William J. Stepp -
1/26/2008
Roderick T. Long’s revises Milton Friedman’s argument about the social responsibility of business by blending it with “stakeholder theory” and libertarianism.
The former doctrine holds that corporate actions ought to be concerned with the interests of shareholders and other stakeholders, including employees, customers, and the community. The latter maintains that any action not in violation of someone’s rights is consistent with liberty and justice and should be allowed.
Prof. Long states that the standard interpretation of Friedman’s argument—that it is consistent with libertarianism but opposed to stakeholder theory because it “seems to grant special status to shareholders on the grounds that that [sic] they are the owners of the company…” —is “quite wrong” (p. 3). On his reading, Friedman’s position is a variation on stakeholder theory. He claims that corporate managers act as agents of shareholders and also, in some ways, of employees and customers.
Prof. Long accepts at face value Friedman’s arguments
that by spending shareholders’ money on the general social interest, a manager reduces their returns; that by raising prices, he is spending the customers’ money; and that by lowering wages, he is spending the employees’ money. However, as I showed in my previous comment, corporate philanthropy can be consistent with maximizing the value of shareholders’ investments, and can be done with the approval of shareholders. As I also explained, neither of Friedman’s other two points are true. Prices (and wages) are changed in response to shifting patterns of supply and demand in both product and labor markets. A higher posted price does not impose a cost on a customer, who is free to pay the price freely or under protest, negotiate a lower price, or take his business elsewhere. The same principle applies for a worker facing a lower wage rate. He can accept it with or without grumbling, negotiate a higher rate, or work elsewhere.
Prof. Long also accepts Friedman’s fallacious argument that a manager taking these actions imposes a “tax” on shareholders, customers, and employees, and then spends the “proceeds” on philanthropic projects. Therefore, he claims, “Freidman’s article is not a defense of shareholder rights against those of stakeholders, but of stakeholder interest against those of society at large. The manager’s obligation to her shareholder employers is simply, it seems, a special case of her obligation to the stakeholders in general” (ibid.).
On his reading, Friedman is a closet stakeholder theorist also because his view of corporate social responsibility excludes sole proprietors, but ensnares corporate managers, who are more likely to have “monopolistic power,” as Friedman put it.
The alleged costs imposed by single proprietors on their “stakeholders” do little harm, and so can be ignored. However, if such a “company were large enough to have an influence comparable to that of a major corporation, then it would be illegitimate for the individual proprietor to pursue socially worth goals in such a way as to lower or raise prices.” This is a variant of stakeholder theory, he maintains, because Friedman implicitly holds that customers and employees have interests with comparable weight to those of shareholders.
The alleged imposition of such “costs” on customers and employees is an “illegitimate tax” only if done as what stakeholders would recognize as an element of a firm’s corporate social responsibility, not as part of the ordinary course of its business (p. 4).
Friedman does not give an example of a monopoly. He would have been hard pressed to, because on the free market they do not exist. He also mentions labor unions, which are (bad word alert) monopsonies. (A monopsony is a single buyer, in this case of labor services). They have the legal power to force employers to bargain with them on behalf of unionized workers, thanks to the Wagner Act and other statutes. The advocates of stakeholder theory can puzzle over the costs they impose on their stakeholders.
Prof. Long admits that Friedman does not say that corporate managers should be enjoined “from imposing these costs on their stakeholders, but his language – his [Friedman’s] talk of using other people’s money, of illegitimately imposing taxes, and so on – suggests as much.” He concludes that “if, as it seems, Friedman is committed to imposing such a legal requirement even on individual proprietors, should their companies be of sufficient size, then he is certainly at odds with the Rothbardian’s or Nozickian’s commitment to the sanctity of private property” (p. 5).
He states that Friedman’s argument (what he calls the “Shareholder Argument”) has been “consistently misinterpreted” and given a libertarian interpretation which does not stand scrutiny. It is not “an anticipatory libertarian critique of stakeholder theory.” On the contrary, it is better seen “as a stakeholder theorist’s critique of libertarianism,” even if Friedman did not mean it this way (ibid.). His goal is to challenge this argument, and to construct a Rothbardian theory for corporate social responsibility.
The second section of Prof. Long’s paper is a summary and critique of various responses to the Shareholder Argument. The Strategy Response holds that corporations should do socially responsible works for stakeholders. Even if they reduce profits in the short term, they are likely to raise them in the long term, thus benefiting shareholders and employees by improving company morale and a firm’s reputation and standing in the community. This argument is consistent with libertarianism, and with the argument made by Zivin and Small cited in my earlier post. Of course, even if corporations ought to do such works, it would be up to them and their shareholders whether they actually do so.
Prof. Long poses the question of what to do when the ends of “stakeholder welfare” (which he does not define even in a cursory way) conflict with shareholder profits.
