On September 13, 1970, the New York Times published a article by Milton Friedman that would become one of the most famous and controversial articles in all of economics. The article was titled “A Friedman Doctrine—The Social Responsibility of Business Is to Increase Its Profits.”
According to Friedman’s now-famous doctrine, a company’s only job is to generate profits for its shareholders. She has no other “social responsibilities” such as caring for the poor or protecting the environment. “Businesspeople who talk like this are unwitting puppets of the intellectual forces that have undermined the foundations of a free society in recent decades,” Friedman wrote.
Friedman’s Doctrine
The essence of Friedman’s argument is that whoever pays the musician should choose the music. If shareholders own the company, then they must decide how it operates, and if they are exclusively interested in profit (either out of greed or because they want to spend the money on causes they personally care about), then whatever the company What you do should be aimed at making as much profit as possible. In summary, the shareholder primacy should be the rule.
“In a system of free enterprise and private ownership, a corporate executive is an employee of the business owners,” Friedman wrote. “He has a direct responsibility to his employers. That responsibility is to conduct business in accordance with the employers’ wishes, which will generally be to make as much money as possible while respecting the basic rules of society, both those enshrined in law and those embodied in ethical customs.”
“In any case,” he continues, “the key point is that, as a corporate executive, the manager is the representative of the people who own the corporation (…) and his primary responsibility is to them.”
Friedman is not saying that we should not care about the poor or the environment—a common interpretation of Friedman’s doctrine. Instead, he is making the more subtle point that it is not up to a business executive to spend what is effectively someone else’s money on causes he considers important. “Shareholders, customers, or employees could separately spend their own money on the specific stock if they wished,” notes Friedman.
Friedman concludes the article with a quote from his book “Capitalism and Freedom.” “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits, as long as it stays within the rules of the game, that is, engages in open and free competition without deception or fraud. “
The Alternative: Stakeholder Capitalism
More than 50 years later, Friedman’s doctrine is still a guiding principle for many in the business community. But not everyone agrees with the idea.
Advocates of Corporate Social Responsibility (CSR), now known as Environmental, Social and Governance (ESG) policies, have long challenged the primacy of shareholders, arguing that other stakeholders such as workers, customers and the government, must also have a say in determining how companies are managed and what they invest in. The insistence on considering these and other “stakeholders” has given rise to the term “stakeholder capitalism” to describe this perspective.
“In the 1950s and 1960s, it was quite natural for a company and its CEO to consider not just shareholders, but everyone who has an ‘interest’ in a company’s success,” wrote Klaus Schwab and Peter Vanham in a 2021 article for the World Economic Forum (WEF). “This is at the heart of stakeholder capitalism: it is a form of capitalism in which companies not only optimize short-term profits for shareholders, but seek long-term value creation, taking into account the needs of all stakeholders. its stakeholders and society at large.”
They explicitly contrast stakeholder capitalism with Friedman’s doctrine.
“As a global organizing principle for business, the stakeholder concept competed directly with Milton Friedman’s notion of ‘shareholder primacy'(…) Shareholder capitalism became the norm in the West as companies globalized, loosening its ties to local communities and national governments, and focusing on maximizing short-term profits for shareholders in competitive global markets…
…The model [das partes interessadas] is simple, but it immediately reveals why shareholder primacy and state capitalism lead to suboptimal outcomes: they focus on the more granular and exclusive goals of profits or prosperity in a specific company or country, rather than the well-being of all people and the planet as a whole.”
Space does not permit a complete discussion of the errors and distortions involved with this vision of “people over profit”. Suffice it to say that free-market capitalists categorically reject the charge of “granular” and “short-term” thinking, and we would argue that the “well-being of all people and the planet as a whole” is, in fact, better achieved with a shareholder primacy and laissez-faire approach.
