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FRIEDMAN’S STOCKHOLDER THEORY OF CORPORATE MORALRESPONSIBILITY

(Accepted 15 November 2002)

ABSTRACT. In this paper I critically discuss Milton Friedman’s classic article, “TheSocial Responsibility of Business is to Increase its Profits.” Friedman offers several argu-ments for his stockholder theory of corporate moral responsibility, according to which acorporation’s only moral responsibility is to promote the financial well-being of its stock-holders. I first consider an inconsistency in his statement of his position – namely, thedistinct and non-equivalent constraints he places on profit-maximization (“the rules of thegame” and “the rules of society”). I then turn to a consideration of six arguments Friedmangives to support his theory, spelling them out in detail and showing that none of them issound. I conclude with a brief intuitive argument against his theory.

KEY WORDS: Agent-Principal Argument, Artificial Persons Argument, corporate moralresponsibility, critical thinking, Free Society Argument, Milton Friedman, PersonalResponsibility Argument, rules of society, rules of the game, stockholder theory, TaxationAnalogy Argument

INTRODUCTION

Milton Friedman’s “The Social Responsibility of Business is to Increaseits Profits” (Friedman, 1970) is a staple in most introductory businessethics courses. Friedman articulates a position that many businesspeopleand business students are sympathetic to, that a business’s only responsi-bility is to maximize wealth for its stockholders. Whatever the popularityof his view, his arguments for it are far from compelling. In what followsI consider just what his view is, noting that his statements of it are notequivalent. I then reconstruct Friedman’s arguments and show that noneis sound – some, indeed, are quite obviously unsound. I conclude byoffering an argument against his stockholder theory of corporate moralresponsibility.

Teaching Business Ethics 7: 437–451, 2003.© 2003 Kluwer Academic Publishers. Printed in the Netherlands.

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FRIEDMAN’S POSITION

As Thomas Carson pointed out in “Friedman’s Theory of Corporate SocialResponsibility” (Carson, 1993), Friedman’s two statements of his positionare at odds with each other. Friedman’s opening statement of his view isthat

a corporate executive is an employee of the owners of the business. He has direct respon-sibility to his employers. That responsibility is to conduct the business in accordance withtheir desires, which generally will be to make as much money as possible while conformingto the basic rules of society, both those embodied in law and those embodied in ethicalcustom. (p. 51)1

He closes his article by quoting the statement of his view he gave inCapitalism and Freedom (1962, p. 133):

there is one and only one social responsibility of business – to use its resources and engagein 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. (p. 55)

I do not wish to appear captious, but since Friedman himself complainsthat his opponents’ views “are notable for their analytical looseness andlack of rigor” (p. 51), it is only fitting that we carefully scrutinize his view:what is sauce for the goose is sauce for the gander, after all.

It should be clear that these statements of Friedman’s view are strik-ingly different in several ways. First, while the first formulation allowsfor the corporation to seek to promote the interests of non-stockholders,provided that this is what the stockholders wish,2 the second formulationrules this out. That Friedman is likelier to embrace the first formulation issuggested by his belief that management is the agent of the stockholders;surely an agent must do her principal’s bidding, even if her principal doesnot wish to maximize her own well-being. Let us suppose, though, thatFriedman is correct in his empirical claim that the stockholders want tomake as much money as possible.3

A second noteworthy difference between his formulations is thedifferent constraints they impose on profit-maximization. What “the basicrules of society” call for and prohibit seems intuitively different from what“the rules of the game” call for and prohibit – at least if we take “the rules

1 All references are to Friedman 1970 unless otherwise noted.2 Obviously, there are technical problems to be worked out here. Must it be the unan-

imous wish of the stockholders? Would the wishes of a bare majority suffice? Or perhapssome sort of super-majority, such as is required to override a Presidential veto?

3 For at least one counter-example to Friedman’s claim, former Clinton Labor SecretaryRobert Reich says “I don’t want Microsoft to maximize the value of my shares at theexpense of my values as a citizen” (1999).

