Satish Bapanapalli on why Friedman’s doctrine helps to explain why auto manufacturers spend so much money to crash-test their vehicles:
Ford Focus versus Ford Explorer crash test IIHS by Brady Holt is licensed under CC BY 3.0
Of all of Friedman’s great ideas, the Shareholder Doctrine is perhaps the most misunderstood by academics, in large part because many left-leaning intellectuals use the good old straw man argument to misleadingly caricature the doctrine as a “profit-at-all-cost system regardless of human toll.”
Case in point, the latest sermon by some reputed academics published in Fortune magazine: “50 years later, Milton Friedman’s shareholder doctrine is dead.”
This one has all the usual tropes, including the claim that “Friedman … urged business to use its muscle to reduce the effectiveness of unions, blunt environmental and consumer protection measures, and defang antitrust law. He sought to reduce consideration of human concerns [such as] treat[ing] workers, consumers, and society fairly.”
Friedman said no such things. Read it for yourselves. Friedman’s primary argument was that it is not the job of the officers of a corporation (corporate executives) to fight for social causes. The officers must only act in accordance with the shareholder’s wishes, “which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
Of course, in some cases, the shareholders may themselves encourage charitable spending and other corporate policies and activities deemed “socially responsible.” In which case, executives are tasked with finding the best ways to fulfill those objectives. In his article, Friedman clearly demonstrates why this is a logically precise position.
The scolds, who authored the Fortune article, put forth an alternative. Their “three pillars” proposal advocates for laws to be imposed on corporations with vague and fuzzy objectives (note the italicized words) such as “responsible corporate citizen[ship]”, “treating workers … fairly“, “avoiding externalities, such as carbon emissions, that cause unreasonable or disproportionate harm to others”, and corporations should make profits by “benefiting others.” To rub foolishness on the vagueness, the proposal calls for putting the onus on the corporations to measure and demonstrate progress on these fuzzy objectives! To put it in Friedman’s own words, such proposals “are notable for their analytical looseness and lack of rigor.”
