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How the Philosophy of Economist Milton Friedman's Shareholder or Free Market Ethics May Have Influenced the Leadership of Boeing Company

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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.

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On Monday, the Business Roundtable, a group that represents CEOs of big corporations, declared that it had changed its mind about the “purpose of a corporation.” That purpose is no longer to maximize profits for shareholders, but to benefit other “stakeholders” as well, including employees, customers, and citizens. While the statement is a welcome repudiation of a highly influential but spurious theory of corporate responsibility, this new philosophy will not likely change the way corporations behave. The only way to force corporations to act in the public interest is to subject them to legal regulation.The shareholder theory is usually credited to Milton Friedman, the University of Chicago economist and Nobel laureate. In a famous 1970 New York Times article, Friedman argued that because the CEO is an “employee” of the shareholders, he or she must act in their interest, which is to give them the highest return possible. Friedman pointed out that if a CEO acts otherwise—let’s say, donates corporate funds to an environmental cause or to an anti-poverty program—the CEO must get those funds from customers (through higher prices), workers (through lower wages), or shareholders (through lower returns). But then the CEO is just imposing a “tax” on other people, and using the funds for a social cause that he or she has no particular expertise in. It would be better to let customers, workers, or investors use that money to make their own charitable contributions if they wish to. Friedman’s theory was wildly popular because it seemed to absolve corporations of difficult moral choices and to protect them from public criticism as long as they made profits. At the same time, it took CEOs down a peg—yes, they were resented even in 1970—by denying that they were visionaries with public responsibilities. And Wall Street saw dollar signs in the single-minded devotion to corporate profits. But Friedman’s argument contained a contradiction that should have been evident even to readers back in 1970. He complained that business executives supported wage and price controls—a policy that President Richard Nixon would later implement. Friedman believed (with some justice) that wage and price controls would harm the economy. Thus, he claimed that the business executives, although “extremely far-sighted and clear-headed in matters that are internal to their business,” evidently became “short-sighted and muddle-headed” in matters of public import. However, there is a simpler explanation for their behavior that does not require such a dubious theory of their psychology. Many business executives realized that wage and price controls would serve their business interest (no doubt by holding down the cost of labor and other inputs) and didn’t care whether they harmed the economy at large. Friedman should have been, and probably was, aware of this possibility. An established business will make the most profits by eliminating competition; the tried-and-true method for doing that is to persuade the government to pass a law that discourages new firms from entering its market, or that in some other way reduces its costs. And if the purpose of a business is to “increase its profits,” as Friedman argued, then it is not only “clear-headed,” but also justifiable for a business to use its political influence to dismantle the free market that Friedman cherished.

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There are arguments that even if social impacts of business are unknown, this cannot be an excuse for the company not to engage in CSR (Mulligan, 1986). The businesses engage in new product and market campaigns despite the fact that there is a lot of uncertainty. However, there are estimation parameters that can be applied in predicting business events that may not be used in estimating social events. The second argument is that CSR cannot be termed as socialist even though Friedman argues that the business manager ceases to be an entrepreneur and gets a political role where he is obligated to the society. The firm deals with scarce resources yet there are numerous needs in the society. Politicians are charged with the task of allocating scarce resources in society. CSR therefore turns the business man into a politician. It is argued that in a capitalist society, the political sphere is laced with individuals who are only concerned about their self-interest therefore CSR is not socialist. Considering this argument, then businesses should not attempt socialist actions at all in the capitalist market structure where there are no rigid controls. It is argued that Milton Friedman’s essay paper showed that he only supported legal restrictions on the enterprise and not moral or ethical restrictions. The fact of the matter is that the law keeps being amended every few years as technology advances and other changes occur in the market place. By using the law, he wanted to give the business men a definite yard stick to work with rather than giving people an ambiguous yard stick that entails changing moral or ethical implications

He therefore did not intend for businesses to disregard the interests of others. It is worthwhile to also note that as much as he recognised the self-interest of business men he did not expect them to act in a selfish manner. Self-interest and selfishness should not be confused to mean the same thing (Cosans, 2009).

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In summary, so the debate continues unabated: What, exactly, is businesses' responsibility? To make profits? To "do well by doing good"? A simple, universally accepted answer is unlikely. The good news is that in the nearly four decades since Milton Friedman elevated the question, the conversation has become robust

And there is clear support for the idea that companies can operate in a way that strengthens their various stakeholders and still provide solid, sustainable returns for their shareholders.

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Coelho, M. and Spry, J. 2003. ‘The Social Responsibility of Corporate Management: A Classic Critique’, American Journal of Business, vol. 18, no. 1, pp. 15-24.

Cosans, C. 2009. ‘Does Milton Friedman Support a Vigorous Business Ethics?’ Journal of Business Ethics, vol. 87, no. 1, pp 391-399.

Mulligan, T. 1986. ‘A Critique of Milton Friedman’s Essay “The Social Responsibility of Business Is to Increase Its Profits”’, Journal of Business Ethics, vol. 5, no. 4, pp 265-269.

Neimark, M.K. 1995. ‘The selling of ethics: The ethics of business meets the business of ethics’, Accounting, Auditing & Accountability Journal, vol. 8, no. 3, pp 81-96.

Post, F. 2003. ‘A Response to “The Social Responsibility of Corporate Management: A Classical Critique’, American Journal of Business, vol. 18, no. 1, pp. 25-35.

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