Profits Milton Friedman Famously Proposed in 1970

Profits

Milton Friedman famously proposed in 1970 that the "social responsibility of business is to increase its profits," and that notion of business ethics is still prevalent today, though the debate about the subject has yet to abate. Friedman was writing in response to a growing call for increased social responsibility from businesses as the result of the strong social changes in the late 1960s, but his argument was underpinned by concepts such as social contracts and agency theory. Managers, he argued, are agents of the shareholders. Shareholders are assumed to be purely rational, and therefore are only investing for profits. They can take those profits and do whatever socially responsible things they want to do with them, but it is not the role of the manager to make those decisions for the shareholders. The role of the manager is simply to earn those products. Friedman did add the caveat that the company needs to work within the laws of the land, something that is sometimes forgotten by critics of his work; he did not give carte blanche for companies to behave as Enrons or Worldcoms. Under Friedman's argument, however, there is no ethical conflict inherent in a corporation existing solely for the pursuit of profit.

At its heart, Friedman's view is rooted in deontological ethics, which at least in their Kantian form are rooted in the idea that society sets norms for behavior and those norms must be upheld (Alexander & Moore, 2007). For Friedman, the norms to which business much adhere are simply the laws of the land. Any norms beyond that are subjective, and may not represent as a reasonable interpretation of a democratic society's values. Friedman's argument perhaps runs into trouble in societies that do not enjoy democracy, for the laws set out by the leaders of those societies cannot be taken by any reasonable person as an expression of the will of the population. Nevertheless, in our society business has a specific role, and that is to make money. Beyond agency theory, this role of business has become ingrained in the social contract we all exist under. The pressure to which Friedman was responding, however, was from elements of society that sought to see a shift in the social contract by which business operates.

The shift sought -- the move towards a more comprehensive view of corporate social responsibility -- appears to derive more from consequentialist ethics, wherein the merit of a deed is measured by its outcome (Sinnott-Armstrong, 2011). Corporations have effects on the external world greater than that which can be measured on an income statement, and corporations therefore have a responsibility to ensure that those effects are positive. There are two ideas at the heart of this argument. The first is that the idea of the purely rational investor -- the idea on which Friedman's argument is predicated -- is a falsehood. The rise of "ethical" mutual funds, for example, would seem to serve as evidence that some investors at least care about outputs other than profit. A corporation can behave any way it wants, if the investors want that. In other words, managers are agents and if the owners want the company to have a high standard of responsibility, then the managers need to deliver on that.