The social responsibility of business Matt 25 Aug 2005

43 comments Latest by Darrel

The Social Responsibility of Business is to Increase its Profits by Milton Friedman.

The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for “social” purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil servants — insofar as their actions in the name of social responsibility are real and not just window-dressing — should be selected as they are now. If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expenditures to foster “social” objectives, then political machinery must be set up to make the assessment of taxes and to determine through a political process the objectives to be served.

43 comments so far (Jump to latest)

Morgan Goeller 25 Aug 05

“No man is an island, entire of itself; every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend’s or of thine own were: any man’s death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bell tolls; it tolls for thee.”


John Donne


Craig Davey 25 Aug 05

Bullshit.

Rich 25 Aug 05

This view reminded me od an article I read the other day:

Is Your Boss a Psychopath?

http://www.fastcompany.com/magazine/96/open_boss.html

Art Wells 25 Aug 05

I can agree, if I forget we aren’t just machines.

Sure, we create machines, and legal fictions like corporations, with which we get our work done. Some of us are happy to remain human nonetheless, and expect it in others. Some of us even want the organizations and tools with which we work to not be utterly efficient at the expense of humanity. Some of us invest that way as well.

jankowski 25 Aug 05

Art, you’ve got it backwards — they’re efficient *in the name of* humanity, not at the expense of humanity.

Dave 25 Aug 05

I think you left out the line, “Now talk amongst yourselves!” Is this supposed to be news? Cause I’m pretty sure most people understand that the prime motive of any business is profit. Anything else is secondary.

Jack DeNeut 25 Aug 05

When did this blog become Slashdot.org? Is this really the best place to debate the pluses and minuses of capitalism? What’s next - “PC vs. Mac?” or “Is the Patriot Act good for America?”

Dan H 25 Aug 05

Yep. “Is this good for the company?” and if it is, it also is good for me. And, that’s the only reason they do it. Psychopaths.

Mark Roseman 25 Aug 05

I recall doing a business ethics course back in undergrad, where about the first month was basically pulling out and analysing the multitude of logical errors and bogus arguments from Friedman and several others who’d pitched comparable ideas.

Anonymous Coward 25 Aug 05

jankowski, I’m not sure how I’m getting it backwards when I’m discussing what some of us want. I don’t want any part of my life to be strictly devoted to any one aspect of life at the expense of the other, particularly when that aspect is extremely abstracted and indirect, like money making.

Dave and Jack, I was expecting from this blog to present social ideas and designy stuff when I read “about design, customer experience, entertainment, politics, Basecamp, products we like, small business, ourselves, and more.” Were you expecting it to be news or non-debatable topics for a reason?

Stephen 25 Aug 05

Mr Friedman’s view of taxes as “spending their money” is reductionist. The prices against customers may well be raised, but the money is not being coerced from them, and thus, is not tax. The customers willingly choose who they give their money to. If they feel the company could better invest in the services themselves, rather than “social responsibility”, they are welcome to take their business to another company.

The employees of the company are not being taxed either. While the money could be spend on increased pay, the company is at no obligation to pay them more - if the staff deserve more, they are ripe for poaching by a competitor.

The resonsibility to the employer is indeed to spend their money to maximise return to stockholders. But if the social responsibility is seen as gaining customers, or retaining good staff, this will be satisfied and it is an investment in capital.

Customers have shown that however much they ask for social responsibility, they do not choose their business by it, so it is generally not a good investment. The employer will thus be dissatisfied, the customer annoyed at higher prices and the staff aggrieved at “wasted” money. But this is the market fixing the worth of social responsibility. Mr Friendman’s rant, although paying lip service to Adam Smith, is moralist in tone. Suggesting, scathingly that it is socialistic to spend on corporate responsibility. His description of the corporate executive being legislature and judeicary is hyperbole. Legislation is binding. You can opt out of doing business with the company, working for them, or employing the corporate executive. You cannot opt out of the state.

Benjy 25 Aug 05

While I appreciate capitalism in many respects, the absolute focus on shareholder return as the driving force for public companies is pretty ass backwards.

Historically, those who invested money into a venture did take a large chunk of risk and thus there was the need to reward their seed money. Today, we still see this in terms of VC’s. But once a company is public, the investory risk is greatly reduced. One can buy and sell stock instantly, so if one doesn’t like a company’s actions they can get out and buy stock in another company instead. And typically, investors have a portfolio of investments that further reduces their risk. Additionally, capital gains and dividends from any one company are a small percentage of income for an investor.

