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> “There is one and only one social responsibility of business,” the economist Milton Friedman famously wrote in 1962. And that is “to use its resources and eng

by wgyn 9y ago

> “There is one and only one social responsibility of business,” the economist Milton Friedman famously wrote in 1962. And that is “to use its resources and engage in activities designed to increase its profits.” It's strange to me that Friedman is viewed (at least by economists and "business" folk) as a paragon of logical reasoning and empiricism, all the while his views reek so strongly of ideology. There are tons of reasons why the quoted statement might be false whether you're a policy maker (negative externalities) or even the most cold-hearted capitalist (short-term incentives). Perhaps relatedly, it's actually not true that corporate responsibility to profit is codified in the law. See e.g. https://en.wikipedia.org/wiki/Shlensky_v._Wrigley https://en.wikipedia.org/wiki/Shlensky_v._Wrigley (discussed further in https://www.amazon.co.uk/Shareholder-Value-Myth-Shareholders-Corporations/dp/1605098132 https://www.amazon.co.uk/Shareholder-Value-Myth-Shareholders...)

pjc50 9y ago
> paragon of logical reasoning and empiricism, all the while his views reek so strongly of ideology Motivated reasoning is a very powerful force. Of course people with the same ideology are going to hold up someone who supports them as a paragon of reason, and use him as protective camoflage for policies harmful to the rest of us.
clavalle 9y ago
It is a beautiful example of dogma. It has some meaning but can be bent and molded to fit almost any argument. The obvious argument, especially in Etsy's case is 'well, this works for the short term but can mean no profits in the long term as you commoditize your business and what makes a company like Etsy, Etsy fades into market oblivion.' To which the next statement is 'Oh. Well, Friedman meant all expected profits even into the long term.' which may even be true, but the statement is used to justify all sorts of business behavior that is not in keeping with that idea.
- valuearb 9y ago
  Yea, if you twist Friedmans meaning you can make all sorts of nonsensical arguments. Value is profits extending into the long run forever, he spoke and wrote clearly enough that he doesn't have to spell that out for you. In Etsy's case, paying above market wages and benefits does nothing for the company and it's shareholders, it's just a gift from the CEO to workers, paid for out of shareholder accounts. Etsy didn't get the best web site or software out from it, they got rampant entitlement and sub-par work.
  - clavalle 9y ago
    >paying above market wages and benefits does nothing for the company and it's shareholders Again, we can use Friedman on both sides of the argument (which was my original point as to the meaningless of the statement if not in original intent then in popular application). I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time. I'm not saying that's what I believe but let's assume it is true. Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits. I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps.
  - valuearb 9y ago
    "I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. " Market value means that your turnover should already be low, your employees can't leave for better paying jobs. Obviously there is more to retainment than just wages, there is managerial competency and how you treat people. Bad workplaces have to pay more than market to retain people, good workplaces shouldn't. But again, it's a silly argument that paying substantially more than market is going to benefit shareholders in some obtuse way. There are as many disadvantages as advantages, such building a complacent, insular underperforming culture just like that Etsy appears to have. And another is using excess comp to build a "cult of personality" so the CEO can be worshipped, and those are terrible for business/shareholders. "It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time. I'm not saying that's what I believe but let's assume it is true." Do you really think those people are going to leave Etsy because it no longer has the CEO's cult cheerleader squad decorating the offices? "Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits." Do you really think Etsy's massive admin spending, far higher than similar companies, is really translating into long term value and higher profits? This is money not spent on partners or customers or brand, but internally. "I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps." The easiest response is to ask you to read some Warren Buffett. All his shareholder letters are free to read going back to the 1970s on Berkshirehathway.com. Long term value in a business is created by building a unique and defensible product offering, a brand, a technology, etc. It's not from throwing more employee parties and increasing employee compensation. Employees can walk out the door at any time, even the CEO. One of Warren's favorite quotes is you want a business any fool can run, because sooner or later a fool will be running it. In Etsy's case, it needs to be the best source/destination for it's unique crafts. To do that it needs to provide a viable market place to it's partners. Otherwise it's entire business will just dissipate to Amazon and Ebay and the Kum ba yah nirvana will disappear anyways. Paying engineers $200k a year when they would be content if they made $150k a year is simply wasting $50k each on something that doesn't add value to the business. That excess comp would be far better spent hiring more people to build more and better competitive advantages, or marketing campaigns to get more partners and better build Etsy's brand, or kept in the bank to safeguard against rainy days, or returned to the shareholders as dividends and better support the value of it's stock.
