Home Budget & Tax News 'Corporate Social Responsibility' Is Just Another Term for Socialism

‘Corporate Social Responsibility’ Is Just Another Term for Socialism

We are in the midst of an open counterrevolution against liberty and limited government in the United States. This may sound like strong language for dramatic effect. But it is really not an exaggeration in the current climate of political discord and antagonism, admittedly amplified by this being a presidential election year when political parties make hyperbole the norm. An example of this counterrevolution and lean toward socialism may be seen in a recent attack on the classical liberal, free market economist, the late Milton Friedman, in the pages of The New York Times.

Through a good part of the post-World War II era, Milton Friedman (1912-2006) was a leading voice for personal freedom and economic liberty, as well as one of the most internationally prominent economic scholars of his time. His stature as a serious contributor to economic theory and policy discourse was recognized with the awarding of a Nobel Prize in Economics in 1976.

Friedman’s A Theory of the Consumption Function (1957) and A Monetary History of the United States (1963), the latter coauthored with Anna Schwartz, established his position as a leading critic of mainstream Keynesian economics, while remaining within the generally accepted modern macroeconomic analytical framework. He helped bring about a “rediscovery” of the quantity theory of money, after “money” had been relegated into being a variable of secondary importance in the “new economics” that had emerged out of John Maynard Keynes’s The General Theory of Employment, Interest, and Money (1936).

Friedman’s Voice for Liberty

Besides his scholarly writings primarily addressed to others in the economics profession, Friedman early on, in the 1950s, demonstrated a clarity and often an eloquence in making the case for freedom and the free society, at a time when all the trends seemed to be in the direction of bigger and more intrusive government. He reawakened an understanding of and an appreciation for the power of the free market in Capitalism and Freedom (1962) and Free to Choose (1980), with the latter not only being a successful book but the title of a widely watched television series on personal and economic liberty versus political paternalism and government regulation and planning. [Free to Choose is available to stream on Amazon Prime, and Prime members can view it for free.—Ed.]

For nearly 20 years from 1966 to 1984, Friedman wrote a regular column for Newsweek magazine, with many of his articles being anthologized as the years went by. Through this venue and occasional policy pieces in other places such as The Wall Street Journal, Friedman’s practical policy influence on economic and related social themes (including school choice, ending military conscription, and the decriminalization of various “victimless crimes”) was significantly felt far beyond simply conservative and classical liberal/libertarian circles.

Criticizing the “Social Responsibility” of Business

One such instance was an article that he wrote fifty years ago, which appeared in The New York Times Magazine (September 13, 1970), on “The Social Responsibility of Business.” Friedman’s argument was that businesses, especially corporations, should focus on profit maximization for shareholders rather than increasingly playing social welfare agent, and, secondly, that by taking on such tasks the marketplace was threatened with a dangerous politicization that would negatively transform and potentially corrupt both the private sector and government.

Those who directed and managed shareholder-owned companies were the hired agents of those who had appointed them to such positions. Their primary task was to oversee the effective use of the invested resources placed in their care, which was to make products and provide services that generated the largest net profits possible to be earned for their employers, the shareholders.

For government or others in society to assert that the responsibility of businessmen was to manage the private enterprises under their trust for “social goals” was to expect those business executives to act in ways different from or contrary to the interest of their shareholder employers.

Free to Spend Our Own Income on Good Causes

Nowhere in the article did Friedman say or suggest that social or community issues and problems were not important or worth supporting. He was quite clear that in their roles as income-earning citizens and “good neighbors,” shareholders were at liberty to spend their dividends and other corporate receipts in any manner they thought fit, appropriate, and deserving. Friedman also emphasized that a proprietor of a private enterprise was certainly free to not pursue a maximum of profits. He is spending and investing his own money, and he can choose to forego the profits that might have been his because of other goals in the management of his own company that he considers to be more important.

We are all at liberty in a free society to use the resources at our disposal in any way we consider desirable in our own eyes, and often to far better effect than when determined and directed by government. As a classical liberal, Friedman, not too surprisingly, considered private charitable and voluntary associative activities not only more ethical as matters of individual freedom of choice, but was confident that the outcomes would be more successful than when left to the bureaucratic hands of government agencies. (Though he did say that if citizens, in their role as voters, decided to shift part of their personal responsibility and taxed away resources on to government to perform certain welfare state functions, that was part of the democratic process, which should not be foisted onto private enterprises to perform in society.)

