Milton Friedman Was Right

By HENRY G. MANNE, Wall Street Journal, November 24, 2006; Page A12

Milton Friedman famously declared that the sole business of the managers of a publicly held corporation was to maximize the value of its outstanding shares. Any effort to use corporate resources for purely altruistic purposes he equated to socialism. He proposed that corporation law should prevent managers from straying off the reservation to join the altruists, a power now almost universally granted them by state legislation.

At a conference 34 years ago, celebrating Friedman’s 60th birthday, I presented a paper questioning that dictum by noting that the vast part of apparently nonprofit-oriented behavior by corporate managers was really — and necessarily — a profit-maximizing response to business, social or political pressures dressed up to look like something else. For such a strategy to be successful, the behavior had to appear to be nonprofit maximizing, and, of course, had to be called something like “social responsibility.”


Since it was difficult or impossible to distinguish a profit motive from a charitable motive in any particular corporate action, a strong rule against corporate altruism, as Friedman was advocating, would invite judges to examine the propriety of a significant set of managerial decisions. I argued that American corporation law had traditionally had a strong “business judgment” rule whose principle aim was to prevent judges from even engaging in that kind of examination, which they were perhaps more likely to get wrong than to get right. Thus, if any plausible basis existed for a bona fide managerial decision, no matter how charitable it looked, I argued, we did not want a stronger rule that would invite judges to second guess managers.

The assembled audience of Friedmanites, as we were sometimes called — Are we all Friedmanites now? — was aghast that I dared to counter one of the master’s most pointed proposals, and the immediate response from the audience was hostile. Well, it was, until Friedman took the floor to declare that “I agree with everything that Henry said.” That settled that. I assumed that I would not hear Friedman again declaring that corporate social responsibility was the equivalent of socialism. Consequently, I was chagrined over the ensuing years to hear him make the same pronouncement many times, though to my knowledge not with any explicit proposal for a change in the legal rule.

* * *

Now I realize (I should have known) he was absolutely correct about the significance of proposals for socially responsible corporate behavior, whether they emanated from within or outside the corporation. These proposals reflect, as well as anything else happening today, the inability of many commentators to distinguish between private and public property — in other words, between a free enterprise system and socialism. Somehow large-scale business success, usually resulting in a publicly held company, seems mysteriously to transform the nature of numerous individuals’ private investments into assets affected with a public interest. And once these corporate behemoths are “affected with a public interest,” they must either be regulated by the state or they must act as though they are owned by the public, and are therefore inferentially a part of the state. This attitude is reflected not merely by corporate activists, but by many “modern” corporate managers.

An integral part of the older notion of public utility regulation required that the enterprise be, or act like, a monopoly (whether “natural” or not), in order to be affected with a public interest. But in today’s confusion, there is no such requirement. No arguments, weak as they are, about natural monopoly, market failure, government creation of corporations or the alleged government gifts of limited liability and perpetual existence, are required to justify the demands now regularly placed on business entities. Any large enterprise, no matter how competitive its industry and no matter how successfully it is fulfilling the public’s desires, has a social responsibility — a term that makes mockery of the idea of individual responsibility — to use part of its resources for “public” endeavors. Today’s favorite causes are environmental protection, employee health, sales of goods at below-market prices, weather modification, community development, private enforcement of (not merely abiding by) government regulations and support of cultural, educational and medical facilities.

How did this transposition from private to public responsibility come about? After all, even the largest corporation started simply as an idea in someone’s head. At first this person hires employees, borrows capital or sells equity, produces goods or service and markets a product. Nothing about any of these purely private and benign arrangements suggests a public interest in the outcome. But then the business begins to grow, family stock holdings become more diffused, additional capital is required and, voilà, another publicly held corporation. In other words, another American success story.

But what has happened to implicate public involvement in the management or governance of these enterprises as they grew from a mere idea? Nothing. And if that nothing be multiplied by tens or hundreds or thousands, the product is still zero. So where along the line to enormous size and financial heft has the public-private nexus necessarily changed? True, there are now a large number of complex and specialized private contracts, but every single one of these transactions is based on private property, freedom of contract, and individual risk and reward. If one apple is a fruit, even a billion apples do not become meat.

The origins of this transformation lie in the minds of people who do not like or appreciate the genius of capitalist success stories, including always politicians, who will generally make any argument in order to control more private wealth. Of course, the social responsibility of corporations is always tied to the proponents’ own views of compassion or justice or avoidance of a cataclysm. But the logic of their own arguments requires that essentially private corporations be viewed as somehow “public” in nature. That is, the public, or the preferred part of it, often termed “stakeholders” (another shameful semantic play, this time on the word “shareholders”), has a pseudo-ownership interest in every large corporation. Without that dimension in their argument, free market logic would prevail.

The illusion of great and threatening power, the superficial attractiveness of the notion, and the frequent repetition of the mantra of corporate social responsibility have made this fallacy a part of the modern corporate zeitgeist. Like the citizens who were afraid to tell the emperor that he was naked, no responsible business official would dare contradict the notion publicly for fear of financial ruin, even though the practice continues to cost shareholders and society enormous amounts. This is especially so in large-scale retail businesses like Wal-Mart or Coca-Cola or BP that are highly vulnerable to organized public criticism. Our laws against extortion do not function effectively when it comes to corporations. And so to some extent these private entities have indeed, via the social responsibility notion, been converted into crypto-public enterprises that are the essence of socialism. Milton Friedman was right again.

Mr. Manne is dean emeritus of the George Mason University School of Law.

  URL for this article:


  1. Andras Erszegi

    December 8, 2006 @ 8:13 am


    I believe that Friedman was right, in fact his arguments were beautifully logical and clear, within his model of business and society, which, however, as all models, simplifies complex issues so that they can be dealt with in a rational way.
    In my opinion, the Friedman model ignores two issues:

    (1) The roles of business and government are not as separate in the real world as implied in the Friedman model. In fact, the larger a company, and the smaller the country lead by a government, the greater the company’s influence on the government’s decisions, due to its lobbying power. For instance, Central-Eastern-European governments are competing for large investments by transnational companies, by suiting their countries’ legislation to the interests of those transnationals, mainly in the areas of taxation.
    Mr. Manne is right in saying that even a billion apples do not become meat. But the difference between a small amount and a larger amount of Uranium may determine whether a chain reaction happens. The notion of “critical mass” is quite well known, and widely used in various contexts.

    (2) The timescale of business decisions aimed at increasing profits is also important. Short term profitability decisions tend to reduce the “sustainability” of resources, while long term decisions tend to enhance sustainability. Because of this, long term deicisions usually serve the interests of the larger community better than short term decisions, because it is a long term business interest to sustain an environment which continues to provide the necessary natural resources, skilled people who can work for business, and reasonably wealthy people who can afford to buy the end-products of the business. However, the Friedman model does not provide much guidance on how business executives should choose between short term and long term options.

    Kind regards
    András Érszegi

  2. » Blog Archive » Milton Freedman was right

    January 4, 2007 @ 5:51 am


    […] The article, that also appeared on the Wall Stree Journal, is by Mr. Manne, dean emeritus of the George Mason University School of Law. […]

Leave a Comment

Log in