THE SOCIAL RESPONSIBILITY OF BUSINESS

IS TO INCREASE ITS PROFITS

MILTON FRIEDMAN

When I hear businessmen speak eloquently of 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 objectives 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.
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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 may 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. If we wish, we may refer to some of these responsibilities as
“social responsibilities”. But in these respects he is acting as a principal, not as
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 increase 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 “hard-core” 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 customer’s 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
executives 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
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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 alternate 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 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 his social purpose? What is his appropriate share
and what is the appropriate share of others?
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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 profit 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” doctrine 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 questions of fact – I share Adam Smith’s skepticism about
the benefits that can be expected from “those who are 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 “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.
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
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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 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.
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 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 business but affect the possible survival
of business in general. This short-sightedness is strikingly exemplified in the
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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 centrally controlled system than effective
governmental control of prices and wages.
The short-sightedness is also exemplified in speeches by businessmen for
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 market will not be 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 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 core of 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 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.”