According to Nobel Laureate, Milton Friedman, 'there is one and only one social responsibility of business...to increase its profits...' Do you agree?

Ethan Zhu, The King's School, Australia

Equal Winner of the 2019 Junior Prize ​| 8 min read 

Milton Friedman was a Nobel Prize winning economist who famously defended free market values and conservative politics. In his 1970 article, “The Social Responsibility of Business is to Increase its Profits”, Friedman discusses the stockholder theory, stating that firms only have a ‘legal responsibility’ to make a profit for their shareholders.[1] Friedman’s view emerges in the context of the post-World War II rise of corporate capitalism as firms and executives tried to reconcile social and moral obligations with a stronger cultural emphasis on profit. Prior to this time, in AngloAmerican context, there was a strong belief that firms have moral standards beyond rational selfinterest. For instance, the concept of the ‘Christian’, civically-minded businessperson which predominated in the 19th century and well into the 20th. Friedman’s essay is especially relevant today due to the resurgent debate on the viability of Corporate Social Responsibility. This essay will argue there are five major flaws in Friedman’s arguments. Firstly, it will question Friedman’s argument that, while people have moral obligations, firms are not really moral actors. Relatedly, it will critique his moral distinction between privately owned firms and public companies. Secondly, it will examine Friedman’s odd concession that companies should still observe ‘ethical customs’, which contradicts his general stance. Thirdly, it will explore the complexity of determining when companies are seeking profit or acting morally. This is an issue Friedman acknowledges, but this essay will argue that he downplays its significance. Fourthly, this essay will critique Friedman’s argument that firms would not be efficacious in their attempts to achieve aims other than making profit. Fifthly, it will interrogate Friedman’s claim that firms can leave serious environmental and social reform to governments.

From the outset of his essay, Friedman argues that “only individuals can have responsibilities. A corporation is an artificial person and, in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities”.[2] He states that individuals who wish to contribute to a certain cause may do so with their own money and time, however, seeking to do it through a business is wrong, as it involves spending someone else’s money for one’s own interest. By contrast, he states that the obligations of a firm are to follow the law, not espouse any further morality.[3] However, Friedman’s argument is flawed, because corporations are formed by individuals. For instance, let us imagine an anti-racist CEO working in a racist area with weak anti-discrimination laws. If they follow Friendman’s argument, they would not hire a racial minority job candidate in a public-facing role. By doing so, however, they would perpetuate one of the worst forms of racism, economic disenfranchisement, and entrench race-based income inequality. In a capitalist society, individuals spend much of our lives at work and, indeed, it is often the role where we can most impact our community. While Milton Friedman states that individuals can have morals, therefore, he denies them the opportunity to express those morals or act in accordance with them.

Tellingly, Friedman excludes ‘individual proprietors’ from his essay and ‘focuses on corporate executives’.[4] This is because, technically, individual owners have total control over their business. The business is funded by their own money, and therefore, all expenditures are technically a ‘personal social cause’, which he states they are well within their rights to pursue. However, it should be noted that shareholders are very similar to individual proprietors. Shareholders simply have a portion of capital in a firm and use their shares to make decisions within the company, based on an agreed voting system. As such, if the collective will of the firm is that they should pursue corporate social responsibility then that is not meaningfully different from an individual proprietor. Even if one might say that the shareholders rarely vote on corporate strategy, they select the board who hires the CEO to act on their behalf every day. Part of the CEO’s considerations will naturally be to maximise all interests of the shareholders, including their moral values. Later in his essay, Friedman states, that “the newer phenomenon of calling upon stockholders to require corporations to exercise social responsibility” will... “involved is some stockholders trying to get other stockholders… to contribute against their will to ‘social causes’”. But the reverse is also true: totally-profit-seeking shareholders impose their will on more sociallyminded shareholders.[5] As Asher Schechter has argued in response to Friedman, paraphrasing the theories of Nobel Prize winning economists Oliver Hart and Luigi Zingales, “A company’s ultimate shareholders are ordinary people who, in addition to caring about money, are also concerned about a myriad of ethical and social issues”[6] Friedman also argues that when large public companies pursue ethical standards also might harm consumers or employees[7] but similarly, pursuing profit also does not always please your customers, or employees. For example, raising the prices of your product may increase profit, but will likely frustrate customers, whilst lowering wages to cut costs may also annoy your employees. As scholar Lynn A. Stout noted when examining Friedman’s views “certainly they can choose to maximize profits; but they can also choose to pursue any other objective that is not unlawful, including taking care of employees and suppliers”.[8]

