Friedman’s New York Times Magazine article on the social purpose of business was a specific intervention in the debate over shareholder activism and mentions monopolies just once, yet monopoly is still behind his reasoning.

Editor’s note: The current debate in economics seems to lack a historical perspective. To try to address this deficiency, we decided to launch a Sunday column on ProMarket focusing on the historical dimension of economic ideas. You can read all of the pieces in the series here.

He was naively pro-business and disinterested in the problem of monopoly. These two criticisms are leveled at Milton Friedman, in part, due to his argument that the only social responsibility of business is to increase its profits. While generations of profit-maximizers welcomed his classic statements in Capitalism and Freedom and in the New York Times Magazine, his claims also provoked a torrent of critical responses. Few, however, have considered the historical development of Friedman’s argument. My forthcoming research points to a surprising explanation for his ideas about social responsibility: his concern about business self-dealing and monopoly.

Friedman, in fact, had a lot to say about business and its social responsibilities. By studying speeches, interviews, and correspondence now held in archives, and even other published articles, we can recover the evolution of an antimonopoly critique explicitly rooted in a central insight of classical liberalism.

The story begins in the 1930s, when European and American liberals huddled to regenerate liberalism in the ruins of the Great Depression. Their reading of Adam Smith guided the way. As Smith wrote, and Friedman later liked to repeat, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices…” Smith explained, however, that such combinations were fragile in a competitive market. Only by organizing to shape government regulation to their advantage could groups of tradespeople and merchants hope to durably suppress competition. With this, Smith was able to explain how powerful business interests had shaped the mercantilist structure of the eighteenth-century British Empire. Convincing the legislature to pass such self-serving measures was difficult, however, and so it was usually necessary to disguise them under claims about the public interest. Hence, Smith could write, “I have never known much good done by those who affected to trade for the publick good.”

This diagnosis was ready-made for liberals in the 1930s, when statism was on the rise and the power of big corporations was a hot topic (sound familiar?). German liberals such as Walter Eucken and Wilhelm Röpke applied the Smithian critique of business interests to understand how monopoly capitalism enabled the rise of Nazism.

American liberals wrote in a different context but applied the same Smithian insight. Walter Lippmann’s The Good Society rejected calls for further regulation of corporate power by an “omnipotent state.” According to Lippmann, the state had facilitated the problem of monopolies and large corporations. But the real driver since the nineteenth century had been businesspeople who worked to manipulate regulatory power and corporate law. Lippmann, like Smith, concluded: “I am convinced, that few effective monopolies have ever been organized and that none can long endure except where there is a legal privilege”.

These problems were explicitly discussed at two major (neo)liberal gatherings: the Colloque Walter Lippmann and the inaugural meeting of the Mont Pèlerin Society, where Friedman was present. Many solutions were possible. German Ordoliberals would advocate for a competitive “market order” through the creation of an economic constitution and institutional protections such as an anti-cartel office. A strong state would defend itself against private interests.

The Chicago School found a different path. Their studies of the level of economic concentration in the American economy informed their well-known reinterpretation of antitrust. These studies, however, also drew attention to monopolies or economic concentrations created by regulatory regimes. The Chicago solution to the Smithian problem of business interests would be a weak state with little regulatory power to capture.

Friedman explicitly adopted the diagnosis of Smith and these early writers in his own research. It was not state intervention per se that caused the failure of the competitive system, but predatory business interests manipulating governmental authority. “Government assistance,” he wrote in Capitalism and Freedom, was “probably the most important source of monopoly power” and was hidden under claims about social responsibility. This was the reason why the chapter dedicated to monopolies is also about the “social responsibility of business and labor.” Friedman then explores how federal agencies such as the Interstate Commerce Commission (ICC) and the Federal Communications Commission (FCC) had been used by incumbents to protect their markets.

How did this work in practice? Social responsibility claims provided legitimacy to monopolies, cartels, and large companies. Powerful corporations busied themselves manipulating regulation in their favor. Friedman—always rhetorically adept—liked to explain in speeches how politicians were co-opted by recasting the Smithian invisible hand: “Men who seek through political machinery to serve only the public interest are led by an invisible hand to serve private interests which they would never serve if they knew what they were doing.”

This connection between monopoly and social responsibility did not fade in Friedman’s thinking. He would even joke in an interview in 1972 that businesspeople who boasted of their expenditures on social responsibility, “…should be regarded as asking for an investigation by the Antitrust Division of the Justice Department”.

Friedman’s New York Times article only mentions monopolies once. Part of the reason is that by 1970 his critique had evolved. In 1962, he was preoccupied with post-war corporatism, whereas the later article was a specific intervention in the debate over shareholder activism. But monopoly is still behind his reasoning.

“Friedman was neither naïve about business interests nor about monopoly.”

The essence of Friedman’s argument in 1970 was not that managers should reject moral or social considerations in their decision-making. He acknowledged that corporations might fund amenities in a community, for example, in order to recruit better employees. Friedman explained in private correspondence what this meant. Corporate activities should pass what he termed the “dollar for dollar” test or whether they returned profit. This test actually provided managers with considerable latitude to pursue social responsibility. Friedman, however, objected to the hypocrisy and noted in his article that he shared “Adam Smith’s skepticism” about “those who affected to trade for the public good.” Expenditures on social responsibility that failed the test would be loss-making in a competitive market and place the company at risk. The only entities that could support ongoing and truly altruistic social responsibility expenditures were monopolies. Call the Justice Department!

This reasoning is reinforced by his lone mention of monopoly. He acknowledged that individual proprietors might pursue social responsibility but since they were unlikely “to have monopolistic power, any such side effects will tend to be minor.” The side effects were a rise in costs that would affect employees and customers— costs that only companies with little competition could ignore in the long-run.

The fundamental problem that Friedman attacked in both 1962 and 1970 (though in different ways) was how managers made decisions—whether by political or market logics. But that is another story.

Friedman was neither naïve about business interests nor about monopoly. He made this clear even in his later interviews: “It’s always been true that business is not a friend of a free market … It’s in the self-interest of the business community to get government on its side. It’s in the self-interest of a particular business.”

While suggesting the need to rethink Friedman’s ideas about monopoly and the importance of classical liberalism to antitrust more generally, my research also points to another problem. Friedman was deeply interested in how markets and the “rules of the game” incentivized managerial behavior. While many have sought to encourage virtuous firms, Friedman often alluded in his writings and notes to the shaping of virtuous markets. The roles that government, consumers, and other actors might play to bring about fairer markets seems an increasingly timely question.