prior probability

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?  Continue reading →

The late great Milton Friedman returns to a larger theme in the last part of his classic essay on business ethics (paragraphs 28 to 33): the different domains of markets and politics. To sum up Professor Friedman’s closing argument: he compares and contrasts politics with markets, concluding that markets are essential to a free society, while politics are an unfortunate necessity, a necessary evil. Why? Because markets are always based on consent: “In an ideal free market resting on private property, no individual can coerce any other, all coopera­tion is voluntary, all parties to such coopera­tion benefit or they need not participate.” Politics, by contrast, are based on coercion and conformity: “The indi­vidual must serve a more general social inter­est –whether that be determined by a church or a dictator or a majority. The individual may have a vote and say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.” Let’s put aside the fact that the internal workings of most (if not all) firms fall under the “politics” side of the ledger. And let us also put aside the fact that electoral politics often operate like markets. Friedman’s distinction between politics and markets, like his Kantian critique of the true motives behind CSR, is worth taking seriously.  Continue reading →

We are close to completing our in-depth review of Milton Friedman’s classic essay on business ethics. Here, we will focus on paragraphs of 24 to 27 of his essay, where Friedman describes CSR as “hypocritical window dressing” and as “a cloak for actions that are justified on other grounds.” Why does Friedman describe CSR as window dressing? What are these “other grounds” or true reasons motivating firms to engage in CSR (and to publicize their CSR efforts)? According to Friedman, these “other grounds” all boil down to one thing, and one thing only, naked self-interest! Here is Friedman’s argument in full:  Continue reading →

We are still reviewing Milton Friedman’s 1970 essay on business ethics. Previously, Friedman had argued that CSR initiatives operate as a kind of stealth tax on shareholders and that taxes should be imposed via ordinary political processes. To his credit, Friedman finally identifies (and then responds to) a potential objection to his “CSR as taxation” argument in paragraphs 20 to 23 of his essay. He formulates the objection to his argument this way: “[some] problems are too urgent to wait on the slow course of political processes [;] … the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.” But instead of weighing the relative merits of politics versus markets, Friedman dogmatically asserts that the above consequentialist type of argument “must be rejected on grounds of principle.” Why? Because it is not the role of businessmen to promote the public good. After all, their role, according to Friedman, is to maximize their profits! This argument, however, is circular, for it begs the question, what should the “social responsibility” of business be? (As an aside, Friedman does make an exception for sole proprietors, since such individuals are acting on their own behalf when they are making business decisions.)  Continue reading →

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?  Continue reading →

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!  Continue reading →

We shall now proceed with our review of Milton Friedman’s 1970 essay on business ethics. Professor Friedman returns to his principal-agent argument in paragraphs 7 to 10 of his essay, where he draws a fundamental distinction between (a) the social responsibilities of a private individual, i.e. a person acting on his own behalf, and (b) the social responsibilities of a businessman, i.e. a person acting on behalf of the corporation where he is employed. The logic of Friedman’s principal-agent argument can be summed up follows: When a person is acting on his own behalf, he may voluntarily assume many social responsibilities toward a wide variety of private and public groups or causes, such as his family, his church, his clubs, his city, his country, just to name a few. In all these cases, when deciding what causes to support or what organizations to join, an individual is acting on his own behalf as a principal, not as an agent of someone else. A businessman, however, will find himself in a different legal position. When a businessman is making decisions in his capacity as a businessman, he is acting as an agent of the corporation where he is employed. A businessman must therefore act in the best interests of his corporation.  Continue reading →

We now proceed to paragraph six of Milton Friedman’s 1970 essay on business ethics. Whatever theory of business ethics you subscribe to (profit-maximization or stakeholder theory), this short paragraph is perhaps the most important one of the entire essay, so it deserves to be quoted in full:

Needless to say, this [the principal-agent nature of the relationship between shareholders and managers] does not mean that it is easy to judge how well he [a corporate manager] is performing his task [i.e. maximizing profits]. But at least the [profit-max] criterion of performance is straight-forward, and the persons among whom a voluntary contractual arrangement exists are clearly defined.

In other words, to be useful, a theory of business ethics should satisfy the following two criteria: (1) the scope of the theory should be well-defined, i.e. we should be able to tell to whom does the theory apply; and (2) compliance with the theory should be easy to measure, i.e. we should be able to tell when a corporate manager is acting in a way that is consistent or not with the theory.  Continue reading →

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.  Continue reading →

[Update (10/22): We have revised the second paragraph of this post.]

Thus far, we have revisited the first two paragraphs of Professor Friedman’s scathing critique of corporate social responsibility or CSR. (To sum up: we dismissed the opening paragraph as pure hyperbole, but at the same time, we concluded that the criticisms set forth in the second paragraph must be reckoned with.) Prof Friedman concludes the second paragraph by asking, to whom does CSR apply? Do all business firms and businessmen have a moral duty to act in a socially responsible way? Having now set the stage, so to speak, Milton Friedman devotes the remainder of his essay to this key question. In particular, he defines the scope of his inquiry in the third paragraph of his classic essay as follows: “Most of the discussion of [CSR] is directed at corporations, so … I shall mostly neglect the individual proprietor and speak of corporate executives.”  Continue reading →