Milton Friedman - Social Responsibility of Business

Milton Friedman: "The Social Responsibility of Business is to Increase its Profits" (1970)

Published in 1970, arguing against the concept of social responsibility for businesses.
Milton Friedman: A Nobel Prize-winning economist, advocate for free markets and minimal government intervention.

What is Social Responsibility?

Examples: environmental protection, job creation, fair wages, community benefits, consideration for future generations.
Friedman criticizes the notion that businesses should focus on social ends, viewing it as a form of "socialism."

Who Has Responsibilities?

Peter French: Corporations have moral responsibilities.
Friedman: Only biological persons have responsibilities. Corporations are artificial entities without genuine responsibilities.
Friedman: "Only people 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." (1)
Friedman views a corporation as the sum of its executives, aligning with French's aggregate theory.
Note: Friedman's paper preceded French's, so he couldn't directly address French's arguments.

The Responsibilities of a Corporate Executive

A corporate executive is responsible to the owners/shareholders of the corporation.
The primary goal of owners/shareholders is to maximize profit, within legal and ethical boundaries.
Pursuing social responsibilities beyond profit maximization is seen as acting against the interests of the employer.
The corporate executive is essentially spending someone else's money (stockholders, customers, or employees) for a general social interest.
Friedman: "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." (2)
Individuals are free to pursue social responsibilities with their own resources, time, and money.

Circumstances for Pursuing Social Responsibilities

Sole owner of a business: can use their money as they wish, including supporting social causes.
Cooperatives/agreement among owners/shareholders: can collectively decide to support a charity.
Government-imposed taxes: represent a legitimate means of funding social initiatives.

Social Responsibility… or Profit?

Pursuing social responsibilities can be in a corporation's financial interest.
Examples: positive media coverage, improved employee recruitment and retention.
Friedman: "Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions. To illustrate, it may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects. Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to charities they favor by having the corporation make the gift than by doing it themselves, since they can in that way contribute an amount that would otherwise have been paid as corporate taxes." (5)
Friedman argues that actions done under the guise of social responsibility are often driven by the desire to increase profits.
Actions done for the benefit of the company but framed as social responsibility can be seen as hypocritical.
Friedman: "In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate. There are not values, no 'social' responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form." (6)
Friedman's conclusion: "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." (6)

Key Highlights and Ideas from Milton Friedman's "The Social Responsibility of Business is to Increase its Profits":

Core Argument: Friedman argues that the primary responsibility of a business is to increase its profits within the boundaries of law and ethical custom. Businesses should not concern themselves with social responsibilities.
Critique of Social Responsibility: Friedman views the concept of social responsibility for businesses as a form of socialism, undermining the principles of a free market.
Responsibilities of Individuals vs. Corporations: Friedman asserts that only individuals have genuine responsibilities, while corporations, being artificial entities, have only artificial responsibilities. Corporate executives are responsible to the owners/shareholders, whose primary goal is to maximize profit.
Spending Other People's Money: When corporate executives pursue social responsibilities, they are essentially spending someone else's money (stockholders, customers, or employees) without their direct consent.
Circumstances for Social Pursuits: Social initiatives are acceptable when they are pursued by sole business owners with their own money, through voluntary agreements among owners/shareholders, or via government-imposed taxes.
Profit-Driven Motives: Friedman suggests that many actions framed as social responsibility are often driven by financial interests, such as improving public image or employee retention.
Free Market Principles: In a free market, cooperation is voluntary, and all parties benefit. Friedman emphasizes that society is a collection of individuals and groups formed voluntarily, with shared values and responsibilities.

