The Social Responsibility of Business is to Increase its Profits

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Rev.ConfirmingPagesAppendixATheSocialResponsibilityofBusinessIstoIncreaseItsProfitsMiltonFriedmanWhenIhearbusinessmenspeakeloquentlyaboutthe“socialresponsibilitiesofbusinessinafree-enterprisesystem,”IamremindedofthewonderfullineabouttheFrenchmanwhodiscoveredattheageof70thathehadbeenspeakingproseallhislife.Thebusiness-menbelievethattheyaredefendingfreeenterprisewhentheydeclaimthatbusinessisnotconcerned“merely”withprofitbutalsowithpromotingdesirable“social”ends;thatbusinesshasa“socialconscience”andtakesseriouslyitsresponsibilitiesforprovidingemployment,eliminatingdiscrimination,avoidingpollutionandwhateverelsemaybethecatchwordsofthecontemporarycropofreformers.Infacttheyare—orwouldbeiftheyoranyoneelsetookthemseriously—preachingpureandunadulteratedsocialism.Busi-nessmenwhotalkthiswayareunwittingpuppetsoftheintellectualforcesthathavebeenunderminingthebasisofafreesocietythesepastdecades.Thediscussionsofthe“socialresponsibilitiesofbusiness”arenotablefortheirana-lyticalloosenessandlackofrigor.Whatdoesitmeantosaythat“business”hasresponsi-bilities?Onlypeoplehaveresponsibilities.Acorporationisanartificialpersonandinthissensemayhaveartificialresponsibilities,but“business”asawholecannotbesaidtohaveresponsibilities,eveninthisvaguesense.Thefirststeptowardclarityinexaminingthedoctrineofthesocialresponsibilityofbusinessistoaskpreciselywhatitimpliesforwhom.Presumably,theindividualswhoaretoberesponsiblearebusinessmen,whichmeansindividualproprietorsorcorporateexecutives.Mostofthediscussionofsocialresponsi-bilityisdirectedatcorporations,soinwhatfollowsIshallmostlyneglecttheindividualproprietorsandspeakofcorporateexecutives.Inafree-enterprise,private-propertysystem,acorporateexecutiveisanemployeeoftheownersofthebusiness.Hehasdirectresponsibilitytohisemployers.Thatresponsibil-ityistoconductthebusinessinaccordancewiththeirdesires,whichgenerallywillbetomakeasmuchmoneyaspossiblewhileconformingtotheirbasicrulesofthesociety,boththoseembodiedinlawandthoseembodiedinethicalcustom.Ofcourse,insomecaseshisemployersmayhaveadifferentobjective.Agroupofpersonsmightestablishacorpo-rationforaneleemosynarypurpose—forexample,ahospitaloraschool.Themanagerofsuchacorporationwillnothavemoneyprofitashisobjectivebuttherenderingofcertainservices.Ineithercase,thekeypointisthat,inhiscapacityasacorporateexecutive,themanageristheagentoftheindividualswhoownthecorporationorestablishtheeleemosynaryinstitution,andhisprimaryresponsibilityistothem.Source:MiltonFriedman,“TheSocialResponsibilityofBusinessIstoIncreaseItsProfits,”NewYorkTimesMagazine,September13,1970.211ghi24697_app_211-227.indd2112/8/118:20PM ConfirmingPagesNeedlesstosay,thisdoesnotmeanthatitiseasytojudgehowwellheisperforminghistask.Butatleastthecriterionofperformanceisstraightforward,andthepersonsamongwhomavoluntarycontractualarrangementexistsareclearlydefined.Ofcourse,thecorporateexecutiveisalsoapersoninhisownright.Asaperson,hemayhavemanyotherresponsibilitiesthatherecognizesorassumesvoluntarily—tohisfamily,hisconscience,hisfeelingsofcharity,hischurch,hisclubs,hiscity,hiscountry.Hemayfeelimpelledbytheseresponsibilitiestodevotepartofhisincometocausesheregardsasworthy,torefusetoworkforparticularcorporations,eventoleavehisjob,forexample,tojoinhiscountry’sarmedforces.Ifwewish,wemayrefertosomeoftheseresponsibilitiesas“socialresponsibilities.”Butintheserespectsheisactingasaprincipal,notanagent;heisspendinghisownmoneyortimeorenergy,notthemoneyofhisemployersorthetimeorenergyhehascontractedtodevotetotheirpurposes.Iftheseare“socialresponsibili-ties,”theyarethesocialresponsibilitiesofindividuals,notbusiness.Whatdoesitmeantosaythatthecorporateexecutivehasa“socialresponsibility”inhiscapacityasbusinessman?Ifthisstatementisnotpurerhetoric,itmustmeanthatheistoactinsomewaythatisnotintheinterestofhisemployers.Forexample,thatheistorefrainfromincreasingthepriceoftheproductinordertocontributetothesocialobjec-tiveofpreventinginflation,eventhoughapriceincreasewouldbeinthebestinterestsofthecorporation.Orthatheistomakeexpendituresonreducingpollutionbeyondtheamountthatisinthebestinterestsofthecorporationorthatisrequiredbylawinordertocontributetothesocialobjectiveofimprovingtheenvironment.Orthat,attheexpenseofcorporateprofits,heistohire“hardcore”unemployedinsteadofbetterqualifiedavailableworkmentocontributetothesocialobjectiveofreducingpoverty.Ineachofthesecases,thecorporateexecutivewouldbespendingsomeoneelse’smoneyforageneralsocialinterest.Insofarashisactionsinaccordwithhis“socialrespon-sibility”reducereturnstostockholders,heisspendingtheirmoney.Insofarashisactionsraisethepricetocustomers,heisspendingthecustomers’money.Insofarashisactionslowerthewagesofsomeemployees,heisspendingtheirmoney.Thestockholdersorthecustomersortheemployeescouldseparatelyspendtheirownmoneyontheparticularactioniftheywishedtodoso.Theexecutiveisexercisingadistinct“socialresponsibility,”ratherthanservingasanagentofthestockholdersorthecustomersortheemployees,onlyifhespendsthemoneyinadifferentwaythantheywouldhavespentit.Butifhedoesthis,heisineffectimposingtaxes,ontheonehand,anddecidinghowthetaxproceedsshallbespent,ontheother.Thisprocessraisespoliticalquestionsontwolevels:principleandconsequences.Onthelevelofpoliticalprinciple,theimpositionoftaxesandtheexpenditureoftaxproceedsaregovernmentalfunctions.Wehaveestablishedelaborateconstitutional,parliamentaryandjudicialprovisionstocontrolthesefunctions,toassurethattaxesareimposedsofaraspossibleinaccordancewiththepreferencesanddesiresofthepublic—afterall,“taxationwithoutrepresentation”wasoneofthebattlecriesoftheAmericanRevolution.Wehaveasystemofchecksandbalancestoseparatethelegislativefunctionofimposingtaxesandenactingexpendituresfromtheexecutivefunctionofcollectingtaxesandadministeringexpenditureprogramsandfromthejudicialfunctionofmediatingdisputesandinterpret-ingthelaw.Herethebusinessman—self-selectedorappointeddirectlyorindirectlybystockholders—istobesimultaneouslylegislator,executiveandjurist.Heistodecidewhomtotaxbyhowmuchandforwhatpurpose,andheistospendtheproceeds—allthisguidedonlybygen-eralexhortationsfromonhightorestraininflation,improvetheenvironment,fightpovertyandsoonandon.Thewholejustificationforpermittingthecorporateexecutivetobeselectedbythestockholdersisthattheexecutiveisanagentservingtheinterestsofhisprincipal.Thisjustificationdisappearswhenthecorporateexecutiveimposestaxesandspendsthepro-ceedsfor“social”purposes.Hebecomesineffectapublicemployee,acivilservant,eventhoughheremainsinnameanemployeeofaprivateenterprise.Ongroundsofpoliticalprinciple,itisintolerablethatsuchcivilservants—insofarastheiractionsinthenameofsocialresponsibilityarerealandnotjustwindow-dressing—shouldbeselectedastheyarenow.Iftheyaretobecivilservants,thentheymustbeelectedthroughapoliticalprocess.Iftheyaretoimposetaxesandmakeexpenditurestofoster“social”objectives,thenpoliti-calmachinerymustbesetuptomaketheassessmentoftaxesandtodeterminethroughapoliticalprocesstheobjectivestobeserved.Thisisthebasicreasonwhythedoctrineof“socialresponsibility”involvestheaccep-tanceofthesocialistviewthatpoliticalmechanisms,notmarketmechanisms,aretheappropriatewaytodeterminetheallocationofscarceresourcestoalternativeuses.Onthegroundsofconsequences,canthecorporateexecutiveinfactdischargehisalleged“socialresponsibilities”?Ontheonehand,supposehecouldgetawaywithspend-ingthestockholders’orcustomers’oremployees’money.Howishetoknowhowtospendit?Heistoldthathemustcontributetofightinginflation.Howishetoknowwhatactionofhiswillcontributetothatend?Heispresumablyanexpertinrunninghiscompany—in212•BusinessEthicsNowgghi24697_app_211-227.indd212hi24697_app_211-227.indd212001/02/113:12PM1/02/113:12PM ConfirmingPagesproducingaproductorsellingitorfinancingit.Butnothingabouthisselectionmakeshimanexpertoninflation.Willhisholdingdownthepriceofhisproductreduceinflationarypressure?Or,byleavingmorespendingpowerinthehandsofhiscustomers,simplydivertitelsewhere?Or,byforcinghimtoproducelessbecauseofthelowerprice,willitsimplycontributetoshortages?Evenifhecouldanswerthesequestions,howmuchcostishejus-tifiedinimposingonhisstockholders,customersandemployeesforthissocialpurpose?Whatishisappropriateshareandwhatistheappropriateshareofothers?And,whetherhewantstoornot,canhegetawaywithspendinghisstockholders’,cus-tomers’oremployees’money?Willnotthestockholdersfirehim?(Eitherthepresentonesorthosewhotakeoverwhenhisactionsinthenameofsocialresponsibilityhavereducedthecorporation’sprofitsandthepriceofitsstock.)Hiscustomersandhisemployeescandeserthimforotherproducersandemployerslessscrupulousinexercisingtheirsocialresponsibilities.Thisfacetof“socialresponsibility”doctrineisbroughtintosharpreliefwhenthedoc-trineisusedtojustifywagerestraintbytradeunions.Theconflictofinterestisnakedandclearwhenunionofficialsareaskedtosubordinatetheinterestoftheirmemberstosomemoregeneralpurpose.Iftheunionofficialstrytoenforcewagerestraint,theconsequenceislikelytobewildcatstrikes,rank-and-filerevoltsandtheemergenceofstrongcompeti-torsfortheirjobs.Wethushavetheironicphenomenonthatunionleaders—atleastintheU.S.—haveobjectedtoGovernmentinterferencewiththemarketfarmoreconsistentlyandcourageouslythanhavebusinessleaders.Thedifficultyofexercising“socialresponsibility”illustrates,ofcourse,thegreatvirtueofprivatecompetitiveenterprise—itforcespeopletoberesponsiblefortheirownactionsandmakesitdifficultforthemto“exploit”otherpeopleforeitherselfishorunselfishpur-poses.Theycandogood—butonlyattheirownexpense.ManyareaderwhohasfollowedtheargumentthisfarmaybetemptedtoremonstratethatitisallwellandgoodtospeakofGovernment’shavingtheresponsibilitytoimposetaxesanddetermineexpendituresforsuch“social”purposesascontrollingpollutionortrainingthehard-coreunemployed,butthattheproblemsaretoourgenttowaitontheslowcourseofpoliticalprocesses,thattheexerciseofsocialresponsibilitybybusinessmenisaquickerandsurerwaytosolvepressingcurrentproblems.Asidefromthequestionoffact—IshareAdamSmith’sskepticismaboutthebenefitsthatcanbeexpectedfrom“thosewhoaffectedtotradeforthepublicgood”—thisargumentmustberejectedonthegroundsofprinciple.Whatthisamountstoisanassertionthatthosewhofavorthetaxesandexpendituresinquestionhavefailedtopersuadeamajorityoftheirfellowcitizenstobeoflikemindandthattheyareseekingtoattainbyundemocraticprocedureswhattheycannotattainbydemocraticprocedures.Inafreesociety,itishardfor“evil”peopletodo“evil,”especiallysinceoneman’sgoodisanother’sevil.Ihave,forsimplicity,concentratedonthespecialcaseofthecorporateexecutive,exceptonlyforthebriefdigressionontradeunions.Butpreciselythesameargumentappliestothenewerphenomenonofcallinguponstockholderstorequirecorporationstoexercisesocialresponsibility(therecentG.M.crusade,forexample).Inmostofthesecases,whatisineffectinvolvedissomestockholderstryingtogetotherstockholders(orcustomersoremployees)tocontributeagainsttheirwillto“social”causesfavoredbyactivists.Insofarastheysucceed,theyareagainimposingtaxesandspendingtheproceeds.Thesituationoftheindividualproprietorissomewhatdifferent.Ifheactstoreducethereturnsofhisenterpriseinordertoexercisehis“socialresponsibility,”heisspendinghisownmoney,notsomeoneelse’s.Ifhewishestospendhismoneyonsuchpurposes,thatishisrightandIcannotseethatthereisanyobjectiontohisdoingso.Intheprocess,he,too,mayimposecostsonemployeesandcustomers.However,becauseheisfarlesslikelythanalargecorporationoruniontohavemonopolisticpower,anysuchsideeffectswilltendtobeminor.Ofcourse,inpracticethedoctrineofsocialresponsibilityisfrequentlyacloakforactionsthatarejustifiedonothergroundsratherthanareasonforthoseactions.Toillustrate,itmaywellbeinthelong-runinterestofacorporationthatisamajoremployerinasmallcommunitytodevoteresourcestoprovidingamenitiestothatcommu-nityortoimprovingitsgovernment.Thatmaymakeiteasiertoattractdesirableemploy-ees,itmayreducethewagebillorlessenlossesfrompilferageandsabotageorhaveotherworthwhileeffects.Oritmaybethat,giventhelawsaboutthedeductibilityofcorporatecharitablecontributions,thestockholderscancontributemoretocharitiestheyfavorbyhavingthecorporationmakethegiftthanbydoingitthemselves,sincetheycaninthatwaycontributeanamountthatwouldotherwisehavebeenpaidascorporatetaxes.Ineachofthese—andmanysimilar—cases,thereisastrongtemptationtorationalizetheseactionsasanexerciseof“socialresponsibility.”Inthepresentclimateofopinion,withitswidespreadaversionto“capitalism,”“profits,”the“soullesscorporation”andsoon,thisisonewayforacorporationtogenerategoodwillasaby-productofexpendituresthatareentirelyjustifiedinitsownself-interest.Itwouldbeinconsistentofmetocalloncorporateexecutivestorefrainfromthishypo-criticalwindow-dressingbecauseitharmsthefoundationofafreesociety.ThatwouldbetoAppendixA•213gghi24697_app_211-227.indd213hi24697_app_211-227.indd213001/02/113:12PM1/02/113:12PM