Commentary on and Further Extension of Stanley J. Shapiro’s Review of Milton Friedman: Fifty Years Later

This communication is a further commentary on Stanley Shapiro’s review of Luigi Zingales, Jana Kasperkivic, and Asher Shecter’s Milton Friedman Fifty Years Later (Shapiro 2021), a collection of short essays written in tribute to Milton Friedman’s 1970 essay in the New York Times Magazine, “The Social Responsibility of Business is to Increase its Profits” (Friedman 1970). ¹ Shapiro confesses that Friedman was his candidate for public enemy number one but that now, having read these essays, he has had a change of heart. Perhaps, he writes, he had been “too quick to judge, all too ready to stereotype” (p. 1). He points out toward the end of his review that there has been a near flood of commentaries on Friedman and specifically points to an “almost seminal” (p. 2) article by Jacob Bagha and Eugene Laczniak in which the authors reconstruct certain simplified yet popular conceptions of both Adam Smith and Milton Friedman.

This commentary is, perhaps, another contribution to that flood of material that Shapiro has found. It is, however, specifically an extension of Shapiro’s review and an extension of the Bagha and Laczniak article. The crux of the problem that I see is that Friedman, himself, deftly sidestepped a critical issue in his 1970 essay by omitting something that was in his 1962, Capitalism and Freedom, that is part of the liberal canon to which he subscribes and promotes. Consequently, I am not as quick as Shapiro to forgive, and want to further contribute to reconstructing the simplified yet erroneous conceptions of both Adam Smith and Milton Friedman that Bagha and Laczniak, themselves, contributed.

First, however, a little background for those readers not familiar with Friedman’s ideas on political economy and why this is important. The readers of the Journal of Macromarketing will know John Maynard Keynes (1883-1946) as the most influential economist of the first half of the 20th century, and of Milton Friedman (1912-2006) as the most influential of the second half. Each challenged the economic theories they inherited, and each challenged and changed the economic policies of the day. Keynes, coming of age during the Great Depression of the 1930s, challenged the idea that free markets would automatically, and by themselves, provide full employment; he argued, instead, that aggregate demand determined the overall level of economic activity, and hence employment, giving rise to government deficit spending as the way to end the depression.

Friedman can be said to have come of age during the Stagflation era of the 1970s. He focused on monetary policy, less concerned about full employment than he was with monetary stability and the threat of inflation. He introduced the concept of a “natural rate of unemployment,” the “permanent income hypothesis,” and was the leading figure behind the influential school of thought known as monetarism.

Those that know Friedman the economist also likely recall that he received the 1976 Nobel Prize for Economics. ² Others may recall his role in supporting and advising Chile’s Augusto Pinochet in the 1970s, ³ that he served as an advisor to both the U.S. President Ronald Reagan and the U.K. Prime Minister Margaret Thatcher. To be recalled, too, is that his monetary theory influenced the U.S. Federal Reserve’s response to the global financial crisis of 2007–2008. Most will know him as an ardent defender of the free market and supporter of neoliberalism, a term he, himself, used in 1951 (Friedman 1951).

Friedman was a founding member of the Mont Pelerin Society ⁴ , a University of Chicago professor, and effectively took over from Frank Knight, at Chicago, and further developed what is today known as the Chicago School of Economics. He was also a public intellectual. His book Capitalism and Freedom (1962) was an articulate and easy to read defense of capitalism, which he understood and presented as an individual’s freedom to choose within a market (Friedman 1962, middle of p. 13). This definition conflated capitalism and free enterprise (see DeMille 2011; Galbraith 1999; Heilbroner 1983) and impacts our view and definition of the term capitalism to this day. His rhetoric simplified the world by framing it in a language of black and white. The choice was either full-throated socialism/communism or full-throated capitalism; people must submit to either the power of government or the power of the market. There was no middle ground; the mixed economy was blasphemy.

His rhetoric also focused only on the positive elements of capitalism, as he defined it, marginalizing the exploitative aspects while tending to emphasize the negative aspects of government, marginalizing positive elements. He famously wrote, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand,” a passage attributed to a Newsweek column in 1980 but for which I can find no definitive reference. ⁵

His intent, as he wrote in Capitalism and Freedom, was to establish “a general presumption against the state” (p. 144), an intent woven into neoliberal ideology, which was never just about ideas but was a political project as well—a thirty-year crusade to discredit the legacy of progressivism, FDR’s New Deal, and the notion of a mixed economy. The general presumption against the state was woven into the policies and prescriptions of the Pinochet, Thatcher, and Reagan administrations that followed.