- mi100hael 9y ago
  I disagree. Friedman's statement isn't a justification for decisions and it doesn't determine which specific decisions are right or wrong. It determines which justifications are right or wrong. "We made this decision because it improves environmental sustainability" may or may not be a prudent decision depending on whether the justification of environmental sustainability correlates positively or negatively with financial success. Clearly running your business into the ground through over-spending, even if it generates modest short-term results, is a poor application of Friedman's idea.
TheCowboy 9y ago
I'd disagree with the generalization that Friedman is viewed as the paragon of logical reasoning and empiricism by economists. This might be a case of where there's a vocal minority who like to quote Friedman when it's convenient for their political position, so I do understand why it is hard to avoid the impression you have. His academic contributions to the field are recognized when they've held up, but his views and who he sided with is not without criticism.
kristianc 9y ago
> It's strange to me that Friedman is viewed (at least by economists and "business" folk) as a paragon of logical reasoning and empiricism, all the while his views reek so strongly of ideology. In the U.K. at least his views, along with Hayek's, tend to be associated indelibly with Margaret Thatcher. If there's someone who is seen as a paragon of reason whilst being actually quite ideologically biased, it's Adam Smith.
rvense 9y ago
I don't get how it's compatible with the idea that corporations are people. If people act like dicks there is one and only on social responsibility for the other people around it, and that is to call them out and make them stop. But obviously we expect every one to behave, and generally people do. I don't know exactly what it'd look like if a man on the street started acting like Shell is acting in the Arctic, but I'm quite sure there would be severe and immediate consequences.
valuearb 9y ago
Friedman is of course right, whether lawmakers and jurists have tried to codify rules allowing directors to betray shareholder interests. A single business is not responsible for externalities, any more than a single citizen is. We are ALL responsible for negative externalities like pollution and have to solve those problems together, using the political process and sharing the costs among everyone. And his statement isn't specific to the short term. Increasing profits is maximizing total profits. Making of ton of profits today and none thereafter is in no way as good as making a ton more profits over time. Imagine you can invest your life savings of $100,000 and a lot of sweat equity to build a business (including the opportunity cost of giving up your $100k a year job). You estimate it will fail half the time and you will lose your life savings. But the other half of the time you estimate will make $500k a year in profit, after paying all employee compensation, taxes and other costs. Then you are told that if you succeed, you can't have the $500k a year. That half of that has to go to the employees who risked nothing and got market wages from you for helping build the business (and quit whenever they pleased for better compensation elsewhere). And another half has to go to the "community" to help support the arts, or some other noble cause that did nothing to help you start or grow your business. You still want to risk your life savings? Companies are owned by shareholders. Property rights are one of the most fundamental liberties we have. I don't go into your house and raid your fridge whenever I feel like it. Why should you be able to go into my business and tell me how I need to spend my money?
- sbov 9y ago
  Your post reads a bit contradictory. The only way we can all be responsible for negative externalities is if we each individually choose to be responsible, or if lawmakers force us all to be responsible. I honestly don't know what your view on this subject is, because you seem to be deriding any possible solution to the problem of negative externalities.
  - valuearb 9y ago
    Well, one example would be if you are CEO of a car manufacturer. Your engineers design two catalytic converters, one that meets all government regulations/requirements, and another that does substantially better, but reduces horsepower and drivability significantly. If you are environmentally conscious and decide to standardize all your cars on the cleaner catalytic converter, and consumers react poorly and sales suffer, you aren't serving your shareholders. It's not a problem your company can or should solve, you are part of a shared organizations and your ownership doesn't trump your shareholders. Instead you should take your share of the profits and your massive paycheck and work to get cleaner and more intelligent exhaust standards put into law, so that all new cleaner catalytic converters are as clean as you think they should be. Or find alternative and better ways to reduce emissions. But you can't steal profits from your shareholders to fit your own agenda.
WillPostForFood 9y ago
You did cut off half the sentence, it concludes, " 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." But beyond that, that one sentence doesn't come close to summarizing his view which is nuanced, and more about corporate governance. If you can suffer through the bad OCR, this old NY Times Magazine article covers it. http://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html http://www.nytimes.com/1970/09/13/archives/a-friedman-doctri...

