Are Corporations Socially Responsible?

Capitalism is a counter-intuitive system since human action is coordinated by a pricing system that results in a hidden order that is not determined by a central plan.

After all, it sounds far more rational if some central bureau were to organize what, how much, when, and where to produce, and who should get a fraction of the result.

But history has proven that centrally planned economies are abject failures, and the market is fare more just and efficient at allocating a society’s scarce resources.

Yet, for all the eloquence of Adam Smith and other free-market advocates, capitalism still lacks a moral theory. Even its most ardent defenders have nothing but contempt for businesspeople and entrepreneurs.

An often-heard remark is: The problem with capitalism is capitalists. It appears capitalism suffers from a unique paradox––it is better in practice than it sounds in theory. No one marches in the street for capitalism (and as they say, those prone to this view end up in the bookstores).

Socialism and communism are the opposite: they sound better in theory than they are in practice.

There is a certain “inarticulate wisdom” about the free market.

Profits and Social Responsibility

Businesses are often praised for what they do worst (e.g., social work, fighting inflation, reducing welfare rolls) and denounced for what they do best (e.g., create jobs, wealth, goods and services people desire).

Milton Friedman’s famous 1970 article The Social Responsibility of Business is to Increase Its Profits essentially argues that businesses should pursue profits justly and within the bounds of the law and norms of society.

Friedman makes this argument because management personnel are acting as agents for the principals––that is, the stockholders of the company. For the agents to spend money and resources for “social” purposes denies the profits to the shareholders, who would then be free to donate and spend the proceeds as they see fit.

Another argument, often ignored by Friedman’s critics, is that a business doesn’t have particular expertise––or a comparative advantage––in performing social work, but does have expertise and knowledge about producing, say, automobiles or toasters.

It’s also an ethical argument, as it implies a responsibility and a duty to do the right things.

In the famous Michigan Supreme Court case Dodge v. Ford Motor (1919), Ford was sued by a shareholder (Dodge) for lowering prices on cars and raising wages of employees (Ford thought the company had made enough profits), and the court ruled Ford had to increase dividends to shareholders.

Friedman’s argument is easier to understand if you imagine an employee of a sole proprietorship dictating to the owner how she should spend her profits.

Profit is an Index of Altruism

Profits and social responsibility are not mutually exclusive goals. In fact, given the realities of free-market exchanges––where both parties are better off after the exchange––profits are actually an indicator of social value created—an index of altruism, as George Gilder says.

Those who believe that earning a profit is morally neutral rather than a morally good way for a corporation to discharge its responsibility should be asked if they believe deliberately running losses is ethical––particularly if it’s with someone else’s money?

The economic and ethical responsibility of a business is to serve others, and increase the wealth of its customers. The business world instills, and requires, the practice of a number of virtues: diligence, industriousness, prudence in risk taking, reliability, kindness to strangers (customers), and fidelity in personal relationships.

Are not these the same virtues parents try to teach their children? As Michael Novak explains in Business as a Calling:

My general position on these three questions has two parts. First, business is a morally serious enterprise, in which it is possible to act either immorally or morally. Second, by its own internal logic and inherent moral drive, business requires moral conduct; and, not always, but with high probability, violations of this logic lead to personal and business disgrace. Immoral acts do occur in business. But to behave immorally is neither necessary to nor conducive to business success."

Honesty and ethical standards do not always pay off. They often have costs. For moral reasons alone, these costs are worth paying. Also for business reasons, too, since reputation is a priceless asset, and loss of that reputation is the single biggest risk a company faces.

Ethical behavior is about doing the right thing, even when that will cost us more than we want to pay.

The Seven Internal and External Responsibilities

The moral case for capitalism needs to be made, and fortunately it has been. Nonetheless, most popular culture and institutions, from movies and television shows to research organizations and universities, villainize businesspeople and business firms, endlessly portraying them as power-hungry, stop-at-nothing-to-get-ahead, ruthless members of society.

This view is pernicious, not to mention entirely out of touch with how the world works. A business, in its essence, is a moral institution because it requires moral conduct to succeed in the long run. As Novak explains:

It may help to divide these responsibilities into two different sets. The second set will easily be recognized as “ethics,” since the source of their authority comes from outside business––from religious conviction, moral traditions, humane principles, and human rights commitments.

"The first set [Internal Responsibilities] consists of the moral requirements necessary for business success. One way to see that they are ethical is to ask yourself what happens when they are violated."

Seven Internal Responsibilities:

1. To satisfy customers with goods and services of real value. Like other acts of freedom, launching a new business is in the beginning an act of faith; one has to trust one’s instincts and one’s vision and hope that these are well enough grounded to build success. It is the customers who, in the end, decide.
2. Make a reasonable return on the funds entrusted to the business corporation by its investors. Is it moral to lose other people’s money?
3. To create new wealth. This is no small responsibility. If the business corporation does not meet this, who else in society will?
4. To create new jobs. You cannot create employees without creating employers.
5. To defeat envy through generating upward mobility and putting empirical ground under the conviction that hard work and talent are fairly rewarded. The founders of the American republic recognized that most other republics in history had failed and that the reason they failed was envy: the envy of one faction for another, one family for another, one clan for another, or of the poor toward the rich. ...The best way to conquer this is to generate economic growth through as many diverse industries and economic initiatives as possible, so that every family has the realistic possibility of seeing its economic condition improve within the next three or four years. Poor families do not ask for paradise, but they do want to see tangible signs of improvement over time.
6. To promote invention, ingenuity, and in general, “progress in the arts and useful sciences” (Article I, Section 8, U.S. Constitution). All wealth comes from intellectual capital and the human mind, or caput, Latin for head. The great social matrix of such invention, discovery and ingenuity is the business corporation.
7. To diversify the interests of the republic. Crucial to preventing the tyranny of the majority. “The interests of road builders are not those of canal builders, or of builders of railroads, or of airline companies. The sheer dynamism of economic invention makes far less probable the coalescing of a simple majority, which could act as a tyrant to minorities. The economic interests of some citizens are, in an important sense, at cross-purposes with the economic interests of others, and this is crucial to preventing the tyranny of a majority.”

Seven Responsibilities from Outside Business:

1. To establish within the firm a sense of community and respect for the dignity of persons.
2. To protect the political soil of liberty.
3. To exemplify respect for law.
4. Social justice. To be good citizens of the community. Like other forms of justice and love, social justice begins at home.
5. To communicate often and fully with their investors, shareholders, pensioners, customers, and employees.
6. To contribute to making its own habitat, the surrounding society, a better place.
7. To protect the moral ecology of freedom.

Summary and Conclusions

Dr. Samuel Johnson wrote “There are few ways in which man can be more innocently employed than in getting money,” and John Maynard Keynes agreed, stating, “It is better that a man should tyrannize over his bank balance than over his fellow citizens.”

No doubt businesses act in a social context, as do all individuals, and should be held accountable for doing the right thing for the right reasons. None of this is inconsistent with the pursuit of profit and meeting human needs and wants.

Ethical conduct, integrity, trust, and honesty are not just moral principles, they are also major economic factors, and one all businesses and professionals should be judged against and held accountable for.

Therefore, corporations are, by definition, socially responsible.