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The Friedmanite argument for regulation

By Justin Fox

University of Michigan strategy professor Anil Karnani had a piece in Monday's Wall Street Journal that began like yet another admiring riff on Milton Friedman's famous 1970 essay, "The Social Responsibility of Business is to Increase its Profits":

Can companies do well by doing good? Yes -- sometimes.

But the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed.

By the end, though, Karnani had taken this argument to a more interesting place. Because it's often not in corporations' interest to act in the public interest, he wrote, "The ultimate solution is government regulation ... with all their faults, governments are a far more effective protector of  the public good than any campaign for corporate social responsibility."

This actually isn't diametrically opposed to Friedman's contention that corporations should do whatever they can to make money "within the rules of the game" -- rules presumably set by government. It's just that Friedman was so suspicious of government and of regulation that he seldom permitted himself to say a good word about it.

Add to this the complication that corporations, far more so in modern Washington than in 1970, play an often decisive role in determining the rules of the game under which they operate. Case in point: the relaxation of capital standards on banks and securities firms in the years leading up to the financial crisis, or the machinations of the Kochtopus.

So where does that leave us? I'm not entirely sure, but I do think we ought to be suspicious of any argument that businesspeople and (in particular) their representatives in Washington have the answer to this quandary. Why? Because Uncle Miltie told me so (near the end of his social responsibility essay):

I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely far-sighted and clear-headed in matters that are internal to their own business. They are incredibly short-sighted and muddle-headed in matters that are outside their businesses but affect the possible survival of business in general.

Justin Fox is editorial director of the Harvard Business Review Group and author of "The Myth of the Rational Market."

By Justin Fox  |  August 24, 2010; 9:45 AM ET
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And this is even before you get to the agency problem, where modern managers essentially view themselves as profit-maximizers in their own right, and the corporations they work for as marks, erm, customers for their services.

Posted by: paul314 | August 24, 2010 10:51 AM | Report abuse

After 42 years in advertising, having watched and dealt with many to top executives in many businesses, I can verify Friedman's observation: their ignorance is appalling outside their fields.

Yet that fact doesn't prevent them from acting like experts on anything, as if attaining CEO status made them infallible.

Plus, they don't like it when they are contradicted, which leads to management teams totally obsequious to the top manager—the blind leading the deaf and dumb.

Posted by: tomcammarata | August 24, 2010 1:43 PM | Report abuse

"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." The Social Responsibility of Business is to Increase its Profits by Milton Friedman The New York Times Magazine, September 13, 1970.

Posted by: WPComment1 | August 24, 2010 7:11 PM | Report abuse

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