Milton Friedman’s Shareholder Capitalism and Its Discontents

Note: This essay by Jomo Kwame Sundaram continues the Miami Institute’s economics forum. Drawing on two pieces previously published by Inter-Press Service (IPS)—“Shareholder Capitalism’s Ugly Legacy” and “Milton Friedman versus stakeholder capitalism”—Jomo Kwame Sundaram argues that Milton Friedman’s “shareholder capitalism” is increasingly finding sizable and long-lasting pushback in corporate governance circles as notions of “stakeholder capitalism” and “corporate social responsibility” (CSR) have become increasingly influential.

In 1962, Milton Friedman published his most influential book, Capitalism and Freedom. In September 1970, The New York Times Magazine published his essay, The Social Responsibility of Business is to Increase Its Profits. The 1970 article—reiterating the Friedman Doctrine, presuming perfectly functioning markets that only exist in the minds and writings of some neoliberal economists today—has become a manifesto for U.S. shareholder capitalism. Friedman’s doctrine of ‘shareholder capitalism’—with short-term profit maximization the raison d’etre for corporate governance—increasingly dominated business thinking and corporate practices from the 1970s.

Friedman’s ‘Shareholder Capitalism’

Meanwhile, Milton Friedman’s monetarist economics has been discredited, and has little practical influence anymore, especially with the turn to ‘unconventional monetary policies’, particularly after the 2008-2009 global financial crisis. Yet, his ideological sway remains strong, as it serves powerful interests. Hence, Friedman remains influential, and his 1970 essay has long served as the mainstream manifesto of corporate governance.

Generations of Friedmanites have insisted that ‘the only business of business is business’, and their sole responsibility to society is to make money. Friedman emphasized, ‘‘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.’’

When Friedman insisted “make as much money as possible while conforming to the basic rules of the society”, he may have presumed that market imperfections do not exist, or would be fully addressed by a ‘minimal’ state, although it is well-known that the rule of law has never been adequate to the challenge. For Friedman, government and other stakeholders should not be allowed to interfere with private corporate governance in any way.

Almost like a religion, his thinking became the hegemonic ideology, legitimizing ‘greed-is-good’ behavior. This type of capitalism spread as Friedman’s ideology spread throughout the world, especially with the ‘neoliberal’ counter-revolution against Keynesian and development economics from the 1980s.

His singular focus on maximizing profits for shareholders justified ignoring all problems due to corporate practices. The doctrine thus absolved the firm of social responsibility. It justified and encouraged generations of corporate leaders committed to the primacy of ‘shareholder value’. But even if Friedman is correct that capitalist firms should only be profit-maximizing, there is no reason to presume that such firm behavior will enhance, let alone maximize societal welfare, rather than cause the converse.

Neoliberalism’s Discontents

Unsurprisingly, neoliberal economists’ claims have been discredited by their policies’ failure to significantly increase investments in the real economy in recent decades. ‘Getting government out of the way’, the neoliberal ‘free market’ mantra, was supposed to boost private investments. More handsome corporate profits due to cost savings—from lower wages and taxes as well as weaker anti-trust and other regulations—have not significantly increased real investments in the US. And without sufficient investments to enhance productivity, growth has declined, if not stagnated, besides dimming future economic prospects. With labor incomes declining relatively, if not absolutely, consumer spending has declined, reducing aggregate demand while feeding a vicious circle of stagnation.

The word ‘competition’ appears only once in the last sentence of Friedman’s 1970 essay. Yet, some supporters insist that Friedman was not really ‘pro-business’, but rather ‘pro-market’. But, unlike capitalism, the market has been with us for several millennia and has happily co-existed with unfreedoms of various types.

Perfect competition rarely exists due to inherent tendencies undermining it. For half a century, information and behavioral economics have challenged Friedman’s many, typically simplistic assumptions. Friedman conveniently ignored ‘market imperfections’ in the real world, although or perhaps because they undermined the empirical bases for his reasoning.

Meanwhile, deregulation has not generally increased real investments and output growth. Market finance ideology claims that the stock market can best allocate scarce investment resources among companies. But the share buybacks trend implies that US corporations have no better investment options than to further raise already high, over-valued financial asset prices, inadvertently reducing resources for real investments and future growth.

The Friedman doctrine also celebrated and justified short-termism, besides undermining protection for employees and the environment to maximize shareholder value by increasing corporate profits. The 2007-2009 US financial crisis exposed some problems of short-termism, particularly related to financialization and ‘shareholder value extraction’. Thus, the crisis cast doubt on Friedman’s legacy and its implications, encouraging new challenges to his corporate governance norms.

All markets are shaped by various historical and contemporary economic, cultural, social and political influences. These are often driven by business and other lobbies as politics, collective action and advocacy shape the design, implementation and enforcement of policies.

Milton Friedman’s view of politics and business appears contradictory. Friedman would have us believe that power and politics are not exercised in free markets. But this ostensible insulation of politics from supposedly power-free markets is a fiction which serious Friedmanites knew only too well, as suggested by their own advocacy, behavior and conduct. His writings argue that business should stay out of politics, and not use shareholder money to influence politics. Yet, he is remarkably understanding when it happens: “I can’t blame a businessman who goes to Washington and tries to get special privileges for his company”. “If the rules of the game are that you go to Washington to get a special privilege, I can’t blame him for doing that. Blame the rest of us for being so foolish as to let him get away with it.”

With the Citizens United (2010) ruling in the new century, the US Supreme Court has legally enabled powerful corporate interests to lobby politically. Unsurprisingly, corporate taxation has been dramatically reduced, while social protection and public investments, e.g., in health and education, have declined further.

