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Was Milton Friedman Pro-Capitalist?

Was Milton Friedman Pro-Capitalist?

7 Mins
April 1, 2007

Last year, on November 16 (the anniversary of the Federal Reserve System, ironically), Milton Friedman died at the age of ninety-four. The editorial in the next day’s Wall Street Journal carried the headline “Capitalism and Friedman,” playing off the title of his 1962 work Capitalism and Freedom. The article’s subtitle read: “The man who made free markets popular again.”

Personally, I learned an inestimable amount about economic liberty from Milton Friedman. My educational debt to him stretches back four decades, to that famous book, which I read in high school shortly after its publication. Over the years, whenever I have set out to gather analyses of economic interventionism and anti-business leftism, I have often turned to Friedman first.

And yet I distinctly remember hearing philosopher Ayn Rand remark that she did not consider Milton Friedman to be a defender of capitalism at all, although she understood why some people thought he was.

Milton Friedman not pro-capitalist? Is the pope Protestant? What did Rand mean?

I had occasion to ask those questions recently when I began writing an article about the anti-business journalism of New York Times financial columnist Gretchen Morgenson (published in this issue of TNI). In preparing to analyze Morgenson’s writings, I went back to re-read Friedman’s famous article in the September 13, 1970, New York Times Magazine,“The Social Responsibility of Business Is to Increase Profits.” I remembered having enjoyed the essay enormously, having indeed laughed aloud for the sheer joy of hearing such things said amid those appalling, New Left−dominated times. But my re-reading brought disappointment. Not only did I not find a knockdown answer to Morgenson’s collectivist vision—of “shareholder democracy” as a cure for CEO greed—the piece seemed to offer a view of business and businessmen that lent credence to her views.


Friedman argued as follows:

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose—for example, a hospital or school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.

Having laid down this understanding of the businessman’s place, Friedman went on to ask: “What does it mean to say that the corporate executive has a ‘social responsibility’ in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers.” Quoting his book Capitalism and Freedom, Friedman concluded: “‘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.’”

Ayn Rand did not consider Milton Friedman to be a defender of capitalism.

Does this mean that for-profit corporations may not engage in eleemosynary activities without the express consent of their stockholders? Or, if they may, how are managers to weigh such charity against their supposed responsibility to maximize shareholder wealth?

Friedman took account of corporate philanthropy in his article by considering it no exception to his rule:“It may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.” In short, Friedman argued that even for nominally philanthropic expenditures, the test and measure should be: How does this spending serve to maximize profits?


Back in 1970, when I first read Friedman’s essay, I looked upon it as defending the right of businessmen to pursue their self-interest. This time I saw it differently. By Friedman’s formulation, Walt Disney was not a creative genius who sold stock so that he would have enough capital to pursue his vision on a grand scale. He was just someone who had been hired as “an employee” by his stockholders and thus was obligated to do whatever the majority of his stockholders wished. Friedman presumed that what stockholders wished “generally will be to make as much money as possible.” But will it? Might not today’s stockholders want Disney to make as much money as possible—under the constraint that his cartoons be politically correct?

With no theory of natural rights to guide him, Milton Friedman could oppose lobbying only pragmatically, on a case-by-case basis.

Or look at it from the other side: Suppose Disney’s stockholders did want only to make money, but believed it could be done best through activities that violated Disney’s personal vision of what cartoons should be. For example, suppose the stockholders, wishing Disney to make as much money as possible, elected directors who insisted that he produce disgusting cartoons like South Park. In the face of his stockholders’ desires, Walt Disney, being a mere servant, would have no right to pursue his own creative entrepreneurial vision of cartoons.

Friedman’s dictum of maximizing profits has another consequence that is even harder to reconcile with his status as a defender of capitalism. According to his theory, it is not enough for a business executive to pursue the maximization of shareholder wealth through production and trade. He must take every and any action that he believes will maximize his shareholders’ wealth, so long as it is within the laws and ethical customs of the society where he operates. But those “laws and customs” may not have anything to do with the principles of individualism, or even individual rights.

For example, in 1989 Friedman told the National Association of Business Economics: “A corporate executive who goes to Washington seeking a tariff for his company's product is pursuing his stockholders’ self-interest, and I cannot blame him for doing so. As an employee of the stockholders, he has a fiduciary responsibility to promote their interest. If he’s made a valid, accurate judgment that a tariff will be in the self-interest of his enterprise, he is justified in lobbying for such a tariff.”

With no theory of natural rights to guide him, Friedman could oppose lobbying only pragmatically, on a case-by-case basis. He could not draw a principled distinction between lobbying to have force initiated on behalf of one’s company (seeking a subsidy, say) and lobbying to be defended against force (for example, seeking protection against a U.S. subsidy of a domestic competitor or against a foreign subsidy of a foreign competitor).

But why stop with lobbying? If Google could reap higher profits by helping China’s dictatorship censor search engines, then clearly it would be obligated to pursue such a course. That is not a happy conclusion for one who defends business as a bulwark of the free society.

