VALIDITY OF MILTON FRIEDMAN’S VIEW ON PROFIT

  • Category:
    Management
  • Document type:
    Essay
  • Level:
    High School
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    3
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    1823

Running head: 1VALIDITY OF MILTON FRIEDMAN’S VIEW ON PROFIT

Validity of Milton Friedman’s View on Profit

Introduction

No singular idea made by a single person had become so popular in the ancient days like that brought forth by Milton Friedman. The idea; that the sole purpose of any business is to bring in more money for its stockholders became popular especially after it was published in New York Times on September 13th, 1970. Friedman was a leader in the Chicago School of Economy and won a Nobel Prize in Economics in 1976 and therefore he was a very influential economist. His article in New York attracted famous people’s attention like George Will, who regarded Milton as “the most consequential public intellectual of the 20th century.”

Analysts wondered what the idea behind a Nobel man like Friedman was. People wondered whether the social responsibility of a corporation was just making a profit. What about the safety of worker, pollution, child labor or quality of products? If these issues were not considered in Friedman’s idea, then his article would sound uncivil and unpleasant. However, this statement would be varied in some circumstances. In fact, there is no single business that enters the market world with the aim of making losses (Forbes.com. 2016). The paper that follows discusses the validity of Milton Friedman’s statement in today’s society.

Social responsibility of executive

Friedman argues that the social responsibility of business is to make a profit for its shareholders. The corporate executive has the responsibility of ensuring that business meets the set goals which is making a profit. Friedman argues if the corporate executive carries all duties following the ethical customs, then the persons will be able to fulfill the desires of the company. He argues that the needs of the society are supposed to be met by the government, individuals or various groups that should volunteer for this duty. Therefore, the responsibility of earning and spending money is left to the executive (Bfi.uchicago.edu 2016).

The executive represent the company and do all activities that are required to benefit the company. They should know what it takes to sell the company and thus increasing the profit of that company. According to Friedman, if the corporate executive comes up with social responsibility agenda that are contrary to the agenda of the company making profit, the executive should be fired immediately. This statement is applicable to the marketers of any business. Salespersons that are employed by any company should convince customers to buy the products of that company thus bringing more money, profit. If they do not achieve this agenda, they have no other responsibility in the company and therefore they need to be fired and someone else who is competent in sales be employed (Colorado.edu, 2016).

It should also be noted that the executive is a person as well as an agent of the company. As a person, he/she has social responsibility over the family, society and his own needs. As an agent of the business he is supposed to sell the agenda of the business in order to make more profits for the business. If he doesn’t sell the company, he will not achieve the agenda of the company. In addition, failure to market the company means that he may lose his job or even make less money that will not meet his needs. So he is left with the alternative of selling the business to achieve the agenda of the business and thus meet his personal needs (Bfi.uchicago.edu, 2016).

Social responsibility on the society

The business has a social responsibility of giving back to the society. These activities are conducted by coming up with promotions, sponsorship programs and offering quality products. The society is also part of the stakeholders. If business does not make enough profit it will not be meet its goals of giving back to the society. These activities do not show self-interest but reflect the interest of all stakeholders and making profit will ensure that all stakeholders are satisfied (Bfi.uchicago.edu, 2016).

Socioeconomic views

If the statements of Friedman were viewed keenly in economists’ viewpoint, one would see that there is no contradiction between profit making and civil society. The idea of company making profit is one route of ensuring that the society is civilized. In his statement that “in a free economy, there is one and only social responsibility of the business-to use resources and engage in activities designed to increase its profits as long as it stays within rules of the game” the economist would look at the second part of the statement that is not emphasized by critics of Friedman. The second part of the statement indicates that even if the business is out to make profit, it should be within the rules that govern the business. This is true to the current society where businesses conduct their activities but have to be under a given framework. If the rules are followed, businesses will make profit as well as being social responsible to the environment and people around them (Profit Maximization. 2016).

For instance in cases of pollution control, the legal systems “establish framework of law”. Property rights and liability laws compel the business to cater for the cost brought by the pollutant effects. The business therefore maximizes on profit to in order to cater for the external costs governed by property laws.

Just like Friedman, economist would argue that private individuals would not decide what self-interest is but it is the responsibility of the political and legislative arena to come up with such arena. However, while coming up with regulatory framework, they should not hinder the business from making internalized benefits-profit. With well-defined frameworks, businesses will maximize on making profits that will benefit the makers of the framework. In the current society, the governments make laws that govern how businesses perform. In the same way, the government benefit from the taxes and some service rendered by the businesses. If the government comes up with frameworks that are ill-defined, the businesses will not make good profits which means that the government will not benefit from the businesses. Therefore the laws should allow corporate to make as much profit as possible which will help the government to benefit as well (Profit Maximization. 2016).

