Milton Friedman’s Grand Denial of the Social Responsibility of Corporations

  by    0   0
Matthew Watson, Professor of Political Economy, University of Warwick

Prof. Matthew Watson, Warwick University

The legendary Chicago economist, Milton Friedman, was not somebody to do anything by halves.  Where others before him had shied away from even thinking aloud about the limits of firms’ responsibilities to those around them, Friedman waded into the debate with both feet.  Corporations can serve society best, he stated, by cutting their costs to the bone and accordingly by making as much profit as possible.

This argument did not reference competitiveness directly in its original articulation.  Yet as Matthew Watson shows in the latest post for the Fools’ Gold history files, it acts as an important forerunner of modern-day competitiveness discourse.  Corporations that deny their broader social responsibilities, Friedman argued, set themselves on the road to a truly competitive zero rate of taxation.

 

Milton Friedman’s Grand Denial of the Social Responsibility of Corporations

Adam Smith explained the early onset of industrialisation in Britain through reference to the country’s body of civil law that offered far more extensive protection of private property than elsewhere in Europe.  Knowing that the courts would always act as their backstop, he argued, gave British capital holders much greater confidence that they would enjoy the full fruits of any enhanced economic activity that followed new investments.  The customary right to keep whatever additional money came out of the economy provided incentives for investors to back their hunches.

The Milton Friedman choir summarises his thoughts

This customary right was eventually enshrined around the world in more generalised attempts to promote the accumulation of capital.  However, it did not translate straightaway into claims on the political system to be able to take profit out of the economy, come what may.  The protection of property tended to be accompanied with a clearly articulated duty to act responsibly to ‘pay forward’ on the promise of continued protection.  The radical economics of the nineteenth century and the technocratic response to the Great Depression in the twentieth century served to ensure that profit remained politically a highly contestable term.

Business interests continued to push throughout this time for regulatory regimes that they would find favourable. But they typically remained wary of adopting too belligerent a stance on the question of profit-taking.  The ultra-aggressive assertions of modern-day competitiveness discourse would have been largely unthinkable back then. Representatives of the business community tended to adopt a public face which suggested that they knew they were privileged in being able to take money out of the economy that had been collectively generated.  Only a few renegades felt sufficiently unabashed to make the claim that is routinely heard today about the need to remove regulations which eat into the profit rate.

So, what happened to effect the ensuing shift through which the renegades managed to usher in a new political common sense?

One watershed moment occurred in September 1970 on the occasion of Milton Friedman publishing a lengthy opinion piece in the New York Times Magazine.  He was part of a generation of economists who had risen to prominence in the early stages of the Cold War and had come to public attention promoting the purest possible alternative to the Soviet economy. This led him to see the potential for communist insurgency wherever he was unable to find evidence of the freest of free markets.  He was not big on subtlety or nuance.

“Friedman: “[Businessmen who argue] that business is not concerned ‘merely’ with profit but also with ‘desirable’ social ends … are … preaching pure and unadulterated socialism … [They] are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”

Friedman’s 1970 article begins in typically uncompromising form as he took aim at what he thought was the warped corporate culture of his day.  “The businessmen believe”, he says, “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”.  Perhaps it should not come as too much of a surprise that Friedman sets up his position so stridently, because the article, after all, is called, ‘The Social Responsibility of Business is to Increase its Profits’.  But the leap he makes in his characterisation of companies who even dare to imagine that there might be more to their existence than this does still tend to take the breath away.  “In fact they are … preaching pure and unadulterated socialism.”  Yes, you have just read that right: not just a modicum of social awareness, but ‘pure and unadulterated socialism’.  In the Cold War context in which it was written, that represents a staggering claim. “Businessmen who talk this way”, Friedman continues, clearly enamoured by his own argument, “are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”

This was Friedman having clearly reached the peak of his confidence as a rhetorician and as a prophet of the new age that would subsequently come to supplant welfare capitalism through the onward march of neoliberalism.  He had by this time taken on an overt leadership role in the Mont Pèlerin Society, the organisation that under Friedrich von Hayek had done so much to foster the conservative view that the only legitimate role for the state was to promote conditions for competitiveness.  Friedman was well practiced in advancing the same position by the time he came to write Capitalism and Freedom in 1962, and the New York Times Magazine article eight years later was an attempt to take its arguments to a wider audience.

“He cut his teeth as a professional economist taking public money as a government employee.  The irony was certainly not lost on Friedman himself, who noted in his memoirs that without the increase in demand for economists prompted by New Deal legislation his career would have been over before it had had a chance to begin in earnest.”

