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Where Milton Friedman Was Wrong

It pains me to write such an inflammatory headline about a person I respect. The late Milton Friedman was a great economist, free-market philosopher, and author (Capitalism and Freedom is excellent). Indeed, I've learned a great deal from him and agree with many of the things he said.

But there's one widely known Friedman quote I've come to loathe:

There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits.

He goes on to say, "So long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." (I'm sure you can think of a few companies that forgot that last part.)

Profit at what cost?
That single-minded pursuit of profit has been one of the major culprits for the worst habits and downfalls of corporations.

Too many people blithely focus on the "increasing profits" motif as an excuse for any manner of activities that common sense or everyday ethics should rule out.

That's why Friedman's catchphrase has started to drive me nuts. The emphasis on unfettered short-term profits can result in sketchy behavior such as funky accounting, and it can also translate into strategically unsound decisions that will destroy value over the long haul. And when it comes to free markets, a great deal of responsibility is required -- or the whole concept very easily becomes tarnished.  

A race to the bottom
Relentlessly driving profit can become a race to the bottom. For example, China is a source for low-cost labor, and U.S. companies have, for lack of a better word, exploited that resource. Yet recent quality problems from Chinese manufacturers, evident in the repeated recalls from Mattel (NYSE: MAT  ) , serve as a reminder that not all governments, countries, or cultures share our standards.

Mattel shareholders should rightfully wonder if what once looked like a cost-saving move won't actually undermine the company's long-term profits.

Remember when Sam Walton's Wal-Mart (NYSE: WMT  ) provided inexpensive products and was warmly welcomed into new markets?

In order to keep those prices low, Wal-Mart has resorted to some questionable labor practices that severed its once-strong ties with the communities it operates in -- some now fight Wal-Mart when it tries to come to town. Relentless attention to controlling costs to boost the bottom line may seem of paramount importance when it comes to profits, the last few years of Wal-Mart's performance indicate that shoppers are looking for something more.

Focus on the best
Some investors are voting with their feet on issues of social responsibility; more than 50 SRI funds are available, with more offerings coming. 

There is no standard definition for social responsibility. Of Fortune's 10 Most Accountable Global Companies of 2007, four are multinational oil companies -- BP (NYSE: BP  ) and Chevron (NYSE: CVX  ) among them. In another list, Corporate Responsibility Officer's 100 Best Corporate Citizens 2007, semiconductor company Advanced Micro Devices (NYSE: AMD  ) was No. 2.

Big Oil and semiconductor concerns aren't usually the first to come to mind for SRI-minded investors. But that's a key point -- socially responsible investing means different things to different people. I like focusing on stellar companies, companies that know profitable business doesn't require forgetting the big picture behind sustainable growth. In almost all cases, that goes hand in hand with great management teams.  

By way of an example ...
Current companies that come to mind include Best Buy (NYSE: BBY  ) , which has a customer-centric approach to retail, arguably giving it a strong competitive advantage over cost-cutting competitor Circuit City.

Whole Foods Market (Nasdaq: WFMI  ) is another leader. Whole Foods is known for recognizing business's holistic role in society, and although CEO John Mackey has gotten some flak for posting anonymously on discussion boards, he publicly debated the great Milton Friedman on the topic of social responsibility in business.

Looking ahead to 2108
The social responsibility of businesses might always be a sticky point to debate, but plain old responsibility shouldn't be. Companies with great management teams that focus on profiting from excellence and innovation, and not "profit at all costs," are the ones that will produce sustainable profit growth.

That's how we like to invest at Motley Fool Stock Advisor, where both Best Buy and Whole Foods are current recommendations of our team (they're also both in CRO's list of the 100 Best Corporate Citizens).

At times companies like these require patience and understanding from long-term shareholders, but they're also the types of companies that have a less-risky path to long-term rewards. At Stock Advisor, one of the first questions we ask about a business is whether it's built to last for the next 100 years or more.

I think socially irresponsible companies have little chance of lasting till 2108.

Motley Fool Stock Advisor is all about rewarding investors for the long haul -- it's currently outperforming the S&P by 36 percentage points. To find out all the stocks David and Tom Gardner have recommended to subscribers, including their top five ideas for new money, take a 30-day free trial.

Alyce Lomax owns shares of Whole Foods Market. Best Buy and Whole Foods Market are Motley Fool Stock Advisor recommendations. Wal-Mart and Best Buy are Inside Value recommendations. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (66)

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  • Report this Comment On September 26, 2008, at 5:55 AM, sigmundaldates wrote:

    Well Alyce Lomax you have the consolation of knowing you were right and Friedman was wrong.

    The fact that the USA and the UK are suffering similar economic problems is not a coincidence. He converted both countries to his free market philosophy.

    Here in the UK - Prime Minister Thatcher became a disciple.

    I remember the arguments against Friedman but she embraced his belief in a market free of regulation.

    And we are now seeing the results of this misguided policy.

    It is an irony that the state he spent his life criticising is having to pick up the pieces.

  • Report this Comment On July 24, 2010, at 3:59 AM, safefool1 wrote:

    The other comment is a case of blaming capitalism for problems caused by socialism. Extreme regulation following by massive corporate bailouts/welfare lead to a bubble and crash? Darn capitalism! Wait... the definition said private ownership of capital... shucks, never mind. Get it out of your head that the state knows better than individuals. It doesn't. That's why democracy and civil and political right are so important.

    Moving right along to your article itself, what you're saying is certainly reasonable. The question is how do you measure what's "socially responsible"? What if it's different from what I measure as "socially responsible"? If "cost-cutting" is socially irresponsible for Circuit City to do, I can think of several ways the Motley Fool is severely socially irresponsible. But who gets to decide? Milton Friedman probably would have advocated consumers voting with their wallet. Personally, I see nothing wrong with logical government intervention to prevent fraud, misrepresentation, and obvious irresponsibility, the same standards to which they should hold individuals accountable. Add to that policies that seek to maximize transparency, and you can let consumers make informed decisions to the benefit of the most well behaved companies. This is the environment where free enterprise thrives. Not when state and private enterprise enable each other to be irresponsible, but when they keep each other in check, for the benefit of everyone. Last, I'm not sure why you took a sound byte like that so seriously and read into it so much. Like I alluded to earlier, it's very vaguely defined, and he was very clear that when a third party is affected, it's a bad thing. This can be addressed by keeping both democracy and free enterprise thriving, for one cannot exist without the other. Cheers :)

  • Report this Comment On April 19, 2012, at 6:17 PM, Kukface wrote:

    I just want to set this straight. Milton Friedman was not a free market economist but he may seem like one. He is quite a brilliant micro economist and in that sense he is for the free market but if you look at his views about macro economy he is way out there on the statist side and he was a staunch supporter for FIAT-money and the central banking systems which no real free market economist can be.

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