Saturday, April 11, 2015

Milton Friedman in Perspective

Milton Friedman wrote an article titled "The social responsibility of a business is to increase its profits"

It may seem like he is encouraging businesses to neglect social responsibility and only care about the bottom line.

I think that interpretation would be a mistake.

I'm not saying his ideas are perfect, in fact, I would amend the title in the following way:

"Businesses have a social responsibility to be profitable."

You see, Friedman's concern was that people were talking about social responsibilities in a vague and poorly defined way.

Friedman's idea was that it is possible to frame questions of social responsibility in terms of profitability.  This is very different from ruthlessly pursuing profits and expecting to be an ethical institution.

Framing questions of social responsibilities in economic terms can allow institutions to be rigorous and methodical about their social obligations.

Poor application of some of Friedman's ideas(most likely promoted by Friedman himself) has led to disastrous results in our society.

Ruthless pursuit of maximum profit is ill conceived and counterproductive.  It can lead you to sacrifice long term priorities for short term gains.  Defining maximum profits is a very tricky exercise.

Do we count total profits over the lifetime of the company?  Or do we give up trying to predict the future and just focus on what we control right now?

I think both are important.  Long term priorities should focus on things that we can actually control on that timescale.  A business can't always predict consumer interest or market needs 5 or 10 years down the road.

But they can control their social impact over these longer time frames.  Are we polluting or hurting the public?  Do we have responsible and ethical business and labor practices?

If you are causing harm to others, chances are, over time someone will recognize this, and there will be negative repercussions.  That's karma.

Short term, a business should be engaged in something that the market finds worthwhile, but this isn't the only concern.

Maximizing profits is a bad idea.  Profits that are too high are often an early warning sign that something is wrong.  You don't want to be the next Enron or Lehman Brothers.

Profitability should show that you are providing a service that people value and that you are using your resources responsibly.  But if you take things too far, it no longer works.

Let's amend that title one more time.

"Businesses have a social responsibility to be profitable.  Fulfilling all social responsibilities can help maintain profitability.  For the purposes of analysis, it is sometimes possible to describe social responsibilities in monetary terms."

Edit (2015-05-24): removed inaccuracy about friedman's history, a parenthetical statement, and spelling mistakes