An appropriate ethical model for business and a critique of Milton Friedman's thesis.

• Author: Wilcke, Richard W.

In 1970, when interest in the ethics of business was increasing to a degree that would soon cause the emergence of a whole new discipline, a controversial essay on corporate responsibility, "The Social Responsibility of Business Is to Increase Its Profits," was published in the New York Times Magazine. (1) It was written by Milton Friedman, distinguished professor of economics at the University of Chicago and regular columnist for Newsweek. Based on part of a chapter of Friedman's 1962 book Capitalism and Freedom, the essay has been one of the most widely cited--and criticized--of all Friedman's popular writings. (2)

My goals for this article are to propose a free-market model of business ethics for firms of all sizes and types (by describing a past attempt to promote such a standard), to comment on the history of regulation and on the emergence and teachings of the discipline of "business ethics," and to argue that Friedman's perspective on corporate responsibility as outlined in 1970 and his subsequent position on corporate lobbying are counterproductive to the furtherance of such a free-market model among leaders of the business community.

A New Ethical Standard

For five years, from 1979 to 1984, I was deeply involved in an effort to develop a new national business association through which it was hoped that a contingent of entrepreneurs and executives could be persuaded that their firms ought to refrain, to the maximum extent possible, from seeking to use government resources to achieve their objectives. (3)

Through publications and testimony, this organization worked to introduce, defend, and promote the following basic concept: for a corporation or other business entity to commit itself to compete solely, or primarily, through a free and open market, relying thereby for its success on the voluntary choices of consumers, is an ethical "high road." (4)

We believed that if we could convince even a modest number of prominent corporate leaders and associations to admit publicly that, whatever their practical constraints, they at least believed in and aspired to such a straight and narrow course, the public perception of economic competition and profits would begin to change and an appropriate standard by which to judge the social behavior of business enterprises would emerge. Public awareness of such a high road could not help but focus attention on those who seek privileges.

The organization began to promote its ethical model just as business-oriented journalists and editors were being confronted simultaneously by a new and presumably positive academic focus on business ethics and by a controversial and awkward political issue for business in the form of a massive bailout proposal for the Chrysler Corporation. In retrospect, how the media reconciled the two issues provides an interesting object lesson.

Our organization's view on the connection between ethics and the Chrysler proposal was simple and straightforward: a federal bailout of a private firm would be unethical. Regrettably, it was almost impossible to thrust that perspective into the public debate. Instead, the media, with help from new "philosophers of business," focused mainly on the "ethics" of saving jobs--the numbers exaggerated up to eight hundred thousand--and on the supposed "ethics" of the fact that Chrysler, merely because it was not as big as Ford and General Motors, "deserved" federal help (Weidenbaum 1986, 331).

That Chrysler was awarded $1.5 billion in federal loan guarantees did help to illustrate, along with other, similar initiatives, the acute differences between a policy that is pro-business and one that is pro-market. It also enabled us to stress that public confusion about this point is largely a result of efforts by spokesmen for high-profile firms, such as Chrysler, to advocate and defend policies that have nothing to do with a market economy.

The basic notion--that it is ethical for businesses to uphold the free market and renounce the use of politics--seems elementary, yet it is virtually impossible to overstate the degree to which the point is lost on, if not altogether taboo for, those who sit in corporate boardrooms, no less today than in 1980. Even lip service is rarely paid to the idea.

To be sure, many have written about the ethics of consumer choice in the marketplace. For example, Murray Rothbard noted the following:

Those who succeed on the free market, in economic life, will therefore be those most adept at production and at serving their fellowmen; those who succeed in the political struggle will be those most adept at employing coercion and winning favors from the wielders of coercion.... In sum, governmental subsidy systems promote inefficiency in production and efficiency in coercion and subservience, while penalizing efficiency in production and inefficiency in predation. Those people who ethically favor voluntary production can gauge which system--the free market or subsidies-scores the higher economic marks, while those who favor conquest and confiscation must at least reckon with the overall loss of production that their policy brings about. (1977, 171) Because this ethic is grounded in the right of individuals to seek to satisfy their preferences through voluntary trade in the marketplace, it does not require the utilitarian ethic of "the greater good for the greater number." Yet, as our organization averred, the efficiencies of a competitive economy inure to the benefit of all classes of citizens, rich and poor. To interfere with allocation and pricing is by definition inefficient, hence costly to consumers.

The classic attack on this perspective, of course, is to raise the specter of monopoly and market power. Our position was clear. We advocated an economy both operated and structured by the forces of the free market--that is, one responsive to consumers rather than to politicians. Although some could accept the first part of this ideal as worth discussing, most choked on the second part. Even many economists and those executives and politicians influenced by them shook their heads at our "naivete."

We constantly strived to discredit the widely accepted, mistaken, and confusing premise that small enterprises are ethically superior to large ones. Located on Capitol Hill and exposed to the wide spectrum of legislative and regulatory initiatives, we could see that the associations and coalitions of smaller businesses (especially farms) were, on average, no more committed to free and open competition than those who spoke on behalf of the associations, high-profile law firms, and executive suites of the largest transnational corporations.

Along the way, we also touted a more urgent imperative, summarized by F. A. Hayek in an informal talk he delivered in November 1983: "I very seriously regard the preservation of what is known as the capitalist system, of the system of free markets and the private ownership of the means of production, as an essential condition of the very survival of mankind.... To change from a system of private property in the means of production will very soon mean the end of civilization and the decay of the standard of all of us. So far as they survived, in the long run, only few would survive; but those who did survive would find themselves at the level ultimately very near that of the savage" (1983, 10).

Our final, and by no means least challenging, objective was to foster within the business community itself a greater understanding of and appreciation for economic freedom. Among our targets were the business media and the graduate schools of management, where views on policy have always been infuriatingly pragmatic. When it comes to subsidies and privilege for business, the schools consciously foster agnosticism. To inject a different perspective, we sponsored MBA student "chapters" at Harvard, Thunderbird, UCLA, and Wharton.

Needless to say, we were often frustrated on Capitol Hill when business lobbyists on the ethical side of an issue (usually by pure happenstance) would be unwilling even to acknowledge their support for an ethical position, let alone defend it. Attorneys in particular tend to shy away from arguments on any principle other than strictly legal ones, presumably out of a fear of being hoisted on a "market petard" in the future. A high-profile example was the defense of Microsoft.

We made absolutely no distinction between entrepreneurs who had sole or majority interest in their companies and hired executives who, in most cases, had little or no significant ownership interest in firms they managed. Many experts, including Friedman, argued that only those who managed firms of their own would be justified in or capable of taking a principled stand for competition. We strongly disagreed and claimed that there is no justification for such a convenient distinction.

What of Public Corporations?

For several reasons, we saw no compelling argument against a public company's taking our high road. First, we always acknowledged "real world" constraints--a point understood and made by prominent columnist, David Francis: "With some of the same fervor as a country preacher, Mr. Wilcke is 'agin sin'--that is, against having business get such government favors as subsidies, bailouts, protective tariffs, restrictive regulations, special tax breaks, and so on. He is forgiving. He does not expect corporate members of the organization to be without 'economic sins.' But they are expected to be desirous of reform, of wanting to see a less-regulated, freer business environment, with a shrunken role for the government" (1980, emphasis added).

Admittedly, we were frequently critical of public statements and speeches by spokesmen for business, but our focus was never on those who merely went along with privileges, subsidies, and tariffs, but rather on those who undermined the case for freedom by rationalizing that such policies are consistent with the market or that competition...