“The social responsibility of business is to increase its profits,” was Milton Friedman right?

 One of the more fascinating discussions at the upcoming #Risk conference focuses on Milton Friedman’s famous comment: “The social responsibility of business is to increase its profits.”

Milton Friedman might have been one of the most influential economists of the 20th Century, but in the pantheon of the greatest of all time, even he would have had to bow his head to Adam Smith.

In 1776 Adam Smith wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” That was from the Wealth of Nations, the paper which arguably spawned the theory behind capitalism.

Smith talked about the invisible hand — how the markets know best; how individuals acting in their own selfish interests serve a greater good. 

The fictitious Gordon Gekko said: “Greed is good,” — actually, he said: “Greed, for want of a better word, is good.” He was paraphrasing Smith’s famous idea. 

It’s nature — Darwinian selection, survival of the fittest.

But if the above is true, if the law of the jungle is about greed and selfishness, riddle me this. Why will a vampire bat throw up its ‘dinner’ in order to provide healthy nourishment for some unfortunate bat that was hungry?

And if Adam Smith is all about the invisible hand, about the benefits of being selfish, why did he also say this? “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.” That was from Smith’s other great work, “The History of moral sentiments.”

And if Darwinism is about the survival of the fittest, why was that phrase missing from the first four editions of The Origin of Species, and why did Darwin prefer the phrase: “Natural Selection?”  And why did he also write? “When two tribes of primaeval men, living in the same country, came into competition, if the one tribe included…a greater number of courageous, sympathetic, and faithful members, who were always ready to warn each other of danger, to aid and defend each other, this tribe would, without doubt, succeed best and conquer the other… A tribe possessing the above qualities in a high degree would spread and be victorious over other tribes, but in the course of time, it would, judging from all past history, be in its turn overcome by some other and still more highly endowed tribe. Thus, the social and moral qualities would tend slowly to advance and be diffused throughout the world.” - Charles Darwin, The Descent of Man, 1875.104

Milton Friedman is famous as a free market advocate, that if capitalism is left alone to its own devices, it will create the best outcomes. He said: “The social responsibility of business is to increase profits.” And yet, later in life, Friedman appeared to change his mind somewhat and in a House of Commons Select Committee, appeared to contradict the Thatcherite idea of cutting spending during a recession.  Thatcherism was described as a great Friedman experiment, “the Friedmanite guinea pig,” as Galbraith described it, yet Friedman distanced himself from aspects of Thatcherism.

The answer to the riddle

The riddle has an answer, but it is not one that, in the era of social media, is very popular. The answer is nuance.

Actually, the vampire bat that was apparently kindly throwing up the meal that it had gone to so much trouble to catch was, in a nuanced way, being selfish.

Darwin might have argued that morality could become hardwired — but the idea was, in fact, consistent with the concept of survival of the fittest.

This is the example I like. I believe my dog loves me. It is not cupboard love; it is genuine unconditional love. Evolution, obeying the rules of survival of the fittest, works in mysterious ways. It hardwired into dogs this genuine tendency to love their humans because it serves their survival, the interests of the selfish genes that make them up, to do so. The dog itself is unaware of this underlying selfishness, but it is there all the same — it is a form of cupboard love, but it is evolution that loves the cupboard; the dog remains, as it were, in the closet.

And that takes us back to Friedman and Smith

Is it the social responsibility of business to increase its profits? Answer: yes, but with nuance.

If companies look at their business and observe that chasing net zero adds costs without adding benefits, then why go down the net zero route?

At one level, the answer might be because regulators may force them to, or customers may demand it, or would be employees might insist upon it, so best to start preparing. At that level, net zero is consistent with increasing profits.

But there is another level — what I call the Tit for Tat level  — which introduces nuance. If all companies ignore net zero and go hell for leather on short-term profits, polluting like it is going out of fashion, climate change will create such a disaster that we will all be worse off, and business will make less profit 

But if companies do focus on net zero — and most other companies do the same, then the end result will be increased profits.

It then becomes partly a matter of faith — doing the right thing because if everyone does the right thing, everyone becomes better off.  But for such a policy to work, the transgressors must be punished — maybe by excluding them from the supply chain, or maybe that is where regulators step in — a kind of police force ensuring that freeloaders who ignore net zero and get the benefits without the costs are punished.