Friedman Fallacies

Author(s): Colin Grant

Source: Journal of Business Ethics , Dec., 1991, Vol. 10, No. 12 (Dec., 1991), pp. 907-914
Published by: Springer

Stable URL: https://www.jstor.org/stable/25072233

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 Friedman Fallacies Colin Grant

ABSTRACT. Milton Friedman's article, 'The Social Respon Upon examination, however, the simplicity turns
sibility of Business Is To Increase Its Profits,' owes its appeal out to be oversimplification, the certainty is seen to
to the rhetorical devices of simplicity, authority, and finality. conceal fundamental ambiguities, and thus the air of
More careful consideration reveals oversimplification and finality is dissipated in a recognition of fundamental
ambiguity that conceals empirical errors and logical fallacies.
fallacies in Friedman's rhetorical extravagance. On
It is false that business does, or would, operate exclusively in
one level, these fallacies can be seen as simply em
economic terms, that managers concentrate obsessively on
pirical errors in his descriptions of business and of
profitability, and that ethics can be marginalized. These
errors reflect basic contradictions: an apolitical political base,
the significance of ethics for business; but ultimately
altruistic agents of selfishness, and good deriving from greed. they are indicative of cardinal contradictions at the
heart of Friedman's position as outlined in that
seminal article.

No other piece of writing can begin to compete with

Milton Friedman's 1970 New York Times Magazine
article, The Social Responsibility of Business Is to Empirical errors
Increase Its Profits,'1 for status in the canon of
business ethics classics. It does not matter that one of Business as autonomous economic activity

the central messages of the article would seem to be

that there is no place for anything like business The appeal of Friedman's paper is achieved at the
ethics in any significant sense. That only provides a price of misrepresenting business itself. This is the
useful foil for considering the possibilities and pro first of his empirical errors. His characterization of
spects for business ethics. The appeal of the article, business as an autonomous activity is simply false,
however, probably has more to do with its own empirically. Business does not operate in regal
intrinsic qualities than with this utilitarian function. isolation, totally disconnected from other areas of
life.
It possesses the winning characteristics of great
rhetoric: simplicity, certainty, and finality. It de It is important to notice that this is not a matter
scribes the purpose and procedures of business with of challenging Friedman's rugged free-enterprise,
the absolute assurance of the authoritative expert. laissez-faire defence of the independence of business
as self-contained economic activity. The adequacy of
that theory is no doubt at stake in this error, but the
error itself is empirical. Whatever the merits of the
Colin Grant is a Professor in the Department of Religious Studies at
theoretical debate about the respective virtues of
Mount Allison University. He teaches an undergraduate course
economic systems, a little reflection shows that
on "The Ethics and Ethos of Business/' His article "Giving
Ethics the Business" appeared in JBE 7 (1988), pp. 489-495. Friedman's depiction of business is far removed from
Some of the journals in which he has published are: The the way business does operate. In the simplistic
Christian Century, The Dalhousie Review, Journal of the authoritarian style that gives his statement its im
American Academy of Religion, Modern Theology, pact, Friedman portrays business as the self-con
Religious Studies, Studies in Religion/Sciences Reli tained economic pursuit of profit. Other concerns of
gieuses, The Toronto Journal of Theology. the wider society are the responsibility of that wider

Journal of Business Ethics 10:907-914,1991.

? 1991 Kluwer Academic Publishers. Printed in the Netherlands.

