"The social responsibility of business..." - A position paper on Milton Friedman

Term Paper (Advanced seminar) 2004 11 Pages

Business economics - Business Ethics, Corporate Ethics


Table of Content


Clarifications on the term ‘business’ in the context of social responsibility
Friedman’s approach
A more complete approach

Positive vs. negative rights
The social contract
The fulfilment of the social contract

The costs of social responsibility

Taxation without representation?
The problem of representation
The problem of taxation
The extent of social responsibility




In the aftermath of recent business scandals such as Enron, Worldcom, and Parmalat the discussion about ‘Ethics in Business’, which was not exactly a hot topic during the last 20 years or so, has been inflamed anew. However, ethical corporate governance, the catch line of countless discussions in recent times, is only one but many aspects to ethics in business. This paper will focus on the aspect of corporate social responsibility rather than the issue of corporate governance. Although not as hot as corporate governance, corporate social responsibility is certainly no less important as incidents like the Exxon Valdez accident in 1989 clearly demonstrate. In fact, corporate social responsibility even covers the topic of corporate governance since governance failures as observed at companies like Enron do not only hurt a company’s shareholders but to a large extent also most of a company’s stakeholders – which in the end often make up a considerable part of society.

Milton Friedman’s (in-)famous 1970 article “The social responsibility of business is to increase its profits” will serve to represent the libertarian view which assumes great credibility to concepts like ‘Agency Theory’ and the ‘Invisible Hand’. After elucidating Friedman’s ‘classical’ liberalist approach, which in itself makes perfect sense, this paper will point towards the deficiencies of Friedman’s argument. By applying a broader understanding of how corporate social responsibility is to be derived it becomes obvious that Friedman is telling only part of the story. This consideration will then serve as a foundation for the attempt of developing a framework of corporate social responsibility which goes beyond increasing profits only.

Clarifications on the term ‘business’ in the context of social responsibility

Friedman’s approach

Friedman commences his article by accusing those discussing about corporate social responsibility of “analytical looseness and lack of rigor” and claims that as a whole “business […] cannot be said to have responsibilities” (Friedman, 1970/1993, p. 162). Thus, in an attempt toward clarity in this discussion he narrows down the definition of business to corporations as artificial entities in general and their executive employees in particular. The concept of Agency Theory is of vital importance for his subsequent arguments in that he considers corporate executives as the only persons to have responsibilities; and those are to a company’s owners who generally are only interested in profits (Friedman, 1970/1993, p. 162).

A more complete approach

This limited understanding of who actually can be said to have (social) responsibilities in the context of business, however, does not accurately portray the complexity of the situation. Dunn points out that, by following this approach Friedman himself falls into the same trap of analytical looseness because he never distinguishes between different kinds of responsibility. While it seems clear that businesses, since they do not constitute moral entities, cannot have moral obligations it does not necessarily follow that they do not have social responsibilities (Dunn, n.d., § 4). Rachels definition of the social contract as “[…] the set of rules, governing how people are to treat one another, that rational people will agree to accept, for their mutual benefit, on the condition that others follow those rules as well” (Rachels, n.d., § 4) provides useful help here. Dunn concludes that if these rules are valid throughout society in general they “place legitimate social […] responsibilities on the conduct of business by owners and managers alike” (Dunn, n.d., § 4).

As pointed out above, Friedman prematurely assumes that corporate executives are the only party who theoretically could be said to carry any kind of responsibilities in this scheme. He then explicitly rejects the idea of executives carrying social responsibilities, or any kind of responsibility other than that to the shareholders that is, by referring to the concept of Agency Theory. Now, if a company’s owners can be considered to carry social responsibilities, Dunn’s notion of executives carrying social responsibilities per se may even be relaxed - the effects on Friedman’s line of reasoning remain dramatic. Without even rejecting his employing the concept of Agency Theory, without even challenging his parsimonious understanding of shareholder interests which assumes that profits are the shareholders’ sole objective, it becomes obvious that Friedman’s argument features a major deficiency. If executives are the shareholders’ agents and are supposed to act in their employers best interests, executives should consider the owners’ social responsibilities in each and every decision they make, even if these are not explicitly articulated. Thus, executives can be said to carry indirect social responsibilities (as to their actions) derived from the responsibilities enjoined on their principals. Note that this discussion is only concerned with the executive acting as an agent and not as a principal, meaning that social responsibilities derived from his personal environment are not to be considered in this context.

Positive vs. negative rights

Friedman’s notion of the relationship between companies, government, and society alleges that, no matter who in the end is considered to constitute the ‘business’, there exist no positive claim rights against it. He postulates “not that businesses have no responsibilities, but that they have no responsibilities to actually do anything for anyone else” (Buschert, 2001, p. 4). However, in the following I will demonstrate that society (represented by the government) actually possesses positive claim rights against a company.



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International University in Germany Bruchsal – Department of Sciences and Liberal Arts
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Milton Friedman



Title: "The social responsibility of business..." - A position paper on Milton Friedman