This week’s word comes from a classic New York Times magazine article written by Milton Friedman almost 46 years ago, “The Social Responsibility of Business is to Increase Profits“.
Before I get to the word of the week, it may be helpful to provide some background on Milton Friedman.
Friedman was an American economist who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy. The Economist described him as “the most influential economist of the second half of the 20th century … possibly of all of it.”
A libertarian at heart, his political philosophy extolled the virtues of a free market economic system with minimal intervention.
As such, Friedman did not believe a corporation had any “social responsibility”, and in fact if an executive did exercise any “social responsibility, then Friedman claimed that the executive would be spending someone else’s money for a general social interest. That “someone else” could be a stockholder, a customer, or an employee.
Friedman felt that the doctrine of “social responsibility” involved 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. He also felt that the doctrine of social responsibility was frequently a cloak for actions that were justified on other grounds rather than a reason for those actions.
Friedman argues that there is a strong temptation to rationalize actions that may well be in the long term interest of the firm as an exercise of “social responsibility”, and then using such actions to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.
In his book, Capitalism and Freedom, Friedman notes that social responsibility is a fundamentally subversive doctrine in a free society, and that “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.”
Anyway, in his New York Times Magazine article, Friedman states, “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.”
According to dictionary.com, eleemosynary means
So it seems Friedman is OK for corporations that have a charitable purpose to not have the relentless pursuit of profit as the objective. However, for all other businesses, it should be all about the Benjamins.
I do not agree with Friedman on this issue, since I believe corporations should have multiple objectives, profit perhaps being the primary one, but not the only one.
Individuals are part of a community, and when you are part of a community you can’t just focus on maximizing your own goals. To be a member in good standing of your community, you need to contribute to the success and support of other members of that community.
The same is true for businesses; they benefit from being part of a community. After all, it is the community that buys the firm’s goods and services. As such, businesses need to give back to the community that supports them, if they want to be considered a member in good standing.
While doing so will likely benefit the business in the long run, that should not be the primary reason it engages in such activities.
There has been a movement in the past few years for more and more businesses to focus on more than just profits. Initiatives such as the triple bottom line (TBL) and benefit corporations highlight this movement.
TBL is an accounting framework that incorporates three dimensions of performance: social, environmental and financial.
A benefit corporation is a type of for-profit corporate entity, authorized by 30 U.S. states and the District of Columbia, that includes positive impact on society, workers, the community, and the environment in addition to profit as its legally defined goals.
I am sure Friedman would not be a supporter of such initiatives, claiming they have no place in a free market economy such as the U.S.
But I think these are exactly the types of issues that firms, and not just those with an eleemosynary purpose, should be focused on, and I for one am happy with such developments.
P.S. Here is my first attempt to use eleemosynary in a sentence:
I realize that reading this post was an eleemosynary action on your part, I just hope it wasn’t a painful one.