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 908 Colin Grant

society, and not of business. If the pursuit of eco is not enough to explode the naivete of Friedman's
nomic efficiency by business comes into conflict simplistic picture of the autonomous specialization
with these wider social concerns, then it is the of business, consider how business deals with laws
prerogative of the socio-political machinery to place that are not in its immediate interest. If public
restrictions on business in the form of legal sanc pressure and blatant disregard of public welfare on
tions. But these sanctions must be expressed in terms the part of business conspire to evoke legislation that
that business itself can deal with, which means serves to restrict the activities of business, precisely
economic terms. Laws affecting business must cul the way that Friedman holds business and law
minate in fines. Then business can decide whether it should operate, far from responding in pure eco
is more efficient to pay the fines, or to conform to nomic terms to the fines that may result from the
the requirements of the law and avoid the fines. This imposition of such laws, the typical reaction of
economic decision is the only kind that business can business is to confront this situation through direct
be expected to make. intervention in the judicial process. The scope for
In all the controversy that the Friedman article any pure economic decision recedes behind the
has evoked, there has been surprisingly little com stalling tactics and countersuits of the legal arm of
ment on the extreme naivete of his proposal in light the business corporation, the bank of high-priced
of the way business actually does function. Indeed, corporate lawyers that not even the public treasury
the consensus seems to be that one of the article's can match. For Friedman's proposal to retain any
chief merits is its realism. But in order to find the credibility at all, we must overlook this massive legal
proffered direction credible at all, we must overlook apparatus with which business deals with any laws
the massive involvement of business in the realm of that do get by its powerful political lobby.
law. Far from specializing in pure economic activity, That Friedman's article enjoys the attention it
with law being left to the separate socio-political does suggests that it cannot possibly be as naive as
domain, business is heavily involved in the realm of this reading would suggest. Perhaps it is this reading
law in both its legislative and judicial dimensions. that misses the point, and that point may be that
No political lobby can begin to match the business Friedman does not profess to deal with the way
lobby; thus no influence can begin to match the business actually functions at all. His concern is to
influence of business on the law-making processs. state the case for the way business should function.
Far from business operating in its own economic Yet legitimate though this reminder most certainly
sphere, reacting to the demands of law in its own is, it can hardly dispel the air of unreality surround
economic terms, business is actively and profes ing Friedman's proposal, unless we are prepared to
sionally engaged in attempting to ensure that the believe that it is plausible that there could be institu
laws that are enacted will be in its own interests. tions endowed with absolute economic power which
This powerful political lobby is supported not only would not use this power in legislative and judicial
by the massive financial resources of business but directions like contemporary business actually does.
also by the business sympathies of the legislators The unlikelihood of this eventuality points beyond
themselves. For not only are a significant number of misrepresentations of the reality of business to a
legislators business people, the single most promi fundamental contradiction at the heart of the Fried
nent profession represented in legislatures, that of man vision.
attorneys-at-law, consists largely of individuals with
decidedly pro-business sympathies. As part of the
professional bureaucratic mechanism, lawyers bene The profit obsession of management
fit significantly from current economic arrange
ments, with the result that they are able to accumu The expectation that business could operate in
late funds to invest in business, so that the alignment purely economic terms suggests a conspicuous
of their interests with business interests predisposes naivete in the oudook of an economist, but there is a
them to lend a sympathetic ear to the powerful second error in Friedman's approach to the social
business lobby. responsibility of business that is even more starding.
If this actual symbiosis of business and legislators For not only does his insistence on the autonomy of

