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A Critique of Milton Friedman's Essay *The Social Responsibility of Business Is to Increase Its Profits

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A Critique of Milton Friedman's Essay *The Social Responsibility of Business Is to Increase Its Profits

A Critique of Milton Friedman’s
Essay *The Social Responsibility
of Business Is to Increase Its Profits’ Thomas Mulligan
ABSTRACT. The main arguments of Milton Friedman’s
famous and influential essay are unsuccessful: He fails
to prove that the exercise of social responsibility in
business is by nature an unfair and socialist practice.
Much of Friedman’s case is based on a questionable
paradigm; a key premise is false; and logical cogency
is sometimes missing.
The author proposes a different paradigm for socially responsible action in business and argues that a commitment to social responsibility can be an integral
element in strategic and operational business management without producing any of the objectionable results
claimed by Friedman.
In his famous essay, Milton Friedman a^ues
that people responsible for decisions and action
in business should not exercise social responsibility in their capacity as conipany executives.
Instead, they should concentrate on increasing
the profits of their companies.^
In the course of the essay, he also argues that
the doctrine of social responsibility is a socialist
doctrine.
The purpose of this paper is to assess the
merit of Friedman’s arguments. I shall summarize his main ailments, examine some of his
premises and lines of inference, and propose a
counter-argument.
ThoTnas MuUigan is an Assistant Professor at The Fuqua
School of Business, Duke University, in the areas of
Manufacturing Management Systems and Business
Ethics. He has a PhJ). from Northwestern University
in the field of Philosophy and has worked as an
educator, manager, and consultant in the manufacturing and sofrware industries.
Friedman’s argument: Corporate executives
should not exercise social responsibility
Friedman argues that the exercise of social
responsibility by a corporate executive is:
(a) unfair, because it constitutes taxation without
representation;
(b) undemocratic, because it invests governmental
power in a person who has no general mandate
to govern;
(c) unwise, because there are no checks and balances
in the broad range of governmental power thereby turned over to his discretion;
(d) a violation of trust, because the executive is
employed by the owners “as an agent serving
the interests of his principal”;
(e) futUe, both because the executive is unlikely
to be able to anticipate the social consequences
of his actions and because, as he imposes costs
on his stockholders, customers, or employees,
he is likely to lose their support and thereby
lose his power.
These conclusions are related.
Points (b) and (c) depend on (a), on the
ground that “the imposition of taxes and the
expenditure of tax proceeds are governmental
functions”. Point (d) also depends on (a), because it is precisely in imposing a tax on his
principal that this executive fails to serve the
interests of that principal. Point (e) depends,
in part, on (d), since it is the executive’s failure
to serve the interests of his principal which
results in the withdrawal of that principal’s
support.
Point (a) is thus at the foundation of the
argument, if (a) is false, then Friedman’s demonstration of the subsequent conclusions almost
completely collapses.
Journal of Business Ethics 5 (1986) 265-269.
© 1986 hy D. Reidel Publishing Company.
266 Thomas Mulligan
Is it true, then, that the executive who performs socially responsible action “is in effect
imposing taxes … and deciding how the tax
proceeds shall be spent”?
To make this case, Friedman argues by depicting how a company executive would perform
such action.
He first introduces examples to illustrate that
exercising social responsibility in business typically costs money. He mentions refraining from a
price increase to help prevent inflation, reducing
pollution “beyond the amount that is in the best
interests of the corporation” to help improve
the environment, and “at the expense of corporate profits” hiring ‘hardcore’ unemployed.
To establish that such costs are in effect taxes,
he aigues:
1. In taking such action, the executive expends
“someone else’s money” – the stockholders’, the
customers’, or the employees’.
2. The money is spent “for a general social interest”.
3. “Rather than serving as an agent of the stockholders or the customers or the employees … he
spends the money in a different way than they
would have spent it”.
The first two premises surest a similarity between this money and tax revenues, with respect
to their sources and to the purposes for which
they are used. However, an expense is not yet
a tax unless it is imposed on the contributor,
irrespective of his desire to pay. Only Friedman’s
third premise includes this crucial element of
iniposition.
This third premise reveals the essential character of the paradigm on which Friedman bases
his whole case.
Friedman’s paradigm
In the above examples of socially responsible
action and throughout his essay, Friedman
depicts the corporate executive who performs
such action as a sort of Lone Ranger, deciding
entirely by himself what good deeds to do, when
to act, how much to spend:
Here, the businessman — self-selected or appointed
directly or indirectly by the stockholders — is to
be simultaneously legislator, executive and jurist.
He is to decide whom to tax by how much and for
what purpose.
On this paradigm, the corporate executive does
not act with the counsel and participation of
the other stakeholders in the business. This is
the basis of Friedman’s claim that the executive
is imposing something on those other stakeholders — unfairly, undemocratically, unwisely,
and in violation of a trust.
But does Friedman’s paradigm accurately
depict the socially responsible executive? Does it
capture the essential nature of socially responsible action in business? Or has he drawn a caricature, wrongly construed it as accurate, and
used it to discredit the doctrine it purportedly
illustrates?
A counter-paradigm
Friedman’s paradigm is valid in the sense that it
is certainly possible for a corporate executive to
try to exercise social responsibility without the
counsel or participation of the other stakeholders
in the business.
Friedman is also correct in characterizing
such conduct as unfair and as likely to result in
the vdthdrawal of the support of those other
stakeholders.
Yet Friedman insists, at least with respect to
the executive’s employers, that the socially
responsible executive “must” do it alone, must
act in opposition to the interests of the other
stakeholders:
What does it mean to say that the corporate executive
has a “social responsibility” in his capacity as a businessman? If this statement is not pure rhetoric, it
must mean that he b to act in some way that is not
in the interest of his employers.
There is no good

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