Explaining Milton Friedman on Corporate Social Responsibility

Brad DeLong had a recent post on how he thinks Milton Friedman's take on Corporate Social Responsibility is bunk.

He says, among other things, that "If customers don't want to pay higher prices and so buy from corporations that pursue social responsibility, they are (as long as product markets are competitive) free to do so at their option." The unfortunate reality of CSR is that for the most part, if given the choice, most people want CSR, but only if there is no cost to themselves.

In Supercapitalism, Robert Reich points out, even for such a simple and clearly beneficial issue as dolphin-safe tuna, customers vote only with their pocketbooks. J. W. Connolly, former president of Heinz U.S.A., which was the parent company of StarKist, explains that “consumers wanted a dolphin-safe product,” but “if there was a dolphin-safe can of tuna next to a regular can, people chose the cheaper product. Even if the difference was a penny.”

Where Brad missed the issue was not due to consumer choice, but rather a misunderstanding of Friedman's core argument. Friedman posed that an employee has direct responsibility to his employers, to make as much money as possible while conforming to the basic rules of society. If a company spends money on reducing pollution, for example, below the level required by law, it’s not his money he’s spending. He’s spending the shareholder’s money. The employee is no longer acting as an agent of the stockholders or customers, if he spends the money in a different way than they would have spent it.

One of the commenters noted that Friedman's argument meant that if a company is dumping waste into the stream, polluting it and killing the fish, it has a moral obligation to keep doing so. He's right, within certain parameters. If there was no chance that the company would be fined, would receive bad PR, or otherwise have negative financial consequences, then yes, they should continue dumping in the river, according to Friedman. There are still some countries where this is the case, but that number shrinks every year.

If a company was not created on the basis of maximizing return to investors, but had instead a different commitment, such as Smith and Hawken or REI, where investors know at the outset that social and environmental concerns will be built into company operations, then that company has a different contract with its shareholders, and there's no chance of social efforts causing a breach of contract with the investing community.

But times are changing. Investors are expecting less in the way of "bad behavior" by corporations, and most no longer want to see negative articles about sweatshop labor, bribery and extortion in the companies they love. As the requirements of the shareholders change, then the company must change to stay in line with investor expectations. Some companies, such as GE with their "Ecomagination" initiative, have used CSR as a way of staying ahead of changing shareholder requirements, but they end up having to sell their efforts to shareholders by describing long term capital returns on CSR.