Milton Friedman’s doctrine of the social responsibility of business

Friedman’s essay, titled “The Social Responsibility of Business is to Increase its Profits”, was first published in the 13 September 1970 edition of the New York Times. There is a large body of commentary both pro and con Friedman’s thesis and the 50th anniversary of its publication this year prompted a whole new wave of debate. My bias is probably not supportive of his argument but I recognised that I had not actually read the original essay.

This post seeks to remedy that defect. Structure wise, the post contains

  • sections I have drafted (bold font) which highlight what I perceived to be the key elements of his argument
  • followed by extracts from Friedman’s essay containing the source material
Friedman starts by posing the question how should we think about the social responsibilities of business?

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. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.

Friedman first seeks to establish that any meaningful discussion of responsibility has to focus on the people who own or manage the business, not “the business” itself.

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 proprietor and speak of corporate executives.

Friedman chooses to focus on corporate executives who manage the business as agents of shareholders. He argues that a corporate executive should only use the resources of a company to pursue the objectives set by their employer (i.e. the business owner).

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. … The manager of such a corporation will not have money profit as his objective but the rendering of certain services.

Friedman assumes the profit maximisation constrained by the laws and ethical customs of the society in which they operate will be goal of most business owners but acknowledges that some may have different objectives.

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.

But the key point is that corporate executives have no authority or right to pursue any objectives other than those defined by their employer (the shareholders) or which otherwise serve the interests of those people.
Friedman also argues that having one explicitly primary objective is the best (if not the only) way to ensure that the performance of corporate executives can be judged. Having multiple (possibly ill defined and conflicting) objectives is, Friedman argues, a recipe for giving executives an excuse to underperform.

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.

Friedman acknowledges that people have the right to pursue whatever social responsibilities they choose in their private lives but as corporate executives, their personal objectives must be subordinated to the responsibility to achieve the objectives of the shareholders, their ultimate employers.

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 … 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.

It is important to understand the narrow way Friedman defines “social responsibility. He argues that the idea of a corporate executive having a “social responsibility” is only meaningful if it is not consistent with the interests of their employer.

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.

In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. …

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.

Friedman argues that the use of company resources to pursue a social responsibility raises problematic political questions on two levels: principle and consequences.
On the level of political principle, Friedman uses the rhetorical device of treating the exercise of social responsibility by a corporate executive as equivalent to the imposition of a tax

… 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 …

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 …

But it is intolerable for Friedman that this political power can be exercised by a corporate executive without the checks and balances that apply to government and government officials.

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 selected 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 guide 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, Friedman questions whether the corporate executive can in fact discharge the “social responsibilities” they have assumed. Poor consequences are acceptable if the executive is spending their own time and money but unacceptable as a point of principle when using someone else’s time and money.
Friedman cites a list of social challenges that he argues are likely to lay outside the domain of a corporate executive’s area of expertise

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 holding 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?

On the one hand, suppose he could get away with spending the stockholders’ or customers’ or employees’ money. How is he to know how to spend it?

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.

Private competitive enterprise is the answer because 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.

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.

Friedman considers the argument that some social problems are too urgent to be left to the political process …

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.

… but dismisses this argument on two counts. Firstly because he is suspicious about how genuine the commitment to “social responsibility” really is …

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.

… but mostly because he is fundamentally committed to the principle that these kinds of social questions should be decided by the political process.

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 “good” people to do “good,” but that is a small price to pay for making it hard for “evil” people to do “evil,” especially since one man’s good is another’s evil.

Friedman acknowledges that his doctrine makes it harder for good people to do good but that, he argues, is a “small price” to pay to avoid the greater evil of being forced to conform to an objective you as an individual do not agree with.
It might be argued that shareholders can themselves choose to contribute to social causes but Friedman is not buying it. Partly because he believes that these “choices” are forced on the majority by the shareholder activists

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.

… but also because he believes that using the “cloak of social responsibility” undermines the foundations of a free society.
That is a big statement – how does he justify it?
He starts by citing a list of ways in which socially responsible actions can be argued (or rationalised) to be in the long-run interests of a corporation.

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 them selves, 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 widespread 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.

Friedman acknowledges that corporate executives are well within their rights to take these actions if they believe that their company can benefit from this “hypocritical window dressing”.

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 “social responsibility”! If our institutions, and the attitudes of the public make it in their self‐interest to cloak their actions in this way, cannot summon much indignation to denounce them. At the same time, can express admiration for those individual proprietors or owners of closely held corporations or stock holders of more broadly held corporations who disdain such tactics as approaching fraud.

Friedman notes the irony of expecting business to exercise social responsibility by foregoing these short term benefits but argues that using the “cloak of social responsibility” in this way harms the foundations of a free society

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 far‐sighted and clear‐headed in matters that are internal to their businesses. They are incredibly short sighted and muddle‐headed in matters that are outside their businesses but affect the possible survival of business in general.

Friedman cites the calls for wage and price controls (remember this was written in 1970) as one example of the way in which social responsibility can undermine a free society

This short sightedness is strikingly exemplified in the calls from many businessmen for wage and price guidelines or controls or incomes 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.

But he also sees the trend for corporate executives to embrace social responsibility as part of a wider movement that paints the pursuit of profit as “wicked and immoral”. A free enterprise, market based, society is central to Friedman’s vision of a politically free society and must be defended to the fullest extent possible.

The short‐sightedness is also exemplified in speeches by business men 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, business men seem to me to reveal a suicidal impulse.

Here Friedman expands on the principles behind his commitment to the market mechanism as an instrument of freedom – in particular the principle of “unanimity” under which the market coordinates the needs and wants of individuals and no one is compelled to do something against their perceived interests.

The political principle that under lies 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 “social” 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.

He contrasts this with the principle of “conformity” that underpins the political mechanism.

The political principle that under lies the political mechanism is conformity. The individual must serve more general social interest— whether that be determined by church or a dictator or a majority. The individual may have a vote and a 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.

In Friedman’s ideal world, all decisions would be based on the principle of unanimity but he acknowledges that this is not always possible.

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.

He argues that the line needs to be drawn when the doctrine of “social responsibility” extends the political mechanisms of conformity and coercion into areas which can be addressed by the market mechanism.

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.

Friedman concludes by labelling “social responsibility” a “fundamentally subversive doctrine”.

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 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 fraud.”