Milton Friedman: Business Ethicist

Published January 22, 2007

Nobel Prize-winning economist Milton Friedman died on Nov. 16. In his honor, January 29 was named Milton Friedman Day by some cities and PBS aired a new documentary on his legacy and his contributions to the field of economics and the world at large.

And his accomplishments are many.

We owe our escape from the stagflation of the 1970s to the embrace of Friedman’s monetary policy ideas. We owe the creation of our highly professional, all-volunteer military in part to his vigorous efforts to end the draft.

But there’s one contribution that will likely go unnoticed: his contribution to the field of business ethics.

Perhaps the most reprinted article ever published on corporate social responsibility–the belief that corporations have a responsibility to address social concerns–is Friedman’s 1970 New York Times Magazine piece, “The Social Responsibility of Business Is to Increase Its Profits.”

It is also the most maligned and misunderstood.

A staple of business ethics textbooks preaching corporate social responsibility, Friedman is generally presented as a foil, a what-not-to-believe.

Friedman’s view is simple, straightforward and largely contained in his title.

Business firms are purpose-built entities, well-suited to creating wealth through market exchanges, and ill-suited to other purposes–like solving the myriad social and environmental problems that corporate social responsibility advocates demand.

Friedman said there is a place to address those problems, and that place is the political arena.

The social responsibility of business is to increase profits–not to boost the stock price by what-ever means are convenient, or to ensure that stock analysts are duped or co-opted into giving a healthy “buy” recommendation. Consistent profit-making is virtually impossible without disciplined, ethical conduct.

Many of the longstanding aphorisms of business support this: “Make the customer, not the sale” and “Don’t sell a man one car–sell him five cars over 15 years.” They reflect the importance of making good on promises to customers. Profitability–like that coming from repeat business–is a rough but reliable barometer of ethical conduct because the cheated rarely come back for seconds.

However, because he does not pay obeisance to the enthusiasms of business ethicists, Friedman is often cast by them as inspiration for the worst excesses of corporate America–his views characterized as leading invariably to the scandals the corporate world has so recently suffered.

And yet, nothing could be further from the truth. In fact, Friedman’s views provide a much clearer, more straightforward and more intuitive critique of wrongdoers like Enron than the corporate social responsibility crowd can muster.

Before its fall, Enron was Wall Street’s darling. But it was also much celebrated by the social responsibility crowd. Named repeatedly to lists of the best places to work and the best-run companies, Enron was also the winner of several social responsibility awards.

It issued regular reports on its social and environmental performance, and even embraced the so-called “triple bottom line” (social, environmental, financial) much adored by advocates.

Why would Enron executives concern themselves with social and environmental performance? Because they recognized that corporate social responsibility initiatives bring freedom from accountability. Complex, multifaceted mandates to achieve social, environmental and financial goals are the self-serving executive’s best friend.

Charged with a complex mandate, the manager will have to trade off some goals against others. Because some goal is almost invariably aligned with the self-serving manager’s interests, that manager is essentially free to do as he or she pleases.

Belatedly, some business ethicists are starting to see service to shareholders’ interests in profitability as a solution to problems of managerial accountability.

A recent article by University of Montreal business ethicist Wayne Norman captures the problem with multifaceted mandates: “How could the board of directors judge whether the CEO was doing a good job of managing the firm effectively?

“If the firm’s profit margins were lower than its competitors’, the CEO could claim that this is because he or she was trying to improve, say, benefits to employees or relations with local communities.”

Much has been made of the harmful effects Enron’s collapse had on its employees. But as employees they lost only their jobs. However, as Enron shareholders, the employees lost much of their net worth. Why?

Because Enron wasn’t profitable. The shares they were urged to buy and hold were worthless.

Excessive allegiance to shareholders didn’t bring Enron down. Instead, it was management’s willful disregard of their bedrock responsibility to increase its profits.

In business ethics, as in so much else, we owe Milton Friedman a word of thanks.

Alexei Marcoux ([email protected]) is an associate professor at Loyola University Chicago’s Graduate School of Business and a policy adviser to The Heartland Institute. A version of the op-ed below appeared in Chicago Sun-Times on January 29, 2007.