On the other hand, those who work for the company have taken on a great deal of risk. For one, employees typically only work for one company. You cannot hold a “portfolio” of jobs. And if a company downsizes, restructures, goes out of business, etc. it’s not an instant, painless process to shift your employment to another company. Skills may be industry specific and demand rises and falls, both for general employment and specific skills. And typically, employees derive a large portion of their income from their job so a reduction or loss of paycheck can mean financial ruin.

Peat Bakke 25 Aug 05

The concepts of social spending and stockholder’s agent are not mutually exclusive. They mesh when two things happen:

- The market is socially conscious, and rewards a socially conscious business with their money.

- The stockholders are socially conscious, and therefore demand socially conscious action.

Vote with your dollars.

Michael 25 Aug 05

Roseman, I would be interested in hearing a few of the “multitude of logical errors and bogus arguments from Friedman.” Although his ideas regarding monetary policy appear to be incorrect, I have yet to see many “bogus arguments” from him. Additionally, Friedman’s main point that corporations providing social welfare is inefficient is true. However, what he fails to acknowledge is that the real reason corporations do any social welfare in the first place is because it is a form of advertising. Most companies do not and should not care about most social causes, however by appearing to care they are able to woo irrational customers who do not realize the same thing could be accomplished by paying less for the product and donating the difference themselves. These customers think these corporations are so fantastic for donating to social causes, when in reality the only reason they do so is to get more customers.

Michael 25 Aug 05

One other thing. I am disgusted at how many critics of capitalism have never taken even an introductory economics course. Everyone would laugh at someone who never took a physics course and said Newton or Gallelio were full of shit. Well unless your Catholic, in which case you support the idiots, imprison the astromner until he dies, and wait 300 years to admit you were wrong. However, people seem to have no problem criticizing capitalism without ever attempting to understand it.

Don Schenck 25 Aug 05

I grow a lot of my own vegetables.

Think about that.

Peat Bakke 25 Aug 05

I think there are two big reasons why economics tends to be a horribly misunderstood field: First, economics as a science is relatively new. Second, economic policy is a pretty big part of politics, which makes it a particularly large target for armchair pundits (who likely never studied political science, either).

Anyhow, people make absurd comments about Newton and Gallelio all the time. This is the Internet, after all. ;)

JohnO 25 Aug 05

I have to agree with him. However, good points have been made. In a capitalist system, profit drives the boat. However, as Stephen mentioned, if social responsibility gains customers it can be used. Just don’t expect that responsibility to last when the customers don’t see it as a priority anymore.

Another point of view is the companies vision, long term vs short term. We know there are a lot of bogus businessmen who came in looking to make some money, drove the stock up, took their money, and bailed when it fell through the basement. Obviously a short-term outlook for just the board. This is the kind of selfishness that needs to be avoided. Because while the board may get money, they aren’t servicing the company, because the company, as an entity, just went bankrupt.

I have one problem with this idea though. People have social responsbilities. Corporations have the same legal footholds as people do, yet they don’t have social responsibilities. Why?

JohnO 25 Aug 05

Peate, macro-economics is so vague and wishy washy. It is essentially trying to predict chaos theory. There are so many markets, variables, and trends conflicting. Why do you think Greenspan is pulling out all his hair trying to fix it by moving some interest rates around?

Micro-economics, on the other hand, is more precise and predictable.

Michael 25 Aug 05

JohnO, the long term vs. short term problem is a very important problem facing many corporations. Many papers have been published. What they have found is that it is important to link compensation to long term performance of a company. So instead of paying $10 million a year while the CEO works at the company, pay $1 million a year while they work their. And then provide future payouts depending on company performance in 5 years, 10 years, and 15 years. This tends to provide an incentive for long term thinking. However, this does not happen much in practice yet.

FineJames 25 Aug 05

Uncle Milty makes me happy. Nobody can put a price on that

JohnO 25 Aug 05

As for social responsibilites, corporations have to live by the same rules of society that people do. They cannot murder or assualt other members of society. They cannot damage other people’s property either directly (burning their house down) or indirectly (polluting). But the reason they should not care about education even though citzens should, is because the goal should be for perfect competition. At such a rate, companies are making 0 profit and could not lower prices any more or else they would lose money. At that point they have no money to donate to causes such as education. However, people are still able to donate to necessary causes such as education.

