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Sunday, June 02, 2013

Milton Friedman's wrong: the social responsibility of business is not just to make a profit



Milton Friedman wrote an article for the NYT Magazine in 1970 that was appropriately headlined: The social responsibility of business isto make a profit.

While Friedman was not the first to make the argument, his reasoning certainly is the starting point for an idea that has lodged in the American soul like a tick in a coon’s ass.
The reasoning is not, as it should be, legal, which is why, from the very beginning of his argument, Friedman goes off on the wrong track:
“The discussions of the "social responsibili­ties of business" are notable for their analytical looseness and lack of rigor. What does it mean to say that "business" has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.
Why, you might ask, can only persons have responsibilities? There’s no reason given. The premise is probably some kind of individualism of a very weird kind, in that actually, when we look at how responsibility turns up in everyday practice, we find collectives and institutions operating under the rule of responsibility all the time. There’s nothing in ordinary speech that rules out such sentences as: The responsibility of the Highway Department is to build and care for highways. But Friedman’s lack of an argument for the proposition that only individuals have responsibilities is a minor tic – even if it reflects an individualistic mindset that is founded neither in anthropology, sociology, language or philosophy, but solely in an individualistic ideology.
The second step, however, is where Friedman goes very wrong: “A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense.” The problem here, of course, is that business as a whole is something that doesn’t make much sense. Businesses exist in a number of ways in a number of contexts, and surely the way to talk about business is to specify the context one is speaking in. A business in Alexandria in 300 B.C. is undoubtedly going to be run with some differences from a business in NYC in 1970. One of those differences is surely going to be the fact that the business in NYC in 1970 has to declare itself to the state. There are various ways in which this responsibility can be modified, depending on the scope of the business, but anybody with a halfwit’s sense of commercial law knows that past a certain size, businesses as a whole do have a responsibility – one that divides them into licit and illicit enterprises.
Friedman, of course, was not a lawyer. He was an economist, with a certain ideology. In 1970, as John Kenneth Galbraith made clear with his book, New Industrial State, from 1967, large businesses – corporations – certainly were not operating to maximize their profits. They were, to use an ugly term, satisficing – trying to achieve a level of profit consistent with their sector, while conceding a certain opportunity space that may have created, at least in the short term, more profit.  
Friedman was notoriously dissatisfied with the compromise between ‘socialism’ and the ‘free market’ inscribed in the way that businesses in the post-New Deal, post-war period were actually doing business. He wanted to change the ethos of management, which is why he argued for a unilateral view of the responsibility of businesses. He succeeded in helping create a new management ethos. Unfortunately, the idea that business only exists to make a profit – a statement that is clearly false, since the purposes of business are modified by the laws to which businesses are responsible – emerged as a truism of the Reagan era, partly because it is so easy to state – it has the cocksureness of the popular maxim, on the order of “if you’re so smart why ain’t you rich” – and partly because the underlying premise is firmly rooted in a peculiarly American myth of individualism. Which is why an argument that seems to confound the way things necessarily are with the way Friedman would, as an economist, prescribe the economic order – an argument that is specious on the surface – has gained such footing. It all seems like so much melted butter in the mouth:
“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.
Here one notices that the owner is reduced to a simple function: the owner wants as much money as possible, thus, the business is about making as much money as possible for the owner. But in truth, these owners, especially of large organizations, are a heterogenous and shifting lot, especially in comparison with the entrenched status of the corporate management. Unless that corporate management recognizes its responsibilities – which are spelled out not ethically, but legally, in a contract – they can manage as they will. Or they can manage to loot as much money from the business as possible, on the theory that their ultimate responsibility is to make as much money for themselves as possible. Of course, the managers aren’t the only contract bound individuals here – so are the owners, who are most often owners of the companies stocks. All of which points to the fact that owners and managers are endowed with responsibility not as a natural part of their positions, but as a derivative part of the contractual positions.
My argument, here, is that there is nothing in the idea of the free market system that defines and limits the responsibilities of businesses. Rather, those definitions and limits come into play in the contractual intermediation that brings businesses into existence. One could easily require all corporations to have a portfolio of ‘social responsibilities’ that would bear on the contractual responsibilities of owners and employees alike without, theoretically, damaging the free enterprise system.  The year Friedman published his influential essay, J.W. Hurst published a history of the corporation in the U.S. “The legitimacy of the Business Corporation in the Law of the United States”, which disproves Friedman’s principle, at least as regards the evolution of the corporation in the United States. Hurst shows how business went from being unchartered by the state to being chartered, and how the owners and managers were endowed with or developed their degree of power over the business enterprise.   As Hurst points out, in the colonies and in the pre-bellum U.S., “the legistlature’s grant was necessary to incorporation… that it authoritatively fixed the scope and content of corporate organization.” Which means, simply, that businesses can have multiple purposes designed into their papers of incorporation. For instance, the state can decide that it doesn’t want to be burdened with the negative externalities of business – pollution, for instance – and make the corporation responsible for taking care of those externalities. At the same time, the state can desire that the enterprise undertake its business because it views the undertaking as a social good. And thus it can bring together a number of social purposes in the corporation, without thereby destroying the corporation as an entity.
Battering down the idea that the social responsibility of business is to make a profit is an excellent way of making businesses socially positive once again. It is certainly high time to rewrite the rules of incorporation, including the pernicious rule that allows interstate companies to incorporate under the rules of some selected state – interstate companies should incorporate at the national level with the Commerce Department. This simple rule would be a small start in bringing the plutocracy to heel, at least in the States.

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