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Critics of Friedman

Critics of Friedman. Why Shouldn’t Corporations Be Socially Responsible?. by Christopher D. Stone. Friedman’s 3 rd Supporting Point. Corporate managers have a responsibility to the people who own the equity of the corporation, namely, make the most profit possible.

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Critics of Friedman

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  1. Critics of Friedman

  2. Why Shouldn’t Corporations Be Socially Responsible? by Christopher D. Stone

  3. Friedman’s 3rd Supporting Point. • Corporate managers have a responsibility to the people who own the equity of the corporation, namely, make the most profit possible. • Friedman says the reason is: • “…the manager is the agent of the individuals who own the corporation.” (p. 242 of our text)

  4. What is being an agent? • Stone says it is working for the best interests of the person, group, or enterprise you are the agent for. • An example: • A sports agent tries to get what the client wants – some particular combination of money, length of contract, trade vs. no-trade, etc. • In other words, agents have to know what their clients want and then have to work to get it.

  5. Stone says there is no way corporate executives are this kind of agent. • There is no direct agency connection between the typical shareholder and management • It simply is not true that shareholders in major corporations select their directors and thereby establish a client-agent connection. • Corporate executives do absolutely nothing by way of finding out what shareholders want

  6. Social Responsibility and Economic Efficiency by Kenneth J. Arrow

  7. What is the argument for saying that companies ought to maximize profit above all else. • Companies pay what the market determines is a fair price for the materials and labor needed for production of goods and services. • Customers pay what the goods and services are worth to them. • Profit therefore represents the net contribution the company makes to the social good.

  8. Arrow says there are lots of problems with this argument. • For example, the problem of externalities. • This makes the maximization of profits socially inefficient. • But the main point of capitalist theory is that the free operation of the market is guaranteed to be optimally socially efficient. • What to do about externalities? • Impose regulations. • Internalize the costs (e.g., taxes, liability judgments). • Corporate/professional ethical codes. • But ALL of these add social responsibility to mere profit considerations.

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