Michael 25 Aug 05

Woops mistyped that last message was from Michael. Not JohnO

Kyle 25 Aug 05

“You can opt out of doing business with the company, working for them, or employing the corporate executive. You cannot opt out of the state.”

I concur, and agree with Stephen and Michael on their points. I’d also add to Peat Bakke’s statement:

“Second, economic policy is a pretty big part of politics, which makes it a particularly large target for armchair pundits (who likely never studied political science, either).”

Economic policy being so closely tied to politics also allows it to be abused/twisted by politicians for their own personal gain.

J.D. Petersen 25 Aug 05

In an attempt to make something he personally disapproves of appear unethical and illegitimate, Mr. Friedman describes private expenditures with the rhetoric of public finance. In doing so, Friedman ends up hyperbolically suggesting that certain expenditures of a company ought to become a matter of state control when these expenditures are to pursue ends he considers “political”.

This is a rather frightening line of argument, and atypical of Friedman’s overall contribution to political thought. Posed in this way, Friedman’s premises would require political oversight over a whole realm of economic activity previously determined by the market. If an executive directs a shareholder’s capital in ways that do not produce economic value, the shareholder and the marketplace in general have rather effective way of determining outcomes. Shares are sold, prices drop, management changes. It’s hard to believe Friedman truly wants public soviets determining corporate spending.

It’s an odd selection to quote, as Mr. Friedman’s primary contribution to political thought was pointing out that economic freedom is a necessary component of political freedom and that states that unduly regulate economic freedom frequently unduly regulate political freedoms. What Friedman chooses to portrays as an illegitimate “tax” in this selection is no different than the way many on the left have called for state control of corporate activity that impacts society in adverse ways. One might conclude Mr. Friedman’s rhetoric ran away from him here a bit, and he ends up making an argument many of his foes would wholeheartedly agree with, for very different reasons.

Stan Jones 25 Aug 05

I’m a web designer for a non-profit that promotes (among other things) social responsibility in corporations. The “a-ha moment” with a lot of the people we work with comes when they realize that responsibility to things larger than money ultimately increases their bottom line.

Look at the Toyota Prius. It’s a complete success story, compared to American car companies who latched onto the SUV as a cash cow and wouldn’t let go.

I have a feeling that the primary motivation of the folks at 37signals isn’t “let’s make a boatload of money” but more “wouldn’t it be cool if there were a product that did X?” The world rewards vision and enthusiasm. The fact that vision is also efficient economically is secondary. People don’t fall in love just to have kids, though you could say that “ultimately” that’s the point of romantic relationships. :)

Michael 25 Aug 05

JD is very right. I think Friedman probably wanted to just say companies shouldn’t be involved with charity. Why he threw in the bit about government running it is really wierd and not at all consistent with his previous works. Donating to causes should be done at an individual level not by corporations and certainly not by the government.

Darrel 25 Aug 05

There’s a million ways to interpret that. So, take your pick.

Michael 25 Aug 05

Stan, the Prius has very little to do with social responsibility, and a lot to do with long term product development. Japanese companies tend to be focused more on long term profitability and success than short term profits. As oil prices will only continue to increase in the long term future, it is necessary to develop a car that can run on very little or no oil. As fuel prices rise, gas mileage will become an increasing determinant in what cars people choose to buy. If you make the most fuel effecient cars you are more likely to be at the top of the market when that time comes. It just happens that their greed coincides with environmental goals. Additionally, the reason Toyota makes higher quality cars than Ford isn’t because they want to see everybody drive high quality cars, it’s because they feel they will get more repeat customers by building quality cars, which results in long term success.

emm ess eff 25 Aug 05


Always a fun topic at parties.

I, too, recall considering Friedman’s point — and those of its direct critics — while studying business ethics (before that term had been rendered nearly oxymoronic by the likes of Enron).

My initial gut response to his argument has always been one of strong disagreement. It just seems ‘wrong’ and evil. But that initial reaction steadily evolved into one more accepting.

Not agreement, necessarily, but a slight head knod with the condition of “yes, that should be enough, so long as the checks and balances present in a healthy and competitive marketplace help to shape that corporation’s behavior to match the demands and mores of the society participating in that marketplace.”

Bob Aman 25 Aug 05

TextDrive “taxes” its customers and donates the money to open-source projects. I chose to become a customer of theirs, at the very least, partly as a result of this. Absolutely, yes, I could have donated that money myself, perhaps more efficiently even. But TextDrive indicates to me with this “tax” that they care about the common resources, the things that we all have to use to acheive our goals. If my webhost cares that much about the common good, how much more must they care about their own customers?

