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Friedman doctrine: business exists to make profits
September 13, 1970· Idea or movement· Laws, labor & antitrust
Well documentedSolid records, texts or physical evidence.
Milton Friedman's 1970 argument that a company's only social responsibility is to make money for its shareholders, within the law.
See it on the Innovation & Wealth map →What happened
In a New York Times Magazine essay on September 13, 1970, economist Milton Friedman argued that 'the social responsibility of business is to increase its profits,' while staying within the rules and without deception or fraud. Managers are employees of the shareholders, he wrote; spending company money on social causes taxes the owners without their consent. Agency theory (Jensen and Meckling, 1976) and stock-option pay turned the idea into everyday corporate practice.
Impact on society and the economy
It became the creed of 'shareholder value' that shaped corporate America from the 1980s: sharper focus and higher stock returns, but also layoffs, buybacks and short-termism, critics say.
How we know
The essay itself, Friedman's Capitalism and Freedom (1962), the Business Roundtable's 1997 endorsement of shareholder primacy and its 2019 'stakeholder' statement, and decades of debate in law and management journals.
Still debated
Whether shareholder primacy caused wage stagnation and underinvestment, or simply improved discipline, is debated, as is what Friedman would make of today's 'stakeholder' and ESG movements.
Connections (2)
▸Friedman doctrine: business exists to make profits supplied the shareholder-value creed of Deregulation, privatization and 'shareholder value'Mostly agreed
The connection
Friedman's case that companies should serve shareholders, and that markets usually beat regulators, became an intellectual backbone of the 1980s shift. Reagan and Thatcher deregulated and privatized; boards tied executive pay to stock prices; and 'maximizing shareholder value' became the standard measure of corporate success, with GE's Jack Welch its best-known practitioner.
When and how
United States and Britain from the late 1970s; Friedman advised Reagan and influenced Thatcher; Jensen and Meckling's 1976 paper spread the idea through business schools.
How sure are we?
Policymakers and executives cited Friedman directly, and the spread of stock-based pay and the Business Roundtable's 1997 statement document the creed's adoption.
Debates
How much ideas drove the change versus pressures like stagflation and global competition is debated; deregulation began under Carter with liberal support.
▸Michael Milken, junk bonds and buyouts put into practice Friedman doctrine: business exists to make profitsMostly agreed
The connection
Raiders armed with junk-bond financing bought undervalued or poorly run companies, often cutting jobs, selling divisions and loading on debt to pay shareholders. Supporters said this disciplined complacent managers who wasted owners' money, Friedman's core complaint; critics said it sacrificed workers and long-term investment for quick gains.
When and how
US boardrooms in the 1980s: takeovers of Revlon (1985, by Ronald Perelman), TWA (1985, by Carl Icahn) and RJR Nabisco (1988–89, by KKR).
How sure are we?
Economist Michael Jensen explicitly defended buyouts as enforcing shareholder interests (1986, 1989), and raiders used the same shareholder-value language.
Debates
Economists Andrei Shleifer and Lawrence Summers (1988) argued many takeover gains could come from breaking implicit promises to workers and suppliers, not from efficiency; how often that happened is still debated.