Milton Friedman on the Social Responsibility of Business, 50 Years Later

Milton Friedman’s landmark essay, “The social responsibility of business is to increase its profits.“I was published. The New York Times Magazine 50 years ago this month. The piece is as polarizing today as it was five decades ago.

For some, Friedman’s provocative theory ushered in a new phase in American economic life where “greed is good” and profit is the only true purpose of business. Yet many others saw in it a timely capitalist manifesto that clearly outlined the proper role that executives should play in our free market system.

Commentators on Friedman are generally polarized between those who believe that business has more of a “social responsibility,” and those who believe that the social mission of business is to make profits, period, other social It is best for politics with goals.

But both sides would probably agree that the world has become a more complex place over the past 50 years, and businesses have become ever more complex enterprises that need to balance many different priorities.

Additionally, the rise of a socially responsible approach to business and investment has focused the priorities of both corporate leadership and many investors, whether or not they believe in the broader social purpose of business. I am

What are the responsibilities of the business?

Published on September 13, 1970, the Nobel Prize-winning economist argued against the so-called “social responsibilities of business.”

Many people, in fact, believed at the time that business had social responsibilities. Some business leaders believed that corporations, in addition to generating profits for their shareholders, could help alleviate social ills by providing employment to the long-term unemployed, or by fighting discrimination or avoiding pollution. Should try.

“Business people who talk like this are unwitting puppets of the intellectual forces that have been undermining the foundation of a free society for these past decades,” Friedman wrote.

Friedman was already influential before the publication of “The Social Responsibility of Business Is to Increase Its Profits,” but his stature only increased after the publication of the article. He was anointed as an intellectual leader—or an ideologue, for those opposed to his ideas—whose followers in business and politics changed the regulatory and business landscape beginning in the 1980s. Changed.

Profit as the highest responsibility of business

His signature achievement was the near-universal acceptance—in the business world, anyway—of the idea that a public company should maximize profits and shareholder value above all other goals.

According to this theory, corporate executives are the employees, and the company’s shareholders are the bosses. Shareholders “want to make as much money as possible while staying true to their core values ​​of society,” Friedman says.

For Friedman, executives who respond to social concerns other than making a profit are not fulfilling their duties as employees. Although an individual can do whatever he wants with his money, an employee must always act according to the wishes of his superiors.

The greatest good in Friedman’s analysis is that an executive maximizes returns to shareholders. Anyone who wants to do as much good as possible can do so on their own time with their own money. Executives who take profits and spend them on social causes have, for Friedman, effectively turned themselves into legislators.

“This is the main reason why the doctrine of ‘social responsibility’ involves accepting the socialist view that political mechanisms, not market mechanisms, are the proper way to determine the allocation of scarce resources to alternative uses,” Friedman wrote. .

Furthermore, the analysis assumes that executives are poorly equipped when it comes to implementing social change. An investment banker is good at making deals, but how does that prepare them to tackle pollution?

Friedman’s article remains controversial.

In a ___ Special section of this week’s Sunday edition, The New York Times Friedman’s article was revisited with comments from economic heavyweights, many of whom argued that the piece no longer holds water, if it ever did.

In response to Friedman’s claim that a corporate executive’s primary concern in our economic system is with business owners, Johnson & Johnson CEO Alex Gorsky stated that his company, since its inception, ” Priority is given to patients, doctors and nurses, mothers and fathers, and others who use our products and services” and then to “our customers and business partners, our employees and our communities.” Last on the list was “our shareholders”.

Professor Marianne Bertrand of the University of Chicago, one of Friedman’s alma maters, noted that What is good for shareholders is good for society. The ethos that the article represents only works when markets perform optimally. That said, Bertrand asserts that Friedman himself would not go so far as to say that markets work perfectly.

Others commented that businesses have been implicated in long-term social problems — from discrimination to widening income inequality gaps — even as executive pay has risen faster than that of average workers. Given that reality, executives have a responsibility to fix the mistakes their businesses make, especially when they spend billions lobbying Washington for lower taxes and looser regulations.

Friedman’s explanation of shareholders seemed two-pronged to critics such as American Compass’ Oren Kass. Cass offers a rhetorical argument to explain why shareholders should care about maximizing potential profits from their corporate manager “employees.”

Take a shareholder who lives in Duluth, and invests in a Duluth-based public company. A shareholder benefits from a strong community by having a major employer in town. Do they really want to see the company offshore operations and live in a less vibrant city so they can make some more money?

Social responsibility of business today

This is an interesting time to revisit Friedman’s essay on the social responsibility of business. It seems that corporations have never been more concerned about appearing socially responsible.

The recent protests following the killing of George Floyd have thrown corporate social responsibility into stark relief. Executives from companies as diverse as Business Roundtable, Target and Ben & Jerry’s, and hundreds more, pledged to donate to social justice organizations and causes in a show of solidarity. Your Instagram feed was probably full of companies. Expressing your support. Even the United Postal Service advocated for reform.

Another example is the growing interest in socially responsible investing, or SRI, which seeks to incorporate the social impact of an investment, rather than simply providing long-term returns to your portfolio. Have the ability.

Financial services startup Aspiration has staked its entire business model on being a better corporate citizen. Robo-advisors emphasize socially responsible investment options in Betterment and Wealth Simple marketing pitches.

The rise of socially responsible investing

Worker, socially responsible capitalism has gained a lot of ground over much of the last decade. Take the en vogue acronym ESG — environmental, social and governance — an approach to business and investing that aims to encourage more socially responsible behavior in boardrooms and investment committees.

The number of traditional funds that consider ESG factors, including issues such as carbon emissions, employee diversity and executive pay, rose from 81 in 2018 to 564 just a year later. Morningstar Research.

BlackRock has said it will consider the company’s response to climate change when it makes investments, while State Street Global Advisors has told company boards to use their voting power to ensure will ensure that companies are identifying material ESG issues and incorporating the implications into their long-term strategies. “

Friedman was skeptical of this type of shareholder activism but admitted that he could not condemn it. Instead he praised business owners “who abhor tactics that approach fraud.”

But in today’s market, a corporate executive who ignores ESG factors could lose billions of dollars to the world’s largest institutional investors.

Still, if the definition of cheating is too strict, perhaps a better term is “simplistic.” It’s certainly convenient that most companies now claim to care about popular causes when so much money is on the line. But that doesn’t mean it’s bad for business.