Must Milton Friedman Embrace Stakeholder Theory?

Milton Friedman famously stated that the only social responsibility of business is to increase its profits, a position now known as the shareholder model of busi-ness. Subsequently, the stakeholder model, associated with Edward Freeman, has been widely seen as a heu-ristically stronger theory of the responsibilities of the firm to the society in which it is situated. Friedman’s position, nevertheless, has retained currency among many business thinkers. In this article, we argue that Friedman’s economic writings assume an economy in which businesses operate under the protections of limited liability, which allows corporations to privatize their gains while externalizing their losses. By accepting limited liability, Friedman must also accept a view of business as embedded in social interdependency, which serves as the logical and moral foundation for corporate social responsibility (CSR). To achieve consistency with his economic principles, Friedman must either abandon limited liability or modify his doctrine on CSR and his related shareholder model of business