These changes, and their implications for business and American society in general, were not lost on the men and women who came of age between World Wars I and II. In Concept of the Corporation, a landmark study of General Motors first published in 1946, the sociologist and management guru Peter F. Drucker called the modern company the defining institution of American life. “[T]he large corporation,” he wrote, “has emerged as the representative and determining socio-economic institution which sets the pattern and determines the behavior even of the owner of the corner cigar store who never owned a share of stock, and of his errand boy who never set foot in a mill.” As such, he concluded, “the character of our society is determined and patterned by the structural organization of Big Business, the technology of the mass-production plant, and the degree to which our social beliefs and promises are realized in and by the large corporation.”
How well do major corporations reflect the highest aspirations of American society? Economists, politicians, public intellectuals, labor leaders, and business executives alike wrestled with that question for decades before Friedman effectively told them they needn’t bother. “What does it mean to say that ‘business’ has responsibilities?” he sniffed. “Only people have responsibilities.”
This is a rhetorical sleight of hand and Friedman at his most philosophically obtuse. Whether we’re discussing Standard Oil, or for that matter the Rockefeller family or the University of Chicago, we frequently talk without any confusion about the mission, character, and responsibility of complex associations. There may be good reason, however, for not doing so, which is really what Friedman was after. His essay was written at the height of the Cold War, when one might reasonably conclude that casually speaking in collectivist terms provided unwitting intellectual support to the claims of Karl Marx. For Friedman, talk of corporate social responsibility, by business executives no less, posed just such a danger.
“I have been impressed time and again by the schizophrenic character of many businessmen,” he wrote near the end of his essay. “They are capable of being extremely far-sighted and clearheaded in matters that are internal to their businesses. They are incredibly short-sighted and muddle-headed in matters that are outside their businesses but affect the possible survival of business in general.”
Fair enough, but a contemporary reader might reply, “Professor Friedman, it’s no longer 1970.”
Past, present, and future
This year marks the 30th anniversary of the fall of the Berlin Wall, the most outrageous monument to the failed experiment of Marxist expansionism. If the specter of global Communism stiffened Milton Friedman’s spine, and gave him good reason for being intellectually mulish, the shade has departed, and to suggest that it remains in any manner that remotely resembles the world Friedman knew is to trivialize the devastation it visited.
Today, only a person committed to plugging his ears against the appeals of history would suggest that the threats to capitalism of Friedman’s day remain our own, which may be one reason Friedman’s vision of the place and purpose of a company is losing adherents. Some, notably Harvard’s Oliver Hart and Chicago Booth’s Luigi Zingales, have attempted to update Friedman’s thesis by providing a more complicated vision of what constitutes the “self-interest” of shareholders. (See “It’s time to rethink Milton Friedman’s shareholder value argument,” Winter 2017/18.) Others, such as billionaire Marc Benioff, the founder and chairman of Salesforce, have taken on Friedman directly. “Unfortunately, some CEOs still embrace this myopic view and believe that they have a duty to shareholders alone,” he wrote in the New York Times in October 2018. “I contend that business must have a purpose beyond profits, and that such purpose can, over time, benefit both stockholders and stakeholders.”
Ironically, in some ways, Benioff, Hart, Zingales, and others are lurching toward the conclusions of Friedrich Hayek. He shared his friend’s fear and loathing of Communism, and he largely agreed with the spirit of Friedman’s thesis. “Unless we believe that the corporations serve the public interest best by devoting their resources to the single aim of securing the largest return in terms of long-run profits, the case for free enterprise breaks down,” he wrote a decade before Friedman’s essay. And yet, this did not mean that “in the pursuit of this end [companies] ought not to be restrained by general legal and moral rules.” In fact, he continued, “certain generally accepted rules of decency and perhaps even charitableness should probably be regarded as no less binding on corporations than the strict rules of law.”
Rather than isolated spheres of activity, Hayek understood, corporations are creatures of civilization, and therefore their actions should reflect what qualifies as civilized behavior. How precisely companies might discharge this mission is a tricky matter, one inevitably subject to dispute, and if a wayward board of directors should decide to do nothing—nothing, that is, beyond satisfying their shareholders—this would be a bad choice, Hayek believed, but one they should be free to make.
A willingness to tolerate fairly poor decisions is the practical upshot of “free to choose,” a commitment to human liberty that is stress tested by actions that appear like folly to wisdom’s eyes even when wisdom is willing to honor them. Wisdom still honors Friedman’s austere vision of corporate social responsibility nearly 50 years after it was first articulated, but in an age when the greatest threats to capitalism come from within, rather than from without, increasingly it seems like folly to embrace it.
John Paul Rollert is adjunct assistant professor of behavioral science at Chicago Booth.