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Sept. 21, 2020, 4:47 p.m. EDT

Milton Friedman told us greed was good — he was half right

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By Richard Holden

The point is, ladies and gentleman, that greed – for lack of a better word – is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind.

– Gordon Gekko, “ Wall Street ” 1987

Fifty years ago, well before the movie “Wall Street,” Chicago economist Milton Friedman set down what for many was the essence of the famous speech in Wall Street in an article for the New York Times magazine entitled “ The Social Responsibility of Business is to Increase its Profits ”.

His point, which along with his other contributions was recognized when he was awarded the  Nobel Memorial Prize in Economic Sciences  in 1976, was that businesses serve society best when they abandon talk of “social responsibilities” and solely maximize returns for shareholders.

Incredibly influential (this month has seen  special conferences and  anniversary analyses ), the essay has been credited with ushering in the doctrine of “ shareholder primacy ,” and with it short-termism, hostile takeovers,  colossal frauds  and savage job cuts.

It’s a doctrine not seriously challenged until the 2008-2009 global financial crisis.

But in an important respect it was misread.

Although not clear from the  title of the essay , Friedman himself was quite concerned with broader social aims.

His essay was about how best to achieve them.

His point was that if companies made as much money as they could for their shareholders, those shareholders could spend it on social goals, “if they wished to do so”.

For the company to attempt to guess what goals its shareholders would want to support and to support them itself would be for the company to do its main job badly.

Although it made a certain sort of sense, the Friedman doctrine has turned out to be incomplete.

As Harvard University’s Oliver Hart (who also won the Nobel Prize for Economics) has pointed out, corporations are often  much better  than their shareholders at achieving the goals their shareholders care about.

Individual shareholders can’t do much to avert climate change, but the corporations they own can.

A mining company could either stop operating an environmentally damaging mine or run the mine, make a bunch of money and pay it to shareholders who could use the money to mitigate the damage “if they wished to do so”.

It’s hard to argue that, if shareholders do indeed “wish to do so”, the first option isn’t better.

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