Milton Friedman and the Social Responsibility of Business

The most provocative statement of the past half-century on the role of business in society came in an essay in the New York Times, written by a fellow named Friedman.

Of course, I'm talking about Milt, not Tom.

In a 1970 Times magazine article, the economist Milton Friedman argued that businesses' sole purpose is to generate profit for shareholders. Moreover, he maintained, companies that did adopt "responsible" attitudes would be faced with more binding constraints than companies that did not, rendering them less competitive.

The occasion of Friedman's passing last week offers an opportunity to revisit that argument. It remains the basis for many companies' contention today that "corporate social responsibility," "sustainable business," and other such monikers are a distraction from their core obligation: to act in their shareholders' best interests. That is, acting "responsibly" risks reducing profits or forgoing revenue in the name of social good.

"What does it mean to say that the corporate executive has a 'social responsibility' in his capacity as businessman?" asked Friedman in his 1970 article.

"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. Or that, at the expense of corporate profits, he is to hire 'hardcore' unemployed instead of better-qualified available workmen to contribute to the social objective of reducing poverty.

"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." Friedman argued that such actions in effect turned executives into public employees or civil servants, levying "taxes" (in the form of corporate money allocated to social causes) and making "expenditures" -- a part of "the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses."

Friedman concluded:

"The difficulty of exercising 'social responsibility' illustrates, of course, the great virtue of private competitive enterprise -- it forces people to be responsible for their own actions and makes it difficult for them to 'exploit' other people for either selfish or unselfish purposes. They can do good -- but only at their own expense."

We know better now. For example, we understand that ignoring environmental and social issues can be bad for business. Companies that pollute their local communities risk poisoning their customers. Ignoring the state of the local school system risks depleting the pool of qualified workers. Abusing workers risks higher turnover and training costs, not to mention greater difficultly attracting the most qualified candidates.

It's never that simple, of course. In a globalized world, companies are free to exploit or pollute a local community, then move on to the next place. Unfettered markets and exploitation-friendly tax schemes reward companies for acting in their own interests in the name of economic growth and competitiveness. So, Friedman's philosophy still reigns supreme.

Friedman's philosophy is far from universally shared, even in the business community. In 1979, for example, Quaker Oats president Kenneth Mason, writing in Business Week, declared Friedman's profits-are-everything philosophy "a dreary and demeaning view of the role of business and business leaders in our society." Wrote Mason: "Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life's purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit."

Mason went on:

"The moral imperative all of us share in this world is that of getting the best return we can on whatever assets we are privileged to employ. What American business leaders too often forget is that this means all the assets employed -- not just the financial assets but also the brains employed, the labor employed, the materials employed, and the land, air, and water employed."

He urged readers to "encourage, not evade, discussion of those problems that arise when the activities of business conflict with the needs and concerns of society."

But these were largely just well-intentioned words. Action, and even discussion, on some of these issues would be decades in coming. Even when it did take place, the discussion involved only big companies. The social responsibility of smaller firms is just now entering the conversation.

There are signs that companies are somewhat more enlightened today when it comes to understanding their social responsibility. A survey published this month by The Conference Board found that while big companies see more potential reward than risk when it comes to corporate citizenship and sustainability (CC&S) issues, they are clearly struggling to find concrete ways to capitalize on their programs in the marketplace.

Reward Trumps Risk: How Business Perspectives on Corporate Citizenship and Sustainability Are Changing, by David J. Vidal, queried 198 companies, the majority of them with more than 10,000 employees and worldwide sales of more than $5 billion. Among the key findings:

Two-thirds say corporate citizenship and sustainability issues are of growing importance for their businesses.

Despite this growth, a significant majority (59 percent) don't have an active strategy for developing new business opportunities that arise from meeting corporate citizenship and sustainability (CC&S) needs.

A solid majority (62 percent) have formal programs to manage their CC&S practice. Another 35 percent without formal programs conduct regular reviews of these activities.

Most companies—71 percent—report publicly on citizenship and sustainability performance.

Boards of directors are routinely engaged in CC&S activities at almost half of responding companies. Only 11 percent say there is no board review on these issues.

It's progress, to be sure, but painfully slow, given the scope and urgency of some of our planet's social and environmental ills.

So the debate continues unabated: What, exactly, is businesses' responsibility? To make profits? To "do well by doing good"? A simple, universally accepted answer is unlikely. The good news is that in the nearly four decades since Milton Friedman elevated the question, the conversation has become robust. And there is clear support for the idea that companies can operate in a way that strengthens their various stakeholders and still provide solid, sustainable returns for their shareholders.

Indeed: There's a growing case to be made that they can, they should, and eventually must.

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Comments

[Mark Sofman]

Too much of the discussion of CSR sounds like Humpty Dumpty in Alice's Adventures in Wonderland. I really don't think you make your case against what Friedman had to say about "corporate social responsibility." And I don't think Mason states a countervailing argument either - he strikes me as more in agreement with Friedman than you give credit for. First and foremost what Friedman was about is individual liberty, private property ownership and the freedom of contracts - what he said about what's called CSR these days was aimed at keeping government out of business decisionmaking. That's no less true nowadays for keeping organized political activists out of business decisionmaking.

Henry Manne, on today's WSJ Opinion Page (and opinonjournal.com) is pretty good on the topic. I commend the article to you for your consideration.

[John Schneider]

The beauty of the free market is that business if free to decide how it wants to conduct business, and consumers are free to patronize whatever businesses they see fit.
Ultimately, how business conducts business resides in the purchasing decisions of the consumers.

[Craig]

I think that, putting aside arguments over which philosophy should be written into business charters, that businesses will, for the most part, do the right thing - but only after every other possible option has been exhausted! (to paraphrase a quote by Winston Churchill about U.S. involvement in WWII).

I think there is a mix of what is more important here - consumer education will certainly shape demand, and consequently business activity. At the same time consumers are subject to business influences, and demand/desire what businesses promote and advertise. This sad example of industry influences is a case in point.

The current gradual 'awakening' of enviro-consciousness seems to have started a kind of waltz between between these two concepts.

Not wanting to appear self-promoting, but a recent blurb I put up on Levis is a good practical example of how demand from consumers can be insufficient for an industry turnaround, yet sufficent for both industry and consumers to work together for positive development.

Thanks for the very interesting article Joel.

[the ecopreneur]

I am not convinced by Henry Manne's op-ed (which inadequately considers market and legal failures that necessitate CSR), and have written about it here:

http://ecopreneur.blogspot.com/2006/12/corporate-social-responsibility.html

[Susie Hewson]

Green business practice is scalable, sustainable and profitable. The Corporate Social Responsibility of business does not need to be at the expense of profit, but philanthropy is surely at the heart of socialism. Where the sum of the efforts of workers contribute to the largest percentage of a companies success or failure, socialism as a guiding principle requires care for the people and for the environment in which we all live. For the most part, this is why the Green movement holds a candle to socialism, and Corportate responsibility is an adjunct to environmental responsibility. As a company founded on these two principles, product development began with environmental concerns as a starting point of primary consideration. The next part of the equation was profitability as an achievable value over time. Being an entreprenorial competitive private business, our philosophy has held for 17 years without failure. Perhaps companies that go public, should choose their shareholders more carefully, or better still, trade on a greener more ethical stock market!