Why Milton Friedman Could Love Social Entrepreneurship Pursuit of profits is still paramount. But getting there with a social element is possible.
By Ray Hennessey •
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Milton Friedman wasn't wrong about social good not being the role of business. He was just early.
This past weekend marked 43 years since economist Milton Friedman first wrote his blockbuster article, "The Social Responsibility of Business is to Increase its Profits." To this day, it remains a source of fevered debate. On the one side are the supporters, who argue the business of business is, well, business, and Friedman was only stating what should be the obvious. In the other corner are his detractors, who claim capitalists have a responsibility to use profit to improve society.
Four decades later, it seems both sides are wrong and Friedman was right – just not the way most people think. If anything, he foresaw a trend in entrepreneurship that had yet to be born in 1970, but now creates a third path in thinking about the relationship between pure free markets and the pursuit of social good.
First, a quick rehash of his argument. Writing in The New York Times magazine on Sept. 13, 1970, Friedman argued that, since businesses are not individuals, they cannot possibly serve any social good. That is the responsibility of individuals, who can choose to make decisions howsoever they please.
However, when those individuals are business executives and use their enterprises to further social ends – whether that be by increasing unnecessary employment to ease national joblessness or cutting down pollution below regulatory levels – they are actually using other peoples' money (investors, customers, employees, etc.), which amounts to a tax. Only government can tax, and only government can manage social programs. Capitalist organizations have wealth to create.
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It was music to the ears of free-market capitalists, who were under pressure to "reform" from both political parties in the early days of the Nixon Administration. But it struck an uneven note not only from policymakers, but from other circles. As clean-energy strategist Joel Makower recalled Friedman's view was "far from universally shared, even in the business community." In 1979, Makower noted, Quaker Oats president Kenneth Mason argued the "moral imperative" for businesses was to get "the best return we can on whatever assets we are privileged to employ," but that was not just financial assets "but also the brains employed, the labor employed, the materials employed, and the land, air, and water employed."
That has been the rallying cry of Friedman's detractors, but it is also as blindly off base as some of the overly simplistic defenses of his theory.
Both sides should have done more reading. Friedman himself hinted at a third way -- a manner in which we could envision private enterprise that served a public good.
It came down to one adjective were rarely hear or see today: eleemosynary. It means supporting a charitable end. When a church collects money to then redistribute to the poor in its neighborhood, it performs an eleemosynary function.
In defending profit as the ultimate goal, Friedman gave a shout out to businesses without profit as they aim. "A group of persons might establish a corporation for an eleemosynary purpose–for exam-ple, a hospital or a school," Friedman wrote. "The manager of such a corporation will not have money profit as his objective but the rendering of certain services."
Friedman did not have social entrepreneurship in mind when he mentioned the eleemosynary purposes of some companies. But that was simply because they didn't exist. In 1970, there was a clear delineation between corporations and public service. Or, put in Friedman's terms, there was a separation between corporate good (the pursuit of profit) and social good (saving the polar bears, and all that).
Those boundaries are blurred today. Companies can make a business plan out of a social strategy. Friedman, one can argue, would have embraced that. By mentioning the eleemosynary potential of some corporations, Friedman opened the door to entrepreneurs making a business of social aims.
To be sure, not every business that pursues a social goal would fall into Friedman's third way. It would have to meet certain criteria:
1) Service is a business objective. What Friedman objected to was not the good and welfare of society, but rather the use of corporate revenue and profits to pay for social good. So, if you were an automaker, it was OK to spend your company's money making and selling cars, but not opening soup kitchens. However, if your business was about the efficient management of soup kitchens, that is allowable under a free-market system.
2) Profit is the business objective. It is one thing to make your aim helping others. It is quite another to make your aim becoming profitable by helping others. So, you can make solar panels, sell them at a profit and, by nature of their use, solve a social problem by improving energy efficiency. But giving away the panels runs afoul of Friedman's separation of profit and state.
3) The customer is king. Just as businesses are not people, nor can one view the earth as a customer. It doesn't pay a Visa bill, after all. Businesses that make decisions based on real customer demand can certainly fit in Friedman's framework. Look at Tesla. It makes electric cars for a higher-earning customer base who are looking for a fossil-fuel alternative and willing to pay huge prices for the privilege. Other automakers have had little success with electric cars because their reasons for manufacturing them have less to do with who will buy them but rather by how the companies will be judged if they continue to make only gas-powered vehicles.
None of this gives complete free-market air cover to all social entrepreneurship. While some social entrepreneurs can fit into a Friedman model, most cannot. For one thing, too many decide that they want to make profit as a means to social ends, which was anathema to Friedman. Many startups still preach how they are providing clean drinking water in some corner of the world or saving snail darters. They aren't talking about true return on investment. That's likely why there is a bumper crop of social-entrepreneur startups, but they never become real and – pardon the pun – sustainable businesses.
What's more, it's difficult sometimes to figure out what is a true, profit-seeking plan and what is a social aim. When Facebook decides it wants to invest in giving developing countries access to the Internet, is it doing that to promote access to modern communications to the underprivileged or is it about adding customers in areas the company can't yet penetrate?
Still, one need not agree with Friedman and blindly eschew any social role for business. Friedman was, after all, the ultimate capitalist. He would have delighted in the idea that the business of a business can be a social good, provided the social good is good for business.
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