Rethinking Milton Friedman : Doctrine of Social Responsibility of Businesses
Exactly 50 years ago in the year 1970, Milton Friedman the celebrity Economist laid out arguably the most pathbreaking economic idea of the later part of the 20th century. The essay published in the New York times convinced a generation of Business leaders that Profits should be the primary goal of any business. It was a clarion call for a free market economy influenced policy makers worldwide prominently Ronald Reagan in US and Margaret Thatcher in UK. This still holds sway over the discussion on corporate social responsibility of corporations. The most eye catching quotation from the article ‘The Social Responsibility of Business Is to Increase Its Profits’ has been eked in the memory of corporate honchos for decades.
According to Friedman “WHEN I hear businessmen speak eloquently about the “social responsibilities of business in a free‐enterprise system,” I am reminded of the wonderful line about the Frenchman who discovered at, the age of 70 that he had been speaking prose all his life. 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. In fact they are — or would be if they or any one else took them seriously — preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”
Friedman went on to say that the corporate executives are employees of the company and their primary job is to make as much profit as possible through socially accepted norms. If any executive is inclined to do social he should do it in his own capacity and not as an extension of the corporation he is working for. For example if an executive refrains from raising prices of the products to prevent inflation, spends money on controlling pollution and hires unworthy people in the job to provide employment. In each of this case he spends the money of shareholders and other stakeholders. He compared these actions to imposing taxes which primarily is the function of a Government.
“The stockholders or the customers or the employes could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct “social responsibility,” rather than serving as an agent of the stockholders or the customers or the employes, only if he spends the money in a different way than they would have spent it.
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”.
Friedman states in his essay that a corporate executive is selected as an agent by the principal — the owner of the firm to serve his interest of maximizing profits. If the executive digresses from this objective and uses the scarce resource of the company to benefit the society he would not be a corporate, he would be a civil servant. If that would be the case then political mechanism should guide their actions and not market mechanisms.
“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.”
Friedman then went on to argue that the corporate executive may not have the right skill set to do social tasks. He casts doubt on the ability of executives to tame inflation by reducing prices of their products. An executive is not an expert on inflation targeting which is the job of the central bank.
Friedman makes his argument by stating how would trade unions react if the Government asks them to restrain wages for social responsibility objectives. He feels trade unions would oppose such a move more vociferously than business leaders have done.
“This facet of “social responsibility” doctrine is brought into sharp relief when the doctrine is used to justify wage restraint by trade unions. The conflict of interest is naked and clear when union officals are asked to subordinate the interest of their members to some more general social purpose. If the union officials try to enforce wage restraint, the consequence is likely to be wildcat strikes, rank‐and‐file revolts and the emergence of strong competitors for their jobs. We thus have the ironic phenomenon that union leaders — at least in the U.S. — have objected to Government interference with the market far more consistently and courageously than have business leaders.”
Friedman states that many people would consider the Government as lethargic and slow to respond to pressing problems and would argue for corporations to do a far better job. He rejects this argument because it amounts to the assertion that things can be done through undemocratic process if they cannot be done by democratic means.
Friedman concedes that the doctrine on social responsibility can have exception such as the case when a corporation is a majority employer in a small community and devotes resources to provide amenities to the community. This would not only help existing employees and their families but also help attract new employees. This may help reduce wage bill or lessen losses of pilferage or sabotage.
“In each of these — and many similar — cases, there is a strong temptation to rationalize these actions as an exercise of “social responsibility.” In the present climate of opinion, with its widespread aversion to “capitalism,” “profits,” the “soulless corporation” and so on, this is one way for a corporation to generate goodwill as a by‐product of expenditures that are entirely justified in its own self‐interest.”
Friedman states that he is impressed with the “schizophrenic character of many businessmen” who are incredibly focussed on the long term prospects of their business and are short sighted in the matters outside their business but affect their business in general. He feels that business leaders can earn kudos for their statement on social responsibility but it also strengths the view that pursuit of profit is bad.
“The short‐sightedness is also exemplified in speeches by business men on social responsibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the ptirsuit of profits is wicked and im moral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, business men seem to me to reveal a suicidal impulse.”
Friedman states that in a free society there are no social values or responsibilities than the shared value and responsibility of individuals. “Society is a collection of individuals and of the various groups they voluntarily form.” “The individual must serve more general social interest — whether that be determined by church or a dictator or a majority. The individual may have a vote and a say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.”
“Unfortunately, unanimity is not always feasible. There are some respects in which conformity appears unavoidable, so I do not see how one can avoid the use of the political Mechanism altogether.” As a free market and society advocate Friedman was against intervention. “But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity.”
Friedman concludes his essay by the following lines “there is one and only one social responsibility of business — to use its 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 fraud.”
As time passed by and the world faced the Financial crisis of 2008 and the Pandemic of 2020, Corporations and society in large is beginning the question the vision of shareholder primacy and the single minded devotion to increase profits at all costs. Some have went on to blame the inequalities in the society in terms of income and race on this idea. Many have blamed Friedman’s thinking as a theology for the “Greed is good” narrative as a prime reason for the crisis.
Howard Schultz, emeritus chairman of Starbucks states “If Friedman had balked, asserting that Starbucks could have performed even better without these “socially responsible” activities, I would have told him what I told an institutional investor who wanted me to slash health care costs during the Great Recession, or what I said to a shareholder in 2013 who falsely claimed that Starbucks’s support of gay rights hurt profits: If you feel you can get a better return elsewhere, you are free to sell your shares.”
Joseph Stiglitz, professor of economics at Columbia University, states “I gave a talk at the University of Chicago around this time, presenting an early version of my research establishing that in the presence of imperfect risk markets and incomplete information — that is, always — firms pursuing profit maximization did not lead to the maximization of societal welfare. I explained what was wrong with Adam Smith’s invisible-hand conjecture, which said that the pursuit of self-interest would lead, as if by an invisible hand, to the well-being of society.”
Friedman’s manifesto may have fallen out of favor in the current times but, like any important doctrine, it can be denounced but not ignored.