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of the game” to mean the actual practices obtaining within an industry. Forexample, a restaurant owner who balks at bribing an inspector or payinga mobster for protection may be failing to play by the rules of the game,though she is abiding by the law in doing so. Or, consider the responseof Credit Suisse First Boston (CSFB) to charges made with respect to itsunderwriting of initial public offerings:

Securities regulators and federal prosecutors have been gathering information from FirstBoston and other investment banks about how they sold the shares and whether theyextracted promises from customers to buy more shares at higher prices, a practice thatwould be illegal. The firm has said that it did not deviate from standard Wall Street practice.(McGeehan, 2001)

Whether CSFB’s actions are ethically permissible depends on which ofFriedman’s two constraints on profit maximization we adopt. SupposeCSFB’s actions are illegal but are within the rules of the game; sincethe rules of the game may not be the rules of society (i.e., the laws), itwould seem that Friedman’s theory gives contradictory judgments aboutthe ethical permissibility of CSFB’s behavior.

It may be, though, that Friedman does not intend this everyday sense of“the rules of the game.” Indeed, in Capitalism and Freedom he writes thateven in a truly free marketplace the government is still needed: “govern-ment is essential both as a forum for determining ‘the rules of the game’and as an umpire to interpret and enforce the rules decided upon” (1962,p. 15), a view he confirms throughout the book’s second chapter, “TheRole of Government in a Free Society.” Suppose, then, that “the rules ofthe game” are those set by statutory and administrative law. Thus the merefact that a practice is standard is not normative: one can engage in standardpractices and still violate the rules of the game.

Even so, there remains the problem that Friedman takes the basic rulesof society to be “those embodied in law and . . . ethical custom” (p. 51;my emphasis). I think it is plausible to take these ethical rules to determinea level of moral decency below which it is impermissible to fall. If so,then these will be largely, if not exclusively, negative duties not to harm orinjure. Fulfilling one’s negative duties merely guarantees that one has notacted immorally and has thus avoided blame. If one fulfills what one takesto be one’s positive duties to actively promote the well-being of others, onehas gone well beyond what morality minimally requires – one is a good,rather than merely a minimally decent, Samaritan.

Plainly, on Friedman’s view, a corporation does not have positive dutiesto promote the well-being of non-stockholders. What is not so plain iswhether Friedman allows for extra-legal negative duties towards non-stockholders. My sense is that, for Friedman, corporate morality reduces

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to legality, and thus that extra-legal negative duties do not constrainprofit-maximization. Consider his example of “mak[ing] expenditures onreducing pollution beyond the amount . . . that is required by law” (p. 52).Friedman discusses this as a positive duty, the goal of which is “tocontribute to the social objective of improving the environment” (p. 52),but one can, more accurately, view this as a negative duty not to harmothers. After all, the problem is not that pollution merely fails to benefitothers, but that it causes them harm. Since Friedman thinks that a corpora-tion ought not seek to minimize harm below the legally acceptable level,it follows that corporations do not have extra-legal negative duties tonon-stockholders. Thus it seems that “ethical custom” constrains profit-maximization only to the extent that ethical custom is reflected in thelaw.

Consider, for example, The Southern Company, many of whose powerplants have a grandfather-clause exemption from the provisions of theClean Air Act. Presumably, the company knows that its pollution isharmful – why else would stricter limits have been established? – butsince it is legally permissible for it to pollute at unsafe levels and thusknowingly harm others, it would appear to be morally permissible as well,by Friedman’s lights; indeed, it would be morally obligatory, by his lights.The company would be acting against the stockholders’ best interests ifit upgraded its plants or built newer, cleaner ones, so long as it is moreprofitable to maintain its older, dirtier plants.4

Thus I take Friedman’s view to be that management’s only obligation isto promote the interests of the stockholders, within the bounds of the law.It has neither positive nor extra-legal negative duties to non-stockholders.

FRIEDMAN’S ARGUMENTS

The Artificial Persons Argument

Let us call the first of Friedman’s arguments “the Artificial Persons Argu-ment.” It is not explicitly stated by Friedman, but it seems to be lurkingbeneath the surface of the following passage:

What does it mean to say that “business” has responsibilities? Only people can haveresponsibilities. A corporation is an artificial person and in this sense may have artificialresponsibilities, but “business” as a whole cannot be said to have responsibilities, even inthis vague sense. (p. 51)

4 The Southern Environmental Law Center (http://www.selcga.org) is a helpful sourceof information on this issue.

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While Friedman seems to be arguing against the idea that business as awhole has moral responsibilities, one can without too much distortion takehim to argue that individual businesses do not have moral (i.e., extra-legal)obligations. Spelled out rigorously, the argument goes:

P1 Corporations are artificial persons.P2 Artificial persons can have only artificial responsibilities.C1 So, corporations can have only artificial responsibilities.P3 But moral responsibilities are not artificial responsibilities.C2 So, corporations cannot have moral responsibilities.