Friedman popularized many economic ideas that are still with us today, including the role of monetarism over fiscal policy, the definition of capitalism, neoliberalism, and, of interest to the present commentary, ideas regarding the social responsibility of business. Here his ideas are often taught and discussed using only his 1970 New York Times Magazine article, “The Social Responsibility of Business is to Increase its Profits.” The thing about Friedman is that, especially when reading his more popular publications, one must read slowly, read closely, and apply what Jane Gallop calls “The Ethics of Reading” (Gallop 2000). That is not something we much encourage today. It is to that that the present commentary is addressed.

This, then, is a commentary on and further extension of Shapiro’s review of Milton Friedman: Fifty Years Later, in which Shapiro focused on “the Friedman doctrine,” the idea that corporate executives should devote themselves solely to maximizing shareholder profits. There is one proviso to this doctrine: that corporate executives “engage in open and free competition without deception or fraud” (a passage from Friedman’s 1970 article in which he quotes from his own book, Capitalism and Freedom). In other words, using a sports metaphor (Friedman’s metaphor), that “they play within the rules of the game.”

The problem with this passage, in which Friedman quotes Friedman, is that it omits something significant, something often left out of the conversation—particularly when only the NYT Magazine article of 1970 is being discussed. Bagha and Laczniak (2015), referenced by Shapiro, discussed this passage as they sought “The Real Adam Smith and Milton Friedman.” But they had to augment the 1970 essay. This commentary is, then, also an extension to the Bagha and Laczniak article (which I agree with Shapiro should be read by all).

To repeat, Shapiro confesses to softening his views of Friedman in light of the essays in the Zingales, Kasperkivic, and Shecter book. Bagha and Laczniak, for their part, strive to point out certain popular and over-simplified conceptions of Adam Smith and Milton Friedman that need to be corrected.

To find the real Milton Friedman, it was necessary for Bagha and Laczniak to refer to Friedman’s book, Capitalism and Freedom, for clarifying passages. I only wish they would have pointed out that the passage that they quote from Capitalism and Freedom is not only absent from the NYT essay but that Friedman, himself, left it out! (Why he omitted it from the NYT essay might be an interesting thesis project for some historically oriented student.) So, my first observation is that while virtually all references to the Friedman doctrine are to his, as Shapiro expresses it, “truly seminal” New York Times Magazine essay (Shapiro 2021, p. 1), it is a mistake to read only that essay.

I have had many conversations with notable and knowledgeable people, academic and otherwise, about Friedman. I do not recall having encountered anybody that knew about (or seemed to appreciate) the exclusionary passage that Bagha and Laczniak quote and discuss. (Perhaps I just talk with the wrong people.) Right after Friedman lays out the “one and only one social responsibility of business” (1962, p. 133) he lays out the “‘social responsibility’ of labor leaders,” which he says is “to serve the interests of the members of their unions. He then continues (still on p. 133),

It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interests is, to quote Adam Smith again, “led by an invisible hand to promote an end which was no part of his intention” (emphasis added).

The important point is that business has its social responsibility, labor leaders have theirs, and the rest of us have ours. The exclusionary phrasing is important: the rest of us excludes business and labor leaders (at least in their role as business and labor leaders, not necessarily as private citizens). Also note, in Friedman’s own phrasing, it is not the market that acts as an invisible hand but the framework of law.

The idea that there is an order to things such that the pursuit by each individual of his/her own self-interest contributes ultimately to the social welfare must be considered a cardinal principle of the liberal faith (liberal in the original meaning, the meaning that Friedman intends). It must not be interpreted, however, that such an order is spontaneous nor inherent in the nature of things. That is a later addition to the ideological cannon.

