Last year was way busier than I hoped for, and this year promises to be the same, but there is so much going on that we need to talk about–I’ll try to do better.

In this past week’s news the things that caught my eye were two reports on profits. There has been a decided public discussion in recent years, but accelerating now, that Milton Friedman’s dictum that firms’ #1 goal of maximizing profit is wrong. Friedman’s basic point is that the corporation isn’t the moral agent to do things with its money; when it distributes its earnings to workers, management and stock holders, they will use their resources in the way most appropriate to their desires. The corporation has no comparative advantage over its stakeholders in investing in communities; just let the owners of the companies decide where they should charitably give out of their profits.

This view was dominant for years, but we’ve had a fairly long movement toward a broader definition of stakeholders (beyond shareholders) and the 3Ps, Planet, People, and Profit (since at least the 90s). This past fall the Chamber of Commerce very publicly repudiated the Friedman profit max dictum, in favor of a broader view:

The Business Roundtable, a group of CEOs from large U.S. companies, said Monday that shareholder value should no longer be the primary goal of a corporation. Instead, firms should invest in employees, deliver value to customers, support outside communities and deal ethically with suppliers, according to the group’s statement.

This view was highlighted again this past week in a note about the CEO of Walmart, Doug McMillon and his ascendancy to the head of the CEO Roundtable, where he will have a big platform to define what capitalism is really all about. Walmart has taken a few stands lately that diminish its support of gun/ammunition sales, and in a high profile way, increased its wages to employees. In a seemingly unrelated post, it appears that Tom’s Shoes is going to be taken over by its creditors, as its model of giving a pair of shoes to the poor for every sale is no longer the trendy thing to do. Now I’ve never liked the Tom’s model, as giving products to poor countries is historically the path to dependency and drives poorer countries nascent clothing lines out of business. As the slogan goes, they need trade not aid. So in the longer term Tom’s was likely harmful to the people they claimed to want to help. So I’m not personally weeping a tear for Tom’s. But there is a broader point here–what is a trendy virtue signal today may not be a lasting sustainable model, which suggests we need to think about what a business is doing.

Most of the hostility towards a profit focus comes from a belief that focusing on profit is at the expense of people and planet–it’s just pure greed. And it’s of course true that in the short run, there are pretty greedy people out there–just look in the mirror (all of us!), from the highest to the lowest. But I think there is really no contradiction between profit maximization, over the long term, and investing in employees, delivering value to customers, and dealing ethically with suppliers. There is tension, especially in the short run, to trade off and cut corners in one of those areas to meet a quarterly profit number. But those attributes are precisely the kind of thing that leads to long term profits. Even the investing in communities is part of a firm’s branding strategy, and so can be seen as profit maximizing.*

Further there is a lack of understanding of the social role of profits. We ought to rejoice when a competitive firm is consistently, over the long term, making large profits. That is an indication that they are treating their stakeholders fairly–if they weren’t, the stakeholders would vote with their feet. Further, the way to maximize profits is to produce value-added products or services at minimum cost. The minimum-cost part bothers some people, but not economists (and not just because we’re hard-hearted). Minimizing costs is socially responsible because #1) its good for the planet to use fewer resources in the production of goods/services, 2) using fewer resources frees them up to be used in other socially valuable ways. And as firms continue to make high profits, that steers additional capital into those industries and also gives an incentive for other firms to learn from the profitable firms–so they too can do better. Efficiency and profitability is a good thing. Stewardship of God’s good gifts may require more, but it certainly does not require less.

* But they better be careful to invest in communities in a way that is a sustainable benefit, and not something that is just trendy for a time, a la Tom’s Shoes.