Description
Milton Friedman’s (1970) essay on “The Social Responsibility of Business Is to Increase Its Profits” has long been cited by managers, politicians, and business scholars alike to argue against various forms of social responsibilities of businesses.
(1) Engage with Friedman’s arguments by reading his famous essay and summarize his main lines of argument:
Why, according to Friedman, should the social responsibility of business be to increase its profits?
Internet: please see article 1 attached
In the 50 years since the publication, the public debate as well as our understanding of society and business has moved on. On the 50th anniversary of Friedman’s essay, in Sep. 2020, The New York Times published a piece with a series of responses to Friedman.
(2) Engage with these thoughts to collect and systematically arrange arguments:
Why might businesses have other responsibilities than increasing their profits?
(You can find the responses here: Second Article please see attachemnt
Make use of supplemental material as well as examples/cases, to demonstrate your arguments.
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A Friedman doctrine‐- The Social Responsibility of Business Is to Increase Its Profits – The New York Times
https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-thesocial-responsibility-of-business-is-to.html
A Friedman doctrine‐- The Social Responsibility
of Business Is to Increase Its Profits
By Milton Friedman
Sept. 13, 1970
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September 13, 1970, Section SM, Page 17 Buy Reprints
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WHEN I hear businessmen speak eloquently about the “social responsibilities of
business in a free‐enterprise system,” I am reminded of the wonderful line about
the Frenchman who discovered at, the age of 70 that he had been speaking prose
all his life. The businessmen believe that they are defending free enterprise when
they declaim that business is not concerned “merely” with profit but also with
promoting desirable “social” ends; that business has a “social conscience” and
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takes seriously its responsibilities for providing employment, eliminating
discrimination, avoiding pollution and whatever else may be the catchwords of the
contemporary crop of reformers. In fact they are—or would be if they or any one
else took them seriously— preaching pure and unadulterated socialism.
Businessmen who talk this way are unwitting puppets of the intellectual forces that
have been undermining the basis of a free society these past decades.
The discussions of the “social responsibilities of business” are notable for their
analytical looseness and lack of rigor. What does it mean to say that “business” has
responsibilities? Only people can have responsibilities. A corporation is an artificial
person and in this sense may have artificial responsibilities, but “business” as a
whole cannot be said to have responsibilities, even in this vague sense. The first
step toward clarity in examining the doctrine of the social responsibility of
business is to ask precisely what it implies for whom.
Presumably, the individuals who are to be responsible are businessmen, which
means individual proprietors or corporate executives. Most of the discussion of
social responsibility is directed at corporations, so in what follows I shall mostly
neglect the individual proprietor and speak of corporate executives.
IN a free‐enterprise, private‐property system, a corporate executive is an employe
of the owners of the business. He has direct responsibility to his employers. That
responsibility is to conduct the business in accordance with their desires, which
generally will be 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. Of course, in some cases his employers may have a different objective. A
group of persons might establish a corporation for an eleemosynary purpose—for
example, a hospital or school. The manager of such a corporation will not have
money profit as his objective but the rendering of certain services.
In either case, the key point is that, in his capacity as a corporate executive, the
manager is the agent of the individuals who own the corporation or establish the
eleemosynary institution, and his primary responsibility is to them.
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A Friedman doctrine‐- The Social Responsibility of Business Is to Increase Its Profits – The New York Times
Needless to say, this does not mean that it is easy to judge how well he is
performing his task. But at least the criterion of performance is straightforward,
and the persons among whom a voluntary contractual arrangement exists are
clearly defined.
Of course, the corporate executive is also a person in his own right. As a person, he
may have many other responsibilities that he recognizes or assumes voluntarily—
to his family, his conscience, his feelings of charity, his church, his clubs, his city, his
country. He may feel impelled by these responsibilities to devote part of his income
to causes he regards as worthy, to refuse to work for particular corporations, even
to leave his job, for example, to join his country’s armed forces. If we wish, we may
refer to some of these responsibilities as “social responsibilities.” But in these
respects he is acting as a principal, not an agent; he is spending his own money or
time or energy, not the money of his employers or the time or energy he has
contracted to devote to their purposes. If these are “social responsibilities,” they
are the social responsibilities of individuals, not of business.
What does it mean to say that the corporate executive has a “social responsibility”
in his capacity as 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. For
example, that he is to refrain from increasing the price of the product in order to
contribute to the social objective of preventing inflation, even though a price
increase would be in the best interests of the corporation. Or that he is to make
expenditures on reducing pollution beyond the amount that is in the best interests
of the corporation or that is required by law in order to contribute to the social
objective of improving the en vironment. Or that, at the expense of corporate
profits, he is to hire “hard core” unemployed instead of better qualified available
workmen to contribute to the social objective of reducing poverty.
