prior probability

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 →

Now that we have brushed off the outlandish first paragraph of Professor Friedman’s classic essay on business ethics (see our previous post), let’s turn to the second paragraph. Unlike the ad hominem nature of the first paragraph, this second paragraph does contain some strong opening salvos against corporate social responsibility or CSR.  Continue reading →

Now that we have introduced Milton Friedman’s classic essay on business ethics (see our previous post), let’s jump right in, shall we? Professor Friedman’s first paragraph is by far his weakest one, for it contains some outlandish and sensational claims. In particular, he begins his 1970 essay by claiming that proponents of corporate citizenship or corporate social responsibility (CSR) are “preaching pure and unadulterated socialism” and that such CSR proponents are “unwitting puppets of intellectual forces that have been undermining the basis of a free society these past decades.”

Such claims, however, are irresponsible, if not just plain wrong! After all, a socialist system is one in which business firms are strictly regulated or owned by the government outright, and as I noted in my previous work, the concept of a “free society” is a fuzzy one, since all societies have rules, and since such rules by definition impose limits on our freedom to do as we please. Nevertheless, in fairness to Friedman, we should put his essay into its proper historical context. At the time he published his essay in 1970 (almost fifty years ago!), the world was divided into two great ideological camps – the free world (led by the USA) and the socialist bloc (led by the USSR) – and both sides were engaged in a fierce and worldwide struggle of heroic proportions. The idea of free markets was under siege and in retreat across the globe. In fact, within a year after publishing his essay, President Richard Nixon, a Republican (!), would issue a draconian executive order (Number 11615) on 13 August 1971, imposing a 90-day freeze on wages and prices, the first time the U.S. government had enacted wage and price controls since World War II!

Given this historical context, it’s possible that Milton Friedman made his melodramatic claims about CSR simply to grab the attention of his readers. That said, however, Friedman did himself no favors by equating CSR with socialism and as incompatible with freedom. As a result, we are going to overlook this first paragraph and focus instead on the remainder of his essay in our next few blog posts …

Milton Friedman (1912-2006) made one of the most provocative arguments on the role of business firms in society almost 50 years ago. In a now-famous essay published on 13 September 1970 in The New York Times Magazine, Professor Friedman (pictured below) argued that a firm’s sole purpose is to maximize its profits. His short (3000-word) essay expands on a brief digression he made in his 1962 book Capitalism and Freedom (Friedman, 1962, pp. 133-136), where the late economist wrote: “There is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Is Professor Friedman’s “Smithian” view of business ethics correct? In light of such recent events as the introduction by Senator Elizabeth Warren of “The Accountable Capitalism Act” (S. 3348) as well as the recent amendment (SB826) to California’s General Corporation Law requiring women to be included on companies’ boards of directors, today is an ideal moment to revisit Friedman’s classic essay and explore anew the strengths and weaknesses of his arguments. Although I have been highly critical of Professor Friedman’s normative and empirical assertions in Capitalism and Freedom in some of my previous work, I will review Friedman’s 1970 essay and defend his profit-maximization theory of business ethics in my upcoming posts.

Although there are no “sick days” on the Internet, we’re going to take the day off as we’re feeling under the weather today …

That is the title of the “cookie art” pictured below. Check out Judith G. Klausner’s entire collection of “Oreo Cameos” here. (Hat tip: Cliff Pickover.)

Just kidding! But we love the ingenious idea proposed by Mike Maneth (see above). Yes, President Donald J. Trump promised at a campaign rally to pay $1 million to a charity of Senator Elizabeth Warren’s choice if she could prove her Native American ancestry, but now, based on a recent DNA test, Senator Warren claims to have a remote Indian ancestor dating back many generations ago. (Six to ten generations ago, to be more precise. The full DNA report, via The Boston Globe, is available here.) To put this immense generational range into perspective, one has over 1000 ancestors if one goes back ten generations, or as The Globe itself notes, the Senator is at most between 1/64th and 1/1,024th Native American!

Emily Temple, a writer and senior editor at Lit Hub, describes 20 different rooms where many famous books were written. She includes Ernest Hemingway’s library (pictured below) in Finca Vigía, his home outside Havana, Cuba, where “he wrote seven books, including For whom the bell tolls, A moveable feast, and The old man and the sea, among others.” But Ms Temple mistakenly notes that Hemingway “wrote in the library, which Roxana Robinson describes as ‘a long, pleasant, high-ceilinged room, lined with tall bookcases. In front of the windows is The Desk, huge and magisterial, about ten feet long and three feet wide, and curved like a boomerang. It’s made of dark polished wood, with carved supports at each end. Hemingway sat in the center, the ends curving forward.'” In reality, however, Hemingway did not use “The Desk” to practice his craft. Instead, he wrote in an adjacent room, which was also full of books, and he wrote standing up.

Credit: Jana Crowne