Friedman Doctrine

What Is The Friedman Doctrine? 

Friedman's doctrine stands with the opinion that businesses should always aim to maximize their revenue, hence increasing returns to shareholders.  The Friedman Doctrine suggests that the primary purpose of a business is to maximize profits and shareholder value.

Milton Friedman stated them as part of the guiding principles in business ethics that a company has to follow. He states that the profit-making idea of the business should not cross the norms of the game. The statement implies that profit shall be made while engaging in free and open competition without fraud or deception.

• Friedman's doctrine stands with the opinion that businesses have one major responsibility: to use their resources and involve themselves in activities that would ultimately lead to increased profits.
• The thought was first expressed in the 1970s in an essay for the New York Times.
• He opined that the executives who go above and beyond the mere idea of making money and indulge in an act of social concern are not performing their actual duties as employees.
• The Milton Friedman doctrine of Social Responsibility is criticized for neglecting corporations' broader effects on the community and the environment.

Friedman Doctrine Of Social Responsibility Explained

Friedman Doctrine refers to a set of ethical principles that emphasize the importance of profit maximization. The Friedman Doctrine of Social Responsibility proposes that a business's priority should be increasing profits, that corporate executives are like any other employees, and that the companies' shareholders are the bosses. The thought was first expressed in the 1970s in an essay for the New York Times. He opined that these shareholders desire to achieve maximum monetary benefits, conforming to the basic rules laid down by society.

To explain the thought further, Friedman argued for such a stance in light of a few points, which can make sense from a business perspective. Accordingly, the executive who should act as a businessman cannot, in his liberty, refrain from increasing the price of the goods or services of the business. This should be regardless of a part of society not being able to afford them or saying that it will lead to inflation.

Similarly, they cannot spend money on activities that are detrimental to the company's interests. Another point put forth is hiring. One cannot hire a long-term unemployed person instead of a qualified person to act for societal good. Hence, this will invariably negatively affect the company's interests. These are the reasons why the theory has become controversial because it questions fundamental acts of societal good.

The Friedman Doctrine approach argues that any use of resources for social or charitable causes that goes beyond what is required by law and contract is seen as an inappropriate use of shareholder funds. Therefore, the Friedman Doctrine ethics involves the belief that promoting economic efficiency and productivity is beneficial for society.

Examples

Let us understand the concept better with the help of examples. 

Example #1

Suppose Block Inc. is a publicly traded entity. This company aims to evaluate whether to invest in more environmentally friendly production methods that would reduce its carbon footprint but come with higher initial costs.  On the other hand, the company could opt for less eco-friendly practices that are more cost-effective in the short term.

According to the Friedman Doctrine, the ethical responsibility of a company is to prioritize the interests of its shareholders. Hence, by maximizing profits within the legal and ethical framework.  In this scenario, if the environmentally friendly option is expected to yield lower short-term profits.  The Friedman Doctrine would argue that the company should choose the more cost-effective method to enhance shareholder wealth.

Moreover, the doctrine would encourage the company to take on additional social or environmental responsibilities that are beyond what is legally required. This is because it might be perceived as diverting resources from the primary goal of profit maximization.

This example reflects the theory's emphasis on individual freedom, market efficiency, and the fiduciary duty of businesses to their shareholders.  However, it also underscores the ongoing debate about the ethical considerations of business decisions, particularly concerning environmental sustainability and the broader impact on society.

Example #2

Let's consider a financial institution faced with a decision regarding its investment practices.  The Friedman Doctrine would guide the bank to prioritize the maximization of shareholder value within the legal and ethical boundaries.  Suppose the financial institution is considering two investment portfolios. One includes socially responsible investments (SRI) with a focus on environmental sustainability and corporate social responsibility. Another includes traditional investments with potentially higher returns but without a specific focus on social or environmental criteria.  

According to the theory, the ethical responsibility of the bank is to choose the portfolio that is expected to generate the highest financial returns for its shareholders. It should do it, even if the SRI portfolio aligns with broader social and environmental goals. The doctrine would suggest that the bank should prioritize profit maximization.  This example illustrates how the principles of this approach guide financial decision-making in a scenario where financial returns and social responsibility are in tension.

Influence 

The Nobel Prize-winning economist Milton Friedman's beliefs heavily sided with capitalism and were ignorant of the social side of business (lacked socialistic ideas). Over the past five decades after its introduction, Milton Friedman's theories on corporate social responsibility have gained significant influence in the United States. As a result, the power of the stock market and affluent individuals has increased, while the interests of workers, consumers, and the environment have become less of a priority.

This led to economic inequality, climate change ignorance, and a weakening of public institutions. Corporations, in their pursuit of profits, have played a significant role in loosening regulations that once protected workers and other stakeholders against overreaching. However, in the years since, there has been increasing societal awareness among the general public and companies alike. Companies are giving a part of their profits to various causes such as education, environmental protection, health, etc.

This theory has left a lasting impact on economic academia. The ideas put forth by Friedman and the Chicago School of Economics have been influential in shaping economic curricula and discussions in academic institutions around the world. In addition to the above reasons, such programs can induce a positive atmosphere around the business and contribute to the company's culture. This can improve employee morale and make them more productive, thereby increasing profits.

There is an emphasis on profit maximization and limited social responsibility. Both of these have been challenged by those advocating for a more comprehensive view of corporate social responsibility, environmental sustainability, and ethical business practices.

Criticism 

The Milton Friedman doctrine of Social Responsibility is criticized for neglecting corporations' broader effects on the community and the environment. Critics feel businesses are responsible for considering how their decisions affect stakeholders, such as customers, employees, and the environment, not only shareholders. 

The Friedman Doctrine is also criticized for assuming that all enterprises function in a free market environment, which is not necessarily true. Businesses may have a lot of market influence in various sectors of the economy, which can negatively impact customers and the overall economy. It can influence labor laws and put the general public in distress. 

The doctrine is also often criticized for needing to be more accurate and acknowledge the long-term advantages of ethical corporate conduct. Long-term increased profits and advantages for society and the environment may result from sustainable practices and sound corporate culture. Furthermore, the critics contend that this approach dismisses the idea that corporations have broader social responsibilities beyond profit-making. Many argue that businesses should actively contribute to social and environmental goals rather than focusing solely on legal and ethical constraints.

Frequently Asked Questions (FAQs)

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