In each of these cases, the corporate executive would be spending someone else’s
money for a general social interest. Insofar as his actions in accord with his “social
responsibility” reduce returns to stock holders, he is spending their money. Insofar
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as his actions raise the price to customers, he is spending the customers’ money.
Insofar as his actions lower the wages of some employes, he is spending their
money.
The stockholders or the customers or the employes could separately spend their
own money on the particular action if they wished to do so. The executive is
exercising a distinct “social responsibility,” rather than serving as an agent of the
stockholders or the customers or the employes, only if he spends the money in a
different way than they would have spent it.
But if he does this, he is in effect imposing taxes, on the one hand, and deciding
how the tax proceeds shall be spent, on the other.
This process raises political questions on two levels: principle and consequences.
On the level of political principle, the imposition of taxes and the expenditure of tax
proceeds are governmental functions. We have established elaborate
constitutional, parliamentary and judicial provisions to control these functions, to
assure that taxes are imposed so far as possible in accordance with the preferences
and desires of the public— after all, “taxation without representation” was one of
the battle cries of the American Revolution. We have a system of checks and
balances to separate the legislative function of imposing taxes and enacting
expenditures from the executive function of collecting taxes and administering
expenditure programs and from the judicial function of mediating disputes and
interpreting the law.
Here the businessman—self‐selected or appointed directly or indirectly by
stockholders—is to be simultaneously legislator, executive and jurist. He is to
decide whom to tax by how much and for what purpose, and he is to spend the
proceeds—all this guided only by general exhortations from on high to restrain
inflation, improve the environment, fight poverty and so on and on.
The whole justification for permitting the corporate executive to be selected by the
stockholders is that the executive is an agent serving the interests of his principal.
This justification disappears when the corporate executive imposes taxes and
spends the proceeds for “social” purposes. He becomes in effect a public employe, a
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civil servant, even though he remains in name an employe of private enterprise.
On grounds of political principle, it is intolerable that such civil servants—insofar
as their actions in the name of social responsibility are real and not just window‐
dressing—should be selected as they are now. If they are to be civil servants, then
they must be selected through a political process. If they are to impose taxes and
make expenditures to foster “social” objectives, then political machinery must be
set up to guide the assessment of taxes and to determine through a political
process the objectives to be served.
This is the basic reason why the doctrine of “social responsibility” involves the
acceptance of the socialist view that political mechanisms, not market
mechanisms, are the appropriate way to determine the allocation of scarce
resources to alternative uses.
ON the grounds of consequences, can the corporate executive in fact discharge his
alleged “social responsibilities”? On the one hand, suppose he could get away with
spending the stockholders’ or customers’ or employes’ money. How is he to know
how to spend it? He is told that he must contribute to fighting inflation. How is he
to know what action of his will contribute to that end? He is presumably an expert
in running his company—in producing a product or selling it or financing it. But
nothing about his selection makes him an expert on inflation. Will his holding down
the price of his product reduce inflationary pressure? Or, by leaving more spending
power in the hands of his customers, simply divert it elsewhere? Or, by forcing him
to produce less because of the lower price, will it simply contribute to shortages?
Even if he could answer these questions, how much cost is he justified in imposing
on his stockholders, customers and employes for this social purpose? What is his
appropriate share and what is the appropriate share of others?
And, whether he wants to or not, can he get away with spending his stockholders,
customers’ or employes’ 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 employes can desert him for other producers and employers
less scrupulous in exercising their social responsibilities.
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A Friedman doctrine‐- The Social Responsibility of Business Is to Increase Its Profits – The New York Times
This facet of “social responsibility” doctrine is brought into sharp relief when the
doctrine is used to justify wage restraint by trade unions. The conflict of interest is
naked and clear when union officals are asked to subordinate the interest of their
members to some more general social purpose. If the union officials try to enforce
wage restraint, the consequence is likely to be wildcat strikes, rank‐and‐file revolts
and the emergence of strong competitors for their jobs. We thus have the ironic
phenomenon that union leaders—at least in the U.S. —have objected to
Government interference with the market far more consistently and courageously
than have business leaders.
The difficulty of exercising “social responsibility” illustrates, of course, the great
virtue of private competitive enterprise — it forces people to be responsible for
their own actions and makes it difficult for them to “exploit” other people for either
selfish or unselfish purposes. They can do good—but only at their own expense.
