The Friedman Doctrine Revisited

Milton Friedman’s infamous “profits only” manifesto turned 50 this fall. It’s time to bury it.

By Jonathan Soros

Tagged CapitalismCorporationsEconomicsMilton Friedman

Fifty years ago, Nobel Prize-winning economist Milton Friedman declared that the “one and only social responsibility of business” is “to increase its profits.” His article in the September 13, 1970 edition of The New York Times Magazine became the anchor for a decades-long era of unrepentant corporate profit-seeking that has led to what many are calling a crisis of capitalism. While Friedman’s logic was clear, his flawed assumptions led countless investors and executives to suppress their humanity in service to his credo. It’s long past time to chart a different path.

Friedman’s argument rests on two central pillars. The first is that executives are mere agents for a corporation’s owners—an idea that later came to be known as “shareholder primacy”—and therefore all corporate actions should satisfy the owners’ desires. The second is that the interests of shareholders “generally will be to make as much money as possible.” Friedman argues that any decision that reduces profits to shareholders unnecessarily, like cutting pollution in excess of legal requirements, refraining from an available price increase, or seeking to address poverty by hiring “hardcore” unemployed, is in effect a tax imposed on owners.

As the United States faces the largest disparities in wealth in a century, a global climate crisis, and a reckoning with corporate complacency towards racial injustice, it’s easy to see why the Friedman Doctrine remains a focus of criticism. Americans are looking for corporations to go beyond lip service and token actions and become an affirmative part of solutions to the challenges we face.

For years, critics have sought to negate the first pillar of the Friedman Doctrine, the idea of shareholder primacy, arguing that because corporations are creations of the state and enjoy special benefits (like limited liability and potentially perpetual existence), they owe obligations to the public that may compete with or supersede the financial interests of shareholders. Legislative proposals that follow this line include requirements to consider a company’s employees and communities in their decisions, increase labor representation on boards, and limit share repurchases. But such requirements are simply an extension of the regulatory and taxing authority of the state, with all of its imprecision and opportunities for evasion. It is the second pillar of the Friedman Doctrine—the notion that shareholders prioritize money over everything—that has done the most lasting damage and that must be dismantled.

Without the assumption that shareholders care only for profits, the entirety of Friedman’s argument collapses. According to his own logic, if shareholder concerns are dominant and shareholders care about something other than profits, then profits cannot be the sole corporate mission. Friedman appears to recognize this weakness: He nods to the possibility of forming corporations as hospitals, schools, or for other charitable purposes. He also allows that sole proprietors, and presumably partnerships, may manage their businesses however they please, though he passes over them as largely irrelevant. For Friedman, the big prize is driving the activity of large corporations exclusively towards profit seeking, and he leaves no room for the possibility that such enterprises could pursue both profit and public benefit.

Friedman, like other libertarian-minded economists before and since, believed that the clarifying and simplifying objective of money profit would produce the greatest good for the world. Their defense is both material and philosophical. In the material sense, they contend that the power of this economic engine generates greater prosperity than any other option, creating benefits for everyone. From a philosophical perspective, they argue that the pursuit of self-interest is the essential building block of all freedoms, and that every curtailment of this pursuit is a step in the direction of governmental tyranny. Friedman is not shy on this point. Writing in the midst of the Cold War, he refers to businesses giving consideration to anything other than profit as “collectivist,” “fundamentally subversive,” and “unadulterated socialism.”

For 50 years, we have allowed Friedman’s assumption of shareholder profit-seeking to metastasize into missionary zeal. Generations of investors and corporate executives have been taught the gospel that greed is good. And countless immoral acts have been made righteous by the idea that financial markets’ craving for capital efficiency is a good in and of itself.

Even in 1970, the idea that a myopic drive toward profit-seeking creates maximum social benefit was questionable, and there was ample reason to be concerned with collateral damage from corporate activity. In fact, Friedman was writing directly in response to calls for corporate actors to perform better than regulatory requirements. He explicitly called out a shareholder campaign led by Ralph Nader, author of the 1965 bestseller Unsafe At Any Speed, to make GM “responsible.” While Congress responded by creating the Consumer Product Safety Commission two years after Nader’s book, GM defeated the shareholder resolutions.

Five decades on, the commercial power of large corporations and institutionally owned businesses has expanded dramatically—and the possibility of harming the public while creating private profit has similarly expanded. In 2008, we suffered a global financial crisis; in 2020, we face a worsening climate crisis; ahead of us are the unknown dangers of genetic engineering, artificial intelligence, and other technological advances. We have seen time and again that regulation alone cannot prevent bad outcomes, and it is not always possible for private philanthropy or government spending to clean up messes after the fact. If Mark Zuckerberg were to devote all his Facebook profits to countering misinformation, he wouldn’t be able to create truth. Wouldn’t it be better if he reduced the traffic in lies by changing the way Facebook works, even if it became less profitable?

Zuckerberg’s decision to forgo profits only when required by law or customer pressure is a choice that he made to follow the Friedman path.  But this choice is not inevitable. Most people care about more than just their incomes, and they’re willing to make financial trade-offs to satisfy those other priorities. We care about our families, our communities, and our environment, and we devote both time and resources to their benefit. We volunteer, we contribute, and we sacrifice. Evidence suggests that investors are increasingly looking for ways to express these types of priorities in their investing, so-called “impact investing.” Environmental, social, and governance ratings and indexes have grown in prominence and scale, and the investing arm of the World Bank estimates that the overall impact-investing market could eventually exceed $20 trillion.

It is the essence of capitalism as Friedman defined it—a free-enterprise, private property system—that all investors may decide for themselves what values to prioritize. We can choose to reduce emissions and pollution, to care about the health and wellbeing of our workforce, or to contribute to our communities, even when doing so does not serve our own financial interests. Friedman’s core assumption—that investors care only for their own profits—runs counter to human nature and is thus fatally flawed. And restrictions that require money profits to dominate are, ironically, limitations on the very freedom Friedman fought most fiercely to protect.

We have spent decades perfecting the machinery to prioritize profits, and we have only begun to develop alternatives. The benefit corporation, a legal form now authorized in 33 states, allows companies to balance shareholder profits with other interests. It is an important start, but we need more and better tools to measure and value those trade-offs. These in turn will allow us, voluntarily, to collaborate effectively on building companies that pursue both profits and purpose. To achieve scale for impact-focused investments, we must ultimately create a market exchange for public benefits that can rival the efficiency of financial markets.

The challenges we face in building these new structures are surmountable, but we must approach them with the same zeal with which we previously followed the Friedman Doctrine. If we succeed, we may truly harness corporate power to maximize social benefit. And if we fail, it will be a failure not of capitalism, but of capitalists.

Read more about CapitalismCorporationsEconomicsMilton Friedman

Jonathan Soros is a senior fellow at the Roosevelt Institute and CEO of JS Capital Management LLC.

Also by this author

Needed: Greater Empathy

Click to

View Comments

blog comments powered by Disqus