Milton Friedman

Definition

Milton Friedman was a prominent American economist and a leading advocate for free-market capitalism who made significant contributions to the field of economics and public policy. His philosophy emphasized that the primary responsibility of businesses is to maximize profits for their shareholders, which has important implications for discussions on corporate social responsibility and ethics, as it raises questions about the role of businesses in society beyond profit-making.

5 Must Know Facts For Your Next Test

1. Milton Friedman won the Nobel Prize in Economic Sciences in 1976 for his research on consumption analysis and monetary history.
2. He famously stated that 'the social responsibility of business is to increase its profits,' which has sparked ongoing debates about corporate ethics.
3. Friedman's work significantly influenced economic policies in the late 20th century, particularly during the Reagan and Thatcher administrations.
4. He was a proponent of minimal government intervention in the economy, arguing that free markets lead to more efficient outcomes than regulated markets.
5. Friedman also contributed to the development of the Permanent Income Hypothesis, which suggests that people's consumption choices are based on their expected long-term income rather than current income.

Review Questions

• How does Milton Friedman's perspective on corporate responsibility challenge traditional views on ethics in business?
  • Milton Friedman's perspective fundamentally challenges traditional views on business ethics by arguing that the primary responsibility of corporations is to maximize shareholder profits. This view suggests that ethical considerations should take a backseat to financial performance, contrasting with more modern approaches that advocate for balancing profit-making with social and environmental responsibilities. This creates a tension between profit maximization and ethical obligations, prompting debates on how businesses should operate within society.
• Analyze how Friedman's principles might affect a company's approach to Corporate Social Responsibility (CSR).
  • If a company adheres strictly to Friedman's principles, it might prioritize financial performance over CSR initiatives, viewing them as secondary or even detrimental to profit maximization. This could lead to minimal investment in social programs or environmental sustainability if such efforts do not directly contribute to increased profitability. Conversely, some firms may adopt CSR practices as a strategic way to enhance their public image and ultimately boost long-term profits, reflecting a more nuanced interpretation of Friedman's views.
• Evaluate the implications of Milton Friedman’s theories in today's context of global corporate governance and ethical standards.
  • Evaluating Milton Friedman’s theories today reveals complex implications for global corporate governance and ethical standards. While his emphasis on profit maximization continues to resonate with many businesses, there is increasing pressure from consumers and regulators for corporations to adopt ethical practices that align with social good. This shift challenges the simplistic view of shareholder primacy and pushes firms to consider broader stakeholder impacts, leading to a potential reevaluation of what constitutes responsible business practices in an interconnected world.

Related terms

Shareholder Theory: The theory that a company's primary obligation is to its shareholders, meaning the main goal of a business should be to increase its profits.

Free Market Economy: An economic system where prices are determined by unrestricted competition between privately owned businesses, with minimal government intervention.

Corporate Social Responsibility (CSR): A business model in which companies integrate social and environmental concerns in their operations and interactions with stakeholders.