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What Milt Wrought Right

September 15, 2009

The juxtaposition of the famous University of Chicago economist Milton Friedman against companies acting in “enlightened self-interest” through corporate social responsibility has become so common, it’s a near cliché.  If you attend any major CSR conference, it is virtually guaranteed that a speaker will make reference to his famous quote: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.”

Indeed, it’s a great quote.  At first glance it seems to capture so much of what was a “wrong” way of thinking about the “old guard.” The quote can serve as a bumper sticker for the mentality of the free-market economists and Wall Street Exec’s who seem to care less about the quality of working and more about the next quarterly profits (or loss).

Contrary to what many assume, I argue that Friedman believed businesses could increase profits while still respecting the environment and improving society – under the right conditions. In fact, Friedman’s famed essay, The Social Responsibility of Business is to Increase Profits, where his famous quote is pulled from, was one of the founding documents of the modern “CSR movement” (if you can call it such).

Given this, a deeper examination of Friedman’s essay, which is based off of his book Capitalism and Freedom,  is the perfect starting point of this new journal. This journal is intended to look at how individuals and institutions (especially companies) influence each other in an attempt to make a change in the world.

PUTTING FRIEDMAN IN CONTEXT

There is no doubt that Friedman’s mentality is directly and solely oriented to champion the winds of the free market.  Most importantly, his essay is not simply just a criticism of some of the early pressures on businesses to be more socially responsible, it is mostly a panning of turning away from a free flowing market toward a restrictive market via socialism.

“Socialism” is again a buzz word in American politics. But the socialism of Friedman’s time is much different than the current conservative verbal handle against the Obama Administration. In the current debate on US healthcare, socialism is confused with communism and the socialist-capitalist or capitalist-socialist (yes, there’s a difference) market economies of Europe. Even worse, many people in the current American debate – including radio talk-show hosts – seem to equate socialism with National Socialism.

But at the time of Friedman’s writing, “socialism” was a pseudonym for communism and few would mistake his use of that word to mean anything other than the controlled economies of Eastern Europe under Soviet influence. Make no mistake: the agents of that ideology were the strongest and ever-present threat against the West. During that time Western intellectuals debated the right balance of looseness and regulation in market economies. Friedman essay was his attempt to make a strong stance to resist a slide toward regulation and expanded expectations of businesses.

For Friedman, to expand the responsibilities of businesses was a slippery slope. If you broaden too far, businesses would be inefficient and over-burdened to do what businesses are supposed to do: make money.  He was afraid of the hammer and sickle being flown over Washington:

“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.”

Remember that while Friedman taught on the south side of Chicago, the world that surrounded him was polarized into two very different and conflicting ideologies.  It is easy to forget that. Especially now when most current undergraduate students that walk the same halls as Friedman are too young to remember when Boris Yeltsin stood down a Soviet coup atop of a tank; nevermind the fall of the Berlin Wall.

In the essay, Friedman indicted the forces and voices that attempted to move the Western economies away, to whatever degree, away from an unencumbered marketplace.  There is no doubt that Friedman is and was the champion cheerleader for free-market economics.

Yet, he also left some surprising wiggle room to support CSR in a proper context.

WHAT HE ALSO SAID ABOUT CSR

Mark Twain said that classical literature is a “book everyone praises, but no one has read.”

Much of the same can be said about Friedman’s work. Many quote it, love it, or hate it, but few take the time to read it themselves.

More than just a critique of the planned economies, Friedman warned against the power of corporate executives acting on his/her self-interest in charity and in the community with someone else’s money – namely shareholders and consumer. A single person shouldn’t impose his or her interpretation of what is best for society by using the resources that do not expressly belong to them and them only.

In addition to taking on over-bearing executives, Friedman also says that companies can and should act in their self-interest. It is here that he manages to identify the cases when he finds it acceptable for a company to engage in social responsibility.  And he provides specific examples. He states that it may well be “in the long run interest of a corporate that is a major employer in a small community to devote resources to providing amenities to that community or to improve its government.” Doing so may make it easier to recruit desirable employees, reduce wages, and potentially improve morale and goodwill to reduce costs associated with theft and sabotage.

He also outlines that it is perfectly acceptable for companies to donate to charities in order to reduce the tax burden on the company. This is especially so when the tax benefits of such action outweigh the benefits individual shareholders could receive with their share of such funds individually.

Friedman puts a big “but” to these examples.  Friedman would allow these actions only when they are in the self-interest of the company and any goodwill they great would have to remain a “by-product of [the] expenditures.” In other words, call it what you want, but this is self-interest not social responsibility. If executives want to tout the by-products to increase goodwill, it’s perfectly fine to window dress (he even uses that phrase). Just don’t mistake it as anything other than what is necessary to increase revenues or reduce costs in the short- or long-term.

FINDING THE RIGHT INTERSECTION

So while Friedman is definitely an old-school thinker in terms of free-market economics – he did lead the charge at the economically conservative University of Chicago and won a Nobel Prize in 1976 – he isn’t as “old guard” as some CSR proponents might offer him.

Friedman, wasn’t afraid of CSR. In fact, by outlining the right conditions for CSR programs, he established the foundation for what many would consider effective CSR initiatives: finding the self-interest of a company while improving the social good as a by-product.

Friedman’s quote is often used as a wrong and too narrow-minded answer to the age-old question about the proper role of businesses in society. But just by digging a little deeper, you can find the right conditions for when Friedman would accept CSR as an effective business strategy.

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The writer is the editor of CitizenPolity.com —  You can contact him at JamesERatcitizenpolitydotcom or follow him on Twitter: http://twitter.com/jepsteinreeves

Copyright 2009 – CitizenPolity & James Epstein-Reeves – Not to be used without the written permission of CitizenPolity or the author.

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