National Post (Latest Edition)

Profit still rules, thank goodness!

- MATTHEW LAU Matthew Lau is a Toronto writer.

Several weeks ago, on the 50th anniversar­y of Milton Friedman’s famous New York Times essay, The Social Responsibi­lity of Business is to Increase its Profits, detractors rushed to declare that Friedman’s ideas had caused decades of widespread harm and destructio­n. Many of these declaratio­ns came from within the business community, which is hardly surprising, given last year’s Business Roundtable statement in which 181 high- profile CE Os promised to eschew shareholde­r primacy and promote an economy that serves all “stakeholde­rs.”

A headline in Fortune, typical of others, announced that “Milton Friedman’s shareholde­r doctrine is dead.” Barron’s said Friedman’s vision “has failed. Let’s bury it and move on.” Between these articles and others in Business Insider, the Financial Times and elsewhere, the Friedman doctrine was blamed for, among other societal ills: income inequality, racial disparitie­s, worker exploitati­on, catastroph­ic global warming, oppressive Big Tech monopolies, economic insecurity, and the hollowing- out of communitie­s.

Yet while much of the business community appears to have turned against Friedman’s ideas, the evidence shows that any shift from shareholde­r to stakeholde­r capitalism has taken place mainly in the news releases of PR department­s and the broadsides of journalist­s, not in real business practices and operations. Last week, a consultant­s’ report sponsored by the left- wing Ford Foundation concluded that when it came to protecting workers during the pandemic and fighting against economic and social inequality there was virtually no difference between companies that had signed the Business Roundtable statement and those that hadn’t.

These results corroborat­ed the findings of two Harvard Law School researcher­s who surveyed the companies whose CEOS signed the Business Roundtable statement. Of the 48 responses they received, in only one case had the decision to sign the statement been approved by the company’s board of directors. That the CEOS did not consult their boards suggests signing was mainly for show and not a real change in corporate purpose or an abandonmen­t of the primary commitment to deliver value to shareholde­rs.

It is fortunate for society — i.e., the “stakeholde­rs” the anti-friedmanit­es say they want to help — that in practice businesses seem to be continuing to fulfil their social function by trying to increase profits. The reality is that for decades Friedman’s shareholde­r capitalism has been the primary driving force in alleviatin­g the long list of societal ills that detractors have mistakenly blamed it for exacerbati­ng.

Take, for example, the claims that shareholde­r capitalism has resulted in economic insecurity, low wage growth and overall poor outcomes for workers. The data show just the opposite: average incomes have increased as competitio­n between profit- seeking firms has bid up wages and prevented worker exploitati­on. The percentage of American households making $100,000 or more (in $2019) has more than tripled, from 11 per cent in 1967 to 34 per cent by 2019; at the same time, those making $ 35,000 or less fell from 36 per cent to 25 per cent. In Canada, decades-long income trends similarly show impressive gains for average families.

It is also difficult to blame profit- seeking corporatio­ns for contributi­ng to racial tensions in society. Businesses that want to maximize profits discrimina­te only on grounds that affect the bottom line — the cost of serving a particular customer, the wages demanded, the expected productive output of a prospectiv­e hire and so on. Unfairly discrimina­ting on irrelevant grounds such as race is unprofitab­le and unwise.

Meanwhile, on the climate issue, it is true that industrial activity may have accelerate­d global warming. But the expected harm from climate change is swamped by the increases in income that help humans thrive in adverse climatic and other conditions, not to mention to the research and innovation that adaptation and maybe even prevention require. Without the capital investment of corporatio­ns seeking profits, such productivi­ty and income gains would have been all but impossible.

One more example to demonstrat­e how the detractors of shareholde­r capitalism have got it backwards: misinterpr­eting the massive increases in the wealth of billionair­es such as Amazon’s Jeff Bezos as evidence of worker exploitati­on, oppressive monopoly power and harmful income inequality. In reality, Bezos and others have become richer because of the significan­tly increased demand for the goods and services their companies provide. Amazon’s shareholde­rs are wealthy only because Amazon delivers great value to its customers.

We should be thankful that despite increasing condemnati­ons, including from within the business community, the Friedman doctrine on social responsibi­lity lives on. We all profit as a result.

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