The argument appears to be valid, but in fact it suffers from a crucialequivocation on ‘artificial’. In P1 (and thus P2 and C1), ‘artificial’ isopposed to ‘natural’, so P1 asserts that corporations are the result of arti-fice: they are constructed entities. “A corporation,” Justice John Marshalwrote in Trustees of Dartmouth College v. Woodward (17 US 518 (1819)),“is an artificial being, invisible, intangible, and existing only in contem-plation of law.” This is plainly the sense of ‘artificial’ in P1, P2, and C1.But in P3, ‘artificial’ seems to mean not “non-natural” but “non-genuine.”To deny that moral responsibilities are artificial is to assert that they aregenuine and binding on us. They are not, in short, imaginary. Since ‘artifi-cial’ means different things in C1 and P3, the argument commits the fallacyof equivocation and thus is invalid.

In addition, the Artificial Persons Argument begs the question. P2asserts that the only responsibilities an artificial person, such as a corpora-tion, has are those spelled out in the document by which it comes intobeing. But why would anyone except a committed stockholder theoristaccept such a premise? No one who subscribes to the stakeholder theoryof corporate moral responsibility – according to which the interests of allstakeholders, not just the stockholding stakeholders, are to be considered –would accept P2, for a stakeholder theorist holds that corporations do haveextra-legal duties to non-stockholders. While it is true that Marshall holdsthat “[b]eing the mere creature of law, [a corporation] possesses only thoseproperties which the charter of its creation confers upon it . . .” he fills inthe ellipsis with “either expressly or as incidental to its very existence.”Thus if we take the corporation’s moral personhood seriously, then itshaving extra-legal duties would be part and parcel of its very existence.Though the argument doesn’t formally beg the question, its conclusiondoes rest on a premise that is as doubtful as the conclusion, and is asdoubtful for the same reasons, so the Artificial Persons Argument begsthe question materially.

Again, it may be that Friedman did not intend the argument I haveattributed to him. If so, then my objections are moot. But it is not implau-

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sible that Friedman has some such argument in mind, and to the extent thathe does, my criticisms are germane.

The Agent-Principal Argument

Friedman’s second argument is the Agent-Principal Argument, which isperhaps the most important argument in the article. There can be nodoubt that Friedman makes this argument, for he asserts it quite straight-forwardly: “in his capacity as a corporate executive, the manager is theagent of the individuals who own the corporation . . . and his primaryresponsibility is to them” (p. 51). Fully reconstructed, the argumentgoes:

P1 Management is the agent for the stockholders, who are theprincipals.

P2 An agent’s primary responsibility is to protect and promote theinterests of her principal.

C So, management’s primary responsibility is to protect andpromote the interests of the stockholders.

P2, of course, is implicit, but there is no problem with attributing it toFriedman, not least because it is necessary for the deductive validity of hisargument.

Though the argument is valid, there may be doubts about its sound-ness. John Boatright, for one, argues that management is not the agent forthe stockholders, because the conditions necessary for agency – mutualconsent to the agent-principal relation, the agent’s power to act on theprincipal’s behalf, and the principal’s power to control the agent – arenot met (Boatright, 1994, pp. 80–81). There seems to be some tensionbetween Boatright’s second and third points: he argues that managementis not the stockholders’ agent because management cannot, for example,merge the corporation without stockholder approval; but then the prin-cipal is able to control the agent (in certain matters, anyway). It’s hardto see how Boatright can make both claims simultaneously. Moreover, itmay be that Friedman intends the agency relation in not quite so literal asense. I suggest that even if we waive Boatright’s objections and grant thetruth of Friedman’s premises, the argument still fails to adequately supportFriedman’s view.

That is, even if the Agent-Principal Argument is sound, it is too weakto support Friedman’s theory of corporate moral responsibility; indeed, itis guilty of an ignoratio. Friedman’s position is that management’s onlyresponsibility is to protect and promote the interests of the stockholders:“there is one and only one social responsibility of business – to use its

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resources and engage in activities designed to increase its profits so longas it stays within the rules of the game” (p. 55). But the conclusion of theAgent-Principal Argument is that this is management’s primary respon-sibility. Not only are ‘primary’ and ‘only’ not synonymous, but ‘primary’leaves open and indeed suggests the possibility that there are other intereststo be considered, albeit not primarily.