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 Friedman Fallacies 909

business reflect a naive view of the nature of business corporation. They are means of increasing the profit
in its neglect of the extra-economic aspects and margin of the business itself. However, even that
involvements of business, but his account of the prudential rationale is not explored in the more
operations of business itself represents a simplistic direct consideration of the economic operations of
distorted depiction of how business actually func business. It may be that to make allowance for such
tions. According to this account, business executives wider concerns in business as seeking the security of
are seen to be fixated on the pursuit of profit. Their the corporation would compromise the insistence on
mandate is to ensure that the return to the stock the determinative significance of the pursuit of
holders is as high as it can possibly be. However, profitability. In any event, the characterization of
as has been pointed out, profitability is only one business as involving the uncompromising pursuit of
of several goals on the agenda of the dedicated profit constitutes as inadequate a portrayal of the
executive. operations of business as the contention that business
represents autonomous economic activity is abstract
Management will try to prevent the dividend return from
and incredible as a depiction of the nature of
being too small, the stock from failing to appreciate, or business.
the price-earnings ratio from being too high because
these events may cause the shareholders to withdraw
their money. Management will not, however, return as
much money as possible to the stockholders. The appro The dispensability of ethics
priate return to the stockholders should keep them
invested in the corporation's stock, while leaving plenty That Friedman's simplistic treatment so misrepre
of corporate cash for improvement and expansion.2 sents the reality of business suggests that, for all its
rhetorical power, the thesis that the social responsi
To pay out the largest possible dividends would bility of business is to increase its profits is seriously
be one of the surest ways to undermine a business lacking in plausibility. This is particularly the case
corporation. The first call on the management of the because as an economist, Friedman can be expected
corporation is not to raise the highest possible profits to affirm a credible vision of business. The most
for the stockholders but to ensure the viability of the worrisome aspect of the article, however, emerges
corporation itself. Paradoxically, this must be the not from the peculiarities of Friedman's treatment of
case even to ensure the greatest possible return to the business, but from his treatment of ethics. Here the
stockholders. So Friedman's mandate for business
misrepresentation amounts more to total confusion
implies the more fundamental focus on the success rather than to empirical error; and, of course,
and stability of the business itself. Friedman is by no means alone in this. He is reflect
It is another curious feature of Friedman's ac
ing the state of ethics generally. However, the
count that he recognizes something of this in his simplistic and authoritarian tone of the article serves
analysis of the way that social considerations might to reinforce the popular notion of the secondary and
be addressed by business, but does not begin to optional nature of this whole area.
entertain such wider directions in his depiction of Three approaches to ethics are implied in the
the economic operations of business. It might be a Friedman article. The central thesis suggests the
sound business decision for a corporation to provide equation of ethics with law. In contrast to the purely
daycare services, for instance, not because a business economic responsibility of business, ethical concern
would be making a social contribution by so doing must come from the wider social context where the
but because it might enhance the efficiency of the standards of society receive expression in the form of
business operation itself by reducing absenteeism law. In this starkest form, the implication is not only
and eliminating distractions for working parents. that ethics is excluded from the deliberations of
The reason Friedman raises this type of wider business, but that the ethics that is recognized is of
consideration is to insist that even such apparently the minimalist variety. Business is assumed to be
humane projects represent purely prudential deci endowed with its own intrinsic integrity. Ethics
sions, and are in no way expressions of social or comes into play only when the wider society finds
ethical responsibility on the part of the business some aspect of business operation intolerable so that

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 910 Colin Grant

it has to pass a law restricting the scope of this detected in the article. Besides the implication that
otherwise autonomous activity. In this respect, the ethics is a matter of law, imposed on business by the
standard features of law-based ethics ? their nega wider society, and the focus of the title on social
tive tone, their concentration on the worst excesses, responsibility, the most direct use of ethical terms
and their impersonal impositional demeanor ? are suggests a fundamentally personal approach to ethics.
all indicated, so that ethics is seen as an outside "Only people can have responsibility,"3 Friedman
intrusion that business might have to deal with, but, assures us early in the article; and in its final words,
if so, this should be strictly on the terms of business quoting his book Capitalism and Freedom, stipulates
itself, monetary penalties that business can either that what can be expected of business is that "it stays
take into its stride or seek to avoid. within the rules of the game, which is to say, engages
From the point of view of serious ethical concern, in open and free competition without deception or
we must wonder whether this really involves ethics fraud."4 Clearly, Friedman assumes basic ethical
at all. It may be that what is at stake here is rather integrity on the part of the individuals who engage
what the title of the article suggests, "Social Respon in business. It seems that he takes personal ethics for
sibility.'' This is the second approach to ethics that granted. His attribution of this expectation to busi
can be elicited from the Friedman article, and it ness may be ascribed to exuberance, even though it
poses the question of how he understands the has the added authority of occurring in a quote from
relation between ethical and social responsibility. For one of his books. On his own terms, avoidance of
all that can be ascertained from the article itself, he deception and fraud would seem to be precisely the
might well accept the common tendency to equate kinds of things that cannot be expected of business.
the two, or he might not regard social responsibility Remember: "Only people can have responsibilities."
as an ethical matter at all. Either way, we are faced But even allowing for some carelessness in phrasing,
with a very ambiguous and confusing situation. If he there is still a fundamental problem about how this
regards social and ethical responsibility as synony can be expected even of individuals in business. How
mous, he must then explain how "ethical" can mean are they to make serious efforts to avoid deception
any more than a power play between competing and fraud if their primary and determinative loyalty
social forces. This characterization could certainly fit is to the pursuit of profitability? If personal ethics are
the Friedman scheme, where business has its own seriously acknowledged in the domain of business,
area of specialization as the economic segment of the strict autonomy of business is breached, and it is
society, with wider concerns being the preserve of difficult to see how Friedman can persist in his
other social forces. The picture lends itself to being isolationist version of business operations. With this
seen as a straightforward power struggle, a power once again we are moving beyond empirical mis
struggle which, once we have observed the way representations of the nature and operations of
business involves trespassing into the wider domain business or of ethics, and are approaching the
and thereby gaining dominance as in its extension prospect of blatant logical contradiction at the heart
into the formation and application of law, is heavily of the Friedman agenda.
weighted in favour of business. That Friedman
should promote such an arrangement is certainly
understandable, but if this is his meaning, then not Logical fallacies
only is ethics excluded from the supposedly purely
economic calculations of business; it is eliminated An apolitical basis of political freedom
from social arrangements entirely insofar as these
become the subject of direct power clashes. On the The ambiguities and distortions in Friedman's treat
other hand, if Friedman means to distinguish be ment of business and ethics can each be traced back
tween social and ethical responsibility, how he to fundamental contradictions in his foundational
would characterize the distinctiveness of the ethical assumptions. The outlandish depiction of business as
remains to be explained. an autonomous economic activity not only mis
One answer to this residual question is suggested represents the way in which business does, or
by the third possible meaning of ethics that can be conceivably would, operate, given the prospects and