The idea that private interests can be harmonized with the public good is scarcely more than 250 years old. Prior to roughly 1700 the idea was that the pursuit of private interest (itself an anachronism as the concept of a strictly private interest did not exist) was sacrificed to the public, the community, interest ⁶ . Historically, the idea that if each individual pursued his/her own interest independently and without regard to others a social harmony would result is often related to an 18th century Dutch physician, Bernard Mandeville (1670-1733). Mandeville wrote a fable, in poetic form, about a beehive. His subtitle, “Private Vices, Publick Benefits” (quoted in Rosenberg 1963, p. 183, passim), and various passages within the fable, is often cited as representing an embodiment of the newly emerging laissez-faire philosophy. But this is often without paying any attention to Mandeville’s own extensive prose commentaries. The fable is generally taken to mean that private interests, undirected from the center would automatically harmonize with the public good. Mandeville’s own prose commentary on his fable reveals he intended otherwise (Rosenberg 1963, p. 184, passim):

Private Vices by the dextrous Management of a skilful Politician may be turn’d into Public Benefits.

This passage is clear. There is little automatic about it. It is, rather, a social creation rather than a natural phenomenon, and it is anything but spontaneous: it results from “dextrous Management of the clever Politician” (Rosenberg 1963, p. 184, passim). ⁷

Mandeville was silent on exactly how the politician was to bring this about, how the politician would harmonize separate and disparate interests, but he suggests elsewhere that “Is it the Business of all Law-givers to watch over the Publick Welfare” (Rosenberg 1963, p. 194n32). By the time Adam Smith was writing the state had become fully established and legitimized, and the liberal notion regarding the rule of law, not of men had become entrenched. Hence it would be the legal framework through which the sovereign had undeniable and legitimate power, that the politician would use to skillfully and dexterously manage things.

It should be pointed out that Adam Smith did not see any inherent interests between individuals and classes in society, either. Indeed, he stated quite the opposite:

The interest of the dealers…in any particular branch of trade or manufactures, is always in some respect different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always in the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow citizens. (Smith, p. 250) ⁸

Since the interests of those engaged in trade and manufacture is always and, in some respect different from, and even opposite to, that of the public, Smith was very much concerned that those engaged in trade and manufacture should not have much to say about the legal code and legislation by and through which the sovereign and/or politician was to skillfully and dexterously manage the social economy to the benefit of the public. Smith’s phrasing, continuing directly from the passage above, is:

The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the pubic, and who accordingly have, upon many occasions, both deceived and oppressed it. (p. 250)

These are rather strong words, but they express the same relationships, with stated reasons, that Milton Friedman expresses in Capitalism and Freedom (p. 133, especially if read in conjunction with Chapter II, pages 24-26). It is a relationship not expressed in the 1970 essay. The invisible hand which guides men to purposes which are not their own is not that of the market (contrary to everything our economics classes have taught us) but that of the law giver.

The relationship was clearly stated by Friedman’s English contemporary, Lord Robbins. In his Theory of Economic Policy in English Classical Political Economy (1955, p. 56), Robbins summarized the policy position of classical English political economy as follows:

The invisible hand which guides men to promote ends which were no part of their intention…is the hand of the law giver, the hand which withdraws from the sphere of the pursuit of self-interest those possibilities which do not harmonize with the public good.

Later in the same book (p. 190) he adds that this is accomplished through:

The provisioning of a set of rules which so limited and guided individual initiative, that the residue of free action undirected from the center could be conceived to harmonize with the general objects of public interest…Indeed,…we must regard the provision of such a framework as prior to the recommendation of economic freedom.

I want to point out, too, that it is true that Adam Smith used the invisible hand several times in The Wealth of Nations, and that only once was it in conjunction with the market, “the invisible hand of the market.” In addition, he used the invisible hand trope many more times in his Theory of Moral Sentiments and, in fact, used it in his History of Astronomy, a short treatise written before either Theory of Moral Sentiments or The Wealth of Nations (but posthumously published). While the expression is most associated with Adam Smith, others used it as well (Hill 1998).

So here is the crux of the problem deftly sidestepped by Friedman in the 1970 essay. If economic power is to be separated from political power (the emphasis throughout Capitalism and Freedom), then those who “play the game” must not have a hand in determining the rules by which it is played. But how do we separate the rule maker and the umpire from the players on the field or pitch, those “playing the game”? If we can’t (we know we don’t—business has now amassed such power that it influences the outcome of much government policy, something macromarketers should pay more attention to) then is it still right to say the only social responsibility business has is to increase its profits? One senses it is not, and was not in 1970 when Friedman wrote the NYT Magazine article.