What Milton Friedman says and why he is wrong

Milton Friedman was an American economist who won the Nobel Prize of Economics in 1976. As the central figure of the Chicago School of economics, he was well known for his strong belief in free market capitalism. In what follows, we will take a look at some of Friedman’s ideas.

1. According to Friedman, corporations are artificial entities created for one single purpose – the pursuit of profit. As such, corporations exist for economic purposes only, which means that we should not expect corporations to have moral or social responsibilities.

Counterargument: The corporate law confers ‘legal personhood status’ on corporations, which means that corporations have similar rights and duties as those of other citizens. As such, it is reasonable to expect corporations to have moral and social responsibilities to other members of society.

2. Friedman argues that under a free- market economic system with private property rights, corporations are the private properties of their ‘owners’ (shareholders). He goes further and argues that corporate executives and managers have a fiduciary (legal or contractual) duty to always act in the best interest of shareholders.

Friedman’s view has now become the central tenet of the ‘shareholder model of business’, which holds that: corporations should be managed primarily in the interest of their shareholders; and the market value of shares is the most important measures of shareholder value.

Counterargument: From the standpoint of the corporate law, corporations are legal persons that own themselves. In other words, Friedman is wrong to think that corporations are the private properties of shareholders. Strictly speaking, investors (shareholders) are not really the ‘owners’ of corporations.

When investors purchase shares of a corporation, they enter into contracts with the corporation. In doing so, they contribute capital to the corporation’s business operations, and in return, they are entitled to some of the profit made by the corporation.

In this regard, shareholders stand on equal footing with the corporation’s bondholders, suppliers, customers and employees, all of whom also enter into contracts with the corporation.

If corporate executives and managers have a legal duty to act in the best interest of shareholders, they also have similar duties to act in the best interest of other parties who enter into contracts with the corporation (i.e. the other stakeholders of the corporation).

3. According to Friedman, corporations exist for economic purposes only. The people who run the corporations are experts in economic matters. Thus, we should not expect corporations and corporate executives to handle social problems. Instead, the management of corporations should focus exclusively on finding ways to maximize profit.

Counterargument: The pursuit of profit often implies that corporations have to find ways to cut costs. And they often do so by ‘externalizing’ some of the costs of production, for example, by dumping waste into the river instead of installing a wastewater treatment facility.

Many of society’s problems are, in fact, caused by the unethical and irresponsible behaviors of corporations. Thus, it is reasonable to expect corporations and corporate executives to share some of the responsibility of solving society’s problems.

4. Since the 1970s, Friedman has been a fervent champion of ‘deregulation’. As a free market economist, Friedman thinks that government regulation is bad for business. Corporations, in his view, should have the freedom to do whatever they like without any government intervention or regulation.

Counterargument: From the 1980s onwards, we have witnessed a sharp rise in all kinds of corporate misconduct due to the lack of effective government regulation. According to Mill’s harm principle, governments should regulate, prohibit or punish any activities that harm others.

From society’s point of view, there is no reason to allow a corporation to do business if the corporation’s business activities and practices are likely to do more harm than good to other members of society.

To conclude, ideas have consequences, and bad ideas have bad consequences. Unfortunately, Friedman’s ideas have now become so influential that hardly a day goes by without hearing news of corporate misconduct or about irresponsible corporate executives who put profit before ethics or the common good.

Friedman’s ideas have been popularized by the mainstream media and are now accepted as undisputed truths by most people of the business world. Although many of his ideas are mistaken and harmful, they have been viewed as the cornerstone of modern economics and management studies.

As a result, few people these days care about ethics or the common good as long as the stock market goes up. Most people turn a blind eye to corporate misconduct as if they only care about share prices without paying any attention at all to what corporations actually do.

Tobacco companies and manufacturers of cluster bombs, for example, make huge profits. Undoubtedly, however, what these corporations do is harmful to others. Is it immoral to own shares of these corporations? Do you think that the pursuit of profit is more important that being socially responsible and showing concern for others?