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.