Can you please explain me the meaning of this article. In other words, please summarize it in a way I can understand. The Social Responsibility of

Can you please explain me the meaning of this article. In other words, please summarize it in a way I can understand.

The Social Responsibility of Business is to

Increase Its Profits

The New York

Times Magazine

,

September 13, 1970

When I hear businessmen speak eloquently about the "social responsibilities of

business in a free-enterprise system," I am reminded of the wonderful line about the

Frenchman who discovered at the age of 70 that he had been speaking prose all his

life. The businessmen believe that they are defending free enterprise when they

declaim that business is not concerned "merely" with profit but also with promoting

desirable "social" ends; that business has a "social conscience" and takes seriously its

responsibilities for providing employment, eliminating discrimination, avoiding

pollution and whatever else may be the catchwords of the contemporary crop of

reformers. In fact they are--or would be if they or anyone else took them seriously--

preaching pure and unadulterated socialism. Businessmen who talk this way are

unwitting puppets of the intellectual forces that have been undermining the basis of a

free society these past decades.

The discussions of the "social responsibilities of business" are notable for their

analytical looseness and lack of rigor. What does it mean to say that "business" has

responsibilities? Only people have responsibilities. A corporation is an artificial

person and in this sense may have artificial responsibilities, but "business" as a whole

cannot be said to have responsibilities, even in this vague sense. The first step toward

clarity in examining the doctrine of the social responsibility of business is to ask

precisely what it implies for whom.

Presumably, the individuals who are to be responsible are businessmen, which means

individual proprietors or corporate executives. Most of the discussion of social

responsibility is directed at corporations, so in what follows I shall mostly neglect the

individual proprietors and speak of corporate executives.

In a free-enterprise, private-property system, a corporate executive is an employee of

the owners of the business. He has direct responsibility to his employers. That

responsibility is to conduct the business in accordance with their desires, which

generally will be to make as much money as possible while conforming to their basic

rules of the society, both those embodied in law and those embodied in ethical

custom. Of course, in some cases his employers may have a different objective. A

group of persons might establish a corporation for an eleemosynary purpose--for

example, a hospital or a school. The manager of such a corporation will not have

money profit as his objectives but the rendering of certain services.

In either case, the key point is that, in his capacity as a corporate executive, the

manager is the agent of the individuals who own the corporation or establish the

eleemosynary institution, and his primary responsibility is to them.

Needless to say, this does not mean that it is easy to judge how well he is performing

his task. But at least the criterion of performance is straight-forward, and the persons

among whom a voluntary contractual arrangement exists are clearly defined.

Of course, the corporate executive is also a person in his own right. As a person, he

may have many other responsibilities that he recognizes or assumes voluntarily--to his

family, his conscience, his feelings of charity, his church, his clubs, his city, his

country. He may feel impelled by these responsibilities to devote part of his income to

causes he regards as worthy, to refuse to work for particular corporations, even to

leave his job, for example, to join his country's armed forces. If we wish, we may

refer to some of these responsibilities as "social responsibilities." But in these respects

he is acting as a principal, not an agent; he is spending his own money or time or

energy, not the money of his employers or the time or energy he has contracted to

devote to their purposes. If these are "social responsibilities," they are the social

responsibilities of individuals, not business.

What does it mean to say that the corporate executive has a "social responsibility" in

his capacity as businessman? If this statement is not pure rhetoric, it must mean that

he is to act in some way that is not in the interest of his employers. For example, that

he is to refrain from increasing the price of the product in order to contribute to the

social objective of preventing inflation, even though a price increase would be in the

best interests of the corporation. Or that he is to make expenditures on reducing

pollution beyond the amount that is in the best interests of the corporation or that is

required by law in order to contribute to the social objective of improving the

environment. Or that, at the expense of corporate profits, he is to hire "hardcore"

unemployed instead of better qualified available workmen to contribute to the social

objective of reducing poverty.

In each of these cases, the corporate executive would be spending someone else's

money for a general social interest. Insofar as his actions in accord with his "social

responsibility" reduce returns to stockholders, he is spending their money. Insofar as

his actions raise the price to customers, he is spending the customers' money. Insofar

as his actions lower the wages of some employees, he is spending their money.

The stockholders or the customers or the employees could separately spend their own

money on the particular action if they wished to do so. The executive is exercising a

distinct "social responsiblity," rather than serving as an agent of the stockholders or

the customers or the employees, only if he spends the money in a different way than

they would have spent it.

But if he does this, he is in effect imposing taxes, on the one hand, and deciding how

the tax proceeds shall be spent, on the other.

