Friedman, or driven somehow in the opposite direction, over the past 50 years.
Or, is there less monopoly, more competition, less profit, but a huge misinformation campaign to sustain the policy, or discredit Friedman?
There has certainly been no reduction in the calls from business for government solutions to lots of problems, whether more skilled workers, more paying customers, better infrastructure, less competition (especially cheap “subsidized” imports which Friedman famously praised).
David Laurel
Sep 27 2020 at 2:48am
The lingering inequality for the past decades, together with the irreversible damage to the environment wrought by wanton industrial pollution, is the best evidence to show that Friedman’s neoliberal capitalism which left the poor to the mercy of the “free market”, is terribly wrong. “Res ipsa loquitur”, the thing speaks for itself the increasing global poverty, environmental degradation, as well as the failing global economics, totally negate Friedman’s pipe dream on capitalism. Sadly, everyone lost all their bets on an untested theory…
Michael Pettengill
Sep 27 2020 at 5:56pm
Friedman has been followed only when it cuts costs and increases profits. ie, pollution taxes are almost never mentioned, and never advocated, by those who embrace Friedman on just this portion of his integrated economic policy theory.
No poverty problem for corporations because the negative income tax eliminates slave wages with transfers of monopoly profits to consumers pockets to boost low wages toward market, with firms paying higher wages, and lower taxes, to get and retain the best workers, except advocates of Friedman’s profit maximizing reject Friedman’s negative income tax which is called “basic income” by most today, eg Yang, Hanauer.
Friedman proposed an all you can eat buffet with a hundred dishes, but customers only want to eat the filet steak and lobster, not the dozens of veggies, etc that make a healthy meal, and sustainable food service.
MarkW
Sep 27 2020 at 7:43pm
The lingering inequality for the past decades, together with the irreversible damage to the environment wrought by wanton industrial pollution, is the best evidence to show that Friedman’s neoliberal capitalism which left the poor to the mercy of the “free market”, is terribly wrong.
No, it simply isn’t. It’s the job of the political system to establish the rules and of corporations to function (and earn profits) within that system of rules.
The poor who’ve been ‘left to the mercy’ of the free market have become immeasurably wealthier, healthier, and longer-lived in the roughly 200 years since the beginning of the Great Enrichment that was (and remains) driven by free-market economics. Capitalism (and only capitalism) generated this miracle (and countless more like it).
What’s more, it is the wealthiest countries with the most successful free-market economies who have radically reduced their pollution levels precisely because they can afford to do so while impoverished countries can not and have not. The plastics polluting our oceans come from rivers flowing into the sea in poor countries, not wealthy ones. To stop this, we don’t need plastic bag bans in San Francisco (that will do nothing), we need more free-market economic growth in these places.
And how could it possibly be the job of private corporations to address inequality? If that is, indeed, a problem that requires remediation, surely it’s the role of government to address, not individual enterprises.
Anonymous
Sep 29 2020 at 1:00pm
Considering that the purported “facts” on which you base your conclusion are wrong- in fact, the opposite of reality- should we conclude that your conclusion should also be reversed? I.e., the environment has greatly improved and the number of poor has dramatically declined, so then shall we chalk this up to a triumph of capitalism? Is this a “Straussian” comment that supports the opposite conclusion of the one you draw on its face?
MarkW
Sep 29 2020 at 6:06pm
Considering that the purported “facts” on which you base your conclusion are wrong
Are you asserting that the poor are worse off now that 200 years ago? That there’s no relationship between societal wealth and a cleaner environment or no relationship between free-market economics and wealth? Or that our environment is not cleaner than the middle of the 20th century (when rivers in Ohio caught fire, Lake Erie was considered ‘dead’ and Los Angeles was covered in smog much as Beijing is today?) Are you disputing that the cost of artificial lighting has declined by orders of magnitude or that free-market innovations had nothing to do with it?
Maniel
Sep 28 2020 at 1:03am
@MarkW
Nice response. Dr. Friedman wanted corporations “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” This result is best achieved through customer satisfaction, employee morale, and continual improvement, and invariably leads to more and better jobs.
Danno
Sep 30 2020 at 3:54pm
Sorry to be late to the discussion. It’s been a couple of years since I read the essay but critics of this essay only read the headline. In the essay, does give reasons for why corporate social responsibility (CSR) may increase corporate profits. Being engaged in CSR, Friedman writes, may allow a company to attract better, more productive employees, which of course allows profits to increase.
There is a body of evidence that companies engaged in CSR (as well as good corporate governance) have higher value, trusted to hold more cash (which is valued more because company won’t waste it), have better debt ratings, as well as profits.
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