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Milton Friedman, Adam Smith and the Business Roundtable

Milton Friedman was a brilliant economist and, like all economists, a moral philosopher.  His pronouncement in 1970 that the only social responsibility of business was to “

use its resources and engage in activities designed to increase its profits…” has been taken to heart by two generations of business leaders – perhaps a bit too much.  Friedman was talking about what we now call corporate social responsibility (CSR), an expense in his view that undermined a corporation’s true purpose: to create jobs, returns for investors and downstream wealth effects for society.

In this respect, Friedman was out of step with Adam Smith, the 18thCentury economist and philosopher who hated corporations as much as he hated government interference in the productive purpose of work and business.  He believed that efficient markets and general welfare resulted from the local business owners bearing the cost of their enterprise and sharing the values of their communities.  He viewed government primarily as an instrument for extracting taxes to subsidize elites and for intervening in the market to protect corporate monopolies.  In his words, “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.”

Smith’s observations are extraordinary in that they predated the establishment of the first truly capitalist economy, while Friedman could not foresee the onslaught of corporate raiders and leveraged buyouts that began to change the corporate landscape in the 1980’s.  Once thriving communities – company towns — were decimated by production shifting overseas. It began an era when corporate leaders lost their connection to communities  and were both insensitive and immune to the effects of their decisions.

A generation later, with the capitalist economic system under attack, the Business Roundtable – made up of 181 CEO’s of major American corporations – has outlined a

statement of purpose intended to spread the benefits of corporate activities to “Stakeholders” not only shareholders.  On the one hand the statement is not groundbreaking.  It simply outlines what a great company would do – delivering value to customers, investing in employees, supporting communities.  Many corporations have already embraced the concepts in the statement and designed businesses processes around them.

On the other hand, it’s an important first step.  Culture starts at the top.  The business press is already writing about their statement.  Many companies that have already adopted these practices have a lot to show for it – reduced employee turnover, better customer relations and improved profits.  There will be a trickle-down effect.

Political winds are driving an uneducated generation toward socialism.  I say uneducated because many are responding to media reports of the so-called abuses of capitalism without an understanding of how its economic principles have provided us with our prosperity.  The spread of global capitalism has lifted 2 billion people out of poverty in the last quarter century.  A move toward a socialist economy would not only undermine that prosperity but would not solve the problems that capitalist’s foes complain about. Corruption and greed have been around since the dawn of time and infest countries that don’t have capitalist systems.

It was conservative scion William F. Buckley who said, “the problem with socialism is socialism. The problem with capitalism is capitalists.”  The human beings who lead our business enterprises are as flawed and complex as are we all.  And so, just as it’s important to preserve the economic theories of Milton Friedman, it’s important to make a clear statement of our intentions as leaders in our communities and to keep it front and center as we make decisions about the direction of our enterprises.

If the members of the business roundtable incorporate their stated ideals into their corporate cultures by building those principles into their corporate processes, they will have better companies with happier employees and better returns to investors. If they set a standard by backing up their words by their behavior, smaller enterprises will embrace the same ideas and we will have stronger communities and better macroeconomic performance.

But we have a long way to go.  The Wall Street Journal reports that the CEO’s who signed the statement are compensated solely on the appreciation of shares.  They “issue financial guidance, buy back sums of stock that dwarf capital spending and equate a healthy share price with a healthy payday,” according to the Journal.

In my experience – I estimate I have been inside over 200 companies in the last 20 years – there are private company owners who live the principles outlined by the Business Roundtable. And, there are CEO’s of global companies who also adhere to it.  (The New York Times reports on one such business leader, Paul Polman of Unilever.) But they are few in number.

The Business Roundtable’s Statement of Purpose is like a pebble dropped in the middle of a pond.  The success of our society and the communities within it will depend upon the ripple effect beyond the 181 CEO’s who signed it.

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