When Milton Friedman, prophet of profit, met a pandemic
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Among the many things Milton Friedman could not have predicted in 1970 was that the 50th anniversary of his famous New York Times essay, headlined “The social responsibility of business is to increase its profits”, would fall in the middle of a global pandemic.
The University of Chicago economist might have been less surprised that corporate social responsibility was enjoying a revival, half a century after he condemned executives for indulging in “hypocritical window-dressing” by spending shareholders’ money “for a general social interest”.
Friedman’s ideas continue to provoke debate. That much was clear at a recent online anniversary event, hosted by the University of Chicago’s Booth School of Business. As Raghuram Rajan, a Booth professor and former governor of the Reserve Bank of India, told me in a live interview at the conference, Friedman’s ideas “make sense, but only to a first approximation”. Shareholder value maximisation “sounds sinister, it sounds pro-rich, it sounds evil — even if it may be the right thing to do for society and in many circumstances”.
Today’s circumstances could not be more extreme. But they shed light on Friedman’s doctrine and how companies interpret their responsibilities, in three main ways.
First, Covid-19 has threatened some companies with the extinction of shareholder value, subjecting businesses to a shock that, despite government intervention, has put their existence in question. “At this point,” Prof Rajan told me, “the best thing [a company with thin resources] could do is focus those resources on survival, because in surviving, it provides a decent job for its workers, it continues making that widget which people buy. It lives for the future.”
Not all companies came into the crisis with thin resources. For the tech companies, nursing war chests replenished by tech-hungry consumers in lockdown, this should be a chance to go beyond bare Friedmanite requirements.
Amazon, for instance, could “do more for its various suppliers, some of whom may be struggling small and medium business units”, said Prof Rajan. “It could find ways to provide them more credit to last through the pandemic that will get it more loyalty, because people will know it can be a source of insurance, rather than just a platform.”
Second, the pandemic underlines the interconnectedness of 21st-century capitalism. “The ecosystem lives because it is integrated,” Jaime Augusto Zobel de Ayala, head of the Philippine conglomerate Ayala, told the conference. His group postponed or cancelled interest and rental payments from customers and tenants, inviting them to “symbolically hold hands, ride this out together and rebuild together”.
This sort of action exposes the “missing part” of Friedman’s thesis, said Prof Rajan. He failed to recognise that “implicit equity stakes” — such as the commitment of a company to the partnership with its workers, suppliers or customers — are “as important, sometimes, as the explicit equity stake”.
Third, the pandemic has focused attention on the changed relationship between companies and governments. Friedman attacked companies in part for acting as “legislator, executive and jurist”, and performing roles that should, by rights, be left to governments.
In many cases, though, the pandemic has made businesses realise it is in their interest to supplement a faltering public sector response. Ayala put together an emergency package, including food and medical aid, because it recognised that government support measures would take time to enact. “We got together and as a community put some numbers on the table and said, ‘Let’s fill a gap, because this is going to be bad’,” Ayala’s chief executive told the Financial Times in July.
More darkly, the pandemic has exposed that “a lot of our political institutions have simply broken down and they’re not functioning”, economist Margaret Blair told the conference, making it essential for the private sector to act to support the common good. She cited the joint pledge by pharmaceutical companies not to pursue regulatory approval for coronavirus vaccines without completing the necessary clinical steps. In effect, Prof Blair said, the groups were saying, “We can’t count on the Food and Drug Administration in the US [and other regulatory agencies] to actually do an adequate job, given the political context.”
“There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits 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,” Friedman wrote. But he acknowledged, however grudgingly, that acts of social responsibility were “one way for a company to generate goodwill as a byproduct of expenditures that are entirely justified in its own self-interest”.
The pandemic and its aftermath will show to what extent companies have enhanced, or squandered, that goodwill.
Andrew Hill is the FT’s management editor
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