November 16th marked the seventh anniversary of the death of economist Milton Friedman, whose influence on the world’s economy through his teachings at the Chicago School of Economics was profound – he was awarded the 1976 Nobel Memorial Prize in Economic Sciences. Friedman is most commonly recognized for his commentary on the primary purpose of business — “to use it resources and engage in activities designed to increase its profits” which was published by the New York Times Magazine in September 1970.
Overly simple ideas published by influential economics professors don’t die easy. It’s been over 40 years and many people perceive Friedman’s, out of context statement to be law. The full quote leads one to think that even Friedman might be surprise by how perverted his idea has become
“There is one and only one social responsibility of business — to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” -Milton Friedman, New York Times Magazine, September 1970
Most people I’ve witnessed arguing for profits as the primary purpose of business do not know the full statement and subsequently are not able to apply it to our current economic reality. The “rules of the game” have not changed but the transparency that we’ve been afforded by technology has placed a floodlight on the players that have been cheating.
For the first 20 years following Friedman’s article the game was driven by the competitive tone of the Cold War – for American capitalism’s free markets to beat the Soviet Union’s communist economy. During these competitive and prosperous years our focus as a nation was to play as a team and ignore our economic flaws to show a united front. With the fall of the Berlin Wall in 1989 and shortly following it the Soviet Union itself, capitalism lost its competitor and reigned champion.
With the loss of a competing ideology capitalism has slowly begun to look in on itself. What we’ve discovered is rampant cronyism, industry collusion, political gaming, and outright fraud and theft – all under the guise of profit maximization. Even with all of these negative influences and activities capitalism has continued to create value, elevate humanity, and find solutions to societal challenges. With the maturing of the Internet and rise of social media over the past decade the consumer is now returning to the center of the business equation.
Earlier this year Steve Dennings calling Friedman’s idea ‘The World’s Dumbest Idea’ sites that Peter Drucker in 1973 disagreed with Friedman and had a much more realistic view of business.
“There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. . . . The customer is the foundation of a business and keeps it in existence.”
Today we have numerous thought leaders and companies that are moving this “new” or newly realized idea forward. I am excited to be a witness to this shift back to understanding why we business exists. Denning even predicts Friedman’s concept will be history by 2020.