Genuine question: what is the purpose of business?

Two of the most influential thinkers—Adam Smith and Milton Friedman—offered on-the-surface competing answers, which not only created capitalism, but have driven some of the biggest debates in capitalism. And, interestingly, one of the most searched topics in our Robinhood Learn library is on this topic. Understanding their views isn’t just an intellectual exercise—it’s key to understanding how modern businesses operate and why certain economic policies shape our world.

Let’s start with Adam:

In 1776, Adam Smith, the so-called father of macroeconomics, attempted to answer, publishing the first edition of what came to be known as The Wealth of Nations. In it, he established scientific aspects of economics we still use today. These included:

• The division of labor and specialization for increased efficiency.

• The wealth of a nation is not calculated by how much money (or gold in his time) is in the bank, but is instead derived by how value is created (through the transformation of raw materials to goods) that then 'flows' through society. This came to be known as gross domestic product (GDP). 

• Invisible Hand theory: in the pursuit of self-interest to be the best under certain conditions, competitive society benefits from the unintended and uninterrupted consequences of individuals pursuing their own self-interest.​ Free trade was an intricate part of this. 

For anything you read, it’s crucial to understand the author’s frame of reference, so here’s the context behind his theory: Adam Smith’s book was purposefully political, opposing the vested interests who advocated protectionism and who were driving forward Britain’s colonial and slave trades of the time. Smith was also a moral philosopher which came through in his dissonance for over-simplification.

Fast forward nearly 100 years later, to September 1970, Milton Friedman wrote in the NY Times: “A Friedman doctrine–The Social Responsibility of Business Is to Increase Its Profits”. As the title shares, he asserted that the only “social responsibility” of a business is to increase its profits within legal and ethical bounds, while any money or time spent on the pursuit of social initiatives was effectively imposing “taxes” on shareholders, employees, and customers. The one cross-over with Adam Smith is that the focus on a free-market system and similar assumption that businesses (vs people) will naturally act responsibly to maintain their reputation, retain customers, and attract employees.

And equally, if you understand what was happening as we headed into the 1970’s, you would understand better why he had the views he did. The year 1970 saw its first of several bouts of  high inflation, peaking at 6.4%, only to see higher inflation again in 1974 and 1979-1980. Unemployment (thus stagflation) was also high. He attributed all of this to poorly managed expansionary monetary policy and government interference, through welfare expansion as well as price and wage controls used to combat inflation, rather than market failures. The US was about to go off the gold standard, and an oil embargo from tensions in the Middle East were about to make it all worse. 

The core debate At their core, both Smith and Friedman explored the same fundamental issue: the role of business in shaping society. However, their views on responsibility diverge sharply.

• Smith argued that businesses should focus on delivering high-quality products and services to benefit consumers. By doing so, an "invisible hand" ensures that fairness and economic balance emerge naturally.

• Friedman, on the other hand, believed that companies should prioritize profits—as long as they operate within the law. 

This exemplifies a trade-off between consumer well-being and corporate profit motives. However, Friedman’s philosophy is not against protecting the consumer. Friedman himself clarified his stance stating: "It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interests is, to quote Adam Smith again, ‘led by an invisible hand to promote an end which was no part of his intention.’" (Friedman, 2002, p. 133)

This suggests that Friedman supported rules and regulations to protect consumers—he just believed that responsibility belonged to governments, not businesses.

Meanwhile, Adam Smith’s concept of the invisible hand is often misinterpreted as opposing regulation. However, Smith explicitly warned against unchecked corporate power: "The interest of the dealers…is always in some respects different from and even opposite to that of the public.... The proposal of any new law or regulation of commerce which comes from this order ought always be listened to with great precaution..." (Smith, 1776/2001, p. 292)

Smith wasn’t against regulation—he simply believed businesses should prioritize consumers first, allowing market forces to regulate themselves where possible.

That leaves us at today. Having just finished a decade plus of expansionary monetary policy followed by a bout of inflation. As a result, it’s easy to see why Milton’s approach would be appreciated. 

Yet, we are also in a time when companies have the most influence they have ever had—on government and our lives. Over the past decade, lobbying expenditures directed at the US Congress have risen from approximately $3.3 billion to $4.4 billion. This growth reflects a combination of increased efforts by various industries to influence legislative decisions and the rising costs associated with lobbying activities in general.

The modern economy leans toward Friedman’s world, where maximizing profits is the ultimate goal. And in many ways, this approach has allowed companies to thrive. As a result, some corporations dwarf entire nations in financial and political influence.

This concentration of power has reignited an old debate: Should corporations bear greater responsibility to society, or should their sole duty remain to shareholders?

For a time, investors in stakeholders agreed that they should. As such, ESG (Environmental, Social, and Governance) investing gained traction as companies sought to balance profit with social responsibility. Activist shareholders pushed for climate initiatives, diversity programs, and ethical business practices alongside traditional financial goals.

However, earnings reports from the last few years show stock prices didn’t necessarily rise if they hit ESG targets—but rather they remained dependent on hitting revenue and profit growth targets. Flows into ESG have been declining, a trend that started before the Trump administration took office last month. Moving forward as regulatory rollbacks on climate and social initiatives continue to take hold, ESG’s role in corporate decision-making may shrink even further.

This debate continues to shape policy, investing, and business decisions worldwide. Whether you align with Smith’s invisible hand or Friedman’s profit-first model, one thing is certain: the role of business in society has never been greater. Personally, with some companies carrying that much influence, some responsibility for the greater good seems practically necessary.

Sources:  Smith, A. (2001). An Inquiry into the Nature and Causes of the Wealth of Nations. (Original work published 1776)

NY Times, September 13, 1970: “A Friedman doctrine–The Social Responsibility of Business Is to Increase Its Profits”