Alberto Mingardi  

Corporate social responsibility vs laissez-faire?

Target the unbiased forecast... Blinder's Blunder on Social Se...

If...we want businesses to be "responsible" for other interests than their shareholders', we are, it seems to me, "privatizating" public concerns.

CSR.jpg A friend pointed me to this piece published by Business Insider. Apparently, here Nobel Laureate Joe Stiglitz* explains that fellow Nobel Laureate Milton Friedman has to be blamed for high inequality and weak growth. The piece reports a conversation with Stiglitz, but I would maintain it is by and large the result of journalistic simplification, as I'm sure Stiglitz would have more rigorous, and persuasive, arguments. The article reads as quite a milkshake of far wider debate on free markets vs interventionism.

I am, however, quite impressed by the fact that Stiglitz focuses his own criticism on Friedman's rebuttal of corporate social responsibility:

In his highly influential 1962 collection of essays [sic], "Capitalism and Freedom," Friedman proclaimed that in a free economy, "there is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud."

The idea that "the business of business is business" implies, for Stiglitz and/or Mr Feloni, who summarises Stiglitz's thoughts, a belief in the "invisible hand", meaning by it both a tendency towards equilibrium and the happy coincidence of private and public interests.

Leaving aside long standing controversies on the real importance of the metaphor in Adam Smith's thought (for a summary of the previous instalments, see this paper by Gavin Kennedy), is it really so? Does thinking that companies should focus on shareholder interest require a faith in unfettered competition, and vice versa?

I am not persuaded.

Friedman himself indeed wrote that in a free economy "there is one and only one social responsibility of business―to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game."

Also, again in Capitalism and Freedom, Friedman indeed argued that:

It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith again, 'led by an invisible hand to promote an end which was no part of his intention.'

He quoted Smith's invisible hand, but he placed the burden for allowing private interests to flourish, thereby profiting collective interests too, on the shoulders of the law. It is, in other words, institutions that make for the pursuit of profit to be beneficial to society at large or, on the contrary, detrimental to society at large. Heavy regulations and omnipotent functionaries are likely to give us crony capitalism, in which clearly a handful of beneficiaries tend to have a liberal access to the public purse.

We know that some influential people on the free market side are uneasy with the way in which Friedman phrased his own argument - for example, John Mackey, who has long argued for what he calls conscious capitalism. Personally, I regard these arguments more as a plea to understand the fact that the entrepreneurial experience has a richer texture than profit maximisation, than as a debunking of Friedman's reasoning.

But on the other hand, I think you can believe that the business of business is business, without being particularly libertarian. In a way, the question is: if CEOs and entrepreneurs have a wider social responsibility wider than making profits for stockholders, how shall they know what it is? Do they dispose of all the relevant information? They certainly do frequent mistakes even when they tend to focus on one goal (creating value for shareholders). God forbids what may happen when they need to take care of many.

If you go beyond platitudes (be nice to your employees, keep good relationships with your suppliers), answering this question is problematic and involves an unmistakable exercise of discretion. For one thing, if the CEO were prioritising other goals over increasing shareholder value, he would de facto be imposing his own worldview and worries (whatever they are) on them. He would be playing a political, not a managerial role. In this sense, it doesn't change much if he does so by his own will, or because it is so "nudged" by regulators. What matters is that you are using resources that are supplied to you for a certain end (generating a profit) for another.

Widening the scope of business responsibility seems to me to be largely different than applying general norms to a company's activity. In this case, we are fully consistent with Friedman's words: we may differ on what it takes to make private and collective interests compatible, but that's the game.

If, on the other hand, we want businesses to be "responsible" for other interests than their shareholders', we are, it seems to me, "privatizating" public concerns.

I've always thought that over-emphasising corporate social responsibility was an unwilling admission, on the part of the left, of the government's inefficiency in fostering the goals dearer to her. So the burden gets shifted to private business.

In a sense, Friedman was simply stating the need for a separation of business and politics, not unlike the the separation of state and church. Isn't that something which should be welcomed by people who care about transparency and fear lobbying and cronyism, whatever the source?

In the Feloni piece, Stiglitz does much more than this. He basically offers his own view of one century of economic (and, indeed, political) debate. I don't think the issue of business responsibility is a good focal point for that long a history.

* Note that Stiglitz discussed inequality with Russ Roberts in this 2012 EconTalk episode.

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CATEGORIES: Business Economics

COMMENTS (9 to date)
Cyril Morong writes:

Very interesting post. Good to see someone give a good account of Friedman's views in this area. Thanks

blink writes:

You raise a good question -- how can a corporation know its social responsibility? This interpretive flexibility may actually be an asset, at least to the extent that managers and corporate leaders seem amenable to such exhortation. This gives managers an extra degree of discretion to pursue pet projects or at least explain away poor performance.

Profit is too easily measured, failure too transparent. The veneer of social responsibility gives poor managers a fig leaf to stand behind. My theory suggests that managerial skill be inversely related to avowed interest in social responsibility.