Questions on the Text:

Multiple Choice Question: According to Milton Friedman, what is the primary responsibility of a corporate executive?
a) To maximize social welfare
b) To increase profits within legal and ethical boundaries
c) To ensure environmental sustainability
d) To promote community development
Short Answer Question: Why does Friedman criticize the idea of corporate social responsibility?
Medium-Length Answer: Explain Friedman's argument that corporate executives are "spending someone else's money" when they engage in social responsibility initiatives. Provide examples to support your explanation.
Slightly Longer Answer (Application of Ethical Theories): Describe a hypothetical ethical dilemma faced by a corporation (e.g., a pharmaceutical company pricing a life-saving drug). Apply utilitarian and Kantian ethical theories to analyze the dilemma, and discuss how each theory might lead to different actions or justifications. Explain which approach aligns better with Friedman’s perspective and why.

ANSWER

Questions on the Text:

Multiple Choice Question: According to Milton Friedman, what is the primary responsibility of a corporate executive?

a) To maximize social welfare

b) To increase profits within legal and ethical boundaries

c) To ensure environmental sustainability

d) To promote community development

Correct Answer: b) To increase profits within legal and ethical boundaries

Short Answer Question: Why does Friedman criticize the idea of corporate social responsibility?

Answer: Friedman criticizes corporate social responsibility because he views it as a form of socialism that undermines the principles of a free market. He believes that businesses should focus on increasing profits within legal and ethical boundaries, rather than engaging in social initiatives.

Medium-Length Answer: Explain Friedman's argument that corporate executives are \"spending someone else's money\" when they engage in social responsibility initiatives. Provide examples to support your explanation.

Answer: Friedman argues that when corporate executives engage in social responsibility initiatives, they are essentially spending money that belongs to someone else, such as the stockholders, customers, or employees. For example, if a company donates a portion of its profits to a charitable cause, it is spending the stockholders' money. If a company raises prices to fund environmental programs, it is spending the customers' money. If a company lowers wages to invest in community development projects, it is spending the employees' money. In each of these cases, the corporate executive is making decisions about how to allocate resources that do not belong to them personally.

Slightly Longer Answer (Application of Ethical Theories): Describe a hypothetical ethical dilemma faced by a corporation (e.g., a pharmaceutical company pricing a life-saving drug). Apply utilitarian and Kantian ethical theories to analyze the dilemma, and discuss how each theory might lead to different actions or justifications. Explain which approach aligns better with Friedman’s perspective and why.

Answer: Ethical Dilemma: A pharmaceutical company develops a life-saving drug for a rare disease. The cost of research, development, and production is very high. The company holds a patent, granting it exclusive rights to manufacture and sell the drug. They must decide on the pricing.

Utilitarian Analysis: Utilitarianism seeks to maximize overall happiness or well-being. A utilitarian approach would involve assessing the consequences of different pricing strategies. If the company prices the drug very high, it maximizes profit but limits access to only the wealthiest patients, leading to suffering and death for those who cannot afford it. If the company prices the drug lower, it reduces profit but saves more lives and alleviates suffering.

From a utilitarian perspective, the company should aim to set a price that balances profit with the number of lives saved. This might involve government subsidies, or tiered pricing based on income.

Kantian Analysis: Kantian ethics emphasizes moral duties and principles, regardless of consequences. The key is to treat individuals as ends in themselves, not merely as means. Pricing the drug exorbitantly, knowing it will be unaffordable for many who need it, could be seen as treating those individuals as a means to the company’s profit.

A Kantian approach would require the company to consider whether its pricing decision could be universalized. If every company acted in this way, life-saving treatments would be inaccessible to most people, which is morally problematic.

Alignment with Friedman’s Perspective: Friedman’s perspective aligns more closely with the utilitarian approach in this scenario, but with a focus on profit as the primary driver. He would likely argue that the company has a responsibility to its shareholders to maximize profit within legal and ethical boundaries. A utilitarian argument could be used to justify a high price if it leads to greater overall investment in future research and development, ultimately benefiting more people. However, he would likely caution against extreme pricing that could be seen as exploitative or deceptive, as this could harm the company’s reputation and long-term profitability.

Friedman would emphasize that market forces, rather than social responsibility, should guide the pricing decision. Government intervention, such as subsidies or price controls, would be seen as a distortion of the free market.