Many a reader who has followed the argument this far may be tempted to
remonstrate that it is all well and good to speak of government’s having the
responsibility to impose taxes and determine expenditures for such “social”
purposes as controlling pollution or training the hard‐core unemployed, but that
the problems are too urgent to wait on the slow course of political processes, that
the exercise of social responsibility by businessmen is a quicker and surer way to
solve pressing current problems.
Aside from the question of fact—I share Adam Smith’s skepticism about the
benefits that can be expected from “those who affected to trade for the public
good”—this argument must be rejected on grounds of principle. What it amounts to
is an assertion that those who favor the taxes and expenditures in question have
failed to persuade a majority of their fellow citizens to be of like mind and that they
are seeking to attain by undemocratic procedures what they cannot attain by
democratic procedures. In a free society, it is hard for “good” people to do “good,”
but that is a small price to pay for making it hard for “evil” people to do “evil,”
especially since one man’s good is anther’s evil.
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I HAVE, for simplicity, concentrated on the special case of the corporate executive,
except only for the brief digression on trade unions. But precisely the same
argument applies to the newer phenomenon of calling upon stockholders to require
corporations to exercise social responsibility (the recent G.M. crusade, for
example). In most of these cases, what is in effect involved is some stockholders
trying to get other stockholders (or customers or employes) to contribute against
their will to “social” causes favored by the activists. Insofar as they succeed, they
are again imposing taxes and spending the proceeds.
The situation of the individual proprietor is somewhat different. If he acts to reduce
the returns of his enterprise in order to exercise his “social responsibility,” he is
spending his own money, not someone else’s. If he wishes to spend his money on
such purposes, that is his right, and I cannot see that there is any objection to his
doing so. In the process, he, too, may impose costs on employes and customers.
However, because he is far less likely than a large corporation or union to have
monopolistic power, any such side effects will tend to be minor.
Of course, in practice the doctrine of social responsibility is frequently a cloak for
actions that are justified on other grounds rather than a reason for those actions.
To illustrate, 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 at tract
desirable employes, it may reduce the wage bill or lessen losses from pilferage and
sabotage or have other worthwhile effects. Or it may be that, given the laws about
the deductibility of corporate charitable contributions, the stockholders can
contribute more to charities they favor by having the corporation make the gift
than by doing it them selves, since they can in that way contribute an amount that
would otherwise have been paid as corporate taxes.
In each of these—and many similar—cases, there is a strong temptation to
rationalize these actions as an exercise of “social responsibility.” In the present
climate of opinion, with its widespread aversion to “capitalism,” “profits,” the
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“soulless corporation” and so on, this is one way for a corporation to generate
goodwill as a by‐product of expenditures that are entirely justified in its own self‐
interest.
It would be inconsistent of me to call on corporate executives to refrain from this
hypocritical window dressing because it harms the foundations of a free society.
That would be to call on them to exercise “social responsibility”! If our institutions,
and the attitudes of the public make it in their self‐interest to cloak their actions in
this way, cannot summon much indignation to denounce them. At the same time,
can express admiration for those in dividual proprietors or owners of closely held
corporations or stock holders of more broadly held corporations who disdain such
tactics as approaching fraud.
WHETHER blameworthy or not, the use of the cloak of social responsibility, and
the nonsense spoken in its name by influential and prestigious businessmen, does
clearly harm the foundations of a free society. 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 mat ters 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 incomes policies. There
is nothing that could do more in a brief period to destroy a market system and
replace it by a centrally controlled system than effective governmental control of
prices and wages.
The short‐sightedness is also exemplified in speeches by business men on social
responsibility. This may gain them kudos in the short run. But it helps to
strengthen the already too prevalent view that the ptirsuit of profits is wicked and
im moral and must be curbed and controlled by external forces. Once this view is
adopted, the external forces that curb the market will not be the social consciences,
however highly developed, of the pontificating executives; it will be the iron fist of
Government bureaucrats. Here, as with price and wage controls, business men
seem to me to reveal a suicidal impulse.
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The political principle that under lies the market mechanism is unanimity. In an
ideal free market resting on private property, no individual can coerce any other, all
cooperation is voluntary, all parties to such cooperation benefit or they need not
participate. There are no “social” values, no “social” responsibilities in any sense
other than the shared values and responsibilities of individuals. Society is a
collection of individuals and of the various groups they voluntarily form.
