We reviewed in our previous post the logic of Professor Friedman’s “principal-agent argument” in his classic critique of CSR (corporate social responsibility). To sum up, although the structure of his principal-agent argument appears to be sound (corporate managers must act as faithful agents), Friedman commits an egregious fallacy: he presents a false choice between corporate interests and social interests. In plain English: yes, these interests can collide, but sometimes the most effective way to maximize profits is by acting in a socially responsible way! 

Nevertheless, in addition to the principal-agent argument, Professor Friedman presents a new but more pedantic argument against CSR in paragraphs 11 to 15 of his essay. Simply put, he argues that CSR operates as a stealth tax on shareholders. In Friedman’s own words, when a corporate manager engages in CSR, “he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.” Here, however, is where Friedman’s essay devolves into pure sophistry. According to Friedman, by engaging in CSR, corporate managers are assuming political and legal functions that are reserved exclusively to legislators, executive officials, and judges. Again, in the words of Friedman: “We have a system of checks and balances to separate the legislative function of imposing taxes and enacting expenditures from the executive function of collecting taxes and administering expenditure programs and from the judicial function of mediating disputes and interpreting the law.”

Although the logic of Friedman’s tax argument appears to be sound, his argument proves too much, for all business decisions (not just those decisions designed to promote CSR) could be viewed as a tax. So, yes, one could certainly argue, as Friedman does, that CSR initiatives operate as a tax on shareholders when profit opportunities are foregone (e.g. by not increasing a firm’s prices, to borrow one of Friedman’s CSR examples) or when resources are allocated to promote CSR (e.g. by going beyond what is required by law to protect the environment or by creating a special jobs program for the hardcore unemployed, to borrow Friedman’s other two CSR examples). But so what? All business decisions involve the allocation of scarce resources and foregone opportunities!

Now that we are almost halfway through Milton Friedman’s classic essay on business ethics, I must make a confession. When I began this series of blog posts, my initial intent was to defend Milton Friedman’s profit maximization approach to business ethics. Yet, as soon as I subjected his arguments to close scrutiny — placing his essay under my metaphorical microscope, so to speak — his main anti-CSR arguments began to unravel and fall apart. Can we rescue Friedman’s “greed is good” approach to business ethics? Rest assured, I will press on and review the rest of his classic essay on business ethics in my next few posts …