Author: Peter-Jan Roose
Milton Friedman, the Nobel Prize winning American economist, will always be remembered as one of the most brilliant economists of the 20th century. As the inventor of Friedmanomics, even he would need to face the harsh environmental reality of today. The question is, what would he think about the reality we live in today? How would he react?
To find a possible answer to that question, we need to dig into his full repertoire. It would be too easy to base this article solely on his famous essay in the New York Times, in which he discusses the social responsibility of businesses. Nevertheless, let us use this article as the foundation.
“Businesses have only one responsibility – to make a profit”
His 50-year-old essay reflects the mainstream reaction from the 1970s establishment. A period marked by the rise of social movements (e.g. the anti-war protests, environmentalism, increasing support for sexual revolution, feminism, civil rights) and the Cold War.
In his 1970s essay, he said that the social responsibility of business is a “fundamentally subversive doctrine” and that “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 fraud.”.
In short, he claimed that a company’s main objective is to create profit. He saw the creation of welfare (from profit) as means to an end – in which governments, other collectivized organizations and families had the responsibility to turn this welfare into well-being. While he was progressive on many fronts, especially for his time, on topics such as LGBT rights, immigration, drug policy, negative income tax, social security, he did not believe companies should have a (social) responsibility beyond its shareholders. In his view, democratic governments, activists, and consumers were far better positioned to accomplish this.
As a highly regarded economist, the industry took this idea to heart and ignored all the other brilliant comments he made. Consequently, the industry did very little to look for less environmentally expensive ways of doing business. It did not do much to find alternatives or to innovate in this regard. Essentially, it was simply turning a blind eye to things like burning down forests for a single crop, or enslaving children picking cacao, or carbonating the atmosphere. Change did not seem necessary because a business’ sole responsibility was to make profit...
“An externality is an effect on a third party caused by the mutually beneficial exchange that occurs in a free market”
He did advocate free and fair markets. From an economical perspective that means you need to take in to account externalities. These undesirable side effects (e.g. destroying rainforest or pollution) should be translated in the price, and thus the level of consumption.
In his 1979 discussion on the Phil Donahue Show he said: “There’s always a case for the government, to some extent, when what two people do affects a third party […] There is a case, for example, for emission controls.”.
What I believe he would say if he saw the icecaps melting
We cannot ask him, he has been resting in peace for 14 years now, but I am convinced he would defend the Paris Agreement. Let’s not forget that he also said things such as “Executives who take profits and spend them on social aims have, effectively turned themselves into legislators” and “Executives are employees, and it is up to the owners (shareholders) to decide what happens with the profit”.
Since the essay, owners have changed. Sustainability is on their agenda, albeit often for reputation, goodwill, and risk management sake. In today’s context one can translate the above into: “companies should care about sustainability because (a) it will maximize long-term profit and (b) our legislators fail to put in place effective policies.”
Welcome to the Economy of the 21st century
Last year, Business Roundtable released a new “Statement on the purpose of a corporation,” signed by 181 CEOs. The statement outlined a modern standard for corporate responsibility, one that benefits all stakeholders—customers, employees, suppliers, communities, and shareholders.
Although a modern approach to corporate responsibility is a great start, the 21st century requires a paradigm shift in its economical thinking, one that also considers all stakeholders. An economical model that regards the performance of an economy by the extent to which the needs of people are met without overshooting environmental boundaries. The main goal of this new model is to re-frame economic problems and set new goals. A good example of such a model is Doughnut Economics: a visual framework combining the economic, social, and environmental boundaries. The author, Kate Raworth, is a lauded economist working for the University of Oxford and the University of Cambridge.
We do not need to stop educating the future generation on Friedmanomics. However, we do need to start integrating the future-proof models, such as Doughnut Economics or Sustainable Finance principles. Because everyone, even corporations, need to take responsibility for making our world a more sustainable place to live.
Interested in kick-starting your sustainable finance transformation? Do not hesitate to reach out!