When there is no any other alternative

The idea of Friedman in maximization of profit can be applied to a company that is almost collapsing and the only way that it can be revived is by maximizing the output. The views of Friedman came at a time when America was experiencing the great depletion. At this time there was deficit of many and organizations needed to make extra money to remain stable. This concept can be used by a company that is running low of profit and has many loans. Acquiring more loans would make matters worse and defecting the market will mean that they will face legal constrain due to the accumulated law. The only way that the company can revive itself is concentrating in maximizing profits but still remaining in the legal frameworks (Fareedsiddiqui.expertscolumn.com2016).

When facing competition

If business is facing tough competition from competitors, the option they have is focusing on revenue and costs. In many cases profit maximization is not just any other potential goal but the only goal to remain relevant in a competitive society. In economic terms, profit is the difference between the total revenue and the total costs. When the total costs are more than the revenue costs, the business is making losses and will not have the capability of competing with other business in the market world. On the other hand, when the revenue is more than the total cost, the business is making profit but depends on the range. On way of making the range bigger is by reducing the total cost and increasing revenue or otherwise increasing both the revenue and cost but the business must be sure of the potential buyers. All these activities are aimed at maximizing profit which is advocated by Friedman. Otherwise, the business will not sustain the competition that is always present in the market world (Fareediddiqui.expertscolumn.com, 2016).

Profit for running business

Profit maximization is almost the most important objective of any business. Profit dictates the smooth running of the business as well as its success. It is one of the ways of benchmarking against the efficiency of the business. This helps the business to know whether the business is reaching the met goals or not. If the business is not on the route of accomplishing its objectives, then it will opt for profit maximization.

By measuring why some business fail, lack of profit maximization is one of the reasons. If companies aim is maintain their working capital and do not have measures of maximizing their profits, the situation forces the business to close down. This indicates that profit maximization as suggested by Friedman is a basic objective of making the business survives. It has also been proven that businesses that maximize on profits make necessary expansion of the business or even venture in new business avenue as well as increasing the returns of their shareholders. The aim of any business is t expand. For this reason, profit maximization should be an option in the business. Otherwise, it will remain stagnant and will see other competitors that are maximizing on profit expanding.

The business needs funds that will ensure everyday activities are conducted. However, there are contingencies that occur which were not planned for. This requires a business to set aside some money for such liabilities. A business cannot set aside some money that it does not have. The money to be set aside is obtained from the profit the business makes. Thus maximization of profit will make the business have a working capital that is efficient and sufficient for maintaining business in case of unplanned liabilities (Fareedsiddiqui.expertscolumn.com. 2016).

Conclusion

Milton Friedman got the attention of so many analysts when he published an article on New York Times saying that “the only responsibility of business is maximizing profits for its shareholders”. This statement was seen to be wrong especially looking at the social responsibility the business should have on environment, employees and the society. However, it should be noted that the aim of any organization venturing into business market is making profit. Profit maximization is necessary when the business want to remain competitive, to perform day-to-day activities efficiently, and to give back to the society and ensuring that the business expands.

References

Corporate Social Responsibilty: Friedman’s View | Becker Friedman Institute. (2016). Bfi.uchicago.edu. Retrieved 26 April 2016, from https://bfi.uchicago.edu/news/feature-story/corporate-social-responsibilty-friedmans-view

Forbes Welcome. (2016). Forbes.com. Retrieved 26 April 2016, from http://www.forbes.com/sites/stevedenning/2013/06/26/the-origin-of-the-worlds-dumbest-idea-milton-friedman/#3d9fd81f214c

Profit Maximization. (2016). Economics.illinoisstate.edu. Retrieved 26 April 2016, from http://economics.illinoisstate.edu/ntskaggs/readings/maximization.shtml

Profit Maximization — Merits Of Profit Maximization. (2016). Fareedsiddiqui.expertscolumn.com. Retrieved 26 April 2016, from http://fareedsiddiqui.expertscolumn.com/article/profit-maximization-merits-profit-maximization

The Social Responsibility of Business is to Increase its Profits, by Milton Friedman. (2016). Colorado.edu. Retrieved 26 April 2016, from http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html