What is the purpose of business? Milton Friedman wasn’t all wrong
The trend of corporate activism has caused me to examine the appropriate role of business, generally, and a company, particularly. In reading Friedman’s original text, I discovered he’s been misquoted. Friedman wasn’t completely wrong, but he also didn’t have the full picture.
Back to the Original Text
I’ve always heard that Milton Friedman said the only role of business is generating profit for shareholders. Not surprisingly, this characterization misses a lot of what the famous economist actually said. In his 1970 paper The Social Responsibility of Business is to Increase its Profits, Freidman says:
“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 their basic rules of the society, both those embodied in law and those embodied in ethical custom.” (emphasis mine)
He further explains that companies should make money for shareholders who can then put their profits to charitable purposes as they see fit.
Capitalism, according to Friedman, contains its own inherent constraint on exploitations. The free market “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.” Companies act in the interests of the employees and communities because that is good for business and, therefore, good for shareholders in the long run.
Making money for shareholders over the long term will actually mean acting in the interests of employees, vendors, and the community. Otherwise, the executive will not be able to retain top talent, could lose support of the community in which he/she operates, or may even encounter fines for bad behavior.
Understanding Freidman’s historical context makes his words even more timely for a reader in 2021. Talking about the corporate reformers of his own day, Friedman says, “In fact they are—or would be if they or anyone else took them seriously—preaching pure and unadulterated socialism.” He says that “corporate social responsibility” would necessarily lead to socialism because it’s anybody’s guess what “social responsibility means.” Freidman warned that this would eventually lead to the “politicization of everything.” That sounds familiar in 2021.
The Business Roundtable: Socialism Repackaged?
The leaders of Coca Cola, Delta, and MLB are following a trend expressed by the Business Roundtable, a group of CEOs of the world’s largest corporations. They met in the summer of 2018 and issued a statement “redefining the role of business.” In truth, it was not a redefinition so much as a restatement of the ideas that Friedman was responding to in his original 1970 article. In short, businesses should now be run for the benefit of 5 stakeholders: customers, employees, suppliers, communities (including environment), and shareholders. According to the Business Roundtable website, this includes taking actions such as:
Increasing minimum wages and adjusting starting-wage scales upward to increase employees’ economic security from the start;
Investing in opportunities for employees to gain new skills, grow personally and professionally and contribute to a more innovative future for their companies;
Increasing accessibility and affordability of health care before, during and after trying times; or
Offering educational benefits, such as student loan repayment programs or scholarships for children of employees.
These are great benefits to offer employees. I have no issues with them. But the idea of stakeholder capitalism, as a whole, seems to have a few inconsistencies. Namely, what happens when there’s a conflict between priorities for each of the five stakeholder groups? What if there is not enough money for all the programs that each stakeholder group needs?
Friedman recognized this tension and said that the obligation to shareholders needs to win out because they’re free to use their profits, even if ill-gotten, to give to charities to fix the issues created by their corporations.
That seems inefficient, though. Thankfully, these are not our only two options for answering my existential questions.
Scripture gives us a definition of the role of business, and it also paints a picture of the way the work is to be carried out: Business is meant to work with God (the means) to bring about his purposes in the world (the ends). Sounds simple, but what does it mean for me as an investor or business leader?
