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Milton Friedman and Us(A)

Milton Friedman passed away recently at the age of 94. “Among economic scholars, Milton Friedman had no peer,” Ben S. Bernanke, the Federal Reserve Chairman, said. “The direct and indirect influences of his thinking on contemporary monetary economics would be difficult to overstate.” [1] Although Milton Friedman directly attacked socially responsible investing, I mourn his passing, for he caused all of us who work with and around money to think, to stretch our imaginations, and test our theories of economic systems that would better care for and preserve the populations of the Earth and the planet itself. Importantly, for most of us, this effort involved the protection of, not destruction of, a free market. “The Social Responsibility of Business is to Increase its Profits” is an unambiguous statement. But as Dr. Friedman elaborated on this basic concept, he opened important intellectual doors. “Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.” He referred to the corporation improving a community to “reduce the wage bill” or “lessen losses from pilferage and sabotage.” Even as he railed loudly against the “political mechanism” that he defined as collectivist, he understood that a community’s well-being affects the destiny of the corporation.[2] Whether we mean to or not, those of us in socially responsible investing will be arguing with Dr. Friedman for years to come. The intellectual challenge is good for us. Our key arguments, I believe, can be summarized in three paragraphs:

  • The concept of time. Dr. Friedman, in charging the management of corporations to maximize profits at all times, did not address the survivability of the company over time when the very act of maximizing profits destroys natural resources or alienates customers and potential workers. He failed to understand that not to consider the community and natural resources can be in fact self-destructive.
  • The fact that power corrupts. Dr. Friedman railed against “collectivism” or “socialism” or government interference, but history indicates that with no checks and balances, corporations attempt to become all-powerful and dominate society.
  • The growing disproportionate resources of global corporations. The world’s top six oil companies generated a total of $128 billion in profits in 2005, sufficient to cover the UN’s cost for 8 ½ years. These kinds of excess profits are not part of the idealized competitive markets celebrated in economics textbooks.[3]

I imagine Dr. Friedman would not object to that profit, but I wonder what he would say about the lack of vision on the part of these companies around their use of raw materials and their long-term viability.

[1] New York Times, November 17, 2006

[2] New York Times Magazine, September 13, 1970

[3] The Globalist Quiz, November, 2006