In such cases, can profits be reduced for programs that further “stakeholder welfare”?
This raises the Strategy Counter-Response, the flipside of the Strategy Response, which sees benefiting shareholders themselves as the best way to benefit stakeholders in the long run. Increasing profits benefits customers, which includes all stakeholders. Entrepreneurs do this as a matter of course; and this too is consistent with libertarianism. He writes that both responses “seem overstated,” and that “[i}t is hard to believe that there are no cases in which a corporation could bring about directly a clear and easily discernible benefit to stakeholders that would not be outweighed by a corresponding indirect harm.” This is probably true, but it would have to be judged ex ante by a corporation proposing to offer a benefit to a stakeholder, whatever it might be.
What he calls the Threat Response holds that a corporation ought to provide social benefits voluntarily; otherwise it runs the risk of the public demanding laws that impose them. It is not a valid criticism of the Shareholder Argument, because it overlooks the argument that managers should eschew policies promoting corporate social responsibility. On p. 8, no. 15, he quotes DesJardins and McCall, who say that if Freidman’s advice that money otherwise directed toward charity by corporations were paid out as dividends, the public might demand that government fill the charitable void, and increase corporate taxes to do so. This is plausible, and it would reflect the degree of statism in society. The loudness of the hue and cry for such spending would be in proportion to this statism.
According to the Ignorance Response, managers might allow ethical concerns to guide their actions, because they cannot know what actions maximize profits. He claims that this concedes too much because if managers did know what decisions maximized profits, they would be morally mandatory. Managers make decisions with imperfect information in all conditions, because there is no such thing as complete information in a market economy. It does not follow, however, that therefore they should use ethical concerns to override economic calculations, assuming the latter are consistent with the law (which in turn supposedly has an ethical basis).
The No-Such-Preference Response claims that we cannot assume that shareholders value profits as their highest goal. He cites socially responsible investing as a counterweight to this assumption. (There are mutual funds that cater to such investors.)
“Hence one cannot simply read off from a stock purchase an overriding preference for profit maximization,” he continues, rightly. He notes that shareholders can shift their investments in accordance with their changing views of profit maximization and social responsibility. They can achieve whatever balance they like this way.
Prof. Long sees the advantage in this point, but he thinks that if shareholders did prefer corporate managers who maximized profits, then satisfying this demand would be both economically sound and “morally obligatory. I wish to resist this concession,” he states (p. 9).
Why gainsay what shareholders want, as long as they are investing their money in non-criminal enterprises in accordance with the rule of law? Prof. Long does not say why.
Here we come to the crux of the matter: an investor, as Rothbard (and Mises) pointed out, maximizes his psychic income, ex ante, although not necessarily ex post, which is different from maximizing his monetary income. The same principle applies to other stakeholders. Thus, customers buy or refrain from buying in accordance with their ever changing value scales and assessment of marginal utility. Workers and other interested parties make similar calculations, which they are free to revise and act upon in the light of new information and shifting value calculations. To the extent that these actions are voluntary and within the rule of law (i.e., do not violate anyone’s rights), they are consistent with, and indeed imply anything within the realm of, corporate social responsibility.
Therefore, we need not invent a Rothbardian theory of shareholders’ rights or of corporate social responsibility. It is contained within Rothbard’s theory.
The last response, the Weak Rights Response, attacks the property rights of shareholders, even while conceding the Shareholder Argument’s point that corporate social responsibility (allegedly) stands in opposition to the rights of shareholders.
He points out that, correctly, that it is not impermissible for corporations to pursue socially responsible policies even under a stringent system of property rights. He closes the second section with a paen to “the odd rightwing Naderism of the Shareholder Argument,” but claims, incorrectly, that it “draws no support from libertarianism” (p. 10).
On the contrary, libertarianism is fully consistent with such a theory, assuming this brand of Naderism refrains from violating anyone’s property rights, including those of shareholders, customers, workers, and anyone else under the stakeholders’ umbrella.
The third section of the paper offers a theory of why libertarians should reject the Shareholder Argument. He assumes a world in which property rights prevail, that shareholders own corporations, and employ managers as their agents. He claims, incorrectly (see my first comment), that shareholders want the firms they invest in to maximize their revenue (they want them to maximize their profits, or more correctly their free cash flow). He stipulates that “stakeholder interest cannot be taken into account without to some degree frustrating this preference.” He therefore rejects the view, held by both sides of the Shareholder Argument, “that stakeholder theory is incompatible with a libertarian conception of property rights” (ibid.). On this view, he claims, adhering to libertarianism cannot enable one to evade stakeholder theory—and vice versa—embracing stakeholder theory cannot allow one to eschew libertarianism.
