Silver-bullet regulations will not stop ESG.
What Milton Friedman Really Said
In your opinion, do American corporations have a duty to American citizens, or was Milton Friedman right when he said a corporation’s only responsibility is to make as much money as possible?
So asked a recent online poll issued by a conservative organization that I admire. The question is misleading, at best. Granted that it would be unfair to expect a nuanced formulation from an online poll, the wording nonetheless encapsulates a misreading of Milton Friedman that stretches over decades and across many fields and genres of writing. There prevails a deep-seated misconception of Milton Friedman’s “doctrine of corporate social responsibility.”
One part of the explanation is surely the natural tendency for titles to become synecdoches for entire arguments—which may or may not have been the arguments originally attached to the titles by their authors in the actual texts. (Francis Fukuyama’s The End of History comes to mind as another item in this category.) The title of Friedman’s original article, which ran in the New York Times Magazine on September 13, 1970, was “A Friedman Doctrine—The Social Responsibility Of Business Is to Increase Its Profits.” For countless citers of the article ever since, Friedman has been not merely the avatar of the “shareholder theory” of business but an extreme specimen: a business’s “only responsibility,” he purportedly believed, “is to make as much money as possible.”
The piece in question was a 3,000-word article, based on an already distinguished career of study of the operation of business and its interaction with society. The argument contained therein is not infallible and I do not mean to discourage criticism. But the essay bears a close and careful reading, and any criticism should be based on such a reading—not on a reaction to the headline and an intuition about the argument that appears under it.
In the essay, Friedman articulated two statements about business’s social responsibility. The first appears during a discussion specifically about the responsibility of the corporate executive:
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.
In the second, which comes at the very end of the article and is therefore more likely to be noticed and quoted, he cites a passage 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 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.”
These statements do point to a weakness in Friedman’s essay. As some commentators have recognized, they are not identical and in fact differ in important ways. The second emphasizes moral tenets that are generally legally enforceable (deception and fraud), while the first adds a category that extends beyond state regulation: “ethical custom.” Yet Friedman doesn’t elaborate on the difference. What is clear, though, is that Friedman is not advocating profit-seeking without regard to any legal or moral norms.
At the outset, it must be understood that Friedman’s topic is public corporations. This is critically important, because the gravamen of the essay is the ethically problematic nature of an employee (corporate executive) failing to fulfill his responsibilities to his employers (shareholders). His argument may also apply—but does not necessarily—to other kinds of businesses. In fact, in a brief section on the individual proprietor, Friedman expressly exempts such a businessperson from his doctrine: “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.”
Friedman also admits the possibility of even public corporations having charitable aims as their reason for being: “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.” Friedman writes, “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.” This passage demonstrates that Friedman was not opposed to corporations fulfilling what many today would call “social” purposes; his central point was that executives—as employees entrusted with the well-being of the company—are not free to establish and pursue aims independent of those established by their employers (shareholders).
On this point, too, some critics—legal scholars especially—have rightly argued that Friedman’s treatment oversimplifies the issue of ownership and fiduciary responsibility. American corporation law is more complicated than Friedman portrays it: shareholders are not, without qualification, the owners of corporations over which they thereby exert direct control; nor are corporate personnel exactly “employees” of the shareholders to whom they have exclusive fiduciary responsibility. Allowing for the qualifications, however, Friedman’s overarching point still stands: when corporate managers add goals that are extrinsic to the corporation’s chartered purpose and that compromises the financial performance of the company, they are vitiating their responsibility to honor shareholder rights.
In any case, the heaps of abuse that Friedman’s “doctrine” has elicited over the decades since its appearance is not limited to legitimate criticism based on an accurate reading of the essay. Much of it, like the poll cited above, has failed to do basic justice to Friedman’s text.
In a 2013 commentary on Huffington Post, John Friedman—to his credit—cites in full the Friedman doctrine (second version) and points out that many who cite (Milton) Friedman err: “In fact they are misquoting and simplifying just one part” of the statement. “The complete statement,” he notes, “is rather broader and brings in a few elements of what is today considered to be integral parts of corporate responsibility—ethics and integrity.” But even this fairer treatment suffers from the usual deficiencies: it interprets Friedman’s “rules of the game” to mean only legal mandates; and it understands the “pursuit of profit” to mean a myopic, monetary calculation devoid of context or nuance. John Friedman writes, “Mr. Friedman argues that a corporation, unlike a person, cannot have responsibility.” This is ridiculous, the Huffington Post writer suggests, because “no one would engage in a business contract with a corporation if they thought for one minute that a corporation was not responsible to pay its bills, for example. So clearly, therefore, a corporation can have legal, but also moral responsibilities.”
This is a prime example of a surprisingly common obtuseness regarding Milton Friedman’s views. Granting even the slightest benefit of the doubt to the Nobel-Prize-winning economist, is it reasonable to think that he holds a position that implies that businesses have no responsibility (moral, legal, or otherwise) to pay their bills? The explanation is rudimentary, but it is evidently necessary to spell it out: A company that did not pay its bills would quickly ruin its reputation—or possibly face legal action for breach of contract—and others would cease to do business with it. The company’s stock would plummet, and it would fail. This outcome, to put it mildly, would not maximize profits for shareholders. Obviously, an executive’s responsibility to increase shareholder value entails all those things necessary to accomplish this aim—including paying its bills.
