On the 50th Anniversary of Friedman’s Essay
On the 50th anniversary of Milton Friedman’s (in)famous article about business and social responsibility, a lot of people are commenting on the headline of the article (“A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits”) rather than what the article actually says:
In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be 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.
If a business is created “to make as much money as possible while conforming to the basic rules of the society,” how can it be a manager’s mission to seek any other result? I would go even farther than Friedman: the manager’s obligation is to apply those “basic principles” in a way that conforms to the business owners’ understanding of them. Where ownership is concentrated in actual human beings who have a sole or consensus view of those basic principles, management is obliged to operate consistently with that view. But where the erstwhile owners of a business have chosen to raise capital by inviting in new owners with parallel voting rights, no such consensus may exist. In that case, a corporation is essentially rudderless with respect to “basic principles,” falling back instead on those principles that have been codified into law.
Thus, I think it fair to argue that the managers of a closely held business are agents of the owners, but the managers of a publicly held business are charged with making as much money as possible without violating the law. Something is lost, then, when a business “goes public”: its private owners’ mores no longer drive its actions.
“We have met the enemy, and he is us.”
Happily, though, the matter doesn’t end there, because the consuming public determines what business practices will make the most money. The ethical behavior of businesses, including their actions that might be characterized as showing “social responsibility” (an imprecise term, but we sort of get its drift) should be determined by bargaining with customers. Some of that bargaining has already taken place. The existing consensus as to some “basic principles” has already been incorporated in our ethos, so entrepreneurs enter the fray already committed to them. As a logical matter, I think of those principles as “already negotiated,” rather than somehow “outside” the realm of negotiation. That the negotiation took place on Mt. Sinai is really beside the point.
If we, the consuming public, make demonstrating “social responsibility” a winning business strategy, then social responsibility will be demonstrated. We consumers abdicate our responsibility as citizens when we patronize businesses that violate our norms. We cannot ethically “delegate” amorality. If we wouldn’t dump sludge in the river, we cannot buy from someone who dumps sludge in the river. The dumper is dumping so that we can have the benefit of the dumping. So, who is “responsible” for the dumping? The same is true of any cost-saving measure adopted by a business. If we don’t approve of it, we should not patronize it.
It is a fact of our political life that we prefer virtue ethics to rule-based ethics. Google’s motto is not “Break no rules”; it’s “Do no evil.” It’s not quite, “Be good,” but it’s at least a recognition that moral judgment of the actors applies to the business’s behavior. Activists exhort businesses to behave responsibly and judge business executives who don’t measure up to the activists’ standards. But the judgment seems to me too facile and conveniently misdirected. Unless we condemn Wal-Mart shoppers for putting Mom and Pop out of business, we can’t really blame Wal-Mart for doing things that lower prices but don’t turn off customers. The juggernaut is only the juggernaut because we don’t boycott it. (I use “boycott” broadly. Making a practice illegal is one way in which the public can agree to boycott a business that indulges in it.)
The public is free to determine what principles, basic or otherwise, a business must respect to maximize value. A combination of boycotts and regulations can make business as responsive to social needs as society really wishes business to be. Given that underlying fact of life, we can then look at generic exhortations to “act responsibly” as a demand for businesses to think up their own constraints and run them up the flagpole to see if people will insist upon them by boycotting those that do not follow suit. Businesses thus bid for business by attempting to strike the most attractive balance between social action and product price. The business that creates the best mix of socially desirable behavior and reasonably priced products wins, even if the company’s only motivation is maximizing profits.
In short, social responsibility is a social responsibility. How could it be otherwise?