Friedman's 1970 Essay on Business Responsibility Still Answers Its Critics

Some essays are famous because they are great, some because they are short, and a few because everybody has an opinion about them and almost nobody has read them. Milton Friedman's article in the New York Times Magazine of September 13, 1970, belongs to the third group. Its title, "The Social Responsibility of Business Is to Increase Its Profits," has been quoted at more dinner parties, shareholder meetings and faculty lounges than most Supreme Court opinions, usually by people who skipped the next paragraph.

The title is the headline. The argument is in the body, and the body is more careful, more moral and more modest than the headline suggests. I think it also answers two opposite sets of critics at once: the left that wants corporations to be instruments of social policy, and some on the right who want them to be instruments of ours. Let me read it passage by passage.

The occasion

The essay appeared in the Magazine's pages in the autumn of 1970, a time of campus unrest, corporate protests and a rising demand that big business take on public responsibilities: pollution control, hiring programs, community service. Friedman, then at the University of Chicago, was responding to businessmen who had embraced the idea. He called the doctrine "pure and unadulterated socialism," and he was addressing his own side.

That detail matters. He was not attacking critics of business. He was attacking friends of business who thought it wise to talk like critics. His charge was that businessmen who speak of social responsibilities are puppets of the intellectual forces that have been undermining the basis of a free society.

Who is the corporate executive?

The first move in the argument is a definition. Friedman begins by asking what it means to say a business has responsibilities. Only people can have responsibilities. A corporation is an artificial person, and its responsibilities are artificial, so the real question is about the individual executives.

The corporate executive, Friedman says, is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

Hold on to that last clause, because the whole essay depends on it and the critics always drop it.

The tax argument

Now the central passage. Suppose the executive decides on his own to spend company money on a social purpose: to hold prices down to fight inflation, to hire the hard-core unemployed beyond what is profitable, or to reduce pollution beyond what the law requires. Friedman says that in each case the executive is spending someone else's money for a general social interest.

In so doing, Friedman argues, he is in effect imposing taxes, on the shareholders if the money comes out of profits, on the customers if prices rise, or on the employees if wages are lower. And he is deciding how the tax proceeds are to be spent. Friedman says imposing taxes and spending the proceeds are governmental functions, hedged by constitutional, parliamentary and judicial provisions, and the executive is made, in his words, simultaneously legislator, executive and jurist. Friedman's phrase is that the executive becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. He then draws the conclusion that gives the essay its edge: if such people are to be civil servants, they must be chosen through a political process. They have been chosen by shareholders to run a business, not by the public to run a government.

That is the heart of it, and Friedman himself invokes a Founding principle: taxation without representation, he reminds readers, was one of the battle cries of the American Revolution. The executive who spends other people's money on his own favorite cause taxes without any mandate. The shareholders did not authorize it, the customers did not vote on it, and the cause was picked by one person. It is a private version of the very thing the colonists denied to Parliament.

"The rules of the game"

Friedman does not end there, and this is the passage that critics from both sides forget. He writes that the responsibility of the executive is to make as much money as possible while conforming to the basic rules of the society. Later in the essay he returns to the same point and says that the business is to stay within the rules of the game, which he explains as engaging in open and free competition without deception or fraud.

That phrase, "without deception or fraud," is an ethical floor. It means the essay offers no cover to the company that lies about its product, rigs bids, cooks its books or poisons the river. Fraud is not profit-seeking, it is theft, and the rules of the game exist to forbid it. A manager who obeys the law and the ethical customs of his society, then pursues profit, is doing what the owners hired him to do. A manager who cheats is violating the very rule that the doctrine depends on.

This is a serious reading of the text, and it matters because the quickest criticism of Friedman is that he blesses anything that pays. He does not. His doctrine is a doctrine of fidelity to the people whose money you hold, inside the limits of law and honesty. We make a similar point about markets and morals in Markets Reward Serving Strangers, and That Is a Moral Achievement, and it dovetails with Adam Smith's view that commerce requires justice, covered in Before The Wealth of Nations, Adam Smith Wrote a Book About Conscience.

The owner who wants to give

Friedman anticipates an obvious reply: what if the owners themselves want the company to do good? He says that is fine. If the owner of a closely held business wants to spend his own money on a cause, he is free to. The trouble arises only when someone else's money is spent without consent. And individuals remain free: the executive can spend his own salary on any charity, and the shareholder, with his dividends, can give to whatever cause he cares about. Friedman's objection is to the executive's choosing for them.