These then represent the traditional battle lines, with free market capitalists on one side, defending Friedman’s doctrine of shareholder primacy as the key to freedom and prosperity, and the WEF’s defenders of stakeholder capitalism on the other. side, who maintain that prosperity (conspicuously absent freedom) is best achieved with a stakeholder approach.
Javier Milei’s addendum
In his recent interview with Tucker Carlson, Argentine presidential candidate Javier Milei referenced Milton Friedman and added his own twist to Friedman’s ideas.
Carlson: Argentina is now a poor country because of these policies [socialistas]. What advice would you give Americans after experiencing this?
Milei: Never embrace the ideals of socialism. Never be seduced by the siren song of social justice(…) At the same time, we have to make the business sector aware that the masses are necessary — Milton Friedman used to say that the social role of an entrepreneur is to make money. But this is not enough. Part of his investment must include investing in those who defend the ideals of freedom, so that socialists do not advance further. And if they don’t do this, they [os socialistas] they will enter the State and use the State to impose a long-term agenda that will destroy everything they touch. Therefore, we need a commitment from all those who create wealth to fight against socialism, to fight against statism, and to understand that if they fail to do so, the socialists will continue.
The idea that business owners have a duty, not just to make profits, but to invest in the individuals and organizations that promote freedom, makes a lot of sense. This “Milei doctrine,” as we might call it, highlights the reality that persuading the masses to believe in freedom is a crucial part of improving everyone’s lives. The entrepreneur who seeks only profits, but is not concerned with protecting the profit and loss system itself, will soon find himself surrounded by socialists and statists. And when that day comes, all the profits in the world will not be able to save it from the tyranny of the majority.
Does Milei’s doctrine conflict with Friedman’s doctrine? I do not think. Instead, it is better to see it as a complement to Friedman’s doctrine. Here’s why.
The label “Friedman doctrine” is sometimes used a little loosely, so it is important to clarify exactly what is being said. In his 1970 article, Friedman argued that companies should be managed to satisfy the desires of shareholders above all else. I think of this as Friedman’s doctrine proper.
Friedman is also known for the idea that entrepreneurs should pursue profits above all else, but that’s technically a separate point. And it is this point that Milei is contesting.
Milei is not saying that rogue agents should use company funds against the wishes of their principal. Instead, he is saying that the principals, the shareholders, should not focus exclusively on making profits, however beneficial that may be. They also need to invest some of their money in individuals and organizations that champion the cause of freedom.
Milei is effectively saying, “Yes, companies should be run under a shareholder primacy model. But also, business owners should use part of their profits to finance the defense of the free market.”
The idea that capitalists should invest in defending the free market is perfectly compatible with Friedman’s doctrine itself, as detailed in the 1970 article. What Milei is disputing in Friedman is the related but distinct discussion of what entrepreneurs and shareholders must value if they want to help society—profits alone, as Friedman is often interpreted to be saying, or profits plus free-market advocacy, as Milei argues.
A call to entrepreneurs
The only thing I would add to Milei’s point is that even if an entrepreneur does not want to dedicate resources to the cause of freedom, he should, at the very least, lend his voice to that cause. It would be incredibly powerful if the majority of the country’s businesspeople boldly defended free-market capitalism as the key to freedom and prosperity.
But most of them don’t, and that’s a serious problem. Indeed, free-market advocates have long lamented that their potential allies, businesspeople and entrepreneurs, are notoriously silent on the economy or, worse, actively join the clamor for government favors and protections.
It’s time to end this. Entrepreneurs know firsthand how restrictive state intervention can be. They live in a world of bureaucracy, licenses, permits, codes, regulations and statutes. As such, they are perfectly situated to teach their friends, family, and the general population how much the state stifles innovation and progress.
Therefore, it is time for them to stand up in favor of the free enterprise system, with their voices and preferably with their financial resources. It is time for business leaders to openly and consistently defend the principles of a free society. It’s time to adopt Milei’s doctrine.
©2023 FEE – Foundation for Economic Education. Published with permission. Original in English: The Milei Doctrine
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