Milton Friedman, "The Social Responsibility of Business is to Increase its Profits," is wrong.
"there is one and only one social responsibility of
business–to use it(s) 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 his concluding line in an article dedicated to denigrating
the idea of “social responsibility” in businesses, and in particular by corporate
executives. For a corporate executive to act in a “socially responsible”
manner, Dr. Friedman posits that “it must mean that he (the corporate
executive) is to act in some way that is not in the interest of his
employers.” That is, any act, (not
geared to maximizing profits,) in excess of the minimum required by law and
custom is not in the interests of his employers.
His conclusion is at least naïve. Clearly, a business can increase its profits if
“it stays within the rules of the game, which is to say, engages in open and
free competition without deception or fraud." How much easier, though, to maximize its
profit by externalizing all costs, by capturing and corrupting government, and
altering the rules of the game to its convenience? How much easier to profit by eliminating free
and open competition, and legalizing deception and fraud?
Dr. Friedman criticizes the 'socially responsible' postures taken by executives in and prior to 1970. He further condemns
socially responsible behavior by smearing it with the ‘socialist’ paint brush: ”This is the basic reason why the doctrine of
"social responsibility" involves the acceptance of the socialist view
that political mechanisms, not market mechanisms, are the appropriate way to
determine the allocation of scarce resources to alternative uses.” Here Dr. Friedman makes no compromise. He
essentially claims that market mechanisms are the only way to determine the allocation of scarce resources, denying any
limitation to or failure of markets, or any use for political mechanisms of
allocation. But pollution control, and work
place safety, are political
allocations of resources, and ones which would be opposed by market mechanisms. The failure of
the market in the US
to provide universal health care is another case in point, assuming universal
healthcare is desired by a majority of the people.
Milton Friedman's claim that the sole social responsibility
of business is to increase its profits, places businesses into an adversarial
relation to society. That is, businesses
become the enemies, the exploiters, of the society of which they are a
part. The logical conclusion of Dr.
Friedman’s statement is that it is not a
part of the social responsibility of business to behave in a socially
responsible manner. His implication,
although I don’t think he realized
this, is indeed quite the opposite, that a business should behave in a socially
irresponsible, and even socially destructive, manner, if this increases its
profit. This position is schizophrenic. It is as if the hand was encouraged to act
against the interests of the body of which it was a part.
There are ways of increasing a business’ profits which are
damaging to the society of which it is a part. Indeed, it is a tendency of business
to seek to externalize all costs. Thus, to pollute, to ignore worker safety
regulations, to engage in mis-representation if not fraud, etc. If the business
is in competition, and these things are permitted, it must do them, since its competitors, similarly situated, will also
do these things. Its competitors, if
allowed to externalize costs by polluting, will do so, and so it must
also. Its competitors, if allowed to externalize
costs by skimping on worker safety, will do so, and so it must do so also. Further, business will seek subsidies by the
government, and taxes by the government on its competition.
The conclusion of Dr. Friedman’s position implies the
necessity that the corporate executive act without conscience. This is necessary, since any operation of
conscience within the confines of the executive’s office would be contrary to
the profit maximization principle under which the executive, as an employee of
the owners, is obliged to operate. Indeed,
profit maximization obligates the corporate executive to pollute and otherwise
externalize all costs, so far as practically permitted, and to undertake the corruption of the regulating
bodies, that is the corruption of government.
But where is the
root of his error? Consider this quote
from the article: “Society is a collection of individuals and of the various
groups they voluntarily form.” Society
is hardly a mere collection. It is
dynamic, and its dynamic is non-linear. Society is not merely the collection of
individuals, or even the mere collection of their actions. The
effect of everybody doing a thing, is quite different from the effect of just one
or a few persons doing that thing. Society is more than the sum of its parts. A
business is more than the sum of its parts.
And the actions of businesses, and the other parts of society, combine
in non-linear, and synergistic ways. There are returns of scale, and greater
returns on the scale of integration of an entire society. A business unconcerned with these interactions
does society, and itself, disservice. Dr.
Friedman’s conception serves to atomize and divide, and reduce those social
returns to scale, impoverishing society.
This is what we have seen, in the triumph of his error, and the rise of
those who subscribe to it.
Consider instead a purely operational, and self-interested,
definition of conscience: seeking to do that which is ultimately best for one’s self:
Seeking the larger good, with the expectation that one’s own welfare
will be improved if that larger good is enhanced. We do assume that the executive is interested
indeed in maximizing the profits of his company. Then a goal of the business executive
is the optimization of his society, (and by optimizing we can here mean purely maximizing the economy's growth rate,) since in an optimum society, his
corporation itself is optimized, and in the long run, its profits maximized. Thus, the executive with conscience will seek
to participate in, and encourage the development of, a well regulated market, one which will enhance the value of
his business to society, since in such a market growth is optimized for all
businesses. Therefore, rather than
corrupting the regulators, he will seek regulation which maximizes the
efficiency of resource allocation. Rather than competing in a race to the
bottom, he will seek effective regulation that will encourage all businesses to
good behavior. The business man of conscience, therefore, will speak out
against corruption, and the capture of government by other businesses. As this
will be in his own long term best interest.
The corporate executive’s duty to his employers is not uncritical
obedience to the principle of short term profit maximization. Long term
maximization requires the long term survivability of the society of which it is
a part.
Neither do the owners enjoy all incidents of property. Ownership of property in any society is not
an absolute. It entails duties. Society, and its government, retain the most
important incidents of property, and this implies the obligation of the owners to
”socially responsible” behavior. All individuals
in society, by voluntary agreement, undertake this.
While it is beneficial for each business to
pursue its narrow interests, even to act in an unethical manner, (which Dr.
Friedman in the larger sense implies is OK as long as it is within ‘the ‘rules
of the game,’) it is bad for each business if all businesses act so. Where all businesses sacrifice the larger
good, sacrifice their ‘responsibility to society,’ for their narrower
interests, all are poorer, and all lose. Where all businesses sacrifice the larger good, the larger good contracts.
Even the winners lose. Therefore, it is in the interests of each business, to
see that other businesses act in an ethical manner. Thus, that the business exists in a well
regulated market, and not a corrupt, environment.
We take Dr. Friedman to his logical conclusion, and that business
indeed exists in an adversarial relationship to society, that its ultimate
interests are contrary to the interests of society. Then there is no intrinsic restriction to its
activities in that society: There is no
limit on the things it can, or should, do, to gain profit. So business should
seek to capture government, and seek to ‘free’
itself from the constraints of regulation, and mitigate or corrupt that regulation.
Then when business captures government, and
corrupts regulation, it must be that the government also acts contrary to the
interests of society. Therefore, it is
in the interests of society, that the separation of business and state remain
inviolate. The Supreme Court’s decision
Citizens United, therefore, must be considered inimical to society, at the least
a terrible mistake, and those who support it, and profit by it, society’s
enemies.
Clearly, it is in the interests of failing executives, and
failing businesses, to corrupt government, and to legitimize deception and
fraud. Failing at production, they seek success through corruption. Instead it is in the interests of successful executives and businesses to seek a
well-regulated environment, and good government.
Society is captured by men who do not believe that the
larger good is to their benefit, and therefore seek their own narrower
self-interests, to the destruction of the larger good, and ultimately their
own.
That our government is captured by executives and businesses, many of which would otherwise fail, that is to say, are not producers in any real
economic sense, and so could not compete in a free and open market, bodes ill.
Executives and corporations have taken Dr. Friedman's statement to heart. His prescriptions have, so far as they have been carried out, done untold damage to
the economy.
