Social Responsibility

5 Mar

So recently I read an article by Milton Friedman, written in 1970, titled “The social responsibility of business is to increase profits”. The article addresses the idea that businesses have an obligation to act socially responsibly.  I found the article really interesting and had some thoughts on it. (I will try to represent Friedman accurately and not cut up quotes out of context. The full article was published in The New York Times Magazine on September 13, 1970, you can find it here)

“The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit, but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers.”

“Presumably the individuals who are to be responsible are businessmen, which means individual proprietors or corporate executives…In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

(He then makes an exception for corporations that run hospitals or charitable organizations)

“What does it mean to say that the corporate executive has a “social responsibility” in his capacity as a businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment.”

“In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his “social responsibility” reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employees, he is spending their money…But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.

(He then goes on to say that this is taxation without representation without any checks and balances, that he “is to be simultaneously legislator, executive, and jurist.”)

“Many a reader who has followed the argument this far may be tempted to remonstrate that it is all well and good to speak of Government’s having the responsibility to impose taxes and determine expenditures for such “social” purposes as controlling pollution or training the hard-core unemployed, but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing social problems.”

Ok, now that I’ve gotten that out of the way, I can begin discussing it. I agree that a business exists to make money, and that is its primary responsibility. I also agree with Friedman’s assertion that it is not business’s place to try and cure social ills, that’s government’s place. In the preface to the article in my book US. Secretary of labor in 1996 Robert Reich says “If we want companies to do things which do not necessarily improve the returns to shareholders but which are beneficial for the economy and society as a whole…we have to give businesses and economic reason to do so.”

I think Reich has it right. Take the environment for example. It would be wrong to meddle in businesses and force them to acting way X, but it would be fine to give them economic incentives to act way X, say tax breaks for switching over to less polluting procedures.

One point that I disagree with Friedman on is the idea that the executive is “taxing” either the shareholders, customers, or workers, and that this is taxation without representation. He points out later in the article that a free market society is created by relationships and contracts people voluntarily enter into. The shareholders can fire the CEO if they do not like how he is conducting a business, or they can sell their share and invest elsewhere. The customers can take their money elsewhere, and the workers can leave and seek employment elsewhere. All are forms of voting on this “taxation”.

Yet what I find most interesting is that business will increase prices on the customer as much as possible, and lower wages for the worker as much as possible, regardless if they are acting “socially responsible” or not. They are after all trying to make money.

Lastly, Friedman talks about how it is business’ only responsibility to make money as long as they operate within the laws of society.  The reason I support government regulation on some matters is that in a completely free-market system, profit is the only thing that matters. It is more important than people and the environment. There are no mechanisms to protect either. If there we no repercussions keeping a company from dumping toxic waste in a lake they would do it, because it’s cheaper than processing the waste. Yet we as a society recognize that we don’t want businesses dumping waste in our lakes, and so we elect a government that then creates the laws Friedman says businesses must play by.

One Response to “Social Responsibility”

  1. Brian March 6, 2010 at 4:46 pm #

    The reason I support government regulation on some matters is that in a completely free-market system, profit is the only thing that matters. It is more important than people and the environment. There are no mechanisms to protect either. If there we no repercussions keeping a company from dumping toxic waste in a lake they would do it, because it’s cheaper than processing the waste.

    Well, maybe… Profit is a pretty easy thing to understand, but a difficult thing to get. The relationship between behavior and profit isn’t simple. If it was, betamax would have whooped all over VHS and we’d never have had New Coke.

    There are two vital rules for businesses that want to turn a profit. The first is, “respect your customers,” and the second is like unto it: “don’t shit where you eat.”

    By enlightened self-interest, rules like “don’t dump your toxic waste into a lake” shouldn’t be necessary. The problem with enlightened self-interest, of course, is that it requires enlightenement. The problem with my two rules up above is that people need to learn them. We don’t insist every MBA have them tattoed on the inside of their eyelids before graduation.

    In short, stupid people do things like dump toxic waste in lakes; it’s hardly the default behavior of companies. Andrew Carnagie, hardly a lover of the working man, founded hundreds of libraries and a univerisity because he had an interest in producing smarter people to hire. Ford paid his workers enough to be able to afford the cars they built on his assembly lines because he wanted car ownership to become ubiquitious across America. It was thinking like this that made these guys so successful. Unfortunately, while such brilliance is rare, stupidity is pretty much universal. We’ve all committed our share of stupidities. The trick is to do more good than harm. True brilliance is understanding how philanthropy reaps profits.

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