MC 27: The Friedman Paradox - We Win Some, We Lose More
If there’s a reality that defies economic sense it’s this:
if profits are soaring, stock markets are hitting records and global GDP has doubled in the last two decades why is it that social welfare and genuine sustainability, when measured by the accessibility and availability of objectively useful things like, clean air, fertile soil and fresh water, are in decline?
For over half a century Economists have promised that their social purpose through maximum profitability gambit would pay off. Wagering that, absent a host of imperfections like:
asymmetric information;
market failure;
externalities;
incomplete contracts;
government regulation;
inefficient property rights,
everyone wins when firms substitute their goods and services for the incomes of individuals in order to maximise the financial benefits to their shareholders.
And while the eponymous Friedman Doctrine, the idea that the sole social responsibility of a firm is to maximize profits, became the biggest idea in business (The Economist, 2016), was backed in all the way by economists, lawyers and policy makers to become pervasive (Bower and Pain, 2016), became the norm of corporate governance (Macey, 2008) and even considered the law writ large (Bainbridge, 2023), as far as the production of the most socially useful things are concerned, the economic way of life has been more of a crap shoot:
the global temperature is more than 1.5°C above pre-industrial level and predicted to go higher;
90% of arable land is exposed to significant soil degradation;
within my lifetime, wild mammals and freshwater fish have declined by more than half; and
within my children’s lifetime, the same is expected of global insect populations.
Profits and markets are up and useful things are terminally down.
Of course, it’s unfair to lay all the blame on economics. But when the economics profession fell in behind the Friedman Doctrine and took it upon themselves to be the primary discipline that society should use to frame structural decisions on who gets what and why (Van Aartsen, 2024) it is reasonable to expect some level of accountability when their boldest promise is breaking, if not, completely broken.
Not that that the front line defenders of shareholders primacy are close to accepting responsibility or admitting defeat.
Provided the economists preferred definition of value (and value creation) is used as the yardstick- psychological utility without regard to real world usefulness or satisfied preferences as reflected in price – society can’t lose. When social welfare is measured in terms of what is bought and sold, prices, purchasing power and willingness to pay, shareholder primacy is close to a methodological sure thing. By their personal measure of success, society can only win if firms are driven to maximise profits and individuals their preferences.
Economists are untroubled by any need to calibrate their theory against an objective baseline of the conditions necessary for life.
A decline or even collapse in that baseline has little methodological impact on the way economists calculate the odds of success of their social purpose through profit gamble. If more goods and services are being produced, living standards are deemed to be improving even if the standard by which we judge liveability - stability, healthcare, culture and environment, education, and infrastructure are stagnating. Winner. Winner.
The secret to their success is that psychological utility adapts perfectly to any loss of value in use or physical usefulness. Mainstream theory of value maintains its explanatory power despite a reduction of useful things available in the market and largely ignoring what is happening outside the market as an “externality”. The "facts" hold true for economics irrespective of a declining or degrading baseline. It’s why economists “commonly prefer objective empirical evidence over unverifiable reports of affected individuals” (Bebchuk, 2013).
The fact don’t lie. But maybe the assumptions and theory do.
By sticking to the evidence that fits their economic model, the house that Friedman built will always win despite being unable to address the most significant scientific, political, social environmental problems of the 21st century:
Why does maximising profits for a firm’s shareholders while operating within the bounds of open and free competition, without deception not also increase social welfare when measured in terms of the availability and accessibility of socially useful things.
How can useful things be in decline in the world if the market is so good, just, powerful and efficient?
If markets are the best way to organise society why is it that the things with the greatest price cannot buy the things with the greatest value in use? All the diamonds ever mined unable to reacquire a fraction of the seas, rivers, lakes, and aquifers dried up, diverted, poisoned and polluted in the pursuit of profit and things with exchange value. Why can’t firms, so proficient in producing exchange value, produce and reproduce the things required for life, let alone a good life?
This essay considers what I call the the “Friedman Paradox” - If markets are so perfect, where the things that are most useful to life.
Society Wins Some, But Loses More
The essence of the Friedman Paradox is the notion that under the conditions of the Friedman Doctrine society wins some but loses more (and perhaps even all). A profoundly simple idea captured in two diagrams released in weeks of each other.
The first was produced by the Royal Swedish Academy of Sciences, when awarding the 2025 Nobel Memorial Prize in Economic Sciences to three economists working in the field of “innovation-driven economic growth”.
The illustration making the point that “economic growth has lifted billions of people out of poverty over the past two centuries”. The academy going on to state that “while we take this as normal, it is actually very unusual in the broad sweep of history.”
The second, diagram expresses something so unusual in the “broad sweep of history” that it has never happened before. Humanity piecing the boundaries of liveability. The ultimate expression of a vain and uselessness endeavour.
Produced by Andrew Fanning and Kate Raworth when presenting their revised Doughnut framework, sets out 35 indicators that monitor trends in social deprivation and ecological overshoot over the last two decades.
If the period since around 1800 is the first in human history when there has been sustained economic growth, the period since 2000 is the first in human history where so many of the planetary boundaries have been transgressed. We win some, but lose more.
