Purpose of business: Drucker vs Friedman

Peter Drucker - "Because the purpose of business is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs."

Friedman - "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."


Clearly, capitalism does a great job of efficiently allocation resources to optimal uses.  Before Friedman, though, businesses and corporations had much more flexible definitions of their mission and management focus.  Friedman told a compelling tale that investors liked to hear, and over the decades now management is necessarily on board as well.  Unfortunately, we now see the best use of corporate profits seems to be to fund stock buy-backs, which benefits only the investors and management.  

We also see lower investment in long-term areas like R&D, which directly impacts the competitiveness of the US overall, especially over the long term, and in recent decades there has been a dropping fraction of corporate income going to employees.

While investors include 401Ks and pension funds for the little guy, a disproportionate fraction of cash is going to the top few percent, and a decreasing fraction is going to labor and to customers in the form of lower costs.  


Drucker had a different view of business (focus on the customer), as does Buffett (look to the long term).  There are already corporations who track and report on the value they create overall (for customers and society) as well as the value they capture (as revenue and profit).   Some like Google clearly add a LOT of value to users of various types as positive externalities, while some other companies clearly don't, as they have negative externalities such as pollution.

I think it's high time that we re-balance the allocation of profit from businesses toward employees and the public at large over the long term.  We might even modify corporate tax rates to reflect the value split, and favor those that better spread the wealth by offering greater deductions for wages and employee bonuses, at least for those not "highly compensated".  Taxes are simply a means of modifying behavior, so we should be purposeful and tax what we want to see less of, and not tax what we want to see increased.