How to Win the Argument with Milton Friedman

In 1970, in his famous essay, The Social Responsibility of Business is to Increase its ProfitsMilton Friedman railed against any corporate attempt to promote “desirable social ends” which he argued were “highly subversive to the capitalist system.”

Ever since, folks who have gotten together in gatherings like last week’s Inclusive Capitalism Conference have argued that Friedman is wrong to make the trade-off between shareholders and the rest of society so wholly in favor of shareholders and that greater balance is required in that trade-off.

Yet the fact that they make that argument is precisely why Friedman has won the day for going on half a century, a spectacular success for a social sciences argument. Friedman has won the way a great debater wins — by cleverly framing the terms of the debate, not by brilliantly arguing the logic of the debate once it has been framed.

Because Friedman was so inflammatory in his call for a 100% versus 0% handling of the trade-off, his entire opposition for the entire time since 1970 has focused on making arguments for a number lower than 100% for shareholders. In doing so, they implicitly — and I would argue, fully — accepted Friedman’s premise that there is a fundamental trade-off between the interests of shareholders on the one hand and other societal actors such as customers, employees and communities on the other hand.

Ever since, the Friedmanite defense has been to force the opposition to prove that making a trade-off to any extent whatsoever against shareholders won’t seriously damage capitalism. As a result Friedman is innocent until proven guilty and the opposition guilty until proven innocent. That is why we are exactly where we are nearly a half century later.

Had the opposition been cleverer, it would have attacked the premise from the very beginning by asking: what is the proof that there is a trade-off at all? Had they done so, they would have found out that Friedman had not a shred of proof that a trade-off existed prior to 1970. And they would have found out that there still isn’t a single shred of empirical evidence that 100% focus on shareholder value to the exclusion of other societal factors actually produces measurably higher value for shareholders.

Friedman, of course, didn’t feel the need to assemble any empirical evidence to support his point. An economist falls apart and turns into a blubbing puddle on the floor if you take away the concept of trade-offs because they all started in the same place: the societal trade-off between guns and butter. Trade-offs are a sacred article of faith for economists. You simply can’t be an economist if you don’t consider trade-offs to be a central feature of your worldview.

I am an economist but the training apparently didn’t stick entirely for me. I think I read too much Aristotle along the way and to me he just seems smarter than anyone else I have ever read. What he argued about happiness has more direct relevance to shareholder value maximization than anything an economist has ever written. He maintained that happiness does not derive from its pursuit but rather is the inevitable consequence of leading a virtuous life.

The same applies to corporations. If they make it their purpose to maximize shareholder value, shareholders are likely to suffer because that cravenness turns off customers, employees, and the world in general. If they make it their purpose to serve customers brilliantly, be a fabulous place to work, and contribute meaningfully to the communities in which they operate, chances are their shareholders will be very happy.

That is my premise and I am sticking to it until someone can provide a shred of evidence that the opposite has any validity whatsoever.

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