The purpose of this essay and the next, is not to prove or establish causation between economic growth and the shrinking space in which life thrives. That is the role for scholars and science.
This and MC29 asks, if the goal of economic science is to improve the ever day living conditions of people in their every day lives by increasing GDP and incomes (Samuelson and Norhause,1998), why are the lives of everyday people now at existential risk. Put simply, I ask why don’t firms produce the things that are most useful to those people? The variety of things that everyday people need in order to grow.
The Friedman Doctrine
Milton Friedman originated the Friedman Doctrine. A way of thinking about economics founded on the assumption that if companies make the most money, it is for others to exercise their right and freedom to spend their money for their own purposes:
Insofar as [a business executive's] actions in accord with his "social responsibility" reduce returns to stockholders, 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 employees, he is spending their money.
The Nobel prize winner going on to argue that the appropriate agents of social causes are individuals:
"The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so."
Implicit in this framing is the idea that the social welfare is the product of the purchasing preferences of free individual shareholders and other stakeholders.
“There are no “social” values, no “social” responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form.
In other words, the best of all possible worlds is that which we are prepared to pay for individually and collectively. A world free of the values of the best intentions of ideological politicians or the worst intentions of fundamentally untrustworthy executives. According to the Friedman doctrine, provided the price is right, money can buy everything, including sustainability. It follows that a society can never have too much money to buy its way into progress and a glorious future.
A sentiment expressed by Friedman in his famous article 1970 article:
“in a free society, and have said that in such a society, “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.”
A message that has been embraced as the central organising principle of the corporation and corporate governance. Making financial value as the mission, reflected in their governance structures and one-dimensional accountability to the financial success of shareholders ( Jensen and Meckling,1976 and Fama, 1980). And an end of history for corporate law and the purpose of the corporation.
The Friedman Paradox
I was born a year before the famous New York Times article in which the economics professor made his argument. I’ve grown up with the Friedman Doctrine, worked within the set of behaviours it embedded within the firms that I have acted for, from performance measurement and executive compensation to shareholder rights, the role of directors, and corporate responsibility ( Bower and Paine, 2016), and been witness to every overshoot of the planetary boundaries ( Fanning and Raworth, 2025).
Over the course of my life profit maximization has come to be conveyed as a kind of natural law of economics or as a scientific, even pseudo-religious truth (Orts, 2024). Yet, at the same time as global GDP was doubling, the “Planetary Health Check 2025”, is warning that humanity was exceeding seven of nine planetary boundaries.
If the earth’s life support systems are a proxy for social welfare (and they are), the Friedman Doctrine has created a Friedman Paradox[1]:
Why does maximising profits for a firm’s shareholders while operating within the bounds of open and free competition, without deception not increase social welfare when measured in terms of the availability and accessibility of socially useful things
Paradoxes can be useful. Management scientists and psychologists agree that the tension created by opposing ideas creates the necessary space for assumptions to collapse under the weight of the contradictions. Offering a new way to look at problems and discover previously unimaginable solutions.
For example, when I reflect on the Friedman Paradox I am drawn to four questions:
Why the f### does anyone think that money can buy the highest possible level of welfare?
Who the f### would think that the most useful thing a corporation could do for society is to make as much money as possible as algorithmically possible?
Where the f### did economists study law. Butchering agency and corporate law to fit their loaded principles and assumptions?
When the f### will we stop listening to such patently absurd nonsense?
Make no mistake there’s a use case for corporations making money and it’s useful but it’s not, as one billionaire many times over seems to think, magical:
“You could solve every problem in society if you get to 4 per cent GDP Growth”
In the real world of dirt, bugs, overheating oceans and smog, we simply can’t buy back the world that in some way or another has been substituted for products, services and incomes. Money can’t buy what the market isn’t capable of producing.
Consider GDP per person.
GDP per person can’t buy all that is destroyed in the production of money. Put simply, a great many useful and socially necessary things destroyed in the production of profits are not produced by the market and therefore unavailable to be purchased with any amount of money. All the market can do is offer a poor substitute. Meaning not only have we lost the socially necessary thing, but our socially useful incomes are now diverted to buying that which were once both superior and free.
GDP per person can only buy that which the producer doesn’t want. If it’s socially useful but the producer doesn’t want to give it up, it’s unavailable to solve society’s problems. For example, if corporation and the 1 % are analy retentive and want to hoard trillions of dollars that they can never use, none of that is available on the market to do socially useful work. The purpose of the market is to enable unused but useful things to flow to where they are used and useful. The market fails when firms and individuals accumulate useful but unused things rendering them useless.
GDP per person can only buy what is available in the market. What’s the use of increasing GDP per person if a person is compelled, by the lack of inherent usefulness of money, to spend it on a great many things that are either not used, useless or not as useful as things that are not available on the market or produced by firms. And usefulness and social necessity, playing no part in the production decision (Polyani, 1944) what hope is there that the useful and socially necessary things destroyed will be substituted with anything that comes close. Let alone, see the production of things that are more useful than the hours spent acquiring the money to pay for them.