It bears remembering, however, that other Friedmans had done the rounds previously.  There were quite a few of his former selves for him to leave behind before he could become the foremost free market public intellectual in the United States.  Given this later incarnation, it might raise a few eyebrows that he cut his teeth as a professional economist taking public money as a government employee.  The irony was certainly not lost on Friedman himself, who noted in his memoirs that without the increase in demand for economists prompted by New Deal legislation his career would have been over before it had had a chance to begin in earnest. During that time, moreover, he actively supported Roosevelt’s introduction of the very obviously anti-market Works Progress Administration, Public Works Administration and Civilian Conservation Corps.  He also voted for Roosevelt in 1936 on a ticket dedicated to extending New Deal legislation.  His brother-in-law and fellow conservative doyen of the University of Chicago, Aaron Director, never allowed him to forget these youthful indiscretions.  He was much earlier the free market purist that Friedman was later to become and continually ribbed him about his past as a New Dealer.

However, this equivocation on where the outer limits of markets should be placed had been well and truly cast off by the time that Friedman wrote the 1970 article.  There the phrase ‘social responsibility’ is always placed in scare quotes, and using some conceptual sleight-of-hand he demonstrates why by turning it into a euphemism for tax. Whilst taxation might have been acceptable to Friedman in his days of government service, those days were now long gone.  In Capitalism and Freedom taxation was repositioned as pretty much a universal curse, a nasty trick played on poor beleaguered businesspeople by pilfering governments.  He grumbled that “there has been an enormous expansion of taxation of some for the benefit of others”, but as these anti-market policies had also been anti-growth even the presumed benefits had been entirely illusionary.  In trying to help the people who needed the most help, his argument ran, governments who over-used the tax mechanism had ended up operating against the interests of everyone.

This same type of reasoning reappears in his 1970 critique of socially-aware company managers. They can only act on that awareness, Friedman says, when acting against the interests of the firm’s ultimate owners, its shareholders. “For example, that he [Friedman’s socially-aware businessman] 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 ‘hardcore’ unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.”  It is here that the magician’s wand has to come out to change what might otherwise be conceived of as a good into a bad.  “In each of these cases”, Friedman continues, “the corporate executive would be spending someone else’s money for a general social interest … But if he does this, he is in effect imposing taxes …  [T]he businessman – self-selected or appointed directly 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.”

This is completely over the top, of course, whether the argument is to be considered one of logic, one of politics or one of philosophy.  But that in itself would seem to be the point of the article. It is the typical alchemist’s strategy of trying to turn one thing into another, in this instance in the absence of anything other than ideological conviction that the transposition holds.

The most obvious message of Friedman’s 1970 article is to ask his readers to reimagine the good of social responsibility as the bad of taxation.  In this way, the degree of moral censure is likely to be reduced whenever news subsequently emerges of corporations having taken advantage of legal, political or ethical loopholes in the myopic and often socially destructive pursuit of profit. However, there is also a subtext that is of interest here to us at Fools’ Gold.  The demobilisation of moral censure for this sort of activity has created a legislative space in which competitiveness discourse has been able to flourish.  What had previously been the bad of unfettered competition was suddenly allowed to be seen as something quite different: something, moreover, that struck right at the heart of welfare capitalism.  As populist anti-tax campaigns began to take hold, all sorts of regulatory arbitrage became permissible as an increasingly lawless environment was opened up for corporations to operate in.  From Friedman’s perspective at least, shedding one social responsibility after another was, after all, little more than bidding down the effective tax rate in a political context in which taxation had become more or less a dirty word.

Yet this does all revolve around an important fallacy of composition.  To say that the only responsibility businesses have is to make money, it is first necessary to deny the roots that they must necessarily put down – whether in terms of plant, machinery or workforce – in specific locations, specific communities, specific social contexts.  Of course, structures have been subsequently set up to allow goods to be produced across multiple sites in multiple countries and for the legal entity of the firm to be different for tax purposes than for production purposes. But this has followed Friedman’s intervention in his New York Times Magazine article.  Thus, it must be seen at least in part as a reflection of a world he hoped to imagine into being rather than something that existed at the time.  The wider point about the fallacy of composition therefore remains.

For rhetorical purposes as much as anything else, Friedman abstracts the corporation from the social basis that gives it vitality and allows it to act as a functioning economic unit.  Modern-day competitiveness discourse now follows very much in these footsteps.  The same argument can therefore be advanced to refute both.  Companies do not make profits despite their workers and despite their incorporation into regulatory institutions that offer broader social and environmental protection.  They find it possible to accumulate capital precisely because of these things.

 

Matthew Watson is Professor of Political Economy in the Department of Politics and International Studies at the University of Warwick and an Economic and Social Research Council Professorial Fellow.

 

 

Leave a Reply

Back to Top