by wgyn 9y ago

pjc50 9y ago

> paragon of logical reasoning and empiricism, all the while his views reek so strongly of ideology Motivated reasoning is a very powerful force. Of course people with the same ideology are going to hold up someone who supports them as a paragon of reason, and use him as protective camoflage for policies harmful to the rest of us.

clavalle 9y ago

It is a beautiful example of dogma. It has some meaning but can be bent and molded to fit almost any argument. The obvious argument, especially in Etsy's case is 'well, this works for the short term but can mean no profits in the long term as you commoditize your business and what makes a company like Etsy, Etsy fades into market oblivion.' To which the next statement is 'Oh. Well, Friedman meant all expected profits even into the long term.' which may even be true, but the statement is used to justify all sorts of business behavior that is not in keeping with that idea.

valuearb 9y ago
Yea, if you twist Friedmans meaning you can make all sorts of nonsensical arguments. Value is profits extending into the long run forever, he spoke and wrote clearly enough that he doesn't have to spell that out for you. In Etsy's case, paying above market wages and benefits does nothing for the company and it's shareholders, it's just a gift from the CEO to workers, paid for out of shareholder accounts. Etsy didn't get the best web site or software out from it, they got rampant entitlement and sub-par work.
- clavalle 9y ago
  >paying above market wages and benefits does nothing for the company and it's shareholders Again, we can use Friedman on both sides of the argument (which was my original point as to the meaningless of the statement if not in original intent then in popular application). I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time. I'm not saying that's what I believe but let's assume it is true. Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits. I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps.
- valuearb 9y ago
  "I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. " Market value means that your turnover should already be low, your employees can't leave for better paying jobs. Obviously there is more to retainment than just wages, there is managerial competency and how you treat people. Bad workplaces have to pay more than market to retain people, good workplaces shouldn't. But again, it's a silly argument that paying substantially more than market is going to benefit shareholders in some obtuse way. There are as many disadvantages as advantages, such building a complacent, insular underperforming culture just like that Etsy appears to have. And another is using excess comp to build a "cult of personality" so the CEO can be worshipped, and those are terrible for business/shareholders. "It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time. I'm not saying that's what I believe but let's assume it is true." Do you really think those people are going to leave Etsy because it no longer has the CEO's cult cheerleader squad decorating the offices? "Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits." Do you really think Etsy's massive admin spending, far higher than similar companies, is really translating into long term value and higher profits? This is money not spent on partners or customers or brand, but internally. "I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps." The easiest response is to ask you to read some Warren Buffett. All his shareholder letters are free to read going back to the 1970s on Berkshirehathway.com. Long term value in a business is created by building a unique and defensible product offering, a brand, a technology, etc. It's not from throwing more employee parties and increasing employee compensation. Employees can walk out the door at any time, even the CEO. One of Warren's favorite quotes is you want a business any fool can run, because sooner or later a fool will be running it. In Etsy's case, it needs to be the best source/destination for it's unique crafts. To do that it needs to provide a viable market place to it's partners. Otherwise it's entire business will just dissipate to Amazon and Ebay and the Kum ba yah nirvana will disappear anyways. Paying engineers $200k a year when they would be content if they made $150k a year is simply wasting $50k each on something that doesn't add value to the business. That excess comp would be far better spent hiring more people to build more and better competitive advantages, or marketing campaigns to get more partners and better build Etsy's brand, or kept in the bank to safeguard against rainy days, or returned to the shareholders as dividends and better support the value of it's stock.
mi100hael 9y ago
I disagree. Friedman's statement isn't a justification for decisions and it doesn't determine which specific decisions are right or wrong. It determines which justifications are right or wrong. "We made this decision because it improves environmental sustainability" may or may not be a prudent decision depending on whether the justification of environmental sustainability correlates positively or negatively with financial success. Clearly running your business into the ground through over-spending, even if it generates modest short-term results, is a poor application of Friedman's idea.