ConfirmingPagescallonthemtoexercisea“socialresponsibility”!Ifourinstitutions,andtheattitudesofthepublicmakeitintheirself-interesttocloaktheiractionsinthisway,Icannotsummonmuchindignationtodenouncethem.Atthesametime,Icanexpressadmirationforthoseindi-vidualproprietorsorownersofcloselyheldcorporationsorstockholdersofmorebroadlyheldcorporationswhodisdainsuchtacticsasapproachingfraud.Whetherblameworthyornot,theuseofthecloakofsocialresponsibility,andthenon-sensespokeninitsnamebyinfluentialandprestigiousbusinessmen,doesclearlyharmthefoundationsofafreesociety.Ihavebeenimpressedtimeandagainbytheschizophreniccharacterofmanybusinessmen.Theyarecapableofbeingextremelyfar-sightedandclear-headedinmattersthatareinternaltotheirbusinesses.Theyareincrediblyshort-sightedandmuddle-headedinmattersthatareoutsidetheirbusinessesbutaffectthepossiblesurvivalofbusinessingeneral.Thisshort-sightednessisstrikinglyexemplifiedinthecallsfrommanybusinessmenforwageandpriceguidelinesorcontrolsorincomepolicies.Thereisnothingthatcoulddomoreinabriefperiodtodestroyamarketsystemandreplaceitbyacentrallycontrolledsystemthaneffectivegovernmentalcontrolofpricesandwages.Theshort-sightednessisalsoexemplifiedinspeechesbybusinessmenonsocialrespon-sibility.Thismaygainthemkudosintheshortrun.Butithelpstostrengthenthealreadytooprevalentviewthatthepursuitofprofitsiswickedandimmoralandmustbecurbedandcontrolledbyexternalforces.Oncethisviewisadopted,theexternalforcesthatcurbthemarketwillnotbethesocialconsciences,howeverhighlydeveloped,ofthepontificatingexecutives;itwillbetheironfistofGovernmentbureaucrats.Here,aswithpriceandwagecontrols,businessmenseemtometorevealasuicidalimpulse.Thepoliticalprinciplethatunderliesthemarketmechanismisunanimity.Inanidealfreemarketrestingonprivateproperty,noindividualcancoerceanyother,allcooperationisvoluntary,allpartiestosuchcooperationbenefitortheyneednotparticipate.Therearenotvalues,no“social”responsibilitiesinanysenseotherthanthesharedvaluesandrespon-sibilitiesofindividuals.Societyisacollectionofindividualsandofthevariousgroupstheyvoluntarilyform.Thepoliticalprinciplethatunderliesthepoliticalmechanismisconformity.Theindivid-ualmustserveamoregeneralsocialinterest—whetherthatbedeterminedbyachurchoradictatororamajority.Theindividualmayhaveavoteandsayinwhatistobedone,butifheisoverruled,hemustconform.Itisappropriateforsometorequireotherstocontributetoageneralsocialpurposewhethertheywishtoornot.Unfortunately,unanimityisnotalwaysfeasible.Therearesomerespectsinwhichcon-formityappearsunavoidable,soIdonotseehowonecanavoidtheuseofthepoliticalmechanismaltogether.Butthedoctrineof“socialresponsibility”takenseriouslywouldextendthescopeofthepoliticalmechanismtoeveryhumanactivity.Itdoesnotdifferinphilosophyfromthemostexplicitlycollectivedoctrine.Itdiffersonlybyprofessingtobelievethatcollectivistendscanbeattainedwithoutcollectivistmeans.Thatiswhy,inmybookCapitalismandFreedom,Ihavecalledita“fundamentallysubversivedoctrine”inafreesociety,andhavesaidthatinsuchasociety,“thereisoneandonlyonesocialresponsibilityofbusiness—touseitsresourcesandengageinactivitiesdesignedtoincreaseitsprofitssolongasitstayswithintherulesofthegame,whichistosay,engagesinopenandfreecompetitionwithoutdeceptionorfraud.”214•BusinessEthicsNowgghi24697_app_211-227.indd214hi24697_app_211-227.indd214001/02/113:12PM1/02/113:12PM