Consider a non-egalitarian stakeholder theory in which the interests ofall stakeholders are given genuine, but unequal, consideration: the interestsof the non-stockholding stakeholders are considered independently of howtheir satisfaction promotes the interests of the stockholders, though theinterests of the stockholders are given more weight than the interestsof the non-stockholding stakeholders. Something like this seems to beKenneth Goodpaster’s view, in which management has fiduciary dutiesto the stockholders, and morally significant, non-fiduciary duties to theother stakeholders. Unsurprisingly, these are extra-legal, negative dutiesthat include “the duty not to harm or coerce and duties not to lie, cheat, orsteal” (Goodpaster, 1991, pp. 72–73).

Consider also a view in which management has positive duties topromote the interests of the non-stockholding stakeholders (and not merelynegative duties not to harm them), but in which the to-be-promoted stake-holder interests have less weight than the interests of the stockholders.Suppose a company can further maximize an already healthy profit byrelocating a plant. On Friedman’s view, of course, it must do so (providedthat the negative publicity, etc., is factored in). But on the view I amsuggesting, if the corporation is already making a healthy profit – perhapswell above the industry norm – management could reason that increasingthe annual return from 15% to 16% isn’t worth the harm moving theplant would cause the employees and community. The stockholders arealready being well served, management reasons, so the interests of theother stakeholders can be promoted without harming the stockholders.The interests of the stockholders, while not being promoted maximally,are being promoted to a satisfactory degree – indeed, to a very highdegree.

The problem with the Agent-Principal Argument is that, far fromsupporting the stockholder theory, its conclusion is consistent with thenon-egalitarian, satisficing version of stakeholder theory sketched above.Moreover, if we attempt to modify P2 (and C) be replacing ‘primary’with ‘only’, the argument is either unsound or question-begging. It maybe unsound for the reasons Boatright gives, but even if we grant that themanagement-stockholder relation is an agent-principal relation, the argu-ment is still unsound because it is false that an agent’s only duty is to

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her principal. A stockbroker, for example, often acts as the agent for herclient, but she also has duties to her employer: though it would maximallypromote the client’s well-being for the broker to execute a trade withoutany commission, it is not in the firm’s interest that the broker do so. Onthe other hand, the argument begs the question, because no stakeholdertheorist would accept the reformulated version of P2.

Thus Friedman argues for the wrong conclusion, since the issue isnot whether management’s primary obligation is to the stockholders, butwhether management’s only obligation is to the stockholders. So even ifwe grant that the Agent-Principal Argument is sound, it is too weak tosupport Friedman’s view.

The Taxation Analogy Arguments

The next argument is related to the Agent-Principal Argument, but it isindependent of it. Here Friedman argues that

if [the executive] spends the money in a different way than [the stockholders] would havespent it . . . he is in effect imposing taxes, on the one hand, and deciding how the taxproceeds shall be spent, on the other. This process raises political questions on two levels:principle and consequences. (p. 52)

The argument, then, is that since management is in effect imposing taxeson the stockholders if it acts to promote or protect the interests of the otherstakeholders, and since it is wrong – both in principle and because of theconsequences – for management to do so, it follows that managementshould not act to protect and promote the interests of the other stake-holders. So Friedman here argues for his stockholder theory by arguingagainst the stakeholder theory.

There are really two different arguments here, so let us consider themseparately. The first argument goes:

P1 If management seeks to promote or protect the interests of non-stockholding stakeholders at the expense of the interests of thestockholders then it is in effect “taxing” the stockholders.

P2 But it is wrong in principle for management to “tax” on thestockholders.

C Therefore, management should not seek to promote or protectthe interests of non-stockholding stakeholders at the expense ofthe interests of the stockholders.

Straightaway we can see that the argument is valid; the issue is whetherit is sound. The taxation analogy expressed in P1 is plausible enough. Asfor P2, Friedman gives two reasons for thinking that it is in principle wrongfor management to “tax” the stockholders by practicing the stakeholder

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theory. The first is that doing so violates the separation-of-powers prin-ciple on which our government is founded: “the businessman . . . is to besimultaneously legislator, executive and jurist. He is to decide whom totax by how much and for what purpose, and he is to spend the proceeds”(p. 52). The second is that in so acting management violates the principleof “ ‘[no] taxation without representation’ [which] was one of the battlecries of the American revolution” (p. 52).