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 Friedman Fallacies 911

predilections of power, economic or otherwise, but it this latter is more indicative of the direction implicit
also reveals a basic logical contradiction at the heart in Friedman's program and that it would issue in a
of the free market vision extolled by Friedman. The political order dominated by economic power just as
market is supposed to function in its own independ the socialist direction he opposes involves a political
ent economic terms, and yet this independent domination of the economic order. It is certain that
market is also touted as the source and guarantee of he cannot have it both ways. Economic arrange
political freedom. "Economic freedom is an essential ments cannot be both totally apolitical and forma
requisite for political freedom,"5 Friedman insists in tive for the political process.
Free to Choose. The economic arrangement which
prides itself on its separation from the political
realm, in contrast to the socialist alternative where Altruistic agents of self-interest
the economic and political are intimately connected,
is also supposed to underlie and sustain the reality of The second of Friedman's misrepresentations, his
a free political system. Economic freedom is the portrayal of business managers as dedicated agents
cradle of political freedom and yet the economic of profit-intent shareholders, is equally indicative
itself is supposed to be totally apolitical. of a fundamental debilitating contradiction. Alex
In his recognition that business might engage in Michalos depicts the fallacy as the contradiction
what might appear to be acts of social responsibility, between the assumption that shareholders are moti
but which for business itself would have to be vated entirely by self-interest and the requirement
justified prudentially by economic criteria as calcu that the managers of corporations, as agents of these
lated to contribute to the overall profit margin of the self-interested individuals, must be essentially devoid
operation, Friedman comes close to recognizing this of self-interest, or at least have their self-interest
lacuna in his armoury. For he notes the impossibility, sufficiently in check to dedicate themselves to the
on his own terms, of challenging business executives self-interest of the shareholders.7 This suggests two
who profess to pursue these prudential programs as fundamentally different forms of humanity; those
though they were really interested in the causes who are essentially characterized by self-interest, and
themselves and not simply engaging in them in the those who are capable of devoting themselves to the
interests of the economic bottom line. "It would be interests of others. Michalos asks why the share
inconsistent of me to call on corporate executives to holders may not also be capable of something more
refrain from this hypocritical window-dressing than self-interest. In other words, are there really
because it harms the foundations of a free society."6 two types of human beings, takers and givers, or is
It would be inconsistent because business is supposed this characterization required because such priority
to be a self-contained economic activity. What it is given to taking that nothing can be allowed to
does is not supposed to involve the wider society at qualify this lest it compromise the total economic
all, except in its own economic terms. And yet the devotion, with the result that the agents of this self
rationale for promoting this pure economic activity interest seem like another species?
is not only that it produces the most efficient Even within his own exposition, Friedman is not
economic results, the widely available products and able to maintain the strict version of the agency
services of the free market, but that it also underlies thesis. When he complains that the business execu
the parallel form of political organization, democ tive who diverts corporate funds into social projects
racy in its fullest sense, government of, by, and for is in effect levying and spending taxes, because this is
free citizens. Much of the ambiguity and over outside the strict economic mandate of the business
simplification in Friedman's program, particularly corporation, he has to acknowledge that it is not
the naivete in his depiction of business as simply the shareholders' money that is being spent.
autonomous economic activity, can be traced to this For while such expenditures might reduce the
failure to think through this contradiction involved dividends the shareholders receive, they might also
in the official gap between economics and politics result in lower wages for employees than would
and the contradictory assumption that a free political otherwise be available, and in higher prices for the
system depends upon a free economy. It may be that consumers of the company's products. Thus the

