Matthew Lau: Profit still rules, thank goodness!

Shareholder capitalism has been primary driving force in alleviating societal ills detractors have mistakenly blamed it for exacerbating

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Several weeks ago, on the 50th anniversary of Milton Friedman’s famous New York Times essay, “The Social Responsibility of Business is to Increase its Profits,” detractors rushed to declare that Friedman’s ideas had caused decades of widespread harm and destruction. Many of these declarations came from within the business community, which is hardly surprising, given last year’s Business Roundtable statement in which 181 high-profile CEOs promised to eschew shareholder primacy and promote an economy that serves all “stakeholders.”

A headline in Fortune, typical of others, announced that “Milton Friedman’s shareholder doctrine is dead.” Barron’s said Friedman’s vision “has failed. Let’s bury it and move on.” Between these articles and others in Business Insider, the Financial Times and elsewhere, the Friedman doctrine was blamed for, among other societal ills: income inequality, racial disparities, worker exploitation, catastrophic global warming, oppressive Big Tech monopolies, economic insecurity, and the hollowing-out of communities.

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Yet while much of the business community appears to have turned against Friedman’s ideas, the evidence shows that any shift from shareholder to stakeholder capitalism has taken place mainly in the news releases of PR departments and the broadsides of journalists, not in real business practices and operations. Last week, a consultants’ report sponsored by the left-wing Ford Foundation concluded that when it came to protecting workers during the pandemic and fighting against economic and social inequality there was virtually no difference between companies that had signed the Business Roundtable statement and those that hadn’t.

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These results corroborated the findings of two Harvard Law School researchers who surveyed the companies whose CEOs signed the Business Roundtable statement. Of the 48 responses they received, in only one case had the decision to sign the statement been approved by the company’s board of directors. That the CEOs did not consult their boards suggests signing was mainly for show and not a real change in corporate purpose or an abandonment of the primary commitment to deliver value to shareholders.

It is fortunate for society — i.e., the “stakeholders” the anti-Friedmanites say they want to help — that in practice businesses seem to be continuing to fulfill their social function by trying to increase profits. The reality is that for decades Friedman’s shareholder capitalism has been the primary driving force in alleviating the long list of societal ills that detractors have mistakenly blamed it for exacerbating.

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Take, for example, the claims that shareholder capitalism has resulted in economic insecurity, low wage growth and overall poor outcomes for workers. The data show just the opposite: average incomes have increased as competition between profit-seeking firms has bid up wages and prevented worker exploitation. The percentage of American households making $100,000 or more (in $2019) has more than tripled, from 11 per cent in 1967 to 34 per cent by 2019; at the same time, those making $35,000 or less fell from 36 per cent to 25 per cent. In Canada, decades-long income trends similarly show impressive gains for average families.

It is also difficult to blame profit-seeking corporations for contributing to racial tensions in society. Businesses that want to maximize profits discriminate only on grounds that affect the bottom line — the cost of serving a particular customer, the wages demanded, the expected productive output of a prospective hire and so on. Unfairly discriminating on irrelevant grounds such as race is unprofitable and unwise.

Meanwhile, on the climate issue, it is true that industrial activity may have accelerated global warming. But the expected harm from climate change is swamped by the increases in income that help humans thrive in adverse climatic and other conditions, not to mention to the research and innovation that adaptation and maybe even prevention require. Without the capital investment of corporations seeking profits, such productivity and income gains would have been all but impossible.

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One more example to demonstrate how the detractors of shareholder capitalism have got it backwards: misinterpreting the massive increases in the wealth of billionaires such as Amazon’s Jeff Bezos as evidence of worker exploitation, oppressive monopoly power and harmful income inequality. In reality, Bezos and others have become richer because of the significantly increased demand for the goods and services their companies provide. Amazon’s shareholders are wealthy only because Amazon delivers great value to its customers.

We should be thankful that despite increasing condemnations, including from within the business community, the Friedman doctrine on social responsibility lives on. We all profit as a result.

Matthew Lau is a Toronto writer.

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