Apr 26, 2019

Going after Milton Friedman

Friedman, 1986. Photo: George Rose/Getty

When hedge fund CEOs, presidential candidates and college professors shout that something is wrong with capitalism as practiced, they are — unwittingly in most cases — attacking a long-deceased, 800-pound gorilla in the economy.

The backdrop: Thirteen years after his death, Nobel laureate Milton Friedman — a 5-foot-tall University of Chicago economist — continues to exert a dominant hold on public opinion with his stark call for a stripped-down, profit-making-only role for business. But the Friedman Doctrine, as some call it, is under threat as Americans attempt to make sense of the anger in the roiled U.S. heartland, beset by hollowed-out cities, bankrupt pension plans, and decades of flat wages.

What's happening: In recent months, hedge fund billionaire Ray Dalio, BlackRock CEO Larry Fink, numerous Democratic presidential candidates and others have called for a more socially minded corporate America.

But if Friedman were alive, he, with mighty certainty, would have some choice words in response.

  • Friedman's thinking was best boiled down in a 1970 essay in the NYT magazine in which he called a business focus on social outcomes "pure unadulterated socialism."
  • Writing amid the public turmoil flowing from the Vietnam War and attacks on corporations, he said businessmen who embrace social responsibility were "unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."
  • The sole duty of a corporation was not to get involved with social good, but "make as much money as possible while conforming to their basic rules of the society."

Over the subsequent years and decades, Friedman's philosophy became orthodoxy, visible in tax law, accounting standards, business school curricula, and deep-seated corporate and societal attitudes. "There is a 'before-Friedman' and an 'after-Friedman' when it comes to corporate social responsibility," said Jennifer Burns, a professor at Stanford and the author of a forthcoming biography of Friedman.

  • In his defense, scholars say Friedman cleared away prior decades of muddle-headed corporate inefficiency because he "understood that by having corporations focus on one objective, we can hold them accountable," said Charles Calomiris, a professor at Columbia University.
  • But critics say corporate America needs to take a broader view of its societal role, including greater responsibility for employees and their community. Friedman "fit an earlier age very well — when excessive regulation, taxation and New Deal-era controls held back American business competitiveness," said Bruce Mehlman, a leading policy lobbyist. 
  • "But the right answer for 1970s America is no longer optimal for 2020 America. Friedman was visionary for his time, but the pendulum needs to swing back," said Mehlman, whose latest presentation includes a slide on Friedman (slide 19).

Dalio's and Fink's firms did not respond to requests for comment. But leading economists contacted for this post said they do not see a lot of meat in complaints voiced by the business community and others.

  • Larry Summers, a professor at Harvard and director of the National Economic Council under President Obama, said that the Friedman Doctrine "is being more seriously attacked by commentators, but I don’t anticipate big changes in practice."
  • "More speeches by CEOs about social responsibility and inequality will not change my perspective. Restraint in lobbying for tax breaks and regulatory relief would change my view but I have seen little of that."
  • Robert Gordon, a leading economist at Northwestern said: "Despite some noise from far-left Democratic candidates like Elizabeth Warren and Bernie Sanders, I don’t see any prospects for change in the current philosophy of American corporations in maximizing shareholder value."

Some Friedman acolytes came to regret core views, since the pursuit of self-interest sometimes led companies, such as Enron, "to do things that were not in the interest of shareholders," said Richard Sylla, a professor emeritus at New York University.

Yet a lot of the criticism may be getting Friedman wrong, said Chester Spatt, a professor at Carnegie Mellon. It would be entirely consistent with his orthodoxy for a company to equate taking care of a social responsibility with its best service to its shareholders, he said.

The bottom line: Adam Posen, president of the Peterson Institute for International Economics, said the system needs a shakeup. But he is not confident it's coming: "We need tax-based reallocation and investment, as well as increased worker and environmental protection to make a positive change. Milton Friedman opposed that too, which his view on profits reinforces."

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