One of the big criticisms of capitalism is that corporations are purely profit-seeking. If there’s ever an opportunity for a large corporation to work towards a social good, or to benefit the environment, the corporation won’t do it, except insofar as it benefits their stockholders. The corporation is practically obligated to be as greedy as possible. There’s a name for this: the Friedman Doctrine.

The Friedman Doctrine was coined by a 1970 article by economist Milton Friedman. Friedman argued that the social responsibility of a business executive is solely to increase the business’ profits. To prioritize anything else is to unilaterally take money from stockholders, employees, and/or customers, and spend the proceeds on whatever the business executive thinks is good. As a business philosophy, the Friedman Doctrine is considered to have been dominant from the 1980s to today.

As Friedman argues, if a business executive acts in service of a public good, they are effectively taxing stockholders to pay for it. However, this is unlike taxation from a government, since the government has checks and balances, and is ultimately accountable to the democratic process.  When a corporation acts with “social responsibility”, that’s just taxation without representation.

To me, an obvious observation is that shareholders actually can vote? Shareholders rarely vote against the value of their own stock, but it does happen, and that’s what’s called shareholder activism. Friedman says:

But precisely the same argument applies to the newer phenomenon of calling upon stockholders to require corporations to exercise social responsibility […]. In most of these cases, what is in effect involved is some stockholders trying to get other stockholders (or customers or employes) to contribute against their will to “social” causes favored by the activists.

This argument makes no damn sense. Shareholder activism cannot be described as taxation without representation, since shareholders have representation. (Granted, my own investment portfolio is mostly ETFs, and the voting power is held by the investment management firm and not by me. Shareholder voting tends to empower people with much larger investment portfolios.)

More generally, the problem with the Friedman Doctrine is that it just seems to give up on a lot of opportunity to do good in the world.

Yes, if people want to contribute to the public good, they can just contribute their personal fortunes. However, this sort of personal contribution, while it may increase the total good in the world, comes at a personal cost, so most people aren’t willing to do very much of it. Public goods are basically a massive prisoner’s dilemma, and public spending is needed to get us off the ground. That’s why we have taxation and government spending.

But individuals and the government are just poorly positioned to contribute to many public goods. For instance, when Facebook leaked user data to Cambridge Analytica for use in political campaigning, that was an example of a public evil. The government can, at best, impose regulations and sanctions on this behavior, but ultimately the party with the greatest power to protect user privacy is Facebook itself.  If companies do nothing but try to optimize stock value, they will enact all sorts of social evils that nobody else really has any power to correct.

Alternatives to the Friedman Doctrine

There are many ways to criticize the Friedman Doctrine, and you may have thought of a few that I didn’t mention. However, I would like to impress upon readers that there are also problems with the alternatives.

In practice, the most common alternative to the Friedman Doctrine is placing power in the hands of CEOs. CEOs might use that power to contribute to the public good, but let’s be real, CEOs usually have a wildly distorted view of what is good. I mean, just think about Elon Musk and his controlling interest in Twitter. Arguably Facebook is not an example of the Friedman Doctrine gone wrong, but rather CEO power gone wrong, since they use a dual class stock structure that gives Mark Zuckerberg all the power.

The common theoretical alternative to the Friedman Doctrine is called stakeholder theory. Stakeholder theory argues that corporations should serve the interests of all its stakeholders, including stockholders, employees, customers, suppliers, and local communities. The problem with stakeholder theory is that the different stakeholders have competing interests, so any action (or inaction) can be justified by referring to one or another stakeholder. For example, you don’t like that Walmart pays so little to its employees? Well, Walmart is just serving the interests of its customers by keeping costs low.

Corporate finance expert Aswath Damodaran characterized stakeholder theory as “confused corporatism”, arguing that it is likely to lead to decision paralysis, and no accountability. His discussion is framed in the context of the Business Roundtable, a lobbyist association composed of CEOs of major companies. In 2019, the Business Roundtable endorsed stakeholder theory in a statement that boasted signatures from the CEOs of Apple and Amazon, among others. You tell me if you think this statement carries any weight.

I will also briefly discuss another path by which companies may exercise social responsibility. ESG is a philosophy of investment that considers three additional factors: Environmental, Social, and Governance. By focusing on these factors, investors encourage corporations to also focus on these factors, or at least be transparent about them.

There are a few problems with ESG. For one thing, if ESG investors truly succeeded in reducing demand for stock for “bad” companies–say, a cigarette company–this would cause a deflation in stock prices, which ultimately implies higher investor returns for people who do invest in the cigarette company.

Also, ESG often tries to work within the Friedman Doctrine rather than escaping from it. The usual argument is that ESG factors ultimately promote the long-term value of the company. For example, environmental consciousness makes the company more sustainable; social consciousness promotes a stronger workforce. I don’t know if these arguments would hold up to empirical scrutiny, but they appear to be quite limited in how much they can really promote the social responsibility of corporations.

All three of the topics I’ve discussed here–the Friedman Doctrine, stakeholder theory, and ESG investment–are quite deep, and I can only brush the surface. I encourage readers to look these topics up, and think about them independently.