This process raises political questions on two levels: principle and consequences. On

the level of political principle, the imposition of taxes and the expenditure of tax

proceeds are governmental functions. We have established elaborate constitutional,

parliamentary and judicial provisions to control these functions, to assure that taxes

are imposed so far as possible in accordance with the preferences and desires of the

public--after all, "taxation without representation" was one of the battle cries of the

American Revolution. We have a system of checks and balances to separate the

legislative function of imposing taxes and enacting expendituress from the executive

function of collecting taxes and administering expenditure programs and from the

judicial function of mediating disputes and interpreting the law.

Here the businessman--self-selected or appointed directly or indirectly by

stockholders--is to be simultaneously legislator, executive and jurist. He is to decide

whom to tax by how much and for what purpose, and he is to spend the proceeds--all

this guided only by general exhortations from on high to restrain inflation, improve

the environment, fight poverty and so on and on.

The whole justification for permitting the corporate executive to be selected by the

stockholders is that the executive is an agent serving the interests of his principal. This

justification disappears when the corporate executive imposes taxes and spends the

proceeds for "social" purposes. He becomes in effect a public employee, a civil

servant, even though he remains in name an employee of a private enterprise. On

grounds of political principle, it is intolerable that such civil servants--insofar as their

actions in the name of social responsibility are real and not just window-dressing--

should be selected as they are now. If they are to be civil servants, then they must be

elected through a political process. If they are to impose taxes and make expenditures

to foster "social" objectives, then political machinery must be set up to make the

assessment of taxes and to determine through a political process the objectives to be

served.

This is the basic reason why the doctrine of "social responsibility" involves the

acceptance of the socialist view that political mechanisms, not market mechanisms,

are the appropriate way to determine the allocation of scarce resources to alternative

uses.

On the grounds of consequences, can the corporate executive in fact discharge his

alleged "social responsibilities"? On the one hand, suppose he could get away with

spending the stockholders' or customers' or employees' money. How is he to know

how to spend it? He is told that he must contribute to fighting inflation. How is he to

know what action of his will contribute to that end? He is presumably an expert in

running his company--in producing a product or selling it or financing it. But nothing

about his selection makes him an expert on inflation. Will his holding down the price

of his product reduce inflationary pressure? Or, by leaving more spending power in

the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce

less because of the lower price, will it simply contribute to shortages? Even if he

could answer these questions, how much cost is he justified in imposing on his

stockholders, customers and employees for this social purpose? What is his

appropriate share and what is the appropriate share of others?

And, whether he wants to or not, can he get away with spending his stockholders',

customers' or employees money? Will not the stockholders fire him? (Either the

present ones or those who take over when his actions in the name of social

responsibility have reduced the corporation's profits and the price of its stock.) His

customers and his employees can desert him for other producers and employers less

scrupulous in exercising their social responsibilities.

This facet of "social responsibility" doctrine is brought into sharp relief when the

doctrine is used to justify wage restraint by trade unions. The conflict of interest is

naked and clear when union officials are asked to subordinate the interest of their

members to some more general purpose. If the union officials try to enforce wage

restraint, the consequence is likely to be wildcat strikes, rank-and-file revolts and the

emergence of strong competitors for their jobs. We thus have the ironic phenomenon

that union leaders--at least in the U.S.--have objected to Government interference with

the market far more consistently and courageously than have business leaders.

The difficulty of exercising "social responsibility" illustrates, of course, the great

virtue of private competitive enterprise--it forces people to be responsible for their

own actions and makes it difficult for them to "exploit" other people for either selfish

or unselfish purposes. They can do good--but only at their own expense.

Many a reader who has followed the argument this far may be tempted to remonstrate

that it is all well and good to speak of Government's having the responsibility to

impose taxes and determine expenditures for such "social" purposes as controlling

pollution or training the hard-core unemployed, but that the problems are too urgent to

wait on the slow course of political processes, that the exercise of social responsibility

by businessmen is a quicker and surer way to solve pressing current problems.

Aside from the question of fact--I share Adam Smith's skepticism about the benefits

that can be expected from "those who affected to trade for the public good"--this

argument must be rejected on the grounds of principle. What is amounts to is an

assertion that those who favor the taxes and expenditures in question have failed to

persuade a majority of their fellow citizens to be of like mind and that they are

seeking to attain by undemocratic procedures what they cannot attain by democratic

procedures. In a free society, it is hard for "evil" people to do "evil," especially since

one man's good is another's evil.

