Martin Wolf in the Financial Times alerted me to a very interesting and important e-book made available through ProMarket, a publication of the Stigler Center at Booth Business School (disclosure – I received an MBA from Booth in 1977). This book compiles 28 essays, including one from Martin Wolf, that comment on Milton Friedman’s essay of 50 years ago in the New York Times that stated: “a corporation’s only social responsibility was to increase its profits.” The book contains a variety of views and makes for very interesting reading, especially for those of us who believe corporations should look beyond pure profitability in their actions.
I found the most interesting essay to be that of Luis Zingales who is currently at Booth. He was the one of the editors of the book and his essay is the final one included. His essay was a nuanced and important criticism and refinement of the original Friedman views. Key quotes from that essay include the following:
“Five decades later, it is important to . . . restate Friedman as a theorem. Under what conditions is it socially efficient for managers to focus only on maximizing shareholder value? First, companies should operate in a competitive environment, which I will define as firms being both price and rules takers. Second, there should not be externalities (or the government should be able to address perfectly these externalities through regulation and taxation). Third, contracts are complete, in the sense that we can specify in a contract all relevant contingencies at no cost.”
“If these conditions are satisfied, Friedman’s result, which I will label the Friedman Separation Theorem, holds.”
He goes on to address each of the three conditions he lists noting issues in reality with each of them.
- “The really problematic assumption is assumption number one. Friedman himself recognizes that a mo- nopolist maximizing shareholder value is not good for society.”
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“When it comes to the second assumption, nobody in their right mind will defend the idea that we live in a world without externalities.” And he goes on to note: “corporations are born with an original sin: the ability to externalize some of their costs.”
- “Are contracts complete? The answer is a resounding ‘no.'”
This summary provides good insight into the critical views of Zingales but the final words of his essay provide very useful and nuanced perspective
“In sum, Friedman was more right than his detractors claim and more wrong than his supporters would like us to believe. His “theorem” has greatly contributed to determining when maximizing shareholder value is good for society and when it is not. The discipline imposed by Friedman’s theorem also forces greater accountability on managers. In the world of 2020, the biggest shareholder in most corporations is all of us, who have their pension money invested in stocks. We are the real silent majority. Corporate managers finance political candidates, lobby for self-serving legislation, and capture regulation. They have the power to use our money to fight against our own interest. While Friedman did not anticipate these degenerations, he warned us against the risk of unaccountable managers. This warning will remain his most enduring contribution.”
I highly recommend downloading and reading the complete book.
January 15, 2021
[…] to the investor focus I think my post on 13 December provides the best summary of the change. This post focused on the essays published […]
February 16, 2021
[…] He is especially critical of the current business school model that focuses on marketing, finance and quantitative analysis. But as he notes: “The “people stuff” and “culture stuff” gets short shrift in virtually all cases.” He further links this problem to the focus of too many corporations on only making profits as preached by Milton Friedman. An issue covered by me in an earlier post. […]