EB writes:

Last Sunday, my late daughter MJ was remembered by the Alcaldesa and some neighbors in a public square that had been partially reconstructed thanks to the hard work and large donations of MJ and other neighbors (donations were not tax-deductible). For three years, although diagnosed with terminal cancer, MJ spent many hours in that project and at the same time she continued working very hard at her bakery. She was the bakery's only owner and employed over 40 people, and she always used the bakery only to earn money for her and her employees and to pay taxes, a lot of taxes. She was able to separate completely both works --one with the friendly approval of many neighbors, the other with the payment of selling bread and pastry to many people. There is no need at all to mix your business with your other projects. Unfortunately politicians and intellectuals want to overtax your business with all sorts of legal obligations for their own purposes.

Tom West writes:

It is quite possible for both individuals and companies to be both entirely legal and ethically monstrous.

The concept that human's responsibility to each other begins and ends with how well you game the legal system is a recipe for a society that self-destructs.

I also see it as anti-Libertarian, since one of the most effective means (and as I read it, your responsibility as a corporation) of increasing profit is to lobby the government to change the laws to legally put your competitors out of business (or in some countries, legally have them imprisoned or executed).

Of course, *which* ethics should a corporation use to govern their behaviour is an open question. But once we've buried the idea that it is ethical responsibility of people running corporations to act as "legal psychopaths" in the pursuit of profit, then we go back to individuals judging individuals by their actions, with all the nudging effects that such judgement always causes.

No one should get an "indulgence" for acting unethically, even if dispensed by Friedman himself.

So, I won't argue for CSR, but I will certainly argue against Friedman's quip.

Jeff writes:

If the market for corporate governance is truly free, the executives of any corporation that doesn't put the interests of its shareholders first will be replaced by executives who do. In that sense, what Friedman says is a truism.

Which reminds me of one of my favorite quotes. I once heard Michael Rothschild of UCSD quip that "Everything's a truism if you think fast enough."

Sam Grove writes:

Business has been the primary means by which our lives have been enriched beyond the imaginings of kings of yore.
What more do we require of business?

How about keeping politics out of business so that business will stay out of politics?

Let people keep the money they earn so we can do the good works. Asking business for this is just asking someone else to do those good works for us.
That's the lazy means of the collectivist.

Deirdre Nansen McCloskey writes:


What a good point!

Two more: (1.) If one actually reads Friedman's infamous article, which I'll bet Joe didn't really do, one sees that he qualifies the pursuit of profit with more than mechanical "rules of the game." He speaks, too, of moral standards. Slave labor is out.

(2.) The efficient supply of executives might require the company to allow them to play the noble lord with corporate funds. That is, the executives might so much like being liked locally that they would offer themselves for less in cash.

Con affetto,


Hazel Meade writes:

A thought provoking post. I can see both sides of the issue. The thing is that we don't actually live under a perfect free market regime, so a pure pursuit of profit maximization is bound to involve taking advantage of some of those imperfections, to the harm of some individuals. Do corporations maybe have a responsibility to behave *as if* the market were perfectly free - to refrain from taking advantage of the mechanisms that the government lays at their feet to manipulate things to their advantage? If one is not a libertarian, the answer would probably be of course not - a socialist would make no objection to subsidies or government sponsored monopolies. That backs your point that the concept of responsibility is really a privatization of public concerns - if public institutions are failing, people call on the private sector to act in the "responsible" way anyway.

On the other hand, often informal norms are the *correct* mechanism for handling problems that shouldn't be formally instituted in laws. As libertarians, we don't actually want the "public sector" to make all the rules. We want private informal institutions to self-organize. So in that light, perhaps a social pressure on businesses to behave "responsibly" is necessary to establish those private informal institutions.

In private life, we don't necessarily endorse individuals going ahead and being ruthlessly self-interested up to the limit of the law, rather, we want people to be constrained by the norms of a society of mutual respect, to act honorably in the absence of formal rules enforcing codes of behavior. Why wouldn't that standard apply to corporations as well?

Fred Anderson writes:

I realize that the following is simplistic, but . . .

Suppose the business is conceptualized as a company of men & women -- a nexus where resources are taken in and converted into outputs.

Shouldn't the moral firm place as little burden upon society as possible? Purposely choosing to use those resources upon which society places the least value (as witnessed by the society's charging us the lowest price for those inputs)? That is, won't the moral firm minimize its costs? If there are other capable inputs which society values less (as witness their lower price), shouldn't the moral firm switch to using up those less valued (hence lower priced) resources?

And shouldn't the moral firm seek to deliver the maximum benefit to society -- as judged by how much the society is willing to pay for those outputs? That is, won't the moral firm attempt to maximize its revenues? If there is some output achievable with these inputs that society values more -- as witness their willingness to pay more -- isn't the moral firm obliged to switch to the production of that more valued output?

And yet, if we maximize our revenues and minimize our costs, won't we have maximized the firm's profits?

If, in their automobiles, consumers value status highly but fuel economy not so much, shouldn't we use low wage English majors (mostly female) to write advertising copy that conveys high status: rather than using high wage engineers to (laboriously) lift engine efficiency another 3%?

Is it the drug lord's fault that American users will pay him/her handsomely to supply them with heroin produced by child labor in Afghanistan?

Or is the problem a societal hypocrisy? We say we value X highly, but we're unwilling to pay for it. Or we say we abhor Y, but we'll pay dearly to get it.


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