Adam Smith Capitalism vs. Milton Friedman Capitalism

Love it or hate it, we all live in a system of global capitalism, and for businesses, that means navigating the principles of capitalism in order to achieve the best outcome. If everyone is playing under the same principles, then, we must know how to best navigate these principles and maximize outcomes by now, right?

Realistically, it’s not that easy. Although the principles might remain the same, the material conditions under which these principles are observed certainly change; any proper analysis should be stretched when it comes to the current situation. Even more confusing—who’s to say that the principles stay the same, or that there is any one set of principles to follow? Adam Smith and Milton Friedman, for example, are two juggernauts in liberal thought and have fundamentally different mentalities when it comes to the guiding principles for businesses. Smith was a proponent of the infinite mindset, while Friedman was a proponent of the finite mindset. What are these terms, and which should your business be following? Let’s take a closer look.

The Infinite Mindset

While the works of Adam Smith certainly can’t be boiled down to a few paragraphs in a blog post, we can focus on why Smith was more “infinite minded” than Friedman. As Smith writes himself in The Wealth of Nations: “Consumption is the sole end and purpose of all production and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the customer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.”

There are two important things to point out here. First, Smith says that the principle driving factor of production is consumption—not necessarily profit. He also says that this is blindingly obvious. We make things in order to consume them in one way or another. Cars are made to be driven, food is produced to be eaten, art is created to be appreciated; there is profit involved in all of this, but it is secondary to the consumption. This also brings us to the second point: the emphasis should be on the consumer. The line of thought, again, isn’t difficult to follow. Even if a business is solely focused on profit, there can’t be significant profit without active consumers. In that sense, businesses need to cater to consumer interests in order to maximize their performance.

Implicitly, this describes the infinite mindset. Businesses that follow this principle—catering to consumers—aren’t just looking at quarterly figures. The goal isn’t to be the best this month, it’s to play a successful long game, or infinite game. By catering to consumers, the business model might fluctuate and evolve, but this change also means growth, and it allows for sustainability and profitability long-term.

The Finite Mindset

In contrast, Milton Friedman was a proponent of the finite mindset, which can pretty precisely be summed up in his famous quote:
“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.”

This is to say, Friedman believes firmly in that the guiding principle for businesses should be to maximize profits with the confines of the law. We can call this finite in scope, because this maximization usually happens in finite timeframes. Put the biggest numbers up on the board each year, each quarter, etc. In the short term, this is great for shareholders, which is why Friedman’s “finite mindset” is often said to prioritize shareholders over consumers.

Supporters of Friedman’s line of thinking might point out that Friedman’s claim is firmly based in reality. We do, after all, have to live by quarterly reports and maximizing profit whenever possible. Critics of this line of thought, however, will point out that these metrics and timeframes are all arbitrary—what’s the point of maximizing a system of arbitrary rules? The sweet spot, as usual, is likely somewhere in the middle.

The Dialectics

Stepping back from this binary lens of comparison, we can see that both of these perspectives can have their truth in the appropriate contexts. On one hand, Friedman is right. In the short term (in the finite), businesses have to maximize profits. It’s how they stay afloat, it’s how shareholders and investors stay convinced and invested, and it’s how the company makes any money anyway. To throw this immediate profit-motive out the window in the name of idealism might work in a lucky shot, but it would more realistically lead to bankruptcy.

That being said, short term maximization isn’t everything. In this interview, Simon Sinek gives the example of Blockbuster and Netflix. Modern companies live and die by Friedman’s finite mindset, and in the case of Blockbuster, live and die isn’t a figure of speech. When consumer interest began shifting towards subscriptions and streaming, even after Blockbuster’s CEO suggested a change in their business model, the board decided to stick to the then-lucrative model of raking in the revenue via late fees. They maximized the short-term religiously and, in doing so, lost track of what consumers wanted to consume. The rest, of course, is history.

As a business leader, being able to step back and away from binary and view situations dialectically is vitally important. In the case of the finite and the infinite, which is better? Do you need Adam Smith in your corner, or Milton Friedman? The correct answer, of course, is that you need both.