More interestingly, I think if you asked, you would find that the people at TextDrive are excited about what they do. They know they’re doing something different, that they’re not the same as every other webhost out there. I doubt that it’s just the customers who appreciate their “tax.” I’d be willing to bet that the employees are proud to be working for a company that is so willing to give back to the general community.

And then finally, there is the community at large, that has nothing to do with TextDrive (yet) that benefits, either from the side-effects of the “tax,” or from the collective knowledge that is made available through the TextDrive forums. Obviously, the goodwill that is generated makes them more likely to gain new customers. I’ve even seen people who actually aren’t TextDrive customers advertising TextDrive’s service for them.

Cold capitalistic statements like Friedman’s fly in the face of the truth that markets consist, first and foremost, of human beings. Living, breathing human beings that care what the companies they are financially linked to choose to do.

You simply cannot buy this kind of advertising.

JohnO 25 Aug 05

Thanks for stealing my identity :P

“But the reason they should not care about education even though citzens should, is because the goal should be for perfect competition. At such a rate, companies are making 0 profit and could not lower prices any more or else they would lose money. At that point they have no money to donate to causes such as education. However, people are still able to donate to necessary causes such as education.”

0% Profit will never occur. Period. While we think competition moves profit downward, there is a reverse check; collusion. Many people have been found guilty of it over and over. Furthermore, stratification, and the position of products (seen as emotional buys, not value buys) will cause high margins (cars for example, they will never ever reach 0% profit, even though they are being pushed down now). Competition is all well and good, until nobody wins. When nobody wins, businessmen get pissed and turn to collusion so at least they aren’t starving to death. Fact of life.

Therefore, the profit margin will always be there. That is the owner’s stake in the company. It is in his best interest to have a profit margin, and he is the one running the company. I hardly think donations are the focus at this point. My focus is more like Enron washing pensions of employees down the drain. They were legally binded to paying those to the employees. I’m no lawyer, but whether or not there was a law that allows a bankrupt company to default on it’s legally binded promise is wrong. The bankruptcy for personal matters is much much harsher(as I understand them, again no lawyer), yet companies are still considered people.

Owen 25 Aug 05

Why are so many ‘famous’ economists so simplistic? Adam Smith could express more complex ideas about capitalism more succinctly than Friedman. I always thought Friedman was MASSIVELY overrated. This is yet another reason why.

The ONLY businesses I have ever been involved in where profit was the only and sole motive have also been the worst run and the biggest failures.

Let alone that a business doesn’t have a responsibility - it’s a THING. The people involved with the business have responsibilities. One of those is to do the best for their shareholders. But if you do that in a vaccuum you get situations like drug companies pimping drugs like Vioxx and ignoring scientific data. Of course in egregious cases like that they DO actually get caught and made to pay, but the MOTIVE of the executive officers to maximize profits for the shareholder is what drives them to take an action that is bad for the business in the long run.

Profit is ONE of the complex range of responsibilities a business executive takes on, NOT the only one.

Josh 25 Aug 05

This is just wonderful:

“Cold capitalistic statements like Friedman’s fly in the face of the truth that markets consist, first and foremost, of human beings. Living, breathing human beings that care what the companies they are financially linked to choose to do.”

We live in a truly unique time and place in history, in a society that allows people to have “truths” such as this.

Anyway, I think that Friedman’s quote was subject to several key misinterpretations by commenters.

First, there seems to be a general idea that Freidman is admonishing business owners to refrain from pursuing “socially beneficial” ends. He is not: instead, he is admonishing executives - those hired by the owners - from spending money on supposedly socially beneficial things that are separate from the company’s mission.

I put socially beneficial in quotes because it can have so many different meanings - I suspect that activities some on the right deem socially beneficial might be quite different from those that some commenters on this blog would find socially beneficial. Incidentally, I suspect that the same people decrying Friedman’s admonitions against social spending would be among the first to criticize companies that spent charitably on programs they disagree with, though I could certainly be wrong.

The next misinterpreted idea is that “taxes” as Friedman refers to them in his article are only reflected in the price the consumer pays. If an executive’s pet social project was paid for by higher prices, and the consumers voted with their feet against the project, this would be a tax on the owners and investors, who are Friedman’s real subject here. Again, his argument is not that businesses should avoid engaging in social programs, but that executives should avoid engaging in social programs outside of the company’s charter.

