More than any other language written by an economist in the last century, a specific line from Milton Friedman’s 1970 essay in the New York Times Magazine has influenced the pace of American business life. The premise was straightforward: a company’s social responsibility is to boost profits. Friedman gave it with the assurance of a guy who thought he was making sense of a perplexing time. A large portion of corporate America concurred for the decades that followed. It was taught at business schools. It was adopted by boards. It was enforced by investors. The concept evolved into an operating system rather than a theory. Furthermore, the operating system is beginning to exhibit signs of aging after more than 50 years.
The wage-productivity disparity is the most obvious manifestation. American worker productivity and median pay increased nearly simultaneously from the late 1940s and the late 1970s. The lines started to diverge around 1979. Productivity kept increasing. Real wages generally didn’t. Profits for corporations increased. In previous times, executive salary would have been deemed ridiculous. Work harder, produce more, earn more—the link that characterized the postwar middle class—quietly disintegrated, and the structural causes of this break have been discussed ever since. Although Friedman’s theory didn’t directly create all of that difference, it did provide many of the decisions that led to it a philosophical justification.
The second sign is short-termism, which manifests in areas that most customers are unaware of. Capital allocation decisions are reshaped throughout the economy by quarterly earnings calls. Executives are more inclined to make decisions that benefit the next ninety days at the expense of the next ten years since they are aware that missing a number can wipe away years of share appreciation in a single afternoon. Over the past 10 years, a significant portion of corporate cash flow has gone toward stock buybacks, which are frequently funded by debt and carried out at prices that, looking back, did little for long-term shareholders and a lot for short-term ones. Budgets for R&D have been reduced in sectors that should be making significant investments. Employee training has been contracted out, outsourced, and subtly reduced.
The externalities issue, which Friedman freely admitted but mostly disregarded, is the third symptom. According to the idea, businesses shouldn’t be held accountable for the social consequences of their conduct unless mandated by legislation. The outcome is just what the hypothesis predicts. Communities are affected by environmental harm.
While private balance sheets collect cash, public infrastructure aged. Instead of the businesses that profited from lower labor costs, governments and taxpayers bear the costs of underpaid workforces, including health care pressure, public assistance, and regional decline. The nation has been questioning whether that arrangement is sustainable more and more, especially as concerns about infrastructure, public health, and climate change have evolved from theoretical to practical.
The stakeholder capitalism movement—the notion that businesses exist to provide value not only for shareholders but also for employees, customers, suppliers, communities, and the environment—has grown during the past ten years in response. With almost two hundred CEOs endorsing the more comprehensive framework, the Business Roundtable’s 2019 statement on a corporation’s purpose was a significant event. The paradigm has been promoted for years by the World Economic Forum. A constant stream of research has questioned whether maximizing shareholder value truly optimizes long-term value at all in academic finance, which has historically been a Friedmanite stronghold.
Generally speaking, Wall Street isn’t buying it. Speaking with employees of large institutional investors gives the impression that stakeholder language is viewed as marketing, which is helpful for proxy statements but less important when allocating resources. Companies are still being pushed away from long-term investment and toward financial engineering by activist hedge funds. The primary indicator of executive performance is still quarterly earnings. Short-term stock price movement is still rewarded by compensation structures significantly more than long-term value generation, employee retention, or community impact. Friedman laid the groundwork for the institutional framework of American investing, and, with very few exceptions, those in charge of it have shown little desire to reconstruct it.
Whether Wall Street wants it or not, the change might be on the horizon. Over the past ten years, there has been a discernible change in public opinion toward business behavior. Despite recent pressure from technology, labor markets have given workers leverage they haven’t had in forty years. Despite the recent political upheaval, regulatory and antitrust stance has started to regain some of its teeth. The generation that created the current shareholder model routinely polls differently on ESG and stakeholder issues than younger investors, who will eventually inherit the institutional asset base. All of this does not ensure that the doctrine will diminish. However, it implies that the circumstances that made it possible for it to rule are changing.
The larger pattern is difficult to ignore. In 1970, American capitalism appeared solid, widely shared, and self-regulating, making Friedman’s theory tenable. Fifty-five years later, the doctrine appears less like economic wisdom and more like an artifact of an era that ended without anyone updating the operating system, with inequality at levels not seen since the late 1920s, infrastructure clearly deteriorating, and a political environment increasingly hostile to the existing order. It’s still unclear if stakeholder capitalism will truly take its place or if something else will. It is more evident that Friedman’s consensus has broken down, and those who stood to gain the most from it are also the ones who are taking the longest to acknowledge this.