In a free market economy and a free society what responsibility does business have in addressing the issues of poverty and inequality?
This is a question that has been asked repeatedly over the years, frameworks have been developed, examined, redeveloped and re-examined countless times. There is a litany of material and yet the arguments come down to two basic view points. The stakeholder theory (Post, F., 2003) and the the shareholder theory or ‘Friedman’s Paradigm’ (Coelho, McClure & Spry, 2003).
In this essay I will look at the responsibility that business has for addressing the issues of poverty and inequality in society and I will focus on the shareholder view as argued by Friedman. I will examine the argument tabled by Friedman, the context in which it was argued and the strengths and weaknesses of the argument. I will also examine the concept of social responsibility and the advantages and disadvantages of legislating such things.
However as Ruud and Ruud (2011) noted, business ethics are primarily believed to emerge from societal values. However because societies values are consistently changing then it is difficult for business to implement corporate social responsibility (CSR).
I will therefore examine the concept of CSR from two distinct viewpoints, the legal and the moral.
Business, Economics and the Friedman Paradigm
Economics has been defined as the study of how society makes decisions regarding the management of scarce resources. Scarecity refers to the fact that society has less to offer than people wish to have. (Gans et al, 2009. Pg 3). Gans and his associates go on to say that ‘market economies’ have shown to be remarkably successful in organising economic activity. Market economies “allocate resources through the decentralised decisions of many firms and households as they intereact in markets for goods and services” (Gans et al, 2009. Pg 9).
Business practices are constantly changing as new players enter and old players leave the market making it a dynamic environment in which trade is conducted. In free markets and free societies this is the model that has been adopted. Countries that once ran their markets through a centralised decision making process such as former Soviet nations are developing market economies due to the success of this model (Gans et al, 2009. Pg 3).
In (1970), Nobel Prize winning economist, Milton Friedman in an article for the New York Times Magazine was unambiguous in his position. He stated unequivocally that business has only one social responsibility in a free-enterprise system. That responsibility is “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”.
Friedman arrived at this conclusion after discussing the mechanics of business and criticisng the arguments in favour of the “social responsibility of business” for their “analytical looseness and lack of rigour” (Friedman, M. 1970. Pg 1).
Making a powerful argument from the point of view of a free-enterprise system and a free society,Friedman illustrated that business itself is a set of legal machinery set up to achieve the goals of the owners. On this fact he establishes a strong argument that ‘business as an artificial person cannot be said to have responsibilities, even in this vague sense’. In his article Friedman spoke in definitive technical definitions and the term ‘responsible’, he spoke of in relation to the concept of being ‘socially responsible’.
The Macqaurie dictionay describes ‘responsible’ as “having a capacity for moral decisions and therefore accountable; capable of rational thought or action” (Macquarie Dictionary, 1991. Pg 810). As a non-human entity it is therefore impossible for business to be socially responsible.
It should also be noted that Friedman wrote his article in 1970, a time when the ‘Cold War’ was at its most fierce and the competing ideologies of capitalism and socialism were struggling for supremacy. I raise this point because Friedman himself declared in his article that advocates of the stakeholder theory were in fact “preaching pure and unadulterated socialism” (Friedman, M., 1970, Pg 1).
Friedmans argument is that the concept of social responsibility of business opposes a free market economy in that it takes the decision-making-process out of the hands of the market and gives it to a central authority. A hinderance since we have already established that market economies are the best way to organise economic activity (Gans et al, 2009. Pg 9).
Friedman was specific about the only responsibility of business being to increase profits so long as it “engages in open and free competition without deception or fraud” (Friedman, M., 1970. Pg 6). An argument has been raised that this idea falls over because ‘perfect competition’ will never exist.
For ‘perfect competition’ to exist all goods and services would need to be identical and there would need to be sufficient market players, that no single buyer or seller has any influence over the market price. Buyers and sellers in a perfectly competitive market would have to accept the price that the market determines (Gans et al, 2009. Pg 64).
Society, Trade and Social Responsibility
Most people expect that business ethics will reflect societies values however with constantly changing goal posts it is difficult for business to implement socially responsible practices (Ruud and Ruud, 2011. Pg 1).
In the interest of being clearly defined about what is implied society is “an organisation of persons associated together for religious, benevolent, literary, scientific, political, patriotic or other purposes” (Macquarie Dictionary, 1991).
In any society there is an agreed upon set of rules by which the members of the society are expected to abide. This is where rules of law, religious lore, sporting rules etc come into play. These rules are decided upon and accepted by the society either through a voting process as occurs in democratic states or through the acceptance of the authority of an individual or group such as in monarchies, theocracies or socialist states.
The concept of comparative advantage teaches us that we are better off when we trade as in the division of labour described by Adam Smith (1776). Modern economics expands on this with the first two lessons of economics that people face trade-offs and the cost of something is what you give up to get it (Gans et al, 2009 Pg 3-4).
