Review of Friedman (part 9): ethics and epistemology

As we mentioned at the end of our previous post, we have now completed our review of the first half of Milton Friedman’s classic essay on business ethics. To sum up our review thus far, Professor Friedman is probably right to challenge CSR’s “analytical looseness and lack of rigor,” but at the same time, Friedman’s own arguments against CSR are either fallacious or pedantic. For those of us (especially my fellow libertarians) who support the “greed is good” school of business ethics, Friedman has dropped the proverbial ball. Can he recover from this intellectual fumble? 

It turns out that Friedman still has some rounds of intellectual ammunition left in his anti-CSR arsenal. For starters, he presents a serious epistemological argument against CSR in paragraphs 16 to 19 of his essay. In particular, Friedman notes that CSR is unable to provide definitive answers to the following key questions: (1) what types of CSR should a firm engage in?, and (2) how much CSR should a firm engage in? Or as Friedman himself puts it, even if we could figure out which social goals a given corporate manager should try to promote, “how much cost is he justified in imposing on his stockholders … for [x, y, or z] social purpose? What is his appropriate share and what is the appropriate share of others?

Alas, it does not require much imagination to reply to both of these epistemological objections. Let’s consider the second objection first: how much scarce resources should a firm devote to CSR? Easy. To borrow the logic of economics, firms should engage in the “optimal amount” of CSR. By optimal, I mean that amount of CSR that maximizes whatever business firms are supposed to be maximizing, whether it be users (cf. Facebook), or revenues (cf. Amazon), or profits (cf. Friedman’s ideal firm). (That said, the optimal level of CSR might be zero for some firms!)

But this pithy reply still leaves the first of Friedman’s epistemological objections unanswered, for even if we could somehow figure out what the optimal level of CSR for a given firm were, managers would still have a lot of discretion in deciding what types of CSR initiatives to promote. But so what? Managers have a lot of discretion anytime they must make a business decision, e.g. whether to renew or cancel a supply contract, whether to test a new method of manufacturing, how much to invest in advertising, etc. Deciding whether to engage in CSR or how much to spend on CSR is really no different. In all these cases, good managers must exercise discretion; that is why they are managers.

In fairness to Friedman, however, his epistemological objections deserve to be taken seriously, for it is not always obvious what the “optimal amount” of any activity is. Nevertheless, this objection also applies to Friedman’s own profit-maximization thesis as well! Should firms focus on short-term or long-term profits, and if the latter, how long is long? Or should firms even focus on profits at all (instead of revenues or market share or some other global metric)? Stay tuned, we will push on in our next post …

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About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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