People Over Profit: Milton Friedman Was Wrong – Part I

Literally, with a stroke of his pen, Milton Friedman, 1976 Nobel Prize winner in economics, and esteemed professor of economics at the University of Chicago, changed the trajectory of business from 1970 until now.

In his now famous article written for the New York Times in 1970, “The Social Responsibility of Business Is to Increase Its Profits,” he single-handedly gave license to owners of corporations to focus solely on profits and returns and gave notice to managers, the agents of corporate owners, to act consistent with those same interests, otherwise they are acting as elites and “governing” by making decisions using someone else’s money. Friedman argued that these wayward managers were essentially socialists.

He stated early in the article that the discussions of the “social responsibility of business” are notable for their analytical looseness and lack of rigor, reflecting the public debates eschewing the wicked and immoral pursuit of corporate profits and using people as a means to those ends. Accordingly, let’s subject these discussions, still relevant and active today, to appropriate analysis, reason, and rigor to test his entitled hypothesis. But let’s restate his hypothesis in its more digestible, sterile, and familiar interpretation: the purpose of business is to maximize shareholder wealth or profit.

Let me go on record now, at the beginning, that I wish to do nothing but advance free markets, but am compelled to do so with the parallel advancement of virtue. Second, I wish to condemn any and all things that condone a communist/socialist ideology, as Friedman suggests in his article, is the motive for those who speak of any “social responsibility” in and from business.

By the end of this series, I would suggest to you that what Friedman purports is the only social responsibility of business, that of maximizing profits, is exactly that which, if not tempered by the virtue of corporate owners and managers, moves the U.S. capitalist economy down the road to serfdom, to quote the title of Fredrich Hayek’s classic book, The Road to Serfdom.

To counter Friedman’s assertion of “lack of rigor and analytical looseness,” we must set a foundation of understanding so that later arguments are not leaps in logic, but are a consequence of reason. Maximizing profits is no more the purpose of business, than breathing in oxygen is the purpose of life, but both are necessary.

Anyone who has started a business, knows that providing value to society is the cornerstone of any business that hopes to survive, producing ever-increasing increments of value required given the nature of free market competition. Profit is the consequence of providing this value. The more value provided, the more likely higher profits accrue to the business enterprise. It’s easy to follow this reasoning that profits are an effect from the cause of value creation. No value equals no profit and no business.

So, at the core of the purpose of business is value creation, not profit. We now need only govern value creation by what we call “good goods and good services” that benefit versus harm society. There is another fundamental cause and effect about business and business leadership that is essential to understand an even deeper purpose of business, with value creation as its effect.

The formative point of a business enterprise happens when the work to be undertaken requires more than just one person. Until then, only self-discipline is required, not leadership. At precisely when the work requires more than just one, effective business leadership is required to get others to cooperate with you in the work at hand. If you can’t get others to work with you, you will be limited to only that which you can do by yourself.

Ecclesiastes 4:9a (NIV) suggests, “Two are better than one because they have a good return for their work.” This is the bedrock truth about leadership. When two commit more fully and willingly to the work at hand, value creation is enhanced, competitive advantage grown, and the return on the work is better. The cause here is optimizing cooperation of people in the work at hand and the effect is enhanced value creation. We can summarize our rationale for a more accurate purpose of business this way:

Optimized Cooperation → Enhanced Value Creation → Increased Profits

There’s one last rational step to take to bring reason and the real purpose of business to fruition. Before the formative point of an enterprise, the object of the work is the constraint; can you move it, mold it, manufacture it, or transform it. Once the work requires more than just one, the constraint is no longer the object of the work; it’s your ability to get someone to help you. This is the ultimate constraint in any product or service business.

If leadership can be described as the art of optimizing cooperation, then who or what is the object of our efforts to do so? People. That’s right. The purpose of business is about people. More specifically, the more things we can do to engage people to cooperate fully and willingly in the work, the greater the value creation and related profits.

This path of reason demands more from business leaders than the narrow consideration of economic man or political man alone as Friedman considers in his article. We are human beings and our employees are equally human, created in the likeness and image of God. We owe them more than simply treating them as means to the end of profit.

They are ends in-and-of themselves. If this treatment is characterized as “the social responsibility of business,” then how can Friedman be right? Look for the next post in this series coming soon to learn more.

See the entire series here.

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