Capitalism is the best. It’s free enterprise. Barter. Gimbels, if I get really rank with the clerk, ‘Well I don’t like this,’ how can I resolve it? If it really gets ridiculous, I go, “Frig it, man, I walk.’ What can this guy do at Gimbels, even if he was the president of Gimbels? He can always reject me from that store, but I can always go to Macy’s. He can’t really hurt me. Communism is like one big phone company. Government control, man. And if I get too rank with that phone company, where can I go? I’ll end up like a schmuck with a dixie cup on a thread.
Capitalism is a counter-intuitive system since human action is coordinated by a pricing system that results in a hidden order that is not determined by a central plan. After all, it sounds far more rational if some central bureau were to organize what, how much, when and where to produce, and who should get a fraction of the result. But history has proven that centrally planned economies are abject failures, and the market is fare more just and efficient at allocating a society’s scarce resources.
Yet, for all the eloquence of Adam Smith and other free-market advocates, capitalism still lacks a moral theory. Even its most ardent defenders have nothing but contempt for businesspeople and entrepreneurs.
An often-heard remark is: The problem with capitalism is capitalists. It appears capitalism suffers from a unique paradox––it is better in practice than it sounds in theory. There is a certain “inarticulate wisdom” about the free market, and in this show Ed and Ron discussed the social responsibility of business.
Profits and Social Responsibility
Businesses are often praised for what they do worst (e.g., social work, fighting inflation, reducing welfare rolls) and denounced for what they do best (e.g., create jobs, wealth, goods and services people desire).
Milton Friedman’s famous 1970 article The Social Responsibility of Business is to Increase Its Profits essentially argues that businesses should pursue profits justly and within the bounds of the law and norms of society.
Friedman makes this argument because management personnel are acting as agents for the principals––that is, the stockholders of the company. For the agents to spend money and resources for “social” purposes denies the profits to the shareholders, who would then be free to donate and spend the proceeds as they see fit.
Another argument, often ignored by Friedman’s critics, is that a business doesn’t have particular expertise––or a comparative advantage––in performing social work, but does have expertise and knowledge about producing, say, automobiles or copiers.
In the famous Michigan Supreme Court case Dodge v. Ford Motor (1919), Ford was sued by a shareholder (Dodge) for lowering prices on cars and raising wages of employees (Ford thought the company had made enough profits), and the court ruled Ford had to increase dividends to shareholders.
Friedman’s argument is easier to understand if you imagine an employee of a sole proprietorship dictating to the owner how she should spend her profits.
Profits and social responsibility are not mutually exclusive goals. In fact, given the realities of free-market exchanges––where both parties are better off after the exchange––profits are actually an indicator of social value created.
Those who believe that earning a profit is morally neutral rather than a morally good way for a corporation to discharge its responsibility should be asked if they believe deliberately running losses is ethical––particularly if it’s with someone else’s money?
The economic and ethical responsibility of a business is to serve others, and increase the wealth of its customers. The business world instills, and requires, the practice of a number of virtues: diligence, industriousness, prudence in risk taking, reliability, kindness to strangers (customers), and fidelity in personal relationships.
Are not these the same virtues parents try to teach their children? As Michael Novak explains in Business as a Calling:
My general position on these three questions has two parts. First, business is a morally serious enterprise, in which it is possible to act either immorally or morally. Second, by its own internal logic and inherent moral drive, business requires moral conduct; and, not always, but with high probability, violations of this logic lead to personal and business disgrace. Immoral acts do occur in business. But to behave immorally is neither necessary to nor conducive to business success.
These men [industrial barons] did more than make money; calling them “money-makers” trivializes what they accomplished. Nor does the word greed capture their state of soul. “Greed” does not explain why Andrew Carnegie gave virtually all his money away. Instead, he poured [profits] back into his firm as an investment in its future. In other words, he put it at risk. “Greed” is for the impoverished socialist imagination a term of art; its purpose is neither descriptive nor analytical. Its purpose is moral denunciation, for ideological reasons.
The aim is not acquisition but increase. The clutching fist is not the capitalist style.
Honesty and ethical standards do not always pay off. They often have costs. For moral reasons alone, these costs are worth paying. Also for business reasons, too, since reputation is a priceless asset, and loss of that reputation is the single biggest risk a company faces.
Consider the Johnson and Johnson Credo that the company turned to during the two Tylenol poisonings in 1982 and 1986, which had a cumulative effect of $140 million in write-offs. Founder R.W. Johnson wrote this Credo in 1943 and it has often been cited as precedent for ethical decisions made since then, and is carved in stone at the company’s New Brunswick, New Jersey, headquarters:
We believe that our first responsibility is to the doctors, nurses, hospitals, mothers, and all others who use our products. Our products must always be of the highest quality. We must constantly strive to reduce the cost of these products. Our orders must be promptly and accurately filled. Our dealers must make a fair profit.
Our second responsibility is to those who work with us––the men and women in our plants and offices. They must have a sense of security in their jobs. Wages must be fair and adequate, management just, hours reasonable, and working conditions clean and orderly. Employees should have an organized system for suggestions and complaints. Supervisors and department heads must be qualified and fair-minded. There must be opportunity for advancement for those qualified and each person must be considered an individual standing on his own dignity and merit.
Our third responsibility is to our management. Our executives must be persons of talent, education, experience, and ability. They must be persons of common sense and full understanding.
Our fourth responsibility is to the communities in which we live. We must be a good citizen––support good works and charity, and bear our fair share of taxes. We must maintain in good order the property we are privileged to use.
We must participate in promotion of civic improvement, health, education, and good government, and acquaint the community with our activities.
Our fifth and last responsibility is to our stockholders. Business must make a sound profit. Reserves must be created, research must be carried on, adventurous programs developed, and mistakes paid for. Adverse times must be provided for, adequate taxes paid, new machines purchased, new plants built, new products launched, and new sales plans developed. We must experiment with new ideas. When these things have been done the stockholder should receive a fair return. We are determined with the help of God’s grace to fulfill these obligations to the best of our ability.
Summary and Conclusions
Dr. Samuel Johnson wrote “There are few ways in which man can be more innocently employed than in getting money,” and John Maynard Keynes agreed, stating, “It is better that a man should tyrannize over his bank balance than over his fellow citizens.”
No doubt businesses act in a social context, as do all individuals, and should be held accountable for doing the right thing for the right reasons. None of this is inconsistent with the pursuit of profit and meeting human needs and wants. Parents do not raise their children to become rugged individualists, and no company was built by the efforts of a single human being.
Ethical conduct, integrity, trust, and honesty are not just moral principles, they are also major economic factors, and one all businesses and professionals should be judged against and held accountable for.
Other books and resources mentioned
Creative Capitalism: A Conversation with Bill Gates, Warren Buffett and other Economic Leaders, edited by Michael Kinsley
“The criminalization of American business,” The Economist, August 30, 2014
“A mammoth guilt trip,” The Economist, August 30, 2014
“Seven time lucky,” The Economist, August 30, 2014
“A new green wave,” The Economist, August 30, 2014