The political principle that under lies the political mechanism is conformity. The
individual must serve more general social interest— whether that be determined
by church or a dictator or a majority. The individual may have a vote and a say in
what is to be done, but if he is overruled, he must conform. It is appropriate for
some to require others to contribute to a general social purpose whether they wish
to or not.
Unfortunately, unanimity is not always feasible. There are some respects in which
conformity appears unavoidable, so I do not see how one can avoid the use of the
political Mechanism altogether.
But the doctrine of “social responsibility” taken seriously would extend the scope of
the political mechanism to every human activity. It does not differ in philosophy
from the most explicitly collectivist doctrine. It differs only by professing to believe
that collectivist ends can be attained without collectivist means. That is why, in my
book “Capitalism and Freedom,” I have called it a “fundamentally subversive
doctrine” in a free society, and have said that in such a society, “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.”
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A Free Market Manifesto That Changed the World, Reconsidered – The New York Times
A Free Market Manifesto That
Changed the World,
Reconsidered
Milton Friedman’s libertarian economics influenced presidents and inspired
“greed is good.” So what did Friedman get right — and wrong? Today’s business
leaders and economists weigh in.
Introduction by Andrew Ross Sorkin
Published Sept. 11, 2020
Updated Sept. 14, 2020
Sept. 13 is the 50th anniversary of a seminal moment in the world of business: the
publication of Milton Friedman’s essay in The New York Times Magazine entitled
“The Social Responsibility of Business Is to Increase Its Profits.”
Friedman, who died in 2006 at the age of 94, was no mere economist; he was a kind
of celebrity. He became a regular on the talk-show circuit. PBS even gave him a 10part series. His economic theories, among the most consequential of the 20th
century, still hold sway over large parts of corporate America, maybe none more so
than this 1970 manifesto on corporate governance. (For more on the historical
context in which Friedman’s essay landed, see this essay by Kurt Andersen.)
At DealBook, we wanted to mark the occasion by stirring a series of discussions and
debates. So, in conjunction with The Times Magazine, we assembled 22 experts
— including C.E.O.s, Nobel laureate economists and top think-tank leaders — and
asked them to respond to Friedman’s essay. Some cited specific passages, and some
took on (and took issue with) Friedman’s entire argument.
You can read the original essay in its entirety here. Below are quotations from
Friedman’s landmark essay, along with the experts’ responses.
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DEALBOOK Make sense of the latest business and policy headlines
with our daily newsletter. Get it sent to your inbox.
‘The Social Responsibility of Business Is to Increase Its Profits’
MARC BENIOFF, chief executive of Salesforce
I’ll never forget reading Friedman’s essay when I was in business school in the
1980s. It influenced — I’d say brainwashed — a generation of C.E.O.s who believed
that the only business of business is business. The headline said it all. Our sole
responsibility to society? Make money. The communities beyond the corporate
campus? Not our problem.
I didn’t agree with Friedman then, and the decades since have only exposed his
myopia. Just look where the obsession with maximizing profits for shareholders
has brought us: terrible economic, racial and health inequalities; the catastrophe
of climate change. It’s no wonder that so many young people now believe that
capitalism can’t deliver the equal, inclusive, sustainable future they want. It’s time
for a new kind of capitalism — stakeholder capitalism, which recognizes that our
companies have a responsibility to all our stakeholders. Yes, that includes
shareholders, but also our employees, customers, communities and the planet.
MARTIN LIPTON, senior partner at Wachtell, Lipton, Rosen & Katz
The most significant part of the Friedman essay was the headline. For a halfcentury, this phrase has been used to summarize the essay, and Friedman’s earlier
economic writings, in support of “shareholder primacy” as the bedrock of
American capitalism. The Friedman doctrine precipitated a new era of shorttermism, hostile takeovers, junk-bond financing and the erosion of protections for
employees and the environment to increase corporate profits and maximize value
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for shareholders. This version of capitalism was ascendant in the 1980s and
continued until the 2008 financial crisis, when the perils of short-termism were
vividly illustrated and the long-term economic and societal harms of shareholder
primacy were becoming increasingly urgent.
Since then, the Friedman doctrine has been widely eroded, as a growing consensus
of business leaders, investors, policymakers and leading members of the academic
community have embraced stakeholder capitalism as the key to sustainable,
broad-based, long-term American prosperity. This is illustrated by the World
Economic Forum’s adoption in 2016 of The New Paradigm and, in 2020, the Davos
Manifesto embracing stakeholder and E.S.G. (environment, social and
governance) principles. Stakeholder governance is the bedrock of American
capitalism now and in the future.
