Crossroads of Philosophy and Economics

An Ethics Officer's Handbook


The only corporate responsibility is to increase profits

In 1970, just as the idea of corporate social responsibility was gaining traction and influential advocates in the United States, the economist Milton Friedman published a short essay titled The Social Responsibility of Business is to Increase its Profits. Possibly the most provocative single contribution to the history of business ethics, Friedman set out to show that large, publicly owned corporations ought to be about making money, and the ethical obligations imposed by advocates of CSR should be dismissed. Here are his arguments.

Businesses can’t have social responsibilities
A business can’t have moral responsibilities any more than a wrench can. Only humans have moral responsibilities because only we have consciousness and intentions: we’re the only things in the world that can control our actions, that can distinguish between what we want to do and what’s right to do. Therefore, only we can have responsibilities in the ethical sense. What, then, is a business? Nothing more than a tool, something we make to further our ends. It may work well or poorly, but no matter what, it doesn’t do what it wishes, so we can’t blame or credit the business, only those individuals who use it for one purpose or another.

Would you accuse a wrench of being irresponsible if someone uses it to loosen the bolts on some truckers’ tires and so causes an accident and disastrous spill of toxins? You’d probably accuse the person who used the wrench of acting irresponsibly, but blaming the wrench for something would be madness.

The argument that corporate executives are responsible only to shareholders
Corporate executives are employees of the owners of the enterprise. They’re contracted and obligated to conduct the business as the owners’ desire, not in accord with the wishes of some other people out in the world advocating broad social concerns. Executives in this sense are no different than McDonald’s burger flippers: they’re hired and agree to do a certain thing a certain way. If they don’t like it, they’re free to quit, but what they can’t do is take the job, and then flip the hamburgers into the trash because their friends are all texting them about how unhealthy McDonald’s food is.

What do corporate owners desire? According to Friedman, the typical answer is the highest return possible on their investment. When you buy shares of the industrial chemical maker W.R. Grace, you check once in a while what the stock price is because price (and the hope that it’s going up) is the reason you bought in the first place. It follows, therefore, that executives—who in the end work for you, the owner—are duty bound to help you get that higher share price, and the quickest route to the goal is large profits.

What about the executive who decides to dedicate time and a corporation’s resources to social welfare projects, to things like reducing runoff pollution even further than the law requires, or to hiring released felons as a way of easing their passage back into society? Friedman is particularly cutting on this point. It’s despicable selfishness. There’s nothing easier than generosity with other people’s money. And that’s what, Friedman hints, CSR is really about. It’s about corporate executives who like the idea of receiving accolades for their generous contributions to society, and they like it even more because the cash doesn’t come out of their paycheck, it’s subtracted from shareholder returns. (There’s the seed of an argument here that not only is corporate social responsibility not recommendable, there’s actually a requirement built on ethical grounds that corporations refuse to participate.)

The argument that society won’t be served by corporate social responsibility
One serious practical problem with the vision of corporate executives resolving social problems is: it’s hard to be sure that their solutions will do good. Presumably, corporate executives got to be executives by managing businesses profitably. That’s certainly a difficult skill, but the fact that it has been mastered doesn’t automatically imply other talents. More, given the fact that corporate executives frequently have no special training in social and environmental issues, it’s perfectly reasonable to worry that they’ll do as much harm as good.

One example of the reversed result comes from Newsweek. Executives at the magazine probably thought they were serving the public interest when they dedicated space in their April 28th, 1975 issue to the threatening and impending environmental disaster posed by global…cooling. Not a very enticing subject, they probably could’ve done more for their circulation numbers by running a story about the coming summer’s bikini styles, but they did the science to stoke broad discussion of our environmental wellbeing. As for the stoking, they certainly succeeded. Today, many scientists believe that global warming is the real threat and requires corporations to join governments in reducing carbon emissions. They have a hard time getting their message out cleanly, though, when there’s someone around bringing up that old Newsweek article to discredit the whole discussion.

The right institution for managing social problems is government
Social problems shouldn’t be resolved by corporations because we already have a large institution set up for that: government. If members of a society really are worried about carbon emissions or the disposal of toxic waste at chemical plants, then they should express that concern to elected representatives who, in turn, will perform their function which is to elaborate laws and regulations guiding the way all of us—inside and outside of business—live together. Government, the point is, should do its job, which is to regulate effectively, and those in the business world should do their job, which is to comply with regulations while operating profitably.