Former Clinton Labor Secretary Robert Reich has argued that larger US corporations have acquired so much influence over government, as to undermine US democracy. Reich argues instead for public financing of electoral campaigns while curbing corporate influence, e.g., via lobbying and campaign spending. He cites a study of 1,779 policy issues during 1981-2002 which found most “lawmakers acceding to the demands of big businesses with the most lobbying capabilities while the average American had ‘only a minuscule, near-zero, statistically nonsignificant impact upon public policy.’”

For Reich, gains were shared by top executives and shareholders with workers during the post-Second World War ‘Golden Age’ when Keynesian economics was dominant, welfare states grew, and real labor incomes rose with profits. Benefits became increasingly skewed to the very wealthy in the past four decades, thanks to Friedman’s increased influence. From 1948 to 1979, US worker productivity more than doubled while wages fell slightly behind as the stock market grew over six-fold. But from 1979 to 2018, worker productivity rose 70 per cent, as worker pay rose by only 11.6 per cent, while CEO compensation rose almost ten-fold and the stock market 22-fold!

Stakeholder Capitalism and Its Discontents

Friedman’s neoliberal ‘doctrine’ shaped major economic reforms the world over from the 1980s until the 2008-2009 global financial crisis. Lackluster growth and growing inequality since have given rise to various challenges to shareholder capitalism, not least in the name of other stakeholders. As other problems of neoliberal capitalism became more evident, notions of ‘stakeholder capitalism’ and ‘corporate social responsibility’ (CSR) have become increasingly influential. Friedman vehemently opposed stakeholder capitalism, whose proponents argue that companies have responsibilities to all stakeholders, not only shareholders, but also employees, customers, society, and even nature.

To be sure, many have undoubtedly turned away from Milton Friedman’s thinking in recent years. This dissent has included appeals for corporate governance reform and CSR. Multi-millionaires, even some billionaires and chief executive officers (CEOs), have joined the dissent. Influential businessmen, such as writer Andrew Ross Sorkin, would have us believe they represent the future. Unsurprisingly, Friedman denounced dissenting CEOs as “unwitting puppets of the intellectual forces that have been undermining the basis of a free society.”

In 2019, the US Business Roundtable, which had long advocated Friedmanite shareholder primacy, put out a pro-stakeholder statement, replacing its Friedmanite Statement on the Purpose of a Corporation with “a fundamental commitment to all of our stakeholders.” A few months later, the World Economic Forum issued a similar 2020 Davos Manifesto, embracing stakeholder as well as environmental, social, and governance (ESG) principles.

With growing opposition to neoliberal capitalism, ‘stakeholderism’ and CSR have been invoked to save capitalism by offering a more sensitive ‘human’ face. Many CSR advocates argue that they are thinking long-term, and ultimately defending capitalist free enterprise by developing a ‘social conscience’ and taking responsibility for providing employment, avoiding pollution, and pursuing other trendy reforms, ostensibly in the ‘enlightened self-interest’ of shareholders.

Meanwhile, most advocating a stakeholder approach to corporate governance argue that considering the interests of employees or other stakeholders is good for company profits and shareholders, but privately acknowledge that profits must come first, even if they feel constrained to say so in public. Embarrassingly, however, US corporations that signed the ‘stakeholder capitalism’ statement have been more likely to lay off workers in response to the COVID-19 pandemic, and less likely to donate to relief efforts.        

Unsurprisingly, legendary investor Warren Buffett remains skeptical of ‘purpose-over-profit’ stakeholder advocacy. “In representing your interests, business-savvy directors [will] seek managers whose goals include delighting their customers, cherishing their associates and acting as good citizens of both their communities and our country.”

Others insist that many contemporary problems are too urgent for slowly meandering political processes. Instead, they argue, CSR “is a quicker and surer way to solve pressing current problems”. CSR is also said to be a useful, if not necessary complement to government policy and regulation. Friedmanite critics object that CSR involves spending shareholder money for a typically vague public interest, reducing their returns and spending ‘other people’s money’. Friedman warned that the doctrine of ‘social responsibility’ will take over if not checked.

But the converse is more true today as the ‘greed is good’ and ‘short-termist’ shareholder mentalities are clearly hegemonic. Others object that CSR involves the ‘socialist view’, according to Friedmanites, that political, not market mechanisms are better for allocating scarce resources to alternative uses. Meanwhile, CSR has also been invoked to justify wage curbs against trade union demands, ostensibly for some higher public purpose. Philanthropy and charity have also been invoked to minimize tax liability, and for public relations and marketing, e.g., by ‘greenwashing’ products and services.

As capitalism may well be the only ‘show in town’ for some time to come, popular demands for more thoroughgoing reforms and checks and balances are likely to grow as the realities of stakeholder capitalism and CSR become increasingly apparent.

-Jomo Kwame Sundaram

Jomo Kwame Sundaram is Senior Adviser at the Khazanah Research Institute in Kuala Lumpur, Malaysia. He was a member of the Economic Action Council (2019-2020), chaired by the seventh Malaysian Prime Minister, and the 5-member Council of Eminent Persons (2018) appointed by him, Emeritus Professor at the University of Malaya and Fellow of the Academy of Science, Malaysia. He was Founder-Chair of International Development Economics Associates (IDEAs), UN Assistant Secretary General for Economic Development (2005-2012), Research Coordinator for the G24 Intergovernmental Group on International Monetary Affairs and Development (2006-2012), and Assistant Director General for Economic and Social Development, Food and Agriculture Organization (FAO) of the United Nations (2012-2015). He received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.