January 26, 2011

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What We Learned from Milton Friedman

I am a big fan of Milton Friedman. I’m also becoming a big fan of Creating Shared Value. Some believe the two values are inconsistent, but I disagree.

milton-friedman-300x202 In 2005, Reason Magazine posted an online debate between Friedman and Whole Foods Market CEO John Mackey. The debate coincided with the 35th anniversary of Friedmans’ famous The New York Times Magazine article entitled: : “The Social Responsibility of Business Is to Increase Its Profits.”

Now, 2005 was before Mr. Mackey became the darling of the tea party because of his defense of privatized medicine in 2009. At the time, I’m sure, free marketers took sides with Friedman.

But in that debate, Mackey makes a compelling case for businesses understanding the long-term effects of their operations and decisions—and for learning how to articulate the benefits of capitalism to society:

Both capitalism and corporations are misunderstood, mistrusted, and disliked around the world because of statements like Friedman’s on social responsibility. His comment is used by the enemies of capitalism to argue that capitalism is greedy, selfish, and uncaring. It is right up there with William Vanderbilt’s “the public be damned” and former G.M. Chairman Charlie Wilson’s declaration that “what’s good for the country is good for General Motors, and vice versa.” If we are truly interested in spreading capitalism throughout the world (I certainly am), we need to do a better job marketing it. I believe if economists and business people consistently communicated and acted on my message that “the enlightened corporation should try to create value for all of its constituencies,” we would see most of the resistance to capitalism disappear.

Today, I have to admit, I agree with Mackey. Milton Friedman’s 1970 article that the only social responsibility of the corporation is to maximize profits was not wrong. It was poorly expressed. As Mackey points out, Friedman’s words have been (ab)used by leftists ever since—usually by leftists who’ve never read the article.

Earlier in the debate, Mackey pointed out that Adam Smith’s less famous work focused, not on maximizing profits, but on maximizing value:

[E]conomists would be well served to read Smith’s other great book, The Theory of Moral Sentiments. There he explains that human nature isn’t just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human behavior, these are at least as important as self-interest. [hyperlink added]

We’ve learned many great ideas from Friedman, including the ridiculous cost of government hidden in a 32 cent pencil. Free to Choose was the most important book on economics I read in high school. I’m sure it was for many others, too.

We also learned the importance of messaging from Dr. Friedman by way of John Mackey. We owe both men a debt of gratitude. And we owe the great free market system our vigilance in promoting the political system that advanced humanity more than any. By creating shared value, corporations keep the engine of liberty alive.

On Friday, I’ll write more on the idea of Creating Shared Value.