I have, for simplicity, concentrated on the special case of the corporate executive,

except only for the brief digression on trade unions. But precisely the same argument

applies to the newer phenomenon of calling upon stockholders to require corporations

to exercise social responsibility (the recent G.M. crusade, for example). In most of

these cases, what is in effet involved is some stockholders trying to get other

stockholders (or customers or employees) to contribute against their will to "social"

causes favored by activists. Insofar as they succeed, they are again imposing taxes and

spending the proceeds.

The situation of the individual proprietor is somewhat different. If he acts to reduce

the returns of his enterprise in order to exercise his "social responsibility," he is

spending his own money, not someone else's. If he wishes to spend his money on such

purposes, that is his right and I cannot see that there is any objection to his doing so.

In the process, he, too, may impose costs on employees and customers. However,

because he is far less likely than a large corporation or union to have monopolistic

power, any such side effects will tend to be minor.

Of course, in practice the doctrine of social responsibility is frequently a cloak for

actions that are justified on other grounds rather than a reason for those actions.

To illustrate, it may well be in the long-run interest of a corporation that is a major

employer in a small community to devote resources to providing amenities to that

community or to improving its government. That may make it easier to attract

desirable employees, it may reduce the wage bill or lessen losses from pilferage and

sabotage or have other worthwhile effects. Or it may be that, given the laws about the

deductibility of corporate charitable contributions, the stockholders can contribute

more to charities they favor by having the corporation make the gift than by doing it

themselves, since they can in that way contribute an amount that would otherwise

have been paid as corporate taxes.

In each of these--and many similar--cases, there is a strong temptation to rationalize

these actions as an exercise of "social responsibility." In the present climate of

opinion, with its widespread aversion to "capitalism," "profits," the "soulless

corporation" and so on, this is one way for a corporation to generate goodwill as a by-

product of expenditures that are entirely justified on its own self-interest.

It would be inconsistent of me to call on corporate executives to refrain from this

hypocritical window-dressing because it harms the foundation of a free society. That

would be to call on them to exercise a "social responsibility"! If our institutions, and

the attitudes of the public make it in their self-interest to cloak their actions in this

way, I cannot summon much indignation to denounce them. At the same time, I can

express admiration for those individual proprietors or owners of closely held

corporations or stockholders of more broadly held corporations who disdain such

tactics as approaching fraud.

Whether blameworthy or not, the use of the cloak of social responsibility, and the

nonsense spoken in its name by influential and prestigious businessmen, does clearly

harm the foundations of a free society. I have been impressed time and again by the

schizophrenic character of many businessmen. They are capable of being extremely

far-sighted and clear-headed in matters that are internal to their businesses. They are

incredibly short-sighted and muddle-headed in matters that are outside their

businesses but affect the possible survival of business in general. This short-

sightedness is strikingly exemplified in the calls from many businessmen for wage

and price guidelines or controls or income policies. There is nothing that could do

more in a brief period to destroy a market system and replace it by a centrally

controlled system than effective governmental control of prices and wages.

The short-sightedness is also exemplified in speeches by businessmen on social

responsibility. This may gain them kudo in the short run. But it helps to strengthen the

already too prevalent view that the pursuit of profits is wicked and immoral and must

be curbed and controlled by external forces. Once this view is adopted, the external

forces that curb the market will not be the social consciences, however highly

developed, of the pontificating executives; it will be the iron fist of Government

bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal

a suicidal impulse.

The political principle that underlies the market mechanism is unanimity. In an ideal

free market resting on private property, no individual can coerce any other, all

cooperation is voluntary, all parties to such cooperation benefit or they need not

participate. There are not values, no "social" responsibilities in any sense other than

the shared values and responsibilities of individuals. Society is a collection of

individuals and of the various groups they voluntarily form.

The political principle that underlies the political mechanism is conformity. The

individual must serve a more general social interest--whether that be determined by a

church or a dictator or a majority. The individual may have a vote and say in what is

to be done, but if he is overruled, he must conform. It is appropriate for some to

require others to contribute to a general social purpose whether they wish to or not.

Unfortunately, unanimity is not always feasible. There are some respects in which

conformity appears unavoidable, so I do not see how one can avoid the use of the

political mechanism altogether.

But the doctrine of "social responsibility" taken seriously would extend the scope of

the political mechanism to every human activity. It does not differ in philosophy from

the most explicitly collective doctrine. It differs only by professing to believe that

collectivist ends can be attained without collectivist means. That is why, in my

book

Capitalism and Freedom

, I have called it a "fundamentally subversive doctrine"

in a free society, and have said that in such a society, "there is one and only one social

responsibility of business--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."