Neither reason adequately supports P2. As for management’s violatingthe doctrine of the separation of powers principle, surely there is in prin-ciple nothing objectionable in not separating the legislative and executivefunctions – unless we think there is in principle something wrong withparliamentary systems such as Britain’s and Canada’s. Friedman’s objec-tion must be to the usurpation of “the judicial function of mediatingdisputes and interpreting the law” (p. 52), but even here we might bear inmind that England’s highest court comprises certain members of the Houseof Lords. Moreover, the board of directors can mediate disputes betweencompeting stakeholders or institute procedures to guarantee due process,so there is a check on management’s power.

As for the claim that management’s “taxing” the stockholders violatesthe principle of “no taxation without representation,” Friedman seemsto have forgotten that the stockholders elect the board of directors, towhom the executives running the company are immediately answerable,so they are represented (even if they are “taxed”). Though the stockholdersdo not directly elect management, we should remember that Americanvoters do not directly elect the president, and senators were not directlyelected until the passage of the 17th Amendment. Since stockholders dochoose management, albeit indirectly, it is simply false that they sufferunder the tyranny of taxation without representation. Moreover, Friedmanhimself acknowledges that the tax collector-allocator-adjudicator may be“appointed directly or indirectly by stockholders” (p. 52), so it is puzzlingthat he makes the no-representation claim.

Since neither of his reasons adequately supports P2, Friedman has givenus no reason to think his argument is sound; indeed, it seems plainlyunsound.

Let us then turn to the other version of the Taxation Analogy Argument,which asserts that management should not promote the interests of theother stakeholders because of the baleful consequences of doing so. Thisversion of the argument differs from the in principle version only by itsdifferent second premise.

P1 If management seeks to promote or protect the interests of non-stockholding stakeholders at the expense of the interests of thestockholders then it is in effect “taxing” the stockholders.

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P2* But it is wrong because of the consequences for management to“tax” the stockholders.

C Therefore, management should not seek to promote or protectthe interests of non-stockholding stakeholders at the expense ofthe interests of the stockholders.

Again, the argument is valid; the question is whether it is sound, so letus see whether Friedman has given us good reason to think it so. Friedmanargues that while “the corporate executive . . . is presumably an expert inrunning his company . . . nothing about his [position] makes him an experton inflation” (p. 53) or on any other morally worthy objective. If she triesto hold down prices (to benefit her customers), she may simply divert theirspending power elsewhere, thereby failing to solve the problem, or she maymake the problem even worse: her actions “simply contribute to shortages”(p. 53). The Argument from Expertise that Friedman gives for P2* can bereconstructed thus:

(1) Management can effectively promote the interests of the non-stockholding stakeholders only if it has expertise in this area.

(2) Management lacks expertise in this area.(3) Therefore, management cannot effectively promote the interests

of the non-stockholding stakeholders.(4) If management cannot effectively promote the interests of

the non-stockholding stakeholders, it is likely that its effortswill actually demote their interests – the consequences of itsattempting to promote their interests will be baleful.

(5) Therefore, management’s attempt to promote the interests of thenon-stockholding stakeholders will have baleful consequences.

Though Friedman does not state the argument in such detail, I trust that thereader will agree that this is a fair reconstruction of Friedman’s thinking.

The Argument from Expertise is certainly valid, but even a cursoryexamination of its premises, especially (1), reveals that it is unsound.It might be thought that (1) would be more plausible if management’sexpertise were made a sufficient, rather than a necessary condition, forits effectively promoting the interests of the other stakeholders – that is, if‘if’ were substituted for ‘only if’. This would render the argument invalid,of course, but there are other reasons for preferring the only if- to the if-formulation of (1), not least of which is the implausibility of supposing thatexpertise in an area is sufficient for practical effectiveness; that expertsmight be practically ineffective is proverbial. Is (1) true or plausible inthe only if-formulation? I think not. First off, while technical expertisemay be required to promote certain goods – Friedman’s inflation example

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is one – is it really plausible that CEOs of major corporations lack therequisite economic knowledge? It’s doubtful that one must possess a Ph.D.in economics, as does former Enron CEO Ken Lay, to have the requisiteknowledge. Moreover, it is implausible that such technical expertise isrequired for persons, be they corporate or natural, to adhere to or evenrise above the minimal level of moral decency we expect from each other.What sort of expertise is required for an executive to know that relocatinga profitable plant on which a community depends will hurt the community,or that reducing the output of toxic chemicals will benefit the community?