He also addresses the argument that social spending is good business: a donation to the local school improves the community and attracts employees, or a green program improves the brand. Friedman's reply is a shrug. If it really serves long-run profit, he says, it is not what he is objecting to. He calls such rhetoric hypocritical window-dressing, though he says he cannot summon much indignation to denounce it. The honest thing is to say that the program serves the company's interest, and to defend it on those grounds, without the language of conscience.

The case from other people's incentives

Friedman also asks whether the executive can in fact discharge these supposed responsibilities. Suppose he is told to fight inflation. How is he to know what action of his will contribute to that end? Nothing about his selection makes him an expert on inflation, Friedman says, and even if he could answer, how much cost is he justified in imposing on stockholders, customers and employees? And can he get away with it? The stockholders may fire him, and customers and employees can desert for rivals less scrupulous about such responsibilities. That is a version of the knowledge problem Hayek described, which we unpack in Nobody Designed the English Language, and Hayek Called That Spontaneous Order.

In practice, a vague goal is an invitation to unaccountability. A manager judged by profit has something clear to answer for. A manager judged by a rotating menu of social goals can always claim success on one of them, and failure to deliver the thing he was hired for becomes harder to detect.

The strongest objection, answered

Here is the best criticism of Friedman's essay, stated as its defenders would.

Corporations are creatures of law, which grants them limited liability and perpetual life. A privilege like that creates obligations to the society that conferred it. Moreover, profit is not the only thing shareholders want; many want their companies to behave decently. And firms already affect everyone: they pollute, they hire and fire, they shape communities. To pretend they have no wider responsibilities is to pretend the world is simpler than it is.

Here is the response in five points.

1. Friedman already grants the obligations of law and custom. The wider responsibilities the objector wants are largely contained in the rules of the game: honesty, contracts, the law against pollution and fraud. The disagreement is over who decides what goes beyond those, and Friedman's answer is that the public decides through elected legislatures, not the executive by private choice.
2. If shareholders want the company to be decent, they can say so. The doctrine is about fidelity to what the owners want. Where owners actually want a social program and say so, the manager has a mandate. The problem arises when the manager substitutes his own preferences.
3. Limited liability is a legal rule that the public may amend by law. If the public believes the privilege creates obligations, the remedy is legislation, debated in the open with voters accountable. It is not a quiet reassignment of corporate funds by the people who run the company.
4. The objection proves too much. If executives owe duties to a loosely defined society, whose view of the social good governs? Different people want opposite things. A manager told to serve "stakeholders" can justify nearly any decision, which means he is answerable for none. We treat that in Milton Friedman's 1970 essay against stakeholder capitalism still wins.
5. The record shows the difficulty. Companies that buy goodwill with other people's money sometimes find the causes change, the customers split, and the shareholders pay. Accountability that cannot be measured is hard to enforce.

It cuts both ways

Here is the part that makes the essay useful to conservatives specifically. The principle that a manager may not spend shareholder money on his own political preferences applies whichever way the preferences point.

When a company uses its influence to promote causes the left favors, conservatives rightly object. But a conservative who cheers a company for backing a cause the right favors, using the same unconsented funds, has given away the argument. The test is whether the owners authorized it, not whether the cause is a good one. A firm that stays out of the culture wars and sells its product honestly deserves the loyalty of customers of every view. That also bears on the use of other people's retirement money, taken up in ESG investing with your pension money bends the fiduciary duty owed you.

None of this makes business an enemy of public life. Companies create the jobs, goods and wealth that everything else rests on. A firm that makes a good product at a fair price, treats its employees honestly and obeys the law is already serving society, and it has done so without taxing anybody. Friedman's point was that this is a large and honorable contribution, and that we ask for more at the price of accountability.

The case in brief

1. Friedman's essay of September 13, 1970, argues that a corporate executive is an employee of the owners and that his responsibility is to conduct the business as they wish, which generally means making as much money as possible within the rules of the society.
2. An executive who spends the firm's money on social causes is in effect imposing a tax and deciding how to spend it, a power belonging to elected legislators, and a private form of taxation without representation.
3. The essay's own limit is the rules of the game: open and free competition without deception or fraud, so it gives no cover to fraud, deceit or lawbreaking.
4. The doctrine answers the objection that firms owe the public more: obligations of law and custom are already in the rules, owners can authorize extra giving, and the public can legislate further.
5. The principle works in every direction, against activism from the left and from the right, because the test is consent of the owners, not the popularity of the cause.

What you can do: check how your retirement plan or fund votes on shareholder proposals, using the proxy voting records its manager is required to publish, and write to the plan administrator if the votes do not reflect your instructions.