Farewell to the Friedman Doctrine

Milton Friedman (1912-2006), one of the most influential economists of the 20th century, was a free-market advocate, libertarian, teacher, and iconoclast. While his ideas often challenged conventional thinking, he may be best known today for the Friedman Doctrine, which holds that a corporation’s only social responsibility is to increase its profits. 

Beginning in the 1960s, Ralph Nader and other consumer advocates attacked General Motors with lawsuits, shareholder initiatives, and proposed regulations to improve safety, reduce racial discrimination, and advance other social goals. In response, Friedman wrote an article that ran in the New York Times on September 13, 1970, entitled  A Friedman Doctrine: The Social Responsibility of a Corporation. Tragically, given Friedman’s powerful influence in corporate and financial circles (he took the Nobel Prize in Economics in 1976, and went on to advise the Ronald Reagan and Margaret Thatcher administrations), this article and its doctrine have been widely accepted without much criticism or debate.

But the Friedman Doctrine is ethically troublesome. Unlike legal obligations, which can be numerous and conflicting, Friedman argued a corporation’s only social obligation “is to increase profits, so long as it stays within the rules of the game” namely, “competition without deception [or] fraud” [par. 33]. Though he touches “ethical custom” in passing [par. 4], he doesn’t include it when summarizing the “rules of the game” [par. 33].

With lives at stake, vehicle safety is no game, and if the rules don’t include social obligations like ethics, citizenship, manners, and common decency, then anything that legally increases profits—no matter how devious, cruel, irresponsible, or reprehensible—is not only permissible, but logically required by the Friedman Doctrine. Friedman probably didn’t intend that result—but that’s what his words suggest. Because his rules aren’t clear, the Friedman Doctrine favors profit over all, sanctioning unethical and even marginally illegal behavior. Today, there are far too many executives who think their only social responsibility is profit—and they’re clearly wrong. 

This competitive, legalistic, and amoral worldview breeds corporate scandal, which in turn invites regulation that Friedman would have abhorred. The entire modern corporate social responsibility (CSR) movement (including public benefit corporations, B certification, diversity, inclusion, ESG, and more) is both an indictment of the Friedman Doctrine, and an open revolt against it. 

The Friedman Doctrine was both wrong and harmful. It needs to be put to rest. Corporate officers have fiduciary obligations to the corporation and to shareholders, but that doesn’t make those obligations paramount (‘shareholder primacy’), let alone all-encompassing; and certainly doesn’t excuse bad behavior. Friedman made headlines in 1970, but his Doctrine won’t withstand factual, legal, ethical, or policy scrutiny. Let’s examine exactly where he went wrong.

Friedman begins [par. 1-2] by poking fun at businessmen who talk about CSR, saying what they really mean is socialism. He was wrong then; he is still wrong today. He criticizes CSR proponents for “analytical looseness and lack of rigor”, but his own proposal is no better. We’ll give Friedman a more rigorous analysis than he gave his ‘straw man’ opponents—as the proponent of his Doctrine, he should support his assertions. But in hindsight, we can now also see the practical effects of his error—a luxury we didn’t have in 1970.

Friedman first argues [par. 2] that a corporation is a legal fiction, an artificial entity, so it can only have artificial responsibilities. He gives no rationale for this conclusion. Friedman admits that a non-profit corporation can have CSR [par. 4], and that people do too [par. 2, 7]. Any corporation can only act through people. So how does a for-profit corporation escape the responsibility that a non-profit has, and that all of its agents also have? The admitted facts betray him. 

He next argues [par. 8-11] that managers work for shareholders, and since CSR might reduce returns, only shareholders can approve CSR spending. This is wrong. Under corporate law, shareholders elect directors, who choose officers to manage daily operations. Directors may set or approve policies, but they don't often intervene in operations, and shareholders almost never do. (In the General Motors case, they voted not to intervene.) 

As we’ll see later on, CSR is intertwined in almost every operational decision delegated to management. How then can it be the exclusive province of shareholders? Many non-profits are run by trustees for the public good; if their non-existent shareholders have to approve CSR, they can’t operate at all! Since shareholders elect directors, who choose officers, his “involuntary tax on shareholders” argument is just plain hogwash. 

Friedman cites two specific reasons [par. 12] why CSR can’t be adopted: 1) his “principle” argument [par. 10-15] that CSR is an involuntary tax on shareholders (already discussed); and 2) his “consequences” argument [par. 16-19] that CSR interferes with the free market forces of supply and demand. In the end, Friedman doubles down on his “consequences” argument, arguing [par. 20-33] that CSR is a socialist and collectivist attack on capitalism, and opposed to free enterprise. But is it?

CSR can certainly “interfere” with free markets if imposed by law from outside the market. But what if CSR is an integral force within the market itself? Markets are made of people; and people like to buy from those they “know, like, and trust”; especially for important or repeat transactions. What if CSR is nothing more than “know, like, and trust”? Do I want to buy a car from a company that chooses profits over my family’s safety? Do I want to buy from a company with a history of racial discrimination; or that avoids paying local taxes through offshore tax havens, or dark money influence? No, I don’t, and odds are, neither do you!

In this sense, CSR touches everything a company does, from how it advertises, supports customers after the sale, buys supplies, treats its employees and contractors, or disposes of waste. In the Internet age, all aspects of corporate culture (or character) are on very public display. CSR can’t be relegated to a CSR, ESG, or compliance department—it’s the very soul of the company. We’re talking about integrity, and it applies just as much to organizations as to individuals. 

Any person whose sole mission in life is to gain profits by any legal means is a shallow and stupid person; and will be shunned by others, with good reason. Why would we treat a non-human entity any differently? For both people and corporations, the “rules of the game” are the same: play stupid games, win stupid prizes. Cheating and shortcuts lead to disaster, while the road to “know, like, and trust” is integrity and purpose.

There are costs to voluntarily embracing CSR, but the risks of ignoring it as Friedman proposes are much worse. As a corporation or business owner, if your customers don’t like how you behave, you can’t just dismiss it from consideration as Friedman suggests—that’s a luxury only academics enjoy. 

CSR should be recognized for exactly what it is—a potent market force that applies to every business action, and can’t be ignored. The Friedman Doctrine was wrong when it appeared in 1970; today it is nothing more than an excuse for bad behavior. It’s time to consign the Friedman Doctrine to the dung-heap of history. It won’t be missed. 

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