The irony is that in searching to make economics value free in the image of the natural sciences, Friedman had managed to create a “science free” economics. Though clothed in the mathematical pretence of science, this version of economics is largely unscientific. Unburdened by the biophysical implications of profit maximization and the limitations of money as the primary, or even sole means to achieve social ends, economics had become as detached from the planet in the 21st Century as astronomy was from the universe in the 16th Century.
The implications of a science free economics lost on the supremely confident Friedman, who concluded his Nobel speech by impressing upon his audience the importance for humanity of a correct understanding of positive (values free) economic science by quoting Pierre S. du Pont:
“Gentlemen, it is a disagreeable custom to which one is too easily led by the harshness of the discussions, to assume evil intentions. It is necessary to be gracious as to intentions; one should believe them good, and apparently they are; but we do not have to be gracious at all to inconsistent logic or to absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally” (25 September 1790)
What was Friedman’s crime?
Friedman defied Aristotle and nature when he violated the Golden Mean. Cursing corporations and individuals; Leading to the ultimate failure of markets. A situation in which firms, driven to maximise profits, substitute socially necessary and useful things with socially unnecessary and use less or unused things. A paradox in which markets increase the production of exchange value but decrease the production and (reproduction) of the value in use required to do socially productive work.
Prometheus was punished for stealing fire and giving it to humanity. Now imagine the God’s vengeance when Friedman stole the opposite of fire and life from humanity. More on this in MC 29.
Ecodicy – In defence of the Friedman Doctrine
“It’s not the crime, its the cover up”. A phrase associated with the watergate scandal of the same decade as the Friedman Doctrine, economists have engaged in a kind of cover up of the Nobel prize winner which I call “ecodicy”
Ecodicy is the attempt by economists to resolve the “problem of uselessness” at the core of the profit maximization mantra ( a more direct expression of the concept of unsustainabilitly). A cover up that involves reconciling the belief that markets are efficient, just and powerful with the decline in useful things in the world. It combines the Greek word “oikos" (meaning "house" from which we get eco in economics) and “dikaios (justification).
As far as I can reason, there are three versions of ecodicy used by economists to explain the absence of useful things in the world, the strong, the moderate and the new believers.
The Strong Version - The Best of All Possible Worlds
For Friedman, on the modern map of human progress social welfare was marked as the point where the preference maximizing demand curve intersected the profit maximizing supply curve. X marks the spot where free will meets the free market. Everything else is nothing but a woke expression of contestable values rather than incontestable value.
To the most ardent defenders of shareholder primacy, the notion of a Friedman Paradox is nothing more than the hand ringing or a poor loser.
If the shoppers of the world have freely bought their preference and the firms of the worlds have freely maximized the most profit, this version of the planet, is “the best of all possible worlds” when compared to all other alternatives. The divine providence of the invisible hand revealed by the market at the intersection of profit driven supply and preference driven demand.
The Moderate Version - The Market Works in Mysterious Ways
To the more moderate defenders, people like Alex Edmans and Colin Mayer, the Friedman Paradox might be considered nothing more than a timing issue.
Markets are imperfect and the role of the economist is design interventions that address market failures. In the inevitable march towards perfection, some level of market failure is to be expected.
The moderate version has two main arguements:
in time, the Friedman Paradox will be resolved through market-based mechanisms, better legislation, disclosure and regulation, improved corporate governance, ESG and the correct incentives; and
It’s possible to buy our way back into the planetary boundaries buy purchasing sustainable goods and services.
In other words, what separates the Friedman Paradox from the promise of the Friedman Doctrine is money. And firms are having a crack at it; $7 hundred thousand per corporation on ESG disclosure; $2 Billion on ESG Data,;$50 billion on ESG consulting, $40 trillion on ESG investments.
The New Believers - The Second Coming of Steve Jobs
The third form of ecodicy and perhaps the last line of defence, is that the Friedman Paradox will be resolved by something between the rapture and the second coming.
Since the publication of the limits to growth in 1972, that warned that unfettered economic growth could lead to the collapse in global society by 2050, economist have put their faith in innovation and technology to save us if their theory can’t.
At the 2025 International Corporate Governance Societies conference this year, the keynote argued that corporate governance must evolve to creating long term value for the world. When I questioned whether the problem was that the world was butting up against the limitations of the neoclassical theory of economics (and corporate governance) her response was not to defend economics (she is a finance professor) but that she drew on her faith in innovation and technology to maintain her optimism in the future. A deeply unsettling conclusion to what up till then had been a perfectly reasoned presentation.
I don’t buy any of it. And neither should you.
The Curse of Friedman
Prometheus was punished by Zeus for stealing fire from from Mount Olympus and giving it to humans. What is the punishment for stealing souls from Hades?
In MC 29 I will return to the offender, Milton Friedman. Exploring his crime of hubris and defying the Golden Mean, the wicked curse that was placed on corporations and individuals ever since and the consequences of his actions for the planet.
[1] And I’m just the last person to use the phrase Friedman Paradox. Friedman himself using it in a 1972 paper in which he observed the paradoxical relationship between Jewish intellectual’s hostile to capitalism despite the benefits. More recently employed to describe idea that one can't maximize shareholder value without maximizing stakeholder value to