Social Responsibility Politicizes Business Decision-Making

Second, Friedman feared the politicizing of the private market once businesses were expected to take on the role of social welfare workers. For corporations and other such businesses to do so, threatens the profit-oriented efficiency that normally increases productivity, brings about cost savings, and generates product improvements that, in the long run, raise wages, increase consumer standards of living, and bring about a general betterment in the social circumstances of all.

The profit and loss system, guided by competitive prices, ensures rationality to all that happens in the marketplace of supply and demand. Firms can fairly easily evaluate success and failure and whether, at the margin, resources, capital, and labor might be better used in different, more profitable, and cost-effective ways; and whether workers and other employed inputs are or are not providing value-added contributions to the enterprise relative to the opportunity costs of their hire and purchase.

But once private enterprises are expected, indeed pressured, to apply their financial and other resources to tasks other than profit maximization, what standards, measurements, or benchmarks are to serve with the same clarity and objectivity as the market price signals of profit and loss?

The New Attack on Friedman and Profit-Maximizing

This gets us to the recent criticisms of Friedman and his arguments in “The Social Responsibility of Business” article, which is marking its half-century anniversary. The New York Times brought together a symposium of contributors made up of almost two-dozen prominent corporate executives, think tank analysts, and high profile “politically correct” economists, practically all of whom condemn, ridicule, and reject most if not all of Friedman’s case.

One chief executive, Marc Benioff, accused Friedman of “brainwashing” an entire generation of businessmen to ignore their responsibilities to the wider society in which they do their business. He calls for a “stakeholder” capitalism that encompasses not only a company’s shareholders but also “employees, customers, communities, and the planet.”

What does that mean in the concrete? Well, as far as Starbucks’ emeritus chairman Howard Schultz is concerned, that means company-provided health care for part-time workers, tuition-free college education for employees, requiring workers to do neighborhood volunteering, and providing jobs to “impoverished youths” regardless of skills, experience, or the company’s requirements. Schultz insists on companies pursuing a “moral purpose” rather than profits.

Harvard University economist Oliver Hart asks what if a shareholder does not like that a company into which he is invested makes and sells “military-style rifles,” and he cannot persuade enough of his fellow shareholders to change what the firm produces? It does not seem to enter his mind that the shareholder in question could choose to sell his shares and not be financially involved with such an enterprise rather than using social bullying to get this and other companies to stop making firearms and turn to the pursuit of whatever Hart considers to be desirable “environmental and social goals.”

Erika Karp, chief executive of Cornerstone Capital Group, wants companies to follow a “holistic” approach rather than simply profit maximization. Businesses should follow the guidelines of “Environmental, Social and Governance” (E.S.G.) standards. If you are wondering what that is, an answer is given in a different article that appeared about the same time as the New York Times symposium, this one in Fortune magazine (September 13, 2020): “50 years later, Milton Friedman’s shareholder doctrine is dead,” by Colin Mayer, Leo Strine, and Jaap Winter.

Mandating Social Responsibility by Political Pressure and Power

The authors of this article tell us that what is needed is a “renewal” of “the promise of the New Deal,” with “protections for workers, the environment,” and with America moving closer to the “Scandinavian” model of a more intensive social welfare state. Corporations’ internal rules and regulations must be transformed “to give fair consideration to stakeholders and to temper the need to put profit above all other values.”

Corporate structures should be rewritten to make them into “public benefit corporations” (as Elizabeth Warren has proposed). That means companies should be mandated to serve purposes and interests other than mere “profits.” Failure to do so would allow “courts to issue orders, such as injunctions, holding corporations to their stakeholder and societal obligations.” The authors insist that they advocate all this “to save our capitalist system.” Cumulatively, what the New York Times and Fortune contributors are calling for is nothing less than the demise of what remains of any freedom for us to choose as consumers, investors, and enterprisers.

The Important Role of Market-Oriented Corporate Enterprise

In the narratives of these critics, the American corporation is too big and too powerful a villain. Lost and hardly mentioned is that individuals form voluntary business associations under the corporate heading to pool investable resources as well as the risk from doing so through limited liability. It has facilitated the formation of capital and production that has benefited all in society in terms of the quantities, qualities, and cost-competitiveness of much that is taken for granted by us as consumers in the marketplace.

