The Enduring Wisdom of Milton Friedman

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2020-09-30

Posted by Steven Kaplan (University of Chicago), on Wednesday, September 30, 2020
Editor's Note: Steven N. Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business. This post is based on his piece, originally published in ProMarket. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Milton Friedman wrote his famous piece about corporate social responsibility 50 years ago. The wisdom of the piece has been influential, productive, and remains true today.

It is important to understand what Friedman actually said and meant: “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.” I interpret “profits” to mean long-term shareholder value, which is the value of the company. That captures the fact that total shareholder value can increase if a company takes actions that reduce profits in the short-term, but increase them by more in the medium and longer-term. That is surely what Friedman meant.