Having identified some flaws in Friedman’s definition of a ‘company’, this essay will now turn to problems in his conception of what constitutes non-profit based goal or objective. Friedman argues that “responsi­bility is 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.''[9] This is contradictory since ‘ethical custom’ could include a range of moral objectives and values. It can be argued that following these customs will not always maximise company profits, or even may damage them. For example, not lying is an ethical custom, and outside of fraud laws, one is not mandated to tell the truth. However, telling the truth might reduce the company’s profits. For example, imagine a CEO is in negotiations with two companies. She instructs her secretary to lie one of those firms about why she cannot meet with them, when in fact she is conferencing with their rival, this would be legal, but not ethical. Following the ethical custom of honesty would, however, weaken the firm’s negotiation position. If Friedman believes the CEO should be compelled by ethical custom to tell the truth, what is the distinction between this behaviour and the CEO making environmental goals a condition of the tender? Friedman thus contradicts himself here by conceding that there are some cases where a firm should not seek to maximise profitability.

Thirdly, Friedman concedes that there are some unclear cases where profit may or may not conflict with other goals[10], but massively underestimates how often this might occur. This is significant because it makes his advice to executives impractical. Friedman only considers the case where doing some social good may improve your brand image. For example, some banks refuse to lend to fossil fuel projects, which, while does reduce their immediate profits, helps improve their image with current and potential future employees. There are, however, other instances: For example, the government sets baseline standards for non-discrimination in hiring staff but firms often have diversity policies that exceed this because workers value working alongside colleagues that reflect the society which they live in. A more diverse workforce increases company productivity, leading to long term profitability. Moreover, as David Rodin argued in “The Ownership Model of Business Ethics” “the separation of long-term profitability and the social good becomes arbitrary” especially since the “viability of society and the environment are central to the performance of firms over time”[11]. As such, Friedman’s strict distinction between profit and other goals is difficult for firms, directors and executives to uphold.

Finally, Friedman also makes an argument about efficacy. He states that many executives do not know how to truly bring social good, and therefore, they should not attempt doing so. Milton uses the example of an executive told to fight inflation:[12] “He is told that he must contribute to fighting inflation. How is he to know what ac-tion of his will contribute to that end?... But nothing about his selection makes him an expert on inflation. Will his hold-ing down the price of his product reduce infla­tionary pressure?”[13] This argument is spurious, as inflation is unlikely to be combated by individual firms lowering the prices of their goods. There are, however, other examples where corporate change is possible. For example, executives are likely to know how to decarbonise within their industry, and also would know that such a change would improve the environment.

For example, Google has been carbon neutral for two years now, their data centres use 50 percent less energy than comparable facilities and their ‘campuses’ are made from sustainable materials[14]. Google thus chose to forgo immediate profits to pursue an objective that was not required by law. But more importantly, Google were clearly effective: as a major energy-using corporation they cut emissions in California in a non-negligible way. Their actions have also set the standard for their industry.[15] Even if other firms are not experts on how to have an environmental impact, they can hire consultants to help their decisions. Moreover, logically, if people working at a firm suspected their socially-minded actions would not have an impact, it is unlikely they would risk profits, even in the short term. In reality, this debate is confined to cases where the benefits of a socially just decision are probable and measurable.

On the issue of efficacy, Friedman argues that the government has set basic ‘ethical’ regulations on companies, and will continue to do when a problem, such as global warming, become more serious.[16] However, this contradicts the views Friedman has articulated in his broader scholarship, that governments are often not best placed to act and misunderstand the needs of wider society. Additionally, the government can be short-sighted when making regulatory decisions, since they are focussed on winning elections every few years. This means radical action will not happen soon enough for issues such as global warming. Corporations have short term incentives too, of course, like annual earnings targets, but they also have an interest in the long term. For example, companies are actually incentivised to reduce their negative impact on the environment because they recognise the long-term viability of their business is dependent on a healthy ecosystem.

