F20 Week 2: Milton Friedman's theory of Profit Maximization Ethics

[Music] Hey all, Professor Singer here. So today's podcast is a conversation with Pascovon Creechstein at Ryerson University in Toronto. And we're talking about Milton Friedman's piece, the social responsibility of businesses to increase into profits. So another piece that I asked you to read