Milton Friedman Explains Why Stakeholder Capitalism Fails

What brought thousands of people together to create something as simple as a pencil? Some may be familiar with the late economist Milton Friedman’s popular analogy of how a mere pencil represents the effectiveness of a free market.

No single human could create something as simple as a pencil. The phone or computer you are using to read this article took the collaboration of hundreds if not thousands of individuals to achieve from sourcing the materials, innovating the creation through design and trials, manufacturing the product, negotiating trade, shipping the final product, and selling it to you the consumer. People across the world came together, putting in countless hours of work, to provide you with commonly used products that one may not pay much attention to in their day-to-day lives.

What brought these people together? “The magic of the price system!” Friedman explains. They “cooperate so that you could have it for a trifling sum. That is why the operation of the free market is so essential–not only to promote productive efficiency, but even more, to foster harmony and peace among the people of the world.”

Friedman was criticized for promoting the idea that business operates for business purposes, and the “greed is good” doctrine. We now have those who want to implement environmental and social credit scores into business and large banks and institutions have adopted this ideology. . The Human Rights Campaign (HRC) pushes the CEI (Corporate Equality Index), a company’s social woke credit score. The Open Society Foundation, operated by the Soros family, funds the HRC. The ESG promotes a company’s green social credit score, promoted by BlackRock and the World Economic Forum. Companies are shying away from these arbitrary credit scores in droves.

BlackRock even came out and said that the concept of stakeholder capitalism, introduced in 1932 but currently promoted by the World Economic Forum and its partners, was bad for business. BlackRock has $700 billion tied up in ESG policies, and this pivot marked a change in business trends. The first bill that President Joe Biden vetoed was a bill intended to dissolve the ESG climate social credit score, which was only foreshadowing the policies that later came about, most notably the Inflation Reduction Act that Treasury Secretary Janet Yellen admitted was intended to combat climate change. Yet this push to an essentially socialistic society has been undeniably ineffective.

In one of his many writings, “The Social Responsibility of Business Is to Increase Its Profits,” Friedman explains why capitalism produces results. “The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal,” the late economist stated. Friedman was beyond his time. He used the example of what could happen if a company were required to adjust its prices and policies “to contribute to the social objective of improving the environment,” hire less qualified individuals in the name of equality, or change prices to adjust for overall inflation.

The answer is simple – the corporate executive making these decisions would be “spending someone else’s money for a general social interest,” and thus, socialism. “Insofar as his actions in accord with his “social responsibility” reduce returns to stock holders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employes, he is spending their money”

Friedman argued that individuals could spend their personal money as they saw fit, but businesses have no such social obligation. Adjusting prices for social causes is essential imposing taxes and decided how the tax proceeds should be spent. Taxation without representation. The corporate executive and business leaders are the chosen representatives of the shareholders. “Here the businessman—self‐selected or appointed directly or indirectly by stockholders—is to be simultaneously legislator, executive and jurist. He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds—all this guided only by general exhortations from on high to restrain inflation, improve the environment, fight poverty and so on and on.” Forcing businesses to operate based on social policies degrades the elected representative to a “public employee, a civil servant, even though he remains in name an employee of private enterprise.”

Joe Biden continually states he is cracking down on corporate greed. How are we to expect business to combat such a complex topic?

As Milton Friedman explains:

“He is told that he must contribute to fighting inflation. How is he to know what action of his will contribute to that end? He is presumably an expert in running his company—in producing a product or selling it or financing it. But nothing about his selection makes him an expert on inflation. Will his holding down the price of his product reduce inflationary pressure? Or, by leaving more spending power in the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce less because of the lower price, will it simply contribute to shortages? Even if he could answer these questions, how much cost is he justified in imposing on his stockholders, customers and employes for this social purpose? What is his appropriate share and what is the appropriate share of others?”

Separating the public and private sectors is necessary in a free market. “In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate. There are no “social” values, no “social” responsibilities in any sense other than the shared values and responsibilities of individuals.” This is precisely in opposition to what we have seen with CEI and ESG policies, where businesses have been barred from operating freely due to social pressures from Washington and global organizations. The climate change zealots expect the entire energy sector to reform instantaneously without the realization that is utterly impossible to achieve any of their zero CO2 targets.

Milton Friedman speaks extensively on this topic in the book, “Capitalism and Freedom,” as well as countless articles published during his lifetime. The fact of the matter is that the private sector produces for the good of all based on “greed” or profits as that is the motivating factor. Everyone acts according to the invisible hand theory, which Adam Smith put forth years ago. Thousands of people would not have felt compelled to create a mere pencil if it were not for their own self-interest that ensured they would receive something in return for their time and work.

Socialism, climate change initiatives, DEI initiatives, CEI, and ESG scores all suppress the free market and deter business. Taxing businesses into oblivion to support big government suppresses the free market. Absolutely everyone reaps the benefits of a free market where goods flow, jobs are abundant, and talent is rewarded. We must separate the private and public sectors as we do with church and state. History has taught us time and time again that operating under the premise of “social responsibility” leads to utter failure, feminine, and deteriorating economic conditions for all.