Friedman argues that it is undemocratic to impose social obligations and moral preferences that are not legally enforced since this goes against the will of the majority in a society. Rather, he also calls on socially-minded executives to lobby for change in the electorate or legislature.[17] However, this option is not very realistic. In his conception massive corporations are unable to bring about change, so why would individuals, like socially-minded executives, be better placed to do so? Individuals have fewer resources and power compared to corporations, so lobbying for change is more challenging and less likely to yield results. In addition, it is not likely that executives could both effectively argue for social change and continue to work at a firm that undermines it. For instance, it would be odd for the CEO of a firm that does not hire any women as senior executives to call for quotas to be imposed. Or, let us assume, these executives will be successful. By this logic, powerful and wealthy individuals who perform moral actions that are not required by law could also be viewed as anti-democratic since they are imposing their values on an unwilling polity.

Milton Friedman was undoubtedly an incredible economist, and his work has had an immense impact on public policy. However, Friedman was unable to predict the complex role of morality in contemporary business and the blurring of the difference between profit and social good. Especially in a status quo where society faces issues such as global warming and structural inequality, it is important that firms do more than seek profit.

Footnotes

1 Milton Friedman, “The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, September 13, 1970, located at: https://web.archive.org/web/20060207060807/https://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html, accessed 1/06/2019.

2 Friedman, “The Social Responsibility of Business”, op cit.

3 Friedman, “The Social Responsibility of Business”, op cit.

4 Friedman, “The Social Responsibility of Business”, op cit.
5 Friedman, “The Social Responsibility of Business”, op cit.
6 Asher Schechter, “Why Friedman Was Wrong”, in “It’s time to rethink Milton Friedman’s shareholder argument’, Chicago Booth Review Online, 07/12/17, https://review.chicagobooth.edu/economics/2017/article/it-s-time-rethink-milton-friedman-sshareholder-value-argument
7 Friedman, “The Social Responsibility of Business”, op cit.

8 Lynn A. Stout,, "The Shareholder Value Myth" (2013). Cornell Law Faculty Publications. Paper 771. http://scholarship.law.cornell.edu/facpub/771

9 Friedman, “The Social Responsibility of Business”, op cit.

10 Friedman, “The Social Responsibility of Business”, op cit.
11 David Rodin, The Ownership Model of Business Ethics. Metaphilosophy Vol 36, No 1-2, (2005) 163–181.
12 Friedman, “The Social Responsibility of Business”, op cit.
13 Friedman, “The Social Responsibility of Business”, op cit.

14 Google, “Environment Projects”, n.d., located at: https://sustainability.google/environment/, accessed 15/07/2019.
15 Ibid.
16 Friedman, “The Social Responsibility of Business”, op cit.
17 Friedman, “The Social Responsibility of Business”, op cit.

Bibliography


Friedman, Milton,“The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, September 13, 1970, located at: https://web.archive.org/web/20060207060807/https://www.colorado.edu/studentgroups/libertaria ns/issues/friedman-soc-resp-business.html, accessed 1/06/2019.

 

Google, “Environment Projects”, n.d., located at: https://sustainability.google/environment/, accessed 15/07/2019.

 

Schechter, Asher, “Why Friedman Was Wrong”, in “It’s time to rethink Milton Friedman’s shareholder argument’, Chicago Booth Review Online, 07/12/17, https://review.chicagobooth.edu/economics/2017/article/it-s-time-rethink-milton-friedman-sshareholder-value-argument, accessed 16/07/2019

 

Stout, Lynn A., "The Shareholder Value Myth" (2013). Cornell Law Faculty Publications. Paper 771. http://scholarship.law.cornell.edu/facpub/771, accessed 16/07/2019.

 

Rodin, David, The Ownership Model of Business Ethics. Metaphilosophy Vol 36, No 1-2, (2005) 163–181.

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