On this last point, I think he is correct. The devil is in the details of the argument he unfolds.
The argument he makes is the Prior-Obligation Response. It maintains that a contractual obligation to maximize shareholder returns “is overridden by moral obligations antecedent to the contract” (p. 11). He has not seen it posed so as to be consistent with either Rothbardian or Nozickian libertarianism.
He then lists some basic assumptions of libertarianism, which the Shareholder Argument might seem to follow from:
The third point is as follows:
“Stakeholders have negative rights not to be aggressed against in their persons and property, but no positive rights to benevolent treatment from corporate managers” (p. 12).
I would point out that stakeholders have these rights qua persons, not qua stakeholders.
Presumably, non-stakeholders have such rights too.
What if a FedEx plane crashes in some remote Asian village, killing and injuring some villagers and destroying their property? Presumably these are not FedEx stakeholders (unless the term “stakeholders” is so broad as to be devoid of meaning), but they are certainly entitled to restitution from FedEx. Enough of these incidents might lighten the wallets of FedEx’s investors, not to mention ruin the packages of some of its customers, and its “The World on Time” reputation, but caveat emptor.
The fourtheenth point reads,
“Therefore, so long as corporate managers refrain from aggression against stakeholders’ persons or property, a contract requiring them otherwise to fail to take stakeholder interests into account in their decisions is morally binding” (p. 13).
Presumably, a corporate manager who legally aggressed against a stakeholders’ person or property (or even a non-stakeholders’ person or property) would be fired summarily, so the antecedent clause is irrelevant.
Why would a company ever require a manager to work under a contract that stipulated (legally, not morally – contracts are legally binding documents, and courts do not argue about ethical theories, nor should they) he otherwise (i.e., if he didn’t aggress against a
stakeholder) fail to concern himself with stakeholders’ interests in his decision making?
More to the point, why would a firm stipulate anything about anyone else’s interests in an employment contract for anyone?
Employment contracts stipulate lots of things (like expected hours of work and other performance details), but not about stakeholders, or even shareholders for that matter.
He posits three principles, Nonagression (do not invade anyone’s person or property, which is Libertarianism 101); Nonharm (do not make anyone worse off); Benevolence (avoid failing to help anyone in need) pp. 15-16.
Nonagression is the only legally enforceable principle, as he mentions.
Prof. Long states that “commonsense morality” favors the other two. I beg to differ and so did Rothbard, at least with the Nonharm Principle. (I can’t find his critique of it, but I thought it was in The Ethics of Liberty. Maybe not. Does anyone know where he refuted it?) Harm (wasn’t that Mill’s big point?), as Rothbard pointed out, is far too subjective a standard for ethical principles or legal doctrines. How do you define harm? One man’s harm is another’s pleasure, etc. Arson, murder and robbery cause harm, but no court would ever indict an arsonist for causing harm, but rather would do so for arson.
We might call the Benevolence Principle the Good Samaritan Principle, and it fails too as a standard of legally actionable misconduct, as Prof. Long notes. The problem with benevolence is that it fails as a standard by which to judge actions as anything other than morally good, which is also hopelessly subjective and dependent upon the person judging a benevolent action. It too cannot be used as a legal standard to judge an action. (It is ironic that a theory of benevolence, which Adam Smith wrote about, cannot be found in Rothbard’s work. Rothbard loathed Smith’s views, which Prof. Long uses as part of a Rothbardian theory of corporate social responsibility.)
Following Nozick, rights are “side constraints” in guiding action including that of managers; but then he claims that they should be guided by the No Harm and Benevolence Principles too (p. 16). He then states, bizarrely, that “a contract requiring managers to violate the Nonharm and Benevolence Principles would thus not be morally binding.” Has any company ever even thought up such a contract? Do lawyers learn about these in law school? Somehow I doubt it.
Prof. Long posits these conditions without argument, as if they were self-evident. He says “that managers should not throw profits to the winds in a costly orgy of altruism; but it does mean that in making their decisions, managers should take into account the impact of those decisions on other people’s interests – which is exactly what stakeholder theory says” (pp. 16-17). This will lead to some deviation from profit maximizing behavior, although not a great deal of it, he thinks.
To his supposition that that is “a general obligation to consider the impact of our choices on others…” (p. 17), my question is: would such an obligation be legally binding? He says we cannot contractually be relieved of such an obligation, but never addresses the other side of this coin, which is far more important, at least if his idea is to be operational. If it is not legally obligatory on either a firm or its employees, then what is the point of even considering it? I see no libertarian warrant for it, ethically or legally.
I do not find it in Rothbard.
