Week 1 - Q2

“The business of business is to increase its profits”

                Being a right-centred economist, I had some thoughts and comments that I would like to share after reading the paper by Friedman (1975). Ironically, I do not agree on his reasoning, but I agree on his conclusion for a different explanation, let me show you why.

I do not agree the way he reasons that an executive is becoming a non-democratically chosen civil servant, by imposing taxes because he is spending “the money in a different way than [the stockholders or the customers or the employees] would have spent it” (Friedman, 1970). I do not agree that a tax is imposed, because my definition of a tax is “an compulsory payment to a governmental body where no individual performance of the governmental body to the payer is returned”. In the case of the stockholders, no tax is imposed because stockholders are free to fire the executive if the latter party is not acting as agreed on in the job description. If stockholders agree on Social Responsible business policy for whatever reason (improvement of the company’s image or conscience), it is no longer compulsory but free choice. So the obligated part of my definition is not compelling with his reasoning for stockholders.

                No tax is imposed on the customers, because in a market of free competition with product differentiation, consumers can chose to buy another product. In that case the compulsory payment is not applicable. Another important point where I don’t agree with Friedman’s reasoning, is that in my definition the purchase of a Social Responsible product is private, so an individual performance is a returned consequence of my purchase. A good example is the difference between street lightning, where I am obligated to pay for in the form of taxation but I get no individual performance because street lightning is not only for my personal usage, and eggs, where I have the choice of buying biological (Social Responsible) ones or not according to my own preferences and I can exclude other users if I want, meaning that I get an individual performance for my purchase.

                Employees, when for example their wage is reduced to produce in a more social responsible way, have the freedom to get another job and are therefore not obligated to make a payment, in the form of a wage reduction, to the company. Therefore they are not being taxed according to my definition of taxation.

               

Because neither of the three main groups an executive has a professional relation with, are being taxed according to my definition, a Social Responsible businessman is not being “simultaneously [a] legislator, executive and, jurist” (Friedman, 1970) by imposing taxes and making expenditures to foster social objectives, while he has not been elected through a political process but by being selected by the stakeholders to serve their interests.

                Friedman’s reasoning about why a Social Responsible executive spending money on this cause, “belonging” to either the stockholders, consumers or employees, is taxing those relations, concludes with the following point of view of the so-called “doctorine of social responsibility: “"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” (Friedman, 1970), on which I do not agree, just like Friedman. I believe that sustainable Social Responsibility can only be achieved by market mechanisms without governmental interference, just like Friedman, and for that I make the following reasoning which is different from Friedman, assuming a situation of complete competition and product differentiation.

                I believe that Social Responsible products are claimed on the demand-side of the economy when the government is not interfering but acting as an informative actor about the consequences of consuming. This increasing demand over time will result in an increase of the supply of Sustainable Responsible products. If the government would act as an interfering body in the market by supporting those products, an unsustainable system would emerge: when the supporting, interfering government is not able to fulfill these tasks, the market for Social Responsible products would collapse on the short term. So the only possibility for a sustainable market is to stimulate the demand-side, by the supply of information about products from cradle to grave, resulting in increasing prices for non-Social Responsible products passing the point of decreasing prices of Social Responsible products.

                So this is the part where I actually agree with Friedman’s conclusion but for another reasoning: the business of business is to increase its profits (Friedman, 1970). Because the demand-side of the economy asks for Social Responsible products (implying they are willing to pay more), larger companies will comply to that demand (assuming no cheating will occur).  This, because if there was no demand for Social Responsible products, no profit would be made and no executive/company would be able to maintain his business.

References

              Friedman, M., 1970. The Social Responsibility of Business is to increase its profits. The New Yokr Times Magazine, 13 Septemer.