The Friedman Doctrine and alternatives

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.


  1. says

    I don’t have that much time to comment in depth about this, but I’ll just say that what you’re calling “alternatives” to the Friedman Doctrine (FD), aren’t. Giving power to CEOs is just delegating authority within a corporation, which could still be following the FD. (Also, many times the majority shareholder appoints himself CEO anyway.) Stakeholder theory has no teeth unless it’s backed up by actual laws and regulations MANDATING consideration of non-shareholder parties; and that would require a specific mechanism/procedure to represent those other stakeholders in board meetings and executive decisions; and #Bone4Tuna getting anything like that to work reliably. And ESG is just admonishing corporations to act responsibly without imposing real responsibility on them.

    There are only two real alternatives to the FD that I see. One is full-on socialism and nationalization of all private businesses. The other is accepting that such businesses simply CANNOT EVER be trusted to act in the public interest, agreeing that that’s not really a good thing; and having elected lawmakers pass laws regulating corporate behavior, and forcibly imposing social responsibility on them (just like the state imposes social responsibility on ordinary shmoes), instead of letting them pretend they’re “rational” and we can’t ever interfere in their market-informed rational decision-making.

  2. says

    PS: Friedman was just a twit anyway, one of many economists who whored themselves out to plutocrats and zillionaires who wanted a political philosophy custom-made to justify and uphold their own self-interests. Douglas Adams made fun of such whores in his “Hitchhiker’s Guide” books. Who needs a “doctrine” written by whores anyway?

  3. JM says

    Spelling out the problem more explicitly. Companies use the doctrine to say companies shouldn’t be concerned with anything but profits, other things are government concerns. At the same time they complain about government taking those concerns and creating laws and regulations because they get in the way of profits. It becomes a greed for the sake of greed situation where any concern other then profits is considered bad.
    In reality you can’t have it both ways. If corporations are not to be concerned with morality and other concerns then the government must step in, as Raging Bee noted.
    There is also another big problem with the Friedman Doctrine in that it implies that a company should break the law if the profits from breaking the law exceed the profits from following the law. Nobody will exactly spell that out because it doesn’t provide any legal protection when a company is caught but you can see it in the way companies evaluate laws that just have fines if they are broken.

  4. says

    I’d highlight the article by Damodaran (which I linked in the OP). It talks about multiple theories of corporatism, including the idea that corporations should even behave illegally, or try to capture regulatory institutions if it increases their profit.

Leave a Reply

Your email address will not be published. Required fields are marked *