It’s enough for now to remember what Milton Friedman really said—and didn’t say—about the social responsibility of business.
This point also counters a spate of related objections to Friedman’s doctrine of corporate social responsibility. The phrase “the basic rules of society”—and especially the clause “those embodied in ethical custom”—is ignored by most commentators, but it is indispensable to understand fully the concept of pursuing shareholder value, as Friedman explains near the end of his article. “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,” he writes. “That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.”
Friedman frowns on portraying this kind of activity as “socially responsible,” because he believes that this fosters duplicity and hypocrisy. If the business is doing something for the purpose of increasing its profit, it shouldn’t be necessary to concoct a more publicly acceptable rationale such as “social responsibility.” But he leaves no doubt that this kind of activity is justified under the Friedman doctrine, if in fact it is undertaken to improve the company’s performance. His point is that a company benefits society by providing a good or service at a competitive price; adding responsibilities beyond this goal only muddies the water around executive decision-making, obscures the connection between actions and consequences, and complicates the identification of motives.
In a 2019 article in The Atlantic, University of Chicago Law School professor Eric Posner presented a reasonable summary of Friedman’s argument concerning the fiduciary responsibility of corporate executives but went on to impute Friedman’s responsibility for an array of sinister business activities. Among the ways that “Friedmanesque businesses can maximize their profits,” Posner wrote:
They can (like Facebook) break promises to respect their customers’ privacy. They can (like Twitter and Google) generate ad revenue by facilitating the transmission of hate speech. They can (as Exxon used to do) propagandize against climate science. They can (like Jimmy John’s) use illegal contract terms to deter their low-skill workers from quitting low-paying jobs. They can (like the tobacco companies and now the tech companies) push addictive products onto children, or (like Purdue Pharma) create a generation of drug addicts. [Posner included hyperlinks for each of these claims; they have been removed.]
Even if we accept the veracity of these examples at face value for the sake of argument, Friedman’s theory does not self-evidently support such practices. In at least one case, it indisputably does not. Using “illegal contract terms” would explicitly violate Friedman’s directive that companies pursue profits within the “rules of the society … embodied in law.” If a corporation is breaking the law, it is not observing Friedman’s doctrine of social responsibility. Similarly, if a company promises its clients not to divulge private information and then does so, that at least arguably violates Friedman’s stricture against “deception or fraud.” Is it fair, then, to describe these practices as “Friedmanesque”?
Posner’s larger argument is that business executives cannot be trusted to respect the common good, so legislation is needed to rein in business. That question lies beyond the scope of this essay, but the relevant point for our purposes is that nothing in this contradicts Friedman’s doctrine. Whatever Friedman may have thought about any particular regulation or of regulation in general, observing the law is explicitly part of the responsibility of business; law is the context in which the pursuit of profits must occur.
There is a wrinkle in Posner’s argument that poses a potential objection to this defense of Friedman. “The biggest problem with Friedman’s theory is that corporations can—and, according to his theory, should—use their influence in Congress to block laws that stop corporations from causing such harms.” It isn’t clear on what basis Posner makes this claim—he doesn’t cite any passage from Friedman’s article here—but we might guess that Posner considers it to be implied in Friedman’s admonition to maximize value. That is, if corporate executives are concerned with increasing profit, then naturally they will seek to deter government from regulating them in any way that would threaten that aim.
But Friedman does not address this point in his essay. In the single passage that deals with the interaction of corporate interests and government, Friedman’s tone is negative: he complains that businessmen who are “far-sighted and clear-headed” in matters of business are often “incredibly short-sighted and muddle-headed in matters that are outside their businesses”—a fact “strikingly exemplified” in businesses’ support for President Nixon’s wage and price controls. Posner is aware of this passage; he argues that Friedman misunderstands the situation and that executives are in fact operating out of self-interest and the pursuit of profits. Again, we needn’t settle that point in order to get to the one at hand: in the only place where Friedman talks about corporate lobbying, he discourages it, yet Posner seemingly takes it for granted that Friedman’s doctrine envisions corporations active in the halls of government.
Beyond willful or careless misreadings of Friedman’s essay, there may be more systemic factors that have encouraged the enduring propensity to mischaracterize it. Among these, I suspect, is the false dichotomy between shareholder and stakeholder theories that have been erected and reinforced constantly in the decades since Friedman’s essay appeared. The line between the two theories is not as clear as many would have it, and Friedman’s doctrine, far from being an extreme example of one, demonstrates their overlapping character. The caricature of Friedman, however, can be useful as a strawman in the promotion of particular versions of stakeholder theory, including the currently popular ESG variety.
But to make that case would require another essay. It’s enough for now to remember what Milton Friedman really said—and didn’t say—about the social responsibility of business.