You might disagree with Milton Friedman’s famous claim that the sole social responsibility of business is to increase its profits. But you can’t deny that it sounds simple and straightforward.
Here’s the full Friedman, as originally expressed in his 1962 book Capitalism and Freedom, then exposed to a larger audience in a 1970 New York Times Magazine article:
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.
Elegant, no? Same goes for the theories of corporate governance that it inspired. Any other theory of how business ought to behave is going to sound muddled and inconsistent in comparison. Even if it’s closer to being right.
That thought kept coming back to me as I read John Taft’s new book Stewardship: Lessons Learned from the Lost Culture of Wall Street. Taft is CEO of RBC Wealth Management-U.S. (the brokerage firm formerly known as Dain Rauscher) and spent 2011 as chairman of the main securities-industry trade group, SIFMA. Taft wrote the book himself (he’s a former newspaper reporter) while holding down these two jobs. It’s clearly a heartfelt plea, and Taft’s heart is in the right place. But there’s nothing in it evenly remotely as clear and simple as Friedman’s rule.
The closest it comes is with Taft’s definition of stewardship: “the proposition that one’s a true purpose — and that the ultimate purpose of organizations and of our communities — is to serve others.” When I met with him this week in RBC’s Boston office, Taft said the stewardship focus came to him as an “epiphany” in the midst of the financial crisis. “It hit a moment where I just thought, ‘I’ve got to stop worrying about myself. I’ve got to think first about other people.'” That simplified things for him at the time, but does it really work as an all-purpose guide to business decision-making? No. Business-as-purely-altruistic endeavor won’t get you far.
So Taft throws out a few other concepts. One is that culture is really important. “The culture of the financial services sector was and is broken,” he told me. “In the absence of culture, we’re trying to make it up with laws and regulations.” He’s also convinced that businesses’ ability to shove costs onto society (externalities) is rapidly declining, that environmental, social, and corporate governance (ESG) metrics are here to stay, and that Canada’s highly concentrated banking system is safer and better-regulated than ours. Got all that?
Taft is a practical businessman grappling with a complex world. It should be no surprise that he hasn’t been able to come up with a one-size-fits-all rule like Milton Friedman’s. And I doubt anyone else will, either. Economists (at least those who follow Friedman’s approach to the discipline) are all about simplification, even oversimplification. So maybe the goal shouldn’t be to come up with a simple rule like Friedman’s, but to show why Friedman’s rule isn’t nearly as simple as it sounds.
The most obvious complication is that the “rules of the game” Friedman mentions aren’t set by impartial referees. In the U.S., laws, and regulations are crafted in a political system where some businesses expend huge sums of money to ensure that the rules favor them — and in multiple countries in 2008, the rules were set aside to rescue companies whose failure was seen as too much for the financial system to handle.
The rules of the game also go way beyond those enforced by governments. Economies function within a set of societal norms — about how much employees and executives should be paid, about gender roles, about community obligations, about how seriously to take tax laws, about appropriate behavior toward customers — that can change over time, and have a huge impact on overall economic success. It’s likely that Friedman teachings on corporate responsibility have played a role in changing those norms.
Also, the commandment to increase profits is not nearly as straightforward as it might seem. Over what time frame is this profit-increasing suppose to transpire? It’s easy to throw out the phrase “long-term,” but far harder to define it or work toward it. And while economists, when they say “profit,” are thinking of the abstract notion of increasing a firm’s economic value, people in business have to make do with much less comprehensive metrics.
Finally, there’s the widely remarked-upon reality that, at many of the most durably successful businesses on the planet, increasing profits seems secondary to other goals.
So, yeah, the social responsibility of business is to increase its profits. Whatever the heck that’s supposed to mean.
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- Justin Fox
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