In 1970, future Nobel laureate Milton Friedman published an essay in the New York Times Magazine entitled "The Social Responsibility of Business is to Increase its Profits."
Professor Friedman's arguments are notable not only because of his masterful exposition of the problems arising from calls for greater "social responsibility" from "the soulless corporation," but also because the 1970s concept of demanding "social responsibility" from corporations has enjoyed a resurgence of late.
Many big corporations mention "social responsibility" prominently on their websites -- ironically, General Motors (which was mentioned in Milt Friedman's original article as being under pressure in this area), is one of them.* In fact, their corporate mission statement, quoted in many places on the web, begins with the declaration that "GM is a multinational corporation, engaged in socially-responsible operations, worldwide."
It should go without saying that their focus appears to have been in the wrong place and that their current condition may be all the evidence needed to support Professor Friedman's argument.
Professor Friedman's essay demonstrates that this idea of pressuring corporations for "social responsibility" beyond their mission of earning profits for their owners is not only detrimental but actually immoral.
He explains that when a corporate executive takes actions mandated by "social responsibility" rather than maximizing profits, he is actually "spending someone else's money for a general social interest." By reducing returns to stockholders, he notes, the corporation is in effect giving their money to some other cause. Instead, the corporation should focus on making money and allowing its shareholders and employees to spend the profits on social causes which they determine themselves. For example, Bill Gates is now able to be one of the most charitable individuals in the world because his Microsoft Corporation* made so much money for him.
Far from being immoral, the goal of making profits is actually profoundly moral. George Gilder explains this idea as only he can in this recent clip from a question-and-answer session. In that clip, he says:
"I believe profit in moral terms represents the index of altruism of an investment. Profit's often seen as a reflection of greed -- I think that's complete nonsense. When you think of what a profit is, it's the difference between the value of a good or service to the people who produced it, and the value to their customers. So it reflects the degree to which a particular enterprise understands the real needs of their customers -- it's an index of the altruism, the index of the orientation toward the needs of others of a particular business venture."
It bears noting that pressuring business to pursue "socially responsible" goals actually turns out to be morally questionable -- in that it asks them to take money from some groups and give it to others, without the same kind of popular representation and checks and balances that the founders of the United States of America declared to be inalienable human rights -- while allowing corporations to pursue profits by maximizing the value that they provide to the needs of their customers actually turns out to be morally altruistic.
To bring this discussion back to an investing perspective, it is noteworthy that there are now dozens of investment firms and fund companies that offer "socially responsible" investing. We would advise all investors to pursue morally responsible investing: by investing their capital in companies that are making above-average profits, and that appear to be in a position to continue doing so.
* The principals of Taylor Frigon Capital Management do not own securities issued by General Motors (GM) or Microsoft Corporation (MSFT).
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For later posts on this same subject, see also:
- "Freedom and the rescue of the Chilean miners" 10/13/2010.
Great stuff. I wrote my philosophy course paper at the Air Force Academy on this very article in 1985. As I remember it, the logic portion was tough to construct, if only because claiming a transcendent moral ethic without implying a transcendent moral God proved to be impossible. I.e., moral laws are not self creating, but ultimately come from a source greater than finite humans; if that source is finite, then it also had a precedent, back to an infinite source (the axiological argument: moral law implies a Moral Law Giver).
ReplyDeleteThe Friedman article is as timely now as it was then. The idea that being "socially responsible with other people's money" is just rank stealing resonated with cadets who had been trained under an honor code to not lie, steal or cheat. Also, that we appreciated the idea of checks and balances to prevent tyranny and check power had no small influence on its reception. Thanks for the post!