A Remark on Friedman's "The Social Responsibility of Business is to Increase its Profits"
Conor Clarke's posting excerpts from Milton Friedman (1970), "The Social Responsibility of Business is to Increase its Profits" gives me an opportunity to get something off my chest that has been lying there for decades: Friedman's argument never made any sense to me.
As Clarke quotes:
Creative Capitalism: The Social Responsibility of Business is to Increase its Profits: What does it mean to say that the corporate executive has a "social responsibility"...?... [I]t must mean that he is... to refrain from increasing the price of the product in order to contribute to... preventing inflation.... 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... to contribute to... improving the environment. Or... at the expense of corporate profits... hire "hardcore" unemployed... to contribute to... 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.
The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so.... [R]ather than serving as an agent... he spends the money in a different way than they would have... in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.
This is weak toast. This is thoroughly unconvincing. What reason is there not to turn this around? What reason is there not to say, instead:
- If customers don't want to pay higher prices and so buy from corporations that pursue social responsibility, they are (as long as product markets are competitive) free to do so at their option.
- If workers don't want to receive lower wages by working for corporations that pursue social responsibility, they are (as long as labor markets are competitive) free to do so at their option.
- If investors don't want to receive lower profits by investing in corporations that pursue social responsibility, they are (as long as capital markets are competitive) free to do so at their option.
If workers, customers, and investors expect that the executives of the corporations they deal with will pursue social-responsibility objectives, where's the foul? The executives aren't doing anything wrong at any level--they are in fact performing a valuable function by as workers', customers', and investors' trusted and honest agents by pursuing social-responsibility goals. They are helping them pool their resources to achieve what they want to see happen. This pooling-of-resources agency function is an important one--it is, after all, why we have large organizations in the first place. So why limit it to narrowly profit-maximizing goals?