Milton Friedman’s Profit Fiction: Part 2

This is the second of a six-blog series that simply and in plain language explains the dangerous fallacy of Milton Friedman’s “maximize profit” business ethic.

For just one example of how Friedman’s maximize profit ethic provides for rules that support plantation economics, let’s consider the economic concept of externality. Externality is generally defined as a cost or benefit that affects people other than those involved in the economic activity that produced it, and that is not reflected in costs or prices, such as pollution and other negative by-products of production.

Photo Credit Shraga Kopstein on

Externality is a simple enough concept, yet a false one in light of our observation of the relentless rules of economics. Externality truly became a dangerous weapon when, in support of Friedman’s maximize profit ethic, economists chose to frame and offer it as a valid business option. In other words, to shift part of the cost of doing business to others without their agreement and even to their detriment was a valid business decision offered by economists (if and for however long you could pull it off, of course). A brief personal story illustrates the profit-above-all ethic and supporting rule of externality.

In the early 1990s and still early in my career, l was a forensic engineer at a consumer products conglomerate. My responsibilities took me nationwide, and one matter required that I visit the massive plywood mill that manufactured the structural panels at issue in a potential defect claim. During that visit and while touring the oldest section of the mill, the shift supervisor turned to explain the crew installing new pollution controls at the far end of the building, an enlightening backstory.

The shift supervisor explained that the mill had been allowed to operate for decades without meaningful pollution control equipment. This led to manufacturing “by-products”—air pollution vented into the atmosphere and waste dumped into the adjacent stream. If you’ve ever experienced the smell of sulphuric acid (remember that rotten egg smell experiment in grammar school science?) or sloshed through a sewer overflow, then you have a sense of the air pollution and waste this mill generated.

Local citizens living near the mill began to complain to the plant manager about the awful smell and chemicals in the stream generated by the plant. The plant manager’s practiced response was soon familiar to everyone. He’d pause, point his nose upward, and inhale deeply for emphasis before proclaiming, “It smells like money to me.” His point was clear: his only responsibility was to make a profit, and his way of delivering that point suggested that he didn’t have to care about much else. When not at the job site, the plant manager lived comfortably several towns away where he and his family weren’t inflicted with the “smell of money.”

This story from the shift supervisor unintentionally taught me the economic concept of externalities. In the view of that plant manager, he wasn’t polluting. In his view he was merely externalizing that part of the cost of manufacturing and therefore it was a no-brainer to reduce expenses. If there wasn’t a law that prohibited him from polluting, he was “within the rules of the game” and was convinced that it wasn’t his responsibility that the plant under his direction was causing problems for the community. And even if there were a law in place, then he and the company lawyers and lobbyists were allowed to try to get that law abolished or changed. He was “just doing his job” of making money for the company. In fact, we shouldn’t be surprised to learn he deeply believed he was doing exemplary work saving money by not installing pollution control measures that weren’t required by law.

The object lesson here is unavoidably and excruciatingly clear. The Friedman fiction that the one and only social responsibility of business is to increase profit leads to bending and breaking the rules of the game while using the very wealth gained in the abuse to insulate the abuser from the negative effects.

Examples of negative externalizing abound in today’s marketplace and culture. What are the limits of externality? How much cost shifting in support of this profit-first-and-only ethic are we willing to burden? How much further are we willing to abuse our environments and each other in support of Friedman’s fiction that business’s sole social responsibility is to increase profits? There are no limits and there is no end as long as this profit-above-all fiction continues as the primary marketplace ethic.

In the next Part 3 we further illustrate the fallacy of a maximize profit business ethic by asking the question, “Maximize profit for whom and when?” Are you or your organization externalizing in ways harmful to others?

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