On the other hand, suppose that such expertise is required. Why shouldwe suppose that the CEO herself must possess it? One need not be anexpert in baggage-handling systems or know how to fly, for example,to effectively run an airline; instead, one finds someone who is such anexpert, and relies on her for guidance. Similarly, one need not be anexpert in employee relations to effectively promote the well-being of one’semployees: one can hire someone who is.

So even if we grant the truth of (2), the claim embedded in (1), thatsuch expertise is necessary, seems plainly false. Thus Friedman’s argumentin support of P2* is unsound, which gives us no reason to think that theTaxation Analogy Argument is sound.

The Personal Responsibility Argument

Friedman’s next argument turns on the claim that “the great virtue ofprivate competitive enterprise [is that] it forces people to be responsiblefor their own actions” (p. 53). Without straining the limits of charity, wecan, I think, attribute the following argument to Friedman:

P1 If stockholder theory promotes individual responsibility thenceteris paribus we should endorse it.

P2 Stockholder theory promotes individual responsibility.C Therefore, ceteris paribus we should endorse stockholder

theory.

The argument is again valid but again unsound. P1 makes sense givenFriedman’s view that the economic freedom guaranteed by the stockholdertheory is necessary for political freedom, and the plausible connectionbetween individual responsibility and political freedom. Friedman assertsP2 when he says that the stockholder theory “forces people to be respon-sible for their own actions and makes it difficult for them to ‘exploit’ otherpeople for either selfish or unselfish purposes” (p. 53). It is hard to imaginethat Friedman reflected very long on P2, for not only is it false, it is obvi-ously false, since the stockholder theory encourages the exploitation of

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employees, suppliers, customers, etc., for the benefit of the stockholders.It may be best for them not to feel exploited, but there can be no doubt thatthey are treated as mere means: their interests require no direct considera-tion; they are merely to be manipulated for the benefit of the stockholders.If an executive can legally externalize her costs – say, pass on the costsof cleaning up the pollution that is a by-product of making her product –then Friedman’s theory clearly requires her to do so. It would not be inthe interest of the stockholders for her to seek to internalize such costs,since doing so would reduce corporate profit and put the company at adisadvantage if its competitors continued to externalize. And if all agreedto internalize their costs, the CEO now has an incentive to free-ride, sincedoing so would maximize profit. It is simply implausible to suppose thatstockholder theory encourages the sort of personal responsibility Friedmanclaims for it.

The Free Society Argument

The last of Friedman’s arguments is his argument that “the cloak ofcorporate social responsibility . . . does clearly harm the foundations ofa free society” (p. 55). Here he defends stockholder theory by pointing tothe baleful consequences of the stakeholder theory (which he calls “thedoctrine of social responsibility” (p. 53)). I reconstruct the argument thus:

P1 Whatever reduces economic freedom harms the foundations ofa free society.

P2 The practice of stakeholder theory reduces economic freedom.C1 Therefore, stakeholder theory harms the foundations of a free

society.P3 We should reject whatever harms the foundations of a free

society.C2 Therefore, we should reject stakeholder theory.

As usual, the argument is valid but unsound.I think we can safely grant P3, and P2 is not implausible, even though

Friedman regularly overstates his point – for example, he says that stake-holder theory is essentially a “socialist view” (p. 53) and that those whoadvocate it are “preaching pure and unadulterated socialism” (p. 51). Butthe stakeholder theory does not advocate public ownership of the means ofproduction; it merely requires that corporate persons do what we thinkall decent natural persons ought to do, which is to consider how theiractions affect the well-being of those around them. Thus it is hard to seehow stakeholder theory is socialistic. Perhaps Friedman is helped alongto this mistaken view by the assumption that any non-market constraints

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on corporate behavior will not be “the social consciences, however highlydeveloped, of the pontificating executives . . . [but] the iron fist of Govern-ment bureaucrats” (p. 55). Friedman never explains why the constrainingforces must be “external forces” (p. 55). We regularly expect naturalpersons to constrain their conduct within bounds set internally; why shouldwe assume artificial persons such as corporations are incapable of the samesort of self-regulation?

