In 1970 Milton Friedman produced perhaps the most influential popular article by an economist, The Social Responsibility of Business is to Increase Its Profits. Admittedly 43 years late is not the snappiest comeback. (I wrote this in 2013). Still Friedman’s argument has flaws. Many have already tackled major weaknesses. Here I will concentrate on a less noticed problem. This I call Milton Friedman’s ethical joker.
Friedman Claims But Does Not Deliver Clarity
Friedman claims clarity. Simplifying a ridiculously confusing world is laudable so his argument has some appeal. To him businesses have but one goal — making profits (maximizing shareholder value). Friedman’s work appeals to those who don’t want to think too hard about balancing duties to consumers, employees and investors. I love clarity but look closely, Friedman only gives a façade of clarity. He pretends to have clarity while sneaking in a joker he can play to avoid clarity’s unpleasant implications.
Listen to his words. He says ” …make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” (Friedman, 1970).
Ethical Customs Are Unclear And Differ
Laws are occasionally unclear but they are codified. You should try to work out what the laws are. The whole point of ethical customs is that they aren’t codified. Furthermore they differ between people. In a world of international business what ethical customs should the Dutch manager of a French firm with US investors operating in Vietnam choose?
If the ethical customs used are an individual choice then an agent (the manager) is making a choice based upon their personal ethics. They are choosing to impose a cost (in the article’s terminology, a tax) on the principals (the shareholders). This is something that Friedman deplores. If ethical customs are seen as socially, rather than individually, chosen they are coercion of individuals by the group. This is something that Friedman also rails against in the same article. Furthermore, the manager is told to sublimate their views to the shareholders. What does a manager do if shareholders differ in their views?
Friedman’s Ethical Joker Is A Political Tool
Markets have many benefits but they occasionally throw up outcomes that make reasonable people feel uncomfortable. Friedman ducks the problem by suggesting that ethical customs can override making money. What is Friedman’s advice for paying employees in developing countries? It might be that managers should pay the minimum possible even if the worker will struggle to feed their family. That might be the local custom. Still if that sounds unpalatable Friedman can always abandon his position. He can always appeal to ill-defined ethical customs if the politics get too hot. In a sense we all agree with Friedman. An anti-capitalist just has different ethical customs than the average multinational boss.
Maximize Profits Except When You Shouldn’t
Thus, Friedman’s position translates as: you should maximize profits except when you shouldn’t. Friedman claims clarity while maintaining an ethical joker to play to avoid any painful implications.
Clarity is great but we also must recognize how messy the world is. I agree with Friedman that ethics matter. Yet, though it genuinely pains me, I have to honestly admit that I don’t always achieve clarity. Claiming clarity while keeping an ethical joker up your sleeve is at best sloppy thinking. At worst it is intellectually dishonest.
For more on ethics (experimental philosophy) see here.
Read: Milton Friedman The Social Responsibility of Business is to Increase its Profits The New York Times Magazine September 13, 1970