The Nonaggression Principle and the property rights and laws that spring from it are enough for society to function, and for businesses to operate and create good (i.e. services) and jobs. These theories and institutions are also good enough for at least a slimmed down version of Stakeholder Rights theory to be valid, one consistent with Rothbardianism. They enable corporations to pursue corporate social responsibility, even as the rights of shareholders and other interested parties are protected.
Prof. Long considers plant closings and poses the question of what should managers considering closing a plant do if this would have a “devastating impact on the economy of the local community” (pp. 17-18). He admits that under a nonbinding Nonharm Principle, they should close the plant. He thinks that if it is as applicable as the Nonagression Principle, they should either not close the plant (and cause the shareholders and perhaps workers, customers, and suppliers to suffer?) or phase out its closing “extremely slowly, while assisting the employees in finding new jobs” (p. 18).
He admits that firms are not charitable institutions, but holds that “common decency requires giving employees fair notice and some chance to adjust, before cutting off their sole source of income” (ibid.). He thinks managers should take into consideration stakeholder interests, even though non-shareholder stakeholders are not owners of the firm. He notes the inconsistency between this view and the Shareholder Argument.
The main problem with this notion is that the capitalistic process of creative destruction, and its attendant reshuffling of capital flows, and the growth of innovation, business formation, and jobs it leads to, can only be impeded by the legal regime that it might bring forth. This would inevitably harm the local community in a way not envisioned by its advocates. Should the demise of the horse and buggy industry have been stopped by opponents of the new fangled automobile just because blacksmiths and stable workers were threatened with being thrown out of work? They no doubt retooled and found new work. (I can walk a few blocks from my residence and see the sites of several old stables, with their ancient signs and red brick facades, which are now residential buildings.)
In short, there is a Rothbardian theory of corporate social responsibility; it is implicit in Rothbard’s writings. It is, however, at serious odds with the ideas put forth by Prof. Long.
William J. Stepp -
1/25/2008
In his essay, Milton Friedman says that "discussions of the 'social responsibilities of business' are notable for their analytical looseness and lack of rigor."
He proceeds to illustrate his own criticism in two ways.
First, he claims that, in following the ethos of corporate social responsibility, manager-agents "tax" stockholder-principals, customers and employees by spending their money in ways that are inconsistent with increasing the profits of the shareholders, offering a fair (just?) price to customers, and paying a fair (living?) wage to employees.
Never mind that managers sometimes make bad investments that reduce the value of their shareholders' investments, and if they do it enough they might be out of work. Presumably these dodgy investments are not called taxes. If you lose money on a stock, have you taxed yourself? Is your loss Uncle Sam's gain?
It's hard these days to pick up a business publication and not read an article about corporate-sponsored philanthropy. Gene Epstein had an article in Barron's within the last two years highlighting the research of a couple business school professors, who showed that the stock prices of firms making charitable donations outperform those that don't. Joshua Graff Zivin and Arthur Small, "A Modigliani-Miller Theory of Altruistic Corporate Social Responsibility," Topics in Economic Analysis and Policy, 5 (2005) showed that under certain conditions, share price maximization is consistent with corporate philanthropy.
And of course, companies are falling all over themselves to burnish their green credentials these days, with or without subsidies. They are even finding that such actions can be good for their bottom lines and share prices.
Would Milton Friedman object to all this today, particularly if charitable contributions were approved by shareholders?
Friedman does allow near the end of his essay that charitable giving "may make it easier to attract desirable employees," etc.
He says that "Insofar as his actions raise the price to consumers, he is spending the customers' money." When the customers fork over their money, never mind the price they pay, which is agreed to by consenting adults, it's no longer their money. If they don't like paying higher prices, they are free to go across the street or around the globe.
He continues: "Insofar as his actions lower the wages of some employees, he is spending their money."
If their wages are reduced for whatever reason, he is spending the firm's (shareholders') money, not the workers'.
Second, Friedman states that when government imposes taxes, it does "so far as possible in accordance with the preferences and desires of the public...." It's just a short step to the view that a businessman is "simultaneously legislator, executive and, jurist." He not only taxes, but also spends the proceeds to fight inflation, poverty, improve the environment, etc.
As Rothbard pointed out many times, notably in Power and Market, government is not a business, and therefore doesn't produce a product to satisfy consumer demand. On the contrary, there is a split between payment for and receipt of government-provided services. The demand for at least some government "services" (e.g., promulgation and enforcement of drug laws and "intellectual property") is an imposed demand by politicians and bureaucrats, in cahoots with lobbyists (at second hand) and voters (at third hand). The taxes to supply these "services" comes from the taxpayers, who generally are not paying customers.
Whatever a businessman is, he is neither a legislator, an executive (of the government), nor a jurist.
Whether one agrees or disagrees with corporate responsibility in general, or specific contributions that further this end, as long as shareholders are free to choose in this field, they should be allowed to do so.