In a free society poverty and inequality are a perfect example of these first two lessons. The very nature of scarecity means that society wants more than its resources will allow therefore the trade-off is that some people will go without. The cost associated is what people are willing to give up to get the resources they want. Classical economics suggests the three most important factors of production are labour, land and capital (Gans et al, 2009. Pg413).
Tsun Tsu’s the Art of War has become a popular treatise on the concept of conflict in all of its forms. It has been translated into countless languages and adapted to suit many situations including business. If we examine conflict in society in the context of all members of society trading for its scarce resources we can take heed of Tsun Tsu’s fourth essential element of victory. “He will win who, prepared himself, waits to take the enemy unprepared” (Giles L., 1910. Pg 52).
What I mean to say by this is, that it is the nature of open and free competition that the most prepared person will succeed. This will be the individual or the corporation who knows how to best utilise the factors of production, as Friedman said so long as they are “operating within the rules of the game” (Friedman, M., 1970. Pg 6).
It is these rules that are the responsibility of the society to agree upon. I have already established that non-human entities such as business cannot be held responsible in a social manner for moral or ethical decisions as they are not capable of “rational thought or action” (Macquarie Dictionary, 1991. Pg 810).
It is therefore the actions of those who are in control of the entity to make these rational decisions and take action based upon them. The question in relation to this was how do we establish what should be legislated and what should merely be expected of as a value of society.
Excessive legislation and limiting the power of some groups over those of others has seen some of the most heinous acts of terror in history. ‘In the former Soviet Union the STASI in East Germany and Russia’s KGB justified their actions in the name of state security.“Jack Koehler, a former Berlin bureau chief for the Associated Press, describes in exhaustive detail how the concept of state security corrupted the entire society of East Germany” (Bourgholtzer, F. 1999. Pg 66).
As what is morally right changes with society and not everyone agrees absolutley on what is right at any given point it is essential that society establish a level playing field at which all members are able to operate from. This becomes the legal framework in which all business operates within as decided by the agreed upon authority within the society.
John Rawls established two basic principles in his Theory of Justice that set out how these basic rules could be determined. The first principle states ‘‘each person has the same indefeasible claim to a fully adequate scheme of equal basic liberties, which scheme is compatible with the same scheme of liberties for all”
The second principle states “social and economical inequalities are to satisfy two conditions: first, they are to be attached to offices and positions open to all under conditions of fair equality of opportunity; and second, they are to be to the greatest benefit of the least advantaged members of society” (Lindblom, L. 2011. Pg 580-581).
The Social Responsibility of Business
If we use Rawls two basic principals as a guide for establishing the legal framework then we have a level playing field in which a market economy can operate. These rules will change over time to represent the will of society. However the moral actions based on rational thought we have discussed fall under a normative framework that will change depending as a result of what society expects of its citizens who are capable of making these decisions.
Business itself as being a set of legal machinery can only follow the rules defined by law as to how they operate. It is up to the individuals in control of that machinery to make decisions that are moral and ethical as they are the ones with a responsibility to society to act in such a way.
When Friedmans article was published communication within market economies was heavily in favour of business. As communications have improved and tools such as the internet and social media have created a two-way dialogue between buyers and sellers the balanced has shifted.
This has resulted in changes in public sentiment affecting the value of a company on a daily basis much like on a publicly traded stock exchange. Never has this been more evident than in the recent uprisings in the Middle East and Egypt since 2010 where governments have been overthrown.
Although business itself can only be responsible for following the rules set out by society, the way in which it operates is now influenced as much by opinion and popularity as it is by the rules of the game. Reputations can be decimated by digital media and viral campaigns as much as they can be uplifted by them, so it is now more than ever a constant juggling act for business to manage its image in the eyes of the multitudes of stakeholders that are watching its every move.
As Friedman stated “the only social responsibility of business is to increase its profits” so long as it plays by the rules.
When these profits can be influenced by public sentiment then it makes good business sense to conduct business in a way that contributes to the social welfare and benefit of the society in which it operates. Poverty and inequality are an unfortunate trade-off of living in a free society and operating in a free market economy. However it is possible for business to increase its profits by taking on the mantle of a good corporate citizen and raising the wellbeing of the least advantaged members of society.
Bourgholtzer, F. 1999, “The agony and the ex-Stasi”, Bulletin of the Atomic Scientists, vol. 55, no. 4, pp. 66-68. Retrieved from: http://search.proquest.com/docview/197884390?accountid=112781
SR Smedley holds a Bachelors Degree in Business Management with a particular focus on communications. He has also completed studies in financial planning as well as previously studying human health and nutrition.
He is the Director of Operations of Franklin Media Australia, a self taught programmer and web developer and former SCUBA Diving Instructor. He also previously worked as a journalist for an award winning business journalist and former News Corp editor.