To be sure, Friedman did say that a corporation should obey the rules embodied in “ethical custom,” but that is a weak reed in a pluralist, secular society. And it would be an even weaker reed in a fully capitalist society, for defenders of capitalism boast, rightly, that their system is the greatest destroyer of traditional ethical customs and taboos. During the Cold War, it was typically businessmen who rationalized away moral doubts about trade with the Soviet Union; it was labor union leaders like George Meany who insisted that it was simply wrong to trade with a state that enslaved its people.

By trying to extricate business executives from the charge of selfishness, Friedman succeeded only in portraying them as amoral functionaries.

Friedman also allowed that an individual manager who had qualms about pursuing a particular course of profit-maximizing behavior should quit, though the company itself had no moral right to forgo the behavior in question. Considering how strenuously libertarians urge that the law should permit much behavior that is immoral, the result of applying Friedman’s doctrine in a fully free society would seem to be an endless stream of departing managers, leaving only the most amoral or depraved people willing to become CEOs.

In sum, what many libertarian readers interpreted as Friedman’s stout defense of self-interested businessmen turns out to be nothing of the kind. It was, rather, a way to avoid the need to defend the businessman’s pursuit of self-interest. Friedman’s argument said, in effect: “Don’t blame the poor little businessman for making as much money as he can; he’s just doing his duty as a good servant.” But by trying to extricate business executives from the charge of selfishness, Friedman succeeded only in portraying them as amoral functionaries.

What would a more individualist portrayal of the businessman’s role look like? That is a question for a later column.


Still, one might say, if Friedman disavowed the egoism of businessmen, did he not defend the egoism of the stockholder? He maintained that the money-earning activities of businessmen are only expressions of bounden duty. But he also asserted, did he not, that shareholder-bosses are right to be self-interested money-grubbers, desiring only “to make as much money as possible while conforming to the basic rules of society”? One can certainly read his 1970 article in that fashion, particularly when he quotes his book Capitalism and Freedom as saying that the whole notion of a corporation’s social responsibility is “fundamentally subversive.”

But if that is Friedman’s view, then it would seem that the New York Times’s Gretchen Morgenson is on good grounds when she urges that stockholders be given a greater ability to choose the directors of a company and to hold them responsible for the activities of profligate managers. On October 1, 2006, for example, Morgenson quoted the CEO of a proxy advisory research firm as saying: “Unfortunately, shareholders do not now have the means to assert market influence. . . . A good libertarian would seek an easier way for the market’s participants to order their affairs and provide an oversight mechanism for owners that would help eliminate the call for greater regulation and criminal prosecution.” Friedman’s 1970 attack on the social responsibility of business did seem to lay the groundwork for partisans of “shareholder democracy.”

In his final years, however, Friedman apparently backed away from stressing the (presumed but never consulted) desires of stockholder-owners as the basis for profit-maximization by servant-executives. He turned instead to justifying corporate profit-seeking on the basis of utilitarianism, which obviated the need for shareholder input and thus for shareholder democracy.

For example, in a debate published in the October 2005 Reason magazine, Friedman said: “Note that I refer to social responsibility, not financial, accounting, or legal. . . . Maximizing profits is an end from the private point of view; it is a means from the social point of view. A system based on private property and free markets is a sophisticated means of enabling people to cooperate in their economic activities without compulsion; it enables separated knowledge to assure that each resource is used for its most valuable use, and is combined with other resources in the most efficient way.”

So it appears that, for Friedman, “the social responsibility of business” is after all a perfectly valid concept and not “fundamentally subversive.” The perspective of “social responsibility” looks upon a free-market system not as the social expression of individual rights, but as the means by which society organizes the use of “its” resources so that they are employed in the most valuable way—“valuable,” presumably, in accordance with some utilitarian standard. Within this system, shareholders are, yes, justified in pursuing the maximization of their wealth (through the work of their servant-executives). But they are so justified only because their pursuit of profit happens to be a means employed by society for the general, collective good. In effect, society is employing “its” selfish shareholders to make certain that society’s goods are deployed in the most efficient and value-producing manner. That, according to Friedman, is the overarching justification for the selfish behavior of those who participate in business.

And utilitarianism, not the greed of stockholder-owners, is also the overarching reason that both shareholders and their servant-executives should eschew philanthropic behavior. As Friedman put it: “What reason is there to suppose that the stream of profit distributed in this way would do more good for society than investing that stream of profit in the enterprise itself or paying it out as dividends and letting the stockholders dispose of it? . . . Any funds devoted to [charity] would surely have contributed more to society if they had been devoted to improving still further [the company’s business].” Morally speaking, that is a thoroughly collectivist defense of profit-seeking.

In the end, then, was Milton Friedman an advocate of capitalism or not? Strictly speaking, I believe he was. Friedman did defend political and economic individualism; but, like many before him (notably John Stuart Mill), he defended them on the basis of ethical collectivism, specifically, utilitarianism. And such a defense, ultimately, is indefensible.

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