As economist Robert Hessen said in In Defense of the Corporation (1979):

“Combining the capital of millions of investors and the talents of millions of workers, giant corporations are a testament to the ability of free men, motivated by self-interest, to engage in sustained, large-scale, peaceful cooperation for their mutual benefit and enrichment. As a result, Americans today enjoy a standard of living—of luxury, leisure, and longevity—that is unprecedented in world history. . . .

“A business, no matter how large, cannot force anyone to work for it, to buy its products, or to invest in it; it cannot conscript capital and manpower or tax a person to pay for a service he neither wants nor uses. . . .

“Many companies are shielded from both domestic and foreign competition by means of subsidies, loan guarantees, protective tariffs, import quotas, and arbitrary licensing requirements. These restrictions can be created and sustained only by political power—by invoking the threat of governmental intervention to forbid or penalize various forms of production and trade. . . . Corporate power is to be feared only when it involves attempts to secure favors and achieve results that could never be obtained in a free market.” (pp. xi and 109-111)

Corporate Social Responsibility Equals Socialism

What the corporate social responsibility proponents, especially in the E.S.G. framework, threaten is the full and complete “socialization” of business under the supervision and ultimate control of government. It is pertinent that in his 1970 article Milton Friedman referred to the “social responsibility of business” models as “socialism.” It is no longer individuals voluntarily and peacefully coming together to form and work within private enterprises, and deciding what products or services to produce and supply as the market means of honestly earning profits through the successful provisioning of their fellow human beings in their role as consumers within the arena of competitive and cooperative exchange.

No, it is “stakeholders,” meaning ideological busybodies, special interest groups with political axes to grind, and those who simply want to make others do under intimidation and force what they cannot get them to do—as consumers or producers—through reason and persuasion in the free marketplace, who will determine what, why, and how things are produced. Investment decision-making, production, employment, marketing and sales all become political matters of pull and plunder between competing groups wanting to coerce others to act differently than they would if not compelled or prohibited from doing so.

Should more of the private enterprise’s resources be invested in hiring unqualified workers at wages no longer reflecting the market-based supply and demand for that type of employee? “At the margin,” should the corporation devote more financial expenditures to sensitivity training about race and gender discrimination or on community outreach concerning climate change education, along with monies dispensed for the widening of bicycle paths? There are no market-guiding correct or more objective answers to these questions. There is only political power in the changing currents of ideological fashion and fancy in the ongoing game of “democratic” politics.

Throwing Overboard the Rationality of Profit and Loss

In the market arena of profit and loss and competitive prices, the answers to business decision-making still have degrees of prospective uncertainties concerning the future. But it is easier to evaluate whether an advertising strategy is meeting revenue expectations; whether one department or division of the company is financially doing better than another and whether investments should be expanded in one part of the company and reduced in some other in response to their respective profit-earning potential; and whether workers hired seem to be supplying value-added relative to the market wage that must be paid to them given their competitively determined opportunity costs of employment.

Once a market-based profit-maximization approach is discarded for the “social responsibility” paradigm of business decision-making, such rational economic calculations increasingly disappear. They are replaced with power, political pull, and social pressures in influencing and dictating how the scarce resources of such private enterprises are used in directing their activities. This, in fact, represents the abolition of the market system and its replacement with forms of pressure-group political planning of economic affairs. To use a phrase that Ludwig von Mises employed as the title to one of his shorter works, we are left with, de facto, “Planned Chaos” in the name of political correctness in the business world.

Production is no longer directed to producing and supplying what private enterprisers anticipate being the more highly valued and demanded goods by the consuming public. Production is no longer guided by the goal of minimizing expenses to get the most out of the scarce means of production so as to satisfy as many of the wants and desires of all of us in society as seems possible through the actions of profit-pursuing entrepreneurs and executives steering corporate enterprise activities.

The consuming public, which means all of us, become captives to whatever segments of the society in their role as ideological busybodies and political power lusters can successfully impose on the supply side of the marketplace to fulfill their collectivist and coercing dreams of what the world should look like, if only everyone thought like them.

(Tomorrow, we will consider the arguments of the worst of the participants in the New York Times symposium, Columbia University economist and Nobel Prize recipient, Joseph Stiglitz.)

Richard Ebeling
Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel.

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