Instead of rehashing our previous posts, we wish to conclude our review of Milton Friedman’s 1970 essay on business ethics by returning to the problem of theory choice. In brief, the problem is this: Friedman is writing about business ethics, but whenever we find ourselves in a normative or value-laden domain like ethics, how do we know which theory is the “right” one? Friedman himself identifies two potential criteria for theory choice in business ethics: scope and measurement. In other words, (1) we should be able to tell to whom does the theory apply, i.e. the scope of the theory should be well-defined; and (2) we should be able to tell when a corporate manager is acting in a way that is consistent or not with the theory, i.e. compliance with the theory should be easy to measure. Does Friedman’s profit-maximization theory of business ethics pass his own two-part test?
Unlike the CSR approach to business ethics, which requires us to identity a potentially unlimited number of internal and external stakeholders, the profit-max approach is far more limited in scope, since it extends only to corporate management. Friedman’s profit-max approach is thus able to pass the first part of his theory-choice test with flying colors. The second part of the test, however, generates several foundational problems for the profit-max approach. For starters, we have the counterfactual problem. When we say (as Friedman does) that firms should maximize their profits, we must always ask, compared to what? In other words, how can we predict ex ante the future profit-maximizing effects of any given decision? The world is always changing; people make mistakes; unforeseen events occur. A manager often has no way of knowing ahead of time (with any degree of certainty) whether his decisions will, in fact, maximize profits. In addition, what is the manager’s relevant time horizon: short term or long term? And what variable should he be trying to maximize? Profits? Or revenues? Either way, the main point here is that management has a lot of decision-making discretion under the profit-maximization approach.
All of these questions should give proponents of the profit-maximization view of business ethics some pause. That said, the debate between the profit-max and CSR approaches is not an either/or debate. Like the contrary but complementary forces of yin and yang, a firm committed to CSR needs to make money in order to continue its multifarious CSR activities, and a firm committed to making money might make even more money by devoting itself to good CSR causes!