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 912 Colin Grant

implication is that the business executive is an agent as a latter day disciple of Smith, an allegiance that he
of employees and customers, rather than simply and himself owns in the article under consideration. That
solely an agent of the profit-seeking shareholders. In Smith would own the economic system that claims
this, Friedman is slipping from the classical share his patronage, however, is another matter. It is
holder view of business to the broader version that doubtful whether he would endorse the assumption
has tended to replace that monolithic focus for most of the autonomy of the economic realm and its
students of management, the stakeholder view. Al corollary, the marginalization of ethics in the single
though it would undermine his position, Friedman minded pursuit of economic efficiency. It is possible
comes close to recognizing that management owes a that Smith was moving in this direction in The
loyalty to all who have a stake in the company, Wealth of Nations, but it would mean that he had
employees and customers as well as shareholders. To disowned his sensibilities as a moralist as evidenced
embrace this stakeholder expansion explicitly would in The Theory of the Moral Sentiments. For repudiation
be fatal to Friedman's position, however, because of this allegiance and vision would amount to a
there would be no reason to stop short of those who complete reversal because not only was Smith first
have a stake in the company simply by living in an and foremost a moralist, but his morality revolved
area where it operates, and if management had to around the notion of sympathy, the complete
take that kind of stakeholder into account, they antithesis of the self-sufficient individual who stands
would be directly involved in the deflections of at the heart of the pure market vision. The more
social responsibility. adequate reading of Smith is almost certainly the one
The recognition of the impact of executive action which holds that his economic scheme takes for
on employees and customers dilutes the strict granted the moral context of mutual sympathy. Thus
agency-of-the-stockholders view of management, it is highly unlikely that Smith the moralist would
but it does not address the question of the interests have expected a good society to evolve from the
of the agents themselves. One solution which would pursuit of individual greed. That expectation is only
help to bridge Friedman's gap between self-inter possible when the distinctive demands of morality
ested stockholders and altruistic managers is the have been silenced by the insistent imperative of
stock option package which gives managers a de economic efficiency. That Friedman can expect a
finite stake in the interests of stockholders. But this society that gives free reign to economic specialists
eases the problem by collapsing it in the direction to operate in purely economic terms, apart from
of stockholders, and would be tantamount to the restrictions imposed from outside this economic
abandonment of loyal agency. Thus insofar as the expertise, to be even a sustainable, much less a good,
loyal agent is affirmed, this affirmation faces the society, is the determinative fallacy of his whole
diffusion of agency over the disparate demands of program.
stakeholders and the logically contradictory anthro The central challenge of Friedman's position has
pological vision implied in the affirmation of totally been well stated by Bill Shaw. "Friedman will not be
self-interested stockholders and totally other-serving dislodged until it can be shown that the social and
managerial agents. political institutions of this nation, that is, the
mechanisms for determining how power and control
over economic resources are distributed, are inade
Greed yields good quate to promote the common good and social
justice."8 Until recently the prospects for such dis
Beneath the fallacies of business isolationism and of lodgement were not evident, the economic superi
the expectation of unselfish agents of selfishness, the ority of this system appeared all but unassailable. For
central and determinative fallacy in the Friedman some that superiority continues to be demonstrated
program is almost certainly his assumption of what by the dramatic movement in this direction in
has come to be regarded as the first principle of the Russia and Eastern Europe. People who followed the
market system as outlined by Adam Smith. As a extreme socialism of communist regimes are recog
proponent of the free market, Friedman can be seen nizing the advantages, and even the necessity, of