Underneath this division of labor there’s a crucial distinction. Friedman believes that human freedom is based to some significant degree in economic life. Our fundamental rights to our property, and to pursue our happiness are inviolable, and are expressed in our working activities. The situation is complicated, however, because it’s also true that for us to live together in a society, some restrictions must be placed on individual action—no community can flourish if everyone is just doing what they want. There’s room for quite a bit of discussion here, but, in general, Friedman asserts that while government (and outside interests) have to be involved in regulation and the imposing of limits, they shouldn’t start trying to mold and dictate basic values in the economic realm which must be understood in principle as a bastion of individual liberty and free choices.

At this juncture, Friedman’s essay reaches its sharpest point. The notion of corporate social responsibility, Friedman asserts, is not only misguided, it’s dangerous because it threatens to violate individual liberty. Stronger, the violation may ultimately lead to
socialism, the end of free market allocation of resources because rampant political forces take control in the boardroom.

The movement to socialism comes in two steps.

1) Environmental activists, social cause leaders and crusading lawyers will convince at least a handful of preening business executives that working life isn’t about individuals expressing their freedom in a wide-open world, it’s about serving the general welfare. The notion of corporate social responsibility becomes a mainstream concern and wins wide public support.

2) With the way forced open by activists, the risk is that government will follow: the institution originally set up to regulate business life while guaranteeing the freedom of individuals will fall into the custom of imposing liberty-wrecking rules. Under the weight of these intrusive laws, working men and women will be forced to give up on their own projects and march to the cadence of government-dictated social welfare projects. Hiring decisions, for example, will no longer be about companies finding the best people for their endeavors, they’ll be about satisfying social goals. Friedman cites as an example the hiring of felons. Obviously, it’s difficult for people coming out of jail to find good jobs. Just as obviously, it’s socially beneficial for jobs to be available to them. The problem comes when governments decide that the social purpose of reinserting convicts is more important than protecting the freedom of companies to hire anyone they choose. When that happens, hiring quotas will be imposed. They will need to be enforced, and when they are freedom will be crushed by, as Friedman puts it, “the iron fist of Government bureaucrats.”

It’s difficult to miss the fact that Friedman’s worries were colored by the Cold War, by a historical moment that now feels remote in which the world really did hang in the balance between two views of working life: the American view setting individual freedom as the highest value, and the Soviet view raising collectivism and the general welfare above all personal concerns.

Today’s historical reality is quite different from the 1970s, but the essence of Friedman’s objection to CSR hasn’t changed. It’s that you and I get to be who we are by going out into the world and making something of ourselves. When our ability to do that gets smothered beneath social responsibility requirements, we may help others (or possibly not) but no matter what, we sacrifice ourselves because we’ve lost the freedom to go and do what we choose.

The best way for corporations to be socially responsible is to increase profits
The final major argument against corporate social responsibility in its various forms is that the best way for most corporations to be socially responsible is to contribute to the community by doing what they do best: excelling in economic terms. When corporations are making profits, the money isn’t just disappearing or piling up in the pockets of the greedy super-rich (though some does go there), most of it gets sent back into the economy and everyone benefits. Jobs are created, and those that already exist get some added security. With employment options opening, workers find more opportunities to change and move up: more successful corporations mean more freedom for workers.

Further, corporations don’t get to be successful through luck, but by delivering goods and services to consumers at attractive prices. Corporate success, that means, should indicate that consumers are doing well. Their quality of life improves as their consumer products improve, and those products improve best and fastest when corporations are competing against each other as freely as possible.

What about the public welfare in the most general sense, the construction of parks and schools and similar? Here too corporations do the best for everyone by concentrating on their own bottom line. More hiring, sales and profits all also mean more tax revenue flowing to the government. And since elected governmental entities are those organizations best equipped to do public good, the most a corporation can hope for with respect to general social welfare is to succeed, and thereby generate tax revenues for experts (or, at least democratically elected officials) to divide up wisely.

The term marketplace responsibility, finally, names the economic and social (and political) view emerging from Friedman’s arguments. The title doesn’t mean ethical responsibility in the marketplace so much as it does the specific conception of ethical responsibility that the open marketplace produces. It has two aspects. First, the notion of corporate social responsibility is misguided and dangerous, and, second, the corporate purpose of profit maximization serves the social welfare while cohering with the value of human freedom that should be paramount in business ethics.