What is the social responsibility of business?

by on October 24, 2005 at 6:23 am in Economics | Permalink

Milton Friedman has long suggested that the social responsibility of business is to maximize profits.  Recently he tried to clarify this view:

I shall try to explain why my statement that “the social responsibility of business [is] to increase its profits”…

Note first that I refer to social responsibility, not financial, or accounting, or legal. It is social precisely to allow for the constituencies to which Mackey refers. Maximizing profits is an end from the private point of view; it is a means from the social point of view. A system based on private property and free markets is a sophisticated means of enabling people to cooperate in their economic activities without compulsion; it enables separated knowledge to assure that each resource is used for its most valued use, and is combined with other resources in the most efficient way.

Of course, this is abstract and idealized. The world is not ideal. There are all sorts of deviations from the perfect market–many, if not most, I suspect, due to government interventions. But with all its defects, the current largely free-market, private-property world seems to me vastly preferable to a world in which a large fraction of resources is used and distributed by 501c(3)s and their corporate counterparts.

Friedman has qualified his social responsibility claim for force and fraud, but what about negative externalities more generally (just ponder Tamiflu licensing if you want the appropriate headache)?  Is Friedman’s claim:

1. Profit maximization is the best rule available, even though it fails society in particular instances (in that case, isn’t there some slightly more convoluted rule that can cover at least some of these situations and modify the outcomes?  If only "very simple" rules are allowed, why?)

2. Businesses have no responsibility to behave in an act utilitarian fashion.  Rules are rules, and we should follow them, come what may.

3. Following the doctrine of fiduciary responsibility — in this case to shareholders — is the greatest social good in these situations.  It outweighs potential act utilitarian considerations pointing in other directions.

4. Force and fraud aside, profit maximization always coincides with the social good, at least in the absence of bad government interventions.

5. It is a public choice argument.  The claim is a noble lie, for otherwise business will be regulated by government in a counterproductive manner.

6. So much anti-corporate nonsense has been written, so we need to shock people with an extreme claim in the opposite direction.

In response to Friedman, John Mackey, the CEO of Whole Foods, argues: “I believe the entrepreneurs, not the current investors in a company’s stock, have the right and responsibility to define the purpose of the company.” 

My take: No simple rule can sum up what is right to do, for a business or otherwise.  So I have to read Friedman as falling back on #5 and #6, with his partial belief in #4 convincing him he needn’t worry about the complications so much.

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