Milton Friedman (1970) is opposed to the idea of social responsibilities of businesses. He makes the central claim that if there is a social responsibility of businesses it is to increase their profits. According to him, a business is nothing more than a group of workers/employees working for employers. Therefore, individual employers can donate to social causes. If the business (through its management) spends money for social causes, it is imposing costs on employees. Further, it is illegal to impose taxes on people. Only, the legislature has the jurisdiction to impose taxes. Moreover, the corporate executives are not competent enough to determine social issues and the best ways to handle them. In addition, the author claims that if individual businessmen decide to contribute financially to social causes, they are harming the spirit of a free society because shared values and responsibilities based on conformity is important for the society and businesses. Therefore, the only legitimate responsibility of a business is to increase its profit.
Arrow (1973) restates the arguments for profit maximization before criticising the same. One strand of this argument claims that under the perfect market conditions, maximization of profit benefits sellers and buyers, and the society. However, Arrow (1973) claims that there is, therefore, no justification for profit maximization by monopolies. Secondly, profit maximization under unrestrained competition leads to unequal distribution of wealth. There is high average along with the extremes of wealth and poverty under this scenario. In addition, there is the loss of altruistic motive under cut-throat competition.
The profit maximization argument breaks down further under the two categories of effects that Arrow (1973) describes. While work and wage transaction is beneficial to both the parties, there is no similar transaction in cases where the businesses pollute neighbourhoods. The cost imposed by the polluting businesses is disproportionately large in comparison to the benefits to stakeholders and since the companies are not required to pay for their action, they do not have a profit incentive to refrain. Similarly traffic congestion (caused by addition of vehicles) imposes a cost on a large number of members of the society. “The person congested is also congested, but the cost he is imposing on others are much greater than he suffers himself. Therefore, there will be a tendency to overutilize those goods for which no price is charged, particularly scarce highway space” (Arrow, 1973:262). Arrow (1973) further offers the used car analogy to show the inefficiency in the sale of used cars. These arguments are meant to demonstrate that the market does not operate as a perfect mechanism and that the buyers and consumers are not well informed in the market. In other words, there are two types of situations under which the arguments of profit maximization break down: those in which costs are not paid for (pollution) and those in which the seller has considerably more knowledge of the products than the buyer, therefore, it is more desirable to appreciate the idea of social responsibility.
Calkins and Wight (2008) demolishes Friedman’s thesis by claiming that a manager’s role is not just the maximization of profit of the business he manages. Friedman, according to Calkins and Wright (2008) a manager’s duty goes beyond the narrow consequentialist maximization of profit. A good management demands a wide range of other virtues and values. A conscientious manager would find it nearly impossible to choose the consequentialist ethical principle of maximization of profit (even when it does not conflict with the law) against the internal ethic based on the foundation of duty and virtue. The analogy he offers is that of a medical care business where a patient is to be recommended the best treatment for his back pain. The doctor has the option of recommending an expensive treatment modality and a low cost treatment that is also the most effective treatment option. The correct ethical position is pretty much evident in this case.
It would be nearly impossible to defend Friedman because his thesis is that profit maximization should be sole aim of a business, while leaving the task of social responsibility to the government. I find this thesis flawed because the meaning of profit maximization is grossly misunderstood. A company gains if it can connect with the buyers and stakeholders and social responsibility is also an investment in the future profit of a company. In addition, a business is not a money making machine. This is evident from the mission statements of the companies. No company says, we are here to maximize profit.
The readings have further reinforced my views on social responsibility because I have always held that any transaction involving two or more people is a social enterprise and therefore, social responsibility is inherently linked to any business activity.
References
Arrow, Kenneth J. (1973). Social Responsibility and Economic Efficiency. Public Policy, 21(Summer, 1973)
Calkins, Wight. (2008). “The Ethical Lacunae in Friedman’s Concept of the Manager.” Journal of Markets and Morality Volume 11, Number 2 (Fall): 221–238
Friedman, Milton (1970) The Social Responsibility of Business is to Increase its Profits. The New York Times Magazine, September.