This point aside, it is true that following stakeholder theory rules outcertain forms of economic behavior and limits the acceptable options. Letus, at any rate, grant that P2 is plausible. That leaves P1, which rests on aclaim for which Friedman argues at length in Capitalism and Freedom, that“capitalism is a necessary condition for political freedom” (1962, p. 10).Querying this provocative thesis would take us well outside the ambit ofthis little essay, so I shall not consider it in depth. Still, I think we can seethat P1 is false.

One reason for thinking P1 false is that any tenable account of moralitywill rule out certain forms of economic behavior. Even egoism rules out theform of economic freedom known as prodigality, since egoism holds that Iought not spend well beyond my means, because prodigality is imprudent:I am economically, but not morally, free to waste my money. Utilitarianismtells me that I ought not to hoard money or spend it on a new DVD player ifdoing so does not maximize (total or average) well-being. Kant thinks thatboth the avaricious and prodigal persons fail in their duties to others andself, respectively, and Aristotle thinks prodigality, while not as vicious asavarice, is still a vice. It is hard to see how restricting a company’s freedomto externalize its costs (by imposing a duty not to pollute, as Australiadoes) harms the foundations of a free society.

Moreover, far from harming the foundations of a free society,moral constraints on voluntary economic arrangements can be seen topromote these foundations. A good case can be made that the doctrineof employment-at-will militates against self-respect by systematicallytreating persons as mere means: in denying that good reasons or evenany reasons need to be given to terminate employment, rational agentsare treated as though they are not the sort of beings that need or respondto reasons. If this is true, and if self-respect is necessary for the fullexercise of political liberty, then the economic freedom embodied inemployment-at-will will harm the foundations of a free society by assuringthat citizen-employees will lack the full self-respect necessary for the exer-cise of political liberty. Obviously, I can do no more than merely to gestureat this argument here, and I recognize that reasonable people can disagreeabout this. Nonetheless, I do think it is clear that P1 is false, since any

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tenable moral theory will limit economic freedom, though it is obviouslyfalse that any tenable moral theory will harm the foundations of a freesociety. Thus another of Friedman’s arguments is, while valid, unsound.

CONCLUSION

Perhaps Friedman is correct that “discussions of the ‘social responsibilitiesof business’ are notable for their analytical looseness and lack of rigor”(p. 51). The problem is that his discussion of the issue is no different: notonly is it unclear just what his view is, none of the arguments he offersin support of that view are persuasive. We considered six arguments andfound none sound: one is invalid by equivocation, another commits anignoratio elenchi, and the rest are not merely unsound but rather obviouslyunsound.

Now Friedman’s theory of corporate moral responsibility may wellbe correct, though his arguments do not show that it is, and insofar ashis job was to rationally persuade us of his view, he has failed. In lightof Friedman’s failure to provide rationally persuasive arguments for hisview, we might consider how Friedman’s view coheres with other moralconvictions. Imagine a person who considers only her own interests whendeliberating about what to do. This person recognizes that her actionsaffect others – indeed, may often harm or injure others – but she considersthe effects of her actions on others only when they can affect her interests.I think most of us would think that such a person falls well below theminimal level of moral decency we expect from each other. Why thenwould we think it is permissible for a corporation to ignore the effectsof its actions on others, or to consider those effects only from its ownpoint of view? Presumably the fact that the corporation is an artificialperson and not a natural person cannot exempt it from the demands ofmorality.

REFERENCES

Beauchamp, T. L. and N. E. Bowie (eds.): 2001, Ethical Theory and Business (6th edn.),Prentice Hall, Upper Saddle River, NJ.

Boatright, J.: 1994, ‘Fiduciary Duties and the Shareholder-Management Relation: Or,What’s So Special About Stockholders?’, Business Ethics Quarterly 4, 393–407.

Carson, T.: 1993, ‘Friedman’s Theory of Corporate Social Responsibility’, Business andProfessional Ethics Journal 12, 3–32.

Friedman, M.: 1962, Capitalism and Freedom, University of Chicago Press.

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Central Michigan UniversityMt. Pleasant MI 48859E-mail: sean.mcaleer@cmich.edu