TheCowboy 9y ago

I'd disagree with the generalization that Friedman is viewed as the paragon of logical reasoning and empiricism by economists. This might be a case of where there's a vocal minority who like to quote Friedman when it's convenient for their political position, so I do understand why it is hard to avoid the impression you have. His academic contributions to the field are recognized when they've held up, but his views and who he sided with is not without criticism.

kristianc 9y ago

> It's strange to me that Friedman is viewed (at least by economists and "business" folk) as a paragon of logical reasoning and empiricism, all the while his views reek so strongly of ideology. In the U.K. at least his views, along with Hayek's, tend to be associated indelibly with Margaret Thatcher. If there's someone who is seen as a paragon of reason whilst being actually quite ideologically biased, it's Adam Smith.

rvense 9y ago

I don't get how it's compatible with the idea that corporations are people. If people act like dicks there is one and only on social responsibility for the other people around it, and that is to call them out and make them stop. But obviously we expect every one to behave, and generally people do. I don't know exactly what it'd look like if a man on the street started acting like Shell is acting in the Arctic, but I'm quite sure there would be severe and immediate consequences.

valuearb 9y ago

Friedman is of course right, whether lawmakers and jurists have tried to codify rules allowing directors to betray shareholder interests. A single business is not responsible for externalities, any more than a single citizen is. We are ALL responsible for negative externalities like pollution and have to solve those problems together, using the political process and sharing the costs among everyone. And his statement isn't specific to the short term. Increasing profits is maximizing total profits. Making of ton of profits today and none thereafter is in no way as good as making a ton more profits over time. Imagine you can invest your life savings of $100,000 and a lot of sweat equity to build a business (including the opportunity cost of giving up your $100k a year job). You estimate it will fail half the time and you will lose your life savings. But the other half of the time you estimate will make $500k a year in profit, after paying all employee compensation, taxes and other costs. Then you are told that if you succeed, you can't have the $500k a year. That half of that has to go to the employees who risked nothing and got market wages from you for helping build the business (and quit whenever they pleased for better compensation elsewhere). And another half has to go to the "community" to help support the arts, or some other noble cause that did nothing to help you start or grow your business. You still want to risk your life savings? Companies are owned by shareholders. Property rights are one of the most fundamental liberties we have. I don't go into your house and raid your fridge whenever I feel like it. Why should you be able to go into my business and tell me how I need to spend my money?

sbov 9y ago
Your post reads a bit contradictory. The only way we can all be responsible for negative externalities is if we each individually choose to be responsible, or if lawmakers force us all to be responsible. I honestly don't know what your view on this subject is, because you seem to be deriding any possible solution to the problem of negative externalities.
- valuearb 9y ago
  Well, one example would be if you are CEO of a car manufacturer. Your engineers design two catalytic converters, one that meets all government regulations/requirements, and another that does substantially better, but reduces horsepower and drivability significantly. If you are environmentally conscious and decide to standardize all your cars on the cleaner catalytic converter, and consumers react poorly and sales suffer, you aren't serving your shareholders. It's not a problem your company can or should solve, you are part of a shared organizations and your ownership doesn't trump your shareholders. Instead you should take your share of the profits and your massive paycheck and work to get cleaner and more intelligent exhaust standards put into law, so that all new cleaner catalytic converters are as clean as you think they should be. Or find alternative and better ways to reduce emissions. But you can't steal profits from your shareholders to fit your own agenda.

WillPostForFood 9y ago

You did cut off half the sentence, it concludes, " 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." But beyond that, that one sentence doesn't come close to summarizing his view which is nuanced, and more about corporate governance. If you can suffer through the bad OCR, this old NY Times Magazine article covers it. http://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html http://www.nytimes.com/1970/09/13/archives/a-friedman-doctri...