What Milton Friedman Missed About Social Inequality

Joey Zwillinger


By Leo E. Strine Jr. and Joey Zwillinger

Fifty years ago, the economist Milton Friedman warned in his seminal essay, “The Social Responsibility of Business Is to Increase Its Profits,” that corporate executives would undermine the “basis of a free society” if they acted as if “business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the watchwords of the contemporary crop of reformers.”

Instead of operating in a manner that treated all stakeholders fairly, Mr. Friedman argued, every corporation should seek solely to “increase its profits within the rules of the game.” Not only that, Mr. Friedman sought to weaken the rules of the game by opposing basic civil rights legislation, unions, the minimum wage and other measures that protected workers, Black people, and the environment. Mr. Friedman’s cramped vision enhanced the power of the stock market and silenced the voice of workers, leading to profound inequality.

After the publication of his essay in The New York Times Magazine, Mr. Friedman’s adherents gained influence in government and the business community. At the same time as Mr. Friedman’s adherents disparaged government’s role, they sought enormous tax subsidies, greatly reducing the share of taxes that corporations paid. The promise of vital legislative protections against the excesses of unconstrained capitalism — including the National Labor Relations Act, minimum wage laws, the Clean Air Act, the Clean Water Act, antitrust regulations and consumer safety laws, to name a few — were undercut by two generations of ceaseless attack.

The concerns Mr. Friedman lampooned as obsessions of the “contemporary crop of reformers” in 1970 remain urgent problems.

As would be expected when business leaders were told not to worry about “providing employment,” wages stagnated and inequality grew. In the past 50 years, instead of gains for stockholders and top management tracking gains for workers — as characterized by the period when Mr. Friedman wrote — the returns of our capitalist system have become skewed toward the haves.

From 1948 to 1979, worker productivity grew by 108.1 percent and wages grew by 93.2 percent, with the stock market growing by 603 percent. By contrast, from 1979 to 2018, worker productivity rose by 69.6 percent, but the wealth created by these productivity gains went predominately to executives and stockholders. Worker pay rose by only 11.6 percent during this period, while compensation for chief executives grew by an enormous 940 percent and the stock market grew by 2,200 percent.

As would be expected when corporate leaders were told not to worry about “eliminating discrimination,” corporate political spending was used to help seat elected officials who opposed measures designed to reduce racial disparities in education, pay and wealth, and to support gerrymandering and voter suppression efforts.

As would be expected when corporations were told not to worry about “avoiding pollution,” they used their muscle to undermine environmental protection and to conceal the dangers of climate change. As a result of environmental policy distorted by corporate money and misinformation, the entire future of humanity is now at risk.

To reverse the Friedman paradigm, companies should embrace an affirmative duty to stakeholders and society. This requires tangible, publicly articulated goals, such as paying living wages to their workers, respecting workers’ right to join a union, promoting racial and gender inclusion and pay equity, enhancing safety protocols, and reducing carbon emissions. By committing to goals of responsible citizenship, companies allow stakeholders, institutional investors and the public to hold them accountable to their inclusive ideals. In doing so, corporate leaders will also set an example that institutional investors should be required to follow in their own investing and voting policies.

But adopting a stakeholder-centric governance model is only half the battle. Business leaders must support the restoration of fair rules of the game by government; respect the need for strong and resilient public institutions to govern a complex society; pay their fair share of taxes; and stop using corporate funds to distort our nation’s political process. That means ending corporate political spending without shareholder consent, and not contributing to dark money or political party committees. It also means ensuring that spending plans recommended to shareholders only allow contributions to candidates whose views on issues like racial inequality, climate change and fairness to workers are consistent with the corporation’s stated values.

There is a rueful irony in this anniversary. Mr. Friedman wrote the influential essay at a time when economic security was strong, as the New Deal’s principles produced widespread prosperity, reduced poverty and helped Black Americans take their first real strides toward economic inclusion. Since then, the United States has gone backward in economic equality and security — a situation that the Covid-19 pandemic has exposed for all to see.

By contrast, America’s economic allies in market economies like Germany, the Netherlands and in Scandinavia have remained true to those fundamental principles, refusing to embrace the Friedman Doctrine. As a result, they have benefited from less economic insecurity, greater equality and a more effective response to the pandemic. America’s business community should heed these lessons of history and help restore the ideals of fairness, equality and economic common sense that showed that a capitalist economy could work for the many.

Leo E. Strine Jr. is the former chief justice of Delaware, a distinguished fellow at the Columbia and Penn Law Schools, and Of Counsel in the corporate department at Wachtell, Lipton, Rosen & Katz.