The Friedman Doctrine at 50: Happy Birthday and R.I.P.

By Tom Poldre, Director of Marketing, Communications and Public Affairs at B Lab UK.

On my first day of business school, during the decade of greed and big hair, a pompous professor stood at the front of our microeconomics class and proclaimed that “the purpose of every manager, the sole purpose of business, is to maximise the value of the company for its shareholders”. My classmates thought that this was extremely profound in its clarity and focus. We were being taught by a visionary. But Professor Pompous never bothered to attribute the quote or this concept of shareholder primacy, which I found out decades later was a cornerstone philosophy of that influential economist named Milton Friedman.

I barely scraped through business school, never giving the famous quote or its source a second thought until I learnt more about the B Corp movement and joined B Lab UK earlier this year. Now, my re-education has begun as we work to challenge shareholder primacy, a theory presented by Mr Friedman in his seminal article, published 50 years ago today.

For those of you who, like me, never really understood all the fuss about Milton Friedman (I probably skipped that lecture) and why we’re marking the anniversary of the publication of an article, here’s a basic and oversimplified primer on who he was, why he mattered and how his doctrine may have gotten us into the mess we’re in today.

Who was Friedman, what did he believe?

Milton Friedman was an American economist who spent 30 years at University of Chicago. Awarded the Nobel Prize for Economics in 1976, The Economist described him as “the most influential economist of the second half of the 20th century…possibly of all of it”.

On September 13, 1970, Friedman published his famous article in The New York Times titled “A Friedman Doctrine: The Social Responsibility of Business is to Increase its Profits”. Here are just some of the “greatest hits” from his masterwork:

“What does it mean to say that ‘business’ has responsibilities? Only people have responsibilities.”

CEOs should stop “spending someone else’s money for a general social interest”

He goes on,“Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employees, he is spending their money.”

To conclude, “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”

Find Friedman’s full article here

The profound impact on business

When Friedman’s piece appeared, corporations were facing rising global competition, but also increased scrutiny on social responsibility and environmental impacts. So, for those executives who wanted to focus solely on profit as a competitive advantage, Friedman’s doctrine was extremely appealing. CEO stock options re-incentivised profit maximisation, quarterly earnings reports supplanted long-term horizons, and the 1980s marked the beginning of a widening income gap which still grows unabated.

As a critic of government regulation and expenditure, and promoter of laissez-faire economic freedom, Friedman became a favourite of Margaret Thatcher, and an advisor to US President Ronald Reagan. In many respects, the 1980s “Decade of Greed” can claim Milton Friedman as its father.

And as we lionised the titans of commerce, the corporate raiders and the junk bond traders, even Hollywood captured (satirised?) the personae through Gordon “Greed is good” Gekko in Wall Street and even Patrick Bateman in American Psycho.

Friedman’s influence reverberated even to 1997 when the Business Roundtable, the most powerful lobbying group for the largest companies in the US adopted Stockholder Theory as a company’s driving purpose: “The paramount duty of management and of boards of directors is to the corporations’ stockholders.”

Fast forward to new realities

It took the rude awakening of the 2008/9 financial crisis, huge and rising gaps in wealth distribution, and the compounding climate and planetary emergency to remind us that the economic system was not functioning correctly.

Meanwhile, a new model of stakeholder capitalism began to infiltrate the system, proving business can be both profit-making and a positive force for good. Last year, nearly 200 CEOs from the Business Roundtable redefined the purpose of the corporation — “that companies should act not only in the interest of shareholders, but must invest in their employees, the environment and deal fairly and ethically with suppliers.”

More recently, the Coronavirus pandemic has laid bare the interdependence of our systems, the fragility of our assumptions of what is “essential”, while accelerating the adoption of the Benefit Corporation status to ensure businesses are legally responsible to customers, workers, communities and the planet, while delivering profit.

In the UK, the public mood seems ready for reform: A B Lab UK national poll showed us that 72% of the UK public believe that business should have a legal responsibility to people and the planet, alongside maximising profits; while 76% believe that the current system either isn’t working properly or is harmful.

Talk of stakeholder capitalism is now everywhere, with 3,300 B Corporations around the world proving the effectiveness of embedded environmental and social governance everyday. It’s even the theme of the Davos Manifesto 2020.

Around the world, we see statues being pulled down — fallen heroes who were once revered are now at odds with public sentiment. Would we tear down a statue of Milton Friedman, or should we instead say “Happy Birthday” to the Friedman doctrine…”Fifty years old today! Perhaps time to retire?”

Click here to view more results from the B Lab UK and ReGenerate poll. These results will support our advocacy for legislative change to ensure businesses have a positive impact on society and the environment, alongside benefit for shareholders. Interested to hear about progress? Sign up here.