‘The businessmen believe that they are defending free enterprise when they
declaim that business is not concerned “merely” with profit but also with
promoting desirable “social” ends; that business has a “social conscience” and
takes seriously its responsibilities for providing employment, eliminating
discrimination, avoiding pollution and whatever else may be the catchwords of
the contemporary crop of reformers.’
DAVID R. HENDERSON, research fellow with the Hoover Institution
I first read Friedman’s essay a few months after it was published, and I basically
agreed with it. On rereading it, though, I noticed that Friedman criticizes
businessmen who feel responsible for “eliminating discrimination.” I found that
strange. Friedman was surely familiar with his colleague Gary Becker’s work on
discrimination. Becker’s bottom line is that an employer who discriminates against
Black people, for example, gives up the chance to hire a productive person and,
thus, gives up potential profits.
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In economic terms, this can show up in two ways. Either overall discrimination
against Black people causes their wages to be lower and so the employer who
discriminates fails to hire a productive person at a discount. Or, if the employer has
a wage schedule for a position, the employer who discriminates against Black
candidates will give up a chance to hire a more productive Black candidate at the
same wage at which he hires a less productive white candidate. So the employer
who doesn’t try to reduce discrimination is actually not acting in the interest of
shareholders — that employer is either paying too much or getting too little.
‘What does it mean to say that “business” has responsibilities?’
HOWARD SCHULTZ, emeritus chairman of Starbucks
I’ve asked this question since opening my first coffee shop in 1986. My answer, a
rebuke of Friedman’s single-minded focus on profits, appeared in our company’s
original mission statement: “We wish to be an economic, intellectual and social
asset in communities where we operate.” We would do this not at the expense of
profits, but to grow them.
Starbucks’s initiatives included providing part-time baristas with health care and
tuition-free college education; volunteering in neighborhoods; talking openly
about racism; and helping impoverished youth find first jobs. The ethos fueling
such efforts — that companies have a responsibility to enhance the societies in
which they flourish — was integral to Starbucks’s ability to employ great people
and attract customers, which in turn drove a 21,826 percent return to shareholders
between 1992 and 2018, the year I stepped down as executive chairman.
If Friedman had balked, asserting that Starbucks could have performed even
better without these “socially responsible” activities, I would have told him what I
told an institutional investor who wanted me to slash health care costs during the
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Great Recession, or what I said to a shareholder in 2013 who falsely claimed that
Starbucks’s support of gay rights hurt profits: If you feel you can get a better
return elsewhere, you are free to sell your shares.
In 2013, I stood in front of Starbucks shareholders and posed this question: “What
is the role and responsibility of a for-profit public company?” Friedman’s flawed
answer is not his legacy. His legacy is the question itself — which today’s leaders
must answer with a renewed commitment to balancing moral purpose and high
performance.
‘In a free-enterprise, private-property system, a corporate executive is an
employee of the owners of the business. He has direct responsibility to his
employers. That responsibility is to conduct the business in accordance with their
desires, which generally will be 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.’
ALEX GORSKY, chief executive of Johnson & Johnson
Friedman is owed respect for his analysis, but this highlights the ways in which
investors and society have evolved over 50 years. Employees care about how
companies function. Many of them are also a company’s shareholders, and they are
calling on leadership to take action on societal issues.
In 1943, as Johnson & Johnson prepared for its initial public offering, Robert Wood
Johnson made clear our responsibilities as a corporation: first to the patients,
doctors and nurses, mothers and fathers and others who use our products and
services, then to our customers and business partners, our employees and our
communities. And, finally, to our shareholders. We are fortunate in having long had
shareholders who have valued this balancing of interests. Now markets
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increasingly comprise such shareholders. Our performance over generations,
when the life of an S&P 500 company now averages less than 20 years, is a
testament that companies need not choose between service to a broad group of
stakeholders and generating long-term financial value for shareholders. Revisiting
this essay is a welcome exercise, and a reminder of the importance of self-scrutiny.
MARIANNE BERTRAND, professor of economics at the University of Chicago
Booth School of Business
The shareholder-primacy view of the corporation — which gives little voice to the
workers, customers and communities that are impacted by corporate decisions —
has been the modus operandi of United States capitalism. Why did this view
become so dominant? One rationale was a practical one. Rather than being asked
to balance multiple, often conflicting, interests among stakeholders, the manager is
given a simple objective function. More important, though, was the naïve belief,
dominant in the Chicago school at the time, that what is good for shareholders is
good for society — a belief that rested on the assumption of perfectly functioning
markets. Unfortunately, such perfect markets exist only in economics textbooks.
To be fair, Friedman