The third misinterpretation is the idea that Friedman is advocating state control over private expenditures. Again, he is advocating nothing of the sort! Friedman is writing about executives - agents of the owners - doing things the owners may not want done, or about small segments of the shareholders pushing through expenditures that harm the rest.

He is not referring to private expenditures at all! In fact, he writes:

“The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his “social responsibility,” he is spending his own money, not someone else’s. If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any ob­jection to his doing so.”

The final misinterpretation is that Friedman is arguing against engaging in social programs that indirectly enhance a company’s bottom line. Once again, this is simply wrong, as anyone that actually reads the article can see. Friedman does argue that this is hypocritical and near-fraud (which is a silly argument in my opinion, and indicative of his place in academia, not industry), but he admits that he cannot condemn it, for that would be advocation social responsibility! Too funny.

Anyway, it would do the people hyperventilating about this quote well to read the actual article. It probably won’t persuade anyone, but who knows? Maybe it will.

Grayson 25 Aug 05

Tell it like it is, Josh ;)

Wesley Walser 25 Aug 05

and yet I find myself thinking all the time. Well, if I were him I would do it, but because it’s someone else I can’t help but question the morality of it.

Actually though that today when a professor told the class that we have to buy a book that he wrote. Well, if I were him, I would do it, but at the same time sounds like a conflict of interest if you asked me.

Don Schenck 25 Aug 05

Wasn’t it Ayn Rand who said that simply by providing meaningful employment, a corporation is doing enough to “give back”.

Why must corporations give and give? What if, instead, they cut their costs as much as possible and pass the savings along to the consumer, making, say, solar panels more affordable?

Just askin’.

Darrel 26 Aug 05

“Wasn’t it Ayn Rand who said that simply by providing meaningful employment, a corporation is doing enough to “give back”.”

That’s still be a big step up for a lot of people. Lot’s of folks are working ot make ends meet, but getting very little in the way of ‘meaning’ out of their work.

“Why must corporations give and give? What if, instead, they cut their costs as much as possible and pass the savings along to the consumer”

That’s be a big step in the right direction too. Unfortunately, cutting costs today simply means cutting wages to the lowest level workers. And any extra profit margin gained from that rarely ends up in the hands of the consumer.

The Wal-Mart effect is just a downward spiral. People make lower wages, so sell lower wage products. To sell lower wage products, cut costs. To cut costs, cut people’s wages.

*sigh*

I think a good rebuttal to the initial comment is just comparing Sams Club to Costco. Both make profits. Neither is a saint, but Costco manages to give their employees a living wage and good benefits. What? A caring company that can still make money and compete with the ‘anything for a buck’ concept of Sams Club?

Dan Boland 26 Aug 05

I think that globalization is defeating the unions in the US. Instead of adhering to what US workers want, corporations just use cheaper workers in faraway lands. So the only way to counteract that is with global unionization.

Comments?

Josh 26 Aug 05

Regarding Darrel’s comment:


I think a good rebuttal to the initial comment is just comparing Sams Club to Costco. Both make profits. Neither is a saint, but Costco manages to give their employees a living wage and good benefits. What? A caring company that can still make money and compete with the ‘anything for a buck’ concept of Sams Club?

Not only do both make profits, but Costco is in fact more profitable, and investors like them to: Costco’s stock has been outperforming Walmart’s for some time now.

Friedman’s point wasn’t that corporations should treat their employees poorly and try to rip everyone off; it was that executives shouldn’t get the companies they run involved in social programs unrelated to their business. Friedman also admonishes companies that hide the profit motive of their social programs behind rhetoric claiming they do it for the good of society - he complains that this is nearly fraudulent and would prefer that they stated their true reasons for supporting socially beneficient programs - the firm’s bottom line.

Yikes 26 Aug 05

and people fear socialistic societies. Everything Has its Cost.

“They cannot murder or assualt other members of society” - JohnO

Fine line?
———————————————
Food industry - Obesity / Cancer / Diabetis epademic
Tobaccoo Industry - Cancer
Auto Industry - Pollution / Local economic destruction
and the list goes on…

Darrel 26 Aug 05

he complains that this is nearly fraudulent and would prefer that they stated their true reasons for supporting socially beneficient programs - the firm’s bottom line.

That seems contradictory.

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