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 Friedman Fallacies 913

developing a free market system. From another point seen as a more intense version of capitalism. This is
of view, however, this enthusiasm for free market true of the mature Marx himself, for instance, in that
economics is particularly troublesome in the light of his original humanistic concerns seem to progres
what can seen to be intrinsic defects in this system sively displaced by preoccupation with economic
itself. Two factors in the experience of the North arrangements as foundational and determinative for
American versions of this system stand out as par every other aspect of life. Insofar as communism
ticularly worrisome. On the one hand, while this reflects this economic preoccupation of the mature
system has achieved unheard of levels of produc Marx, it can be seen as the epitome of the market
tivity, it has also resulted in a dramatic increase in ideal. Horrified though Friedman would no doubt
disparity between rich and poor, with levels of be at being aligned with the collectivist form of state
luxury assured for the few at the top and more and economics, insofar as that state exists for economic
more people at the other extreme relegated to food reasons it reflects exactly the same vision of life as
banks and soup kitchens. Friedman's single-minded shareholders. And this is
That this is not accidental but the inevitable the fundamental difficulty, the assumption that the
outcome of the free market direction is indicated economic can be significant in itself and that con
more clearly in the other development that prompts centration on its demands can, and even will, lead to
concern about this economic system, the environ fullness of life. The impact on the environment, east
mental crisis. Not only is this system a significant and west, suggests that this is not so. Reflection adds
contributing factor to the depletion of natural that it cannot be so. The more the focus is on short
resources and the pollution that results from the term economic gain for its own sake the more
refinement and consumption of those resources, but detrimental the long-term effect can be expected to
that effect is promoted by the inner logic of the be. Whatever Adam Smith might say about the fate
system itself. A system dedicated to the maximiza of his proposals if he were to reappear on the scene
tion of shareholder profit has to treat environmental today, to expect that cumulative greed can yield
costs as externalities, diseconomies that can only be collective good is surely a particularly amazing
absorbed within the system under the pressure of the expectation, even in a paper that conceives of a
kind of external force about which Friedman fanta totally independent economic sphere peopled by
sizes. These life-threatening costs give the lie to the unselfish agents of selfishness.
promise of the free market. The market is free only
because nature and the most vulnerable of our own
species pay its real costs. Notes
Still some might want to object that this reading
of the situation is also undermined by the eastern 1 Friedman, M.: 1970, 'The Social Responsibility of Business
European experience They might point out that the is to Increase its Profits', New York Times Magazine (Sep
environmental destruction found in western market tember 13), pp. 32 et seq.
economies is nothing compared with the devastation 2 Birsch, D.: 1990, The Failure of Friedman's Agency
wrought by these communist regimes. But while, on Argument', in J. R. Desjardins and J. J. McCall, eds. Con
the surface, this provides further vindication of the temporary Issues in Business Ethics, second edition (Wadsworth
Publishing Co., Belmont, CA)
market system, this is so only so long as we continue
3 Friedman, op. cit., p. 33.
to operate with stereotypes of communist and
4 Ibid., p. 126.
capitalist systems. Thus the market is seen as the free 5 Friedman, R. and Friedman, M.: 1981, Free to Choose
and open economic system where priorities are
(Harcourt Brace Jovanovich, New York). 'Introduction', p.
determined by individuals in contrast to the socially xvi.
planned, bureaucratically imposed state economic 6 Friedman, op. cit., p. 124.
system. A more comprehensive vision of what is at 7 Michalos, A. C: 1987, 'Moral Responsibility in Business',
stake is afforded, however, by the consideration that in D. Poff and W. Waluchow, Business Ethics in Canada
rather than communism representing the polar (Prentice-Hall Canada Inc., Scarborough, Ont.), p. 21; see
opposite of the capitalist market system, it can be also Michalos, A. C: 'The Loyal Agent's Argument', in D.

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 914 Colin Grant

Poff and W. Waluchow, Business Ethics in Canada, pp. 136? Dept. of Religious Studies,
141.
Mount Allison University,
8 Shaw, B.: 1988, 'A Reply to Thomas Mulligan's 'Critique New Brunswick, EOA 3C0,
of Milton Friedman's Essay "The Social Responsibility of Canada
Business [Is, sic] to Increase Its Profits" ', Journal of Business
Ethics 7 (7), p. 538.

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