Thus far, we have reviewed in great detail the first five paragraphs of Professor Friedman’s classic essay on business ethics. In the court of popular opinion, these first few paragraphs constitute Friedman’s “opening statement” about the proper role of business in society. Now, before we proceed any further, we want to pause to make some additional observations about Friedman’s opening statement. One of our observations is somewhat trivial. The other, however, is more weighty.
Our minor quibble is this: what’s up with Professor Friedman’s word choice — elitist or erudite, depending on your point of view — especially in the fourth and fifth paragraphs of his essay, where Friedman deploys the fancy word “eleemosynary” to refer to corporations devoted to charitable ends: “A group of persons might establish a corporation for an eleemosynary purpose.” Although this distinction between for-profit corporations and non-profit ones is essential to Friedman’s argument, why not use a more simple word like “charitable” or “philanthropic” in place of the more old-fashioned term “eleemosynary” to refer to non-profit business entities? Or to paraphrase the great North American writer Mark Twain, Why use a five-dollar word when a five-cent word will do?
Our next observation is more serious, for it concerns the underlying logic of Friedman’s “greed is good” argument. Friedman’s profit-max thesis applies only to for-profit corporations, but then he adds yet another caveat in the fourth paragraph of his essay. According to Prof Friedman, although corporate managers have an ethical duty to make as much money as possible, they must do so, and we now quote Friedman, “while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” That is, corporations must always play by the rules, both legal and ethical! But this critical caveat opens a veritable Pandora’s box of delicate questions. One problem is that Friedman does not bother to say which theory of ethics should apply to business decisions. Virtue ethics? Kantian ethics? Or consequentialist ethics? Take your pick! In addition, as our friend and colleague Haskell Murray has asked, what about firms doing business in places with loose legal rules, and along these lines we would add, what about situations in which there is no relevant law on the books?
Even more importantly, doesn’t this “law and ethics caveat” make the profit-maximization thesis self-refuting? After all, if corporate managers are not only supposed comply with the law but must also act ethically when making business decisions, then why don’t such managers have a broad legal and ethical duty to act in a socially-responsible way all the time? Put another way, if managers are to be constrained by both law and ethics, then isn’t Friedman’s profit-max theory too narrow? Rest assured, we will return to these difficult questions as we continue our review of Friedman’s essay …