The Third Pillar: How Markets and the State Leave the Community Behind

by Raghuram G. Rajan

Milton Friedman was characteristically bold in his answer to these questions: ‘There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.’40 Since profits are what go to shareholders, Friedman was saying management should maximise the value of the corporation’s shares, allowing each shareholder the maximum freedom to use her valuable shares to fund causes dear to her heart. Let her support the local football team in her neighbourhood or donate to the firefighters’ fund if she chooses to, Friedman insisted; after all, it is her money, earned from bearing risk. Friedman’s dictum had an ‘invisible hand’ aspect to it – by maximising the value of the only claim to the corporation that was not fixed, management would not just be maximising shareholder value but also the corporation’s value, and thus the corporation’s contribution to society. Fried-man firmly rejected any role for the corporation in helping the state do its job, for example, in containing inflation, or in undertaking charitable activities, especially if it impinged on its profitability. Friedman’s views had enormous influence, both in academia and outside. The notion that corporate social responsibility began and ended with the corporation maximising shareholder value was very clear and was consistent w...

Milton friedman's view on responsibility of corporations