The Social Responsibility of Business is to Increase its Profits

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

The Social Responsibility of Business is to Increase its Profits

by Milton
Friedman

The New York Times Magazine, September 13, 1970. Copyright @ 1970 by The New York Times Company.



When I hear businessmen speak eloquently about the "social
responsibilities of business in a free-enterprise system," I am reminded
of the wonderful line about the Frenchman who discovered at the age of
70 that he had been speaking prose all his life. The businessmen believe
that they are defending free en­terprise when they declaim that
business is not concerned "merely" with profit but also with promoting
desirable "social" ends; that business has a "social conscience" and
takes seriously its responsibilities for providing em­ployment,
eliminating discrimination, avoid­ing pollution and whatever else may be
the catchwords of the contemporary crop of re­formers. In fact they
are–or would be if they or anyone else took them seriously–preach­ing
pure and unadulterated socialism. Busi­nessmen who talk this way are
unwitting pup­pets of the intellectual forces that have been undermining
the basis of a free society these past decades.



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.



Presumably, the individuals who are to be responsible are businessmen,
which means in­dividual proprietors or corporate executives. Most of the
discussion of social responsibility is directed at corporations, so in
what follows I shall mostly neglect the individual proprietors and speak
of corporate executives.



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. Of course, in some cases his employers may have a different
objective. A group of persons might establish a corporation for an
eleemosynary purpose–for exam­ple, a hospital or a school. The manager
of such a corporation will not have money profit as his objective but
the rendering of certain services.



In either case, the key point is that, in his capacity as a corporate
executive, the manager is the agent of the individuals who own the
corporation or establish the eleemosynary institution, and his primary
responsibility is to them.



Needless to say, this does not mean that it is easy to judge how well he
is performing his task. But at least the criterion of performance is
straightforward, and the persons among whom a voluntary contractual
arrangement exists are clearly defined.



Of course, the corporate executive is also a person in his own right.
As a person, he may have many other responsibilities that he rec­ognizes
or assumes voluntarily–to his family, his conscience, his feelings of
charity, his church, his clubs, his city, his country. He ma}. feel
impelled by these responsibilities to de­vote part of his income to
causes he regards as worthy, to refuse to work for particular
corpo­rations, even to leave his job, for example, to join his country's
armed forces. Ifwe wish, we may refer to some of these responsibilities
as "social responsibilities." But in these respects he is acting as a
principal, not an agent; he is spending his own money or time or energy,
not the money of his employers or the time or energy he has contracted
to devote to their purposes. If these are "social responsibili­ties,"
they are the social responsibilities of in­dividuals, not of business.



What does it mean to say that the corpo­rate executive has a "social
responsibility" in his capacity as businessman? If this statement is not
pure rhetoric, it must mean that he is to act in some way that is not
in the interest of his employers. For example, that he is to refrain
from increasing the price of the product in order to contribute to the
social objective of preventing inflation, even though a price in crease
would be in the best interests of the corporation. Or that he is to make
expendi­tures on reducing pollution beyond the amount that is in the
best interests of the cor­poration or that is required by law in order
to contribute to the social objective of improving the environment. Or
that, at the expense of corporate profits, he is to hire "hardcore"
un­employed instead of better qualified available workmen to contribute
to the social objective of reducing poverty.



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.



The stockholders or the customers or the employees could separately
spend their own money on the particular action if they wished to do so.
The executive is exercising a distinct "social responsibility," rather
than serving as an agent of the stockholders or the customers or the
employees, only if he spends the money in a different way than they
would have spent it.



But if he does this, he is in effect imposing taxes, on the one hand,
and deciding how the tax proceeds shall be spent, on the other.



This process raises political questions on two levels: principle and
consequences. On the level of political principle, the imposition of
taxes and the expenditure of tax proceeds are gov­ernmental functions.
We have established elab­orate constitutional, parliamentary and
judicial provisions to control these functions, to assure that taxes are
imposed so far as possible in ac­cordance with the preferences and
desires of the public–after all, "taxation without repre­sentation" was
one of the battle cries of the American Revolution. We have a system of
checks and balances to separate the legisla­tive function of imposing
taxes and enacting expenditures from the executive function of
collecting taxes and administering expendi­ture programs and from the
judicial function of mediating disputes and interpreting the law.



Here the businessman–self-selected or appointed directly or indirectly
by stockhold­ers–is to be simultaneously legislator, execu­tive and,
jurist. He is to decide whom to tax by how much and for what purpose,
and he is to spend the proceeds–all this guided only by general
exhortations from on high to restrain inflation, improve the
environment, fight poverty and so on and on.



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.



This is the basic reason why the doctrine of "social responsibility"
involves the acceptance of the socialist view that political mechanisms,
not market mechanisms, are the appropriate way to determine the
allocation of scarce re­sources to alternative uses.



On the grounds of consequences, can the corporate executive in fact
discharge his al­leged "social responsibilities?" On the other hand,
suppose he could get away with spending the stockholders' or customers'
or employees' money. How is he to know how to spend it? He is told that
he must contribute to fighting inflation. How is he to know what ac­tion
of his will contribute to that end? He is presumably an expert in
running his company–in producing a product or selling it or financing
it. But nothing about his selection makes him an expert on inflation.
Will his hold­ ing down the price of his product reduce infla­tionary
pressure? Or, by leaving more spending power in the hands of his
customers, simply divert it elsewhere? Or, by forcing him to produce
less because of the lower price, will it simply contribute to shortages?
Even if he could an­swer these questions, how much cost is he
justi­fied in imposing on his stockholders, customers and employees for
this social purpose? What is his appropriate share and what is the
appropri­ate share of others?



And, whether he wants to or not, can he get away with spending his
stockholders', cus­tomers' or employees' money? Will not the
stockholders fire him? (Either the present ones or those who take over
when his actions in the name of social responsibility have re­duced the
corporation's profits and the price of its stock.) His customers and his
employees can desert him for other producers and em­ployers less
scrupulous in exercising their so­cial responsibilities.



This facet of "social responsibility" doc­ trine is brought into sharp
relief when the doctrine is used to justify wage restraint by trade
unions. The conflict of interest is naked and clear when union officials
are asked to subordinate the interest of their members to some more
general purpose. If the union offi­cials try to enforce wage restraint,
the consequence is likely to be wildcat strikes, rank­-and-file revolts
and the emergence of strong competitors for their jobs. We thus have the
ironic phenomenon that union leaders–at least in the U.S.–have objected
to Govern­ment interference with the market far more consistently and
courageously than have business leaders.



The difficulty of exercising "social responsibility" illustrates, of
course, the great virtue of private competitive enterprise–it forces
people to be responsible for their own actions and makes it difficult
for them to "exploit" other people for either selfish or unselfish
purposes. They can do good–but only at their own expense.



Many a reader who has followed the argu­ment this far may be tempted to
remonstrate that it is all well and good to speak of Government's having
the responsibility to im­pose taxes and determine expenditures for such
"social" purposes as controlling pollu­tion or training the hard-core
unemployed, but that the problems are too urgent to wait on the slow
course of political processes, that the exercise of social
responsibility by busi­nessmen is a quicker and surer way to solve
pressing current problems.



Aside from the question of fact–I share Adam Smith's skepticism about
the benefits that can be expected from "those who affected to trade for
the public good"–this argument must be rejected on grounds of principle.
What it amounts to is an assertion that those who favor the taxes and
expenditures in question have failed to persuade a majority of their
fellow citizens to be of like mind and that they are seeking to attain
by undemocratic procedures what they cannot attain by democratic
proce­dures. In a free society, it is hard for "evil" people to do
"evil," especially since one man's good is another's evil.



I have, for simplicity, concentrated on the special case of the
corporate executive, ex­cept only for the brief digression on trade
unions. But precisely the same argument ap­plies to the newer phenomenon
of calling upon stockholders to require corporations to exercise social
responsibility (the recent G.M crusade for example). In most of these
cases, what is in effect involved is some stockholders trying to get
other stockholders (or customers or employees) to contribute against
their will to "social" causes favored by the activists. In­sofar as they
succeed, they are again imposing taxes and spending the proceeds.



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.
In the process, he, too, may impose costs on employees and cus­tomers.
However, because he is far less likely than a large corporation or union
to have mo­nopolistic power, any such side effects will tend to be
minor.



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.



In each of these–and many similar–cases, there is a strong temptation to
rationalize these actions as an exercise of "social responsibility."
In the present climate of opinion, with its wide spread aversion to
"capitalism," "profits," the "soulless corporation" and so on, this is
one way for a corporation to generate goodwill as a by-product of
expenditures that are entirely justified in its own self-interest.



It would be inconsistent of me to call on corporate executives to
refrain from this hyp­ocritical window-dressing because it harms the
foundations of a free society. That would be to call on them to exercise
a "social re­sponsibility"! If our institutions, and the atti­tudes of
the public make it in their self-inter­est to cloak their actions in
this way, I cannot summon much indignation to denounce them. At the same
time, I can express admiration for those individual proprietors or
owners of closely held corporations or stockholders of more broadly held
corporations who disdain such tactics as approaching fraud.



Whether blameworthy or not, the use of the cloak of social
responsibility, and the nonsense spoken in its name by influential and
presti­gious businessmen, does clearly harm the foun­dations of a free
society. I have been impressed time and again by the schizophrenic
character of many businessmen. They are capable of being extremely
farsighted and clearheaded in matters that are internal to their
businesses. They are incredibly shortsighted and muddle­headed in
matters that are outside their businesses but affect the possible
survival of busi­ness in general. This shortsightedness is strikingly
exemplified in the calls from many businessmen for wage and price
guidelines or controls or income policies. There is nothing that could
do more in a brief period to destroy a market system and replace it by a
centrally con­trolled system than effective governmental con­trol of
prices and wages.



The shortsightedness is also exemplified in speeches by businessmen on
social respon­sibility. This may gain them kudos in the short run. But
it helps to strengthen the already too prevalent view that the pursuit
of profits is wicked and immoral and must be curbed and controlled by
external forces. Once this view is adopted, the external forces that
curb the market will not be the social consciences, however highly
developed, of the pontificating executives; it will be the iron fist of
Government bureaucrats. Here, as with price and wage controls,
businessmen seem to me to reveal a suicidal impulse.



The political principle that underlies the market mechanism is
unanimity. 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 no 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.



The political principle that underlies the political mechanism is
conformity. The indi­vidual must serve a more general social
inter­est–whether that be determined by a church or a dictator or a
majority. The individual may have a vote and say in what is to be done,
but if he is overruled, he must conform. It is appropriate for some to
require others to contribute to a general social purpose whether they
wish to or not.



Unfortunately, unanimity is not always feasi­ble. There are some
respects in which conformity appears unavoidable, so I do not see how
one can avoid the use of the political mecha­nism altogether.



But the doctrine of "social responsibility" taken seriously would extend
the scope of the political mechanism to every human activity. It does
not differ in philosophy from the most explicitly collectivist doctrine.
It differs only by professing to believe that collectivist ends can be
attained without collectivist means. That is why, in my book Capitalism and Freedom,
I have called it a "fundamentally subversive doctrine" in a free
society, and have said that in such a society, "there is one and only
one social responsibility of business–to use it 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."