Defense of Milton Friedman

Fifty years ago, Milton Friedman wrote that the sole purpose of a business is to generate maximum profits for its shareholders, subject to and constrained by law and regulation governing acceptable behavior.  That point of view has been under attack since then for a number of reasons – most significantly because its critics view it as validating and condoning greed. They argue Friedman’s reasoning provides ammunition for business executives focus solely on increasing profits and the public interest be damned.

Most recently, in the current conceit of “wokeness”, this criticism has taken the form of businesses, particularly larger public corporations needing to promote some version of social justice and to describe their job as serving other stakeholders – employees, customers, the general public –  in a manner and to a degree equal to shareholders. In a larger sense, many see the problems in our society as caused by this capitalist understanding and therefore condemn the underlying capitalist structure as unfair and in need of reconstruction – with some believing change at the margin is needed while others are clamoring for total reconstruction.

I believe Milton Friedman was essentially correct and his critics either misread him or deliberately distort his argument.  The purpose of this essay is to describe why he was right and why his critics are wrong. I’ll focus on our country, because it epitomizes what is right and proper in a capitalist structure, operating in a market-based economy and doing so within the rule of law protecting property rights and contracts.

To start at the beginning, businesses are launched by entrepreneurs who: have an idea for a product or service that they believe customers will be willing to buy at a price that will allow the business to succeed; obtain the necessary capital from investors who also believe in the idea and think they will earn a return on that investment; then put together the business structure to make it all work.

Several things are true about this model: First, it’s application has made the US. the wealthiest nation in the world in absolute terms and the wealthiest large nation in per capita and purchasing power terms. (You can google GDP by country to verify this claim).  Second, most new businesses fail and often do so quickly because the entrepreneur was wrong in his assumptions or execution. It’s akin to watching the Sunday performance of a professional golf match where we see only the survivors of a Darwinian selection process where all the weaker players are gone and only the most successful are left. Third, and most important, the businesses that prosper over the long term are those that have products others are willing to buy where, almost always, other products are available, employees are hired, retained and developed (most of whom can work elsewhere if they choose) and run their businesses to create long term value for their shareholders. If they don’t do all three things consistently they will fail and either go out of business or be taken over by others who think they can operate the business better. This is the genius underlying capitalism because of the “creative destruction” as described by Shumpeter.  To be clear, that is their social purpose and, in fact, their only social purpose.

There are some clear possible implications of this model.  There will be churn in the system: some businesses will fail while others start, some people will lose their jobs and will have to find new ones while new jobs open, some investors will lose their capital while other do well, some entrepreneurs will fail while others will become extraordinarily wealthy.  To put it another way, there will be winners and losers.  However, the overall national wealth will grow sufficiently to support a very robust safety net for those that need it.

There is another downside to this structure Mr Friedman and I support. Some entrepreneurs undoubtedly would try to abuse the system by offering shoddy products to unwary consumers, take advantage of employees who have little choice, steal from investors, or try to externalize their costs if they can.  Our history is replete with examples;: slavery, indentured servitude, unsafe factory and mine conditions, pollution of rivers and skies, Ponzi schemes, monopolistic pricing by railroads and so on.  All of that is true and it is true because all of this involves imperfect humans, some of whom will try to take advantage of their power.

Consequently, we do need an effective restraint system which define unacceptable or illegal behaviors and employ robust enforce systems.  Over the years, we have developed them.  In some cases, we have overdone the constraints but no one can argue honestly that we have unfettered capitalism.  Anyone wo has ever started or run a business can tell you that  federal, state and local laws govern almost every action of a business – large and small.

There are inequities in our country, but it is not the job of corporations to solve.  They should continue to focus on creating long term value for shareholders.  Achieving that objective will require treating employees and customers well. That will serve the public good better than anything else they could do.

i think it worthwhile to point out the flaws in alternative systems – those ranging from government programs to full scale authoritarian systems – either fascist or socialist. Government run activities are almost always inferior in products offered, effectiveness or efficiency than private ones.  You can compare the Post Office to UPS or FedEx, VA hospitals to private medical practice, public education to private at the country level, compare any socialist country on the list above to the capitalist countries.  You can add statistics on business formations, patent development, size of housing available.  The comparisons all lead to the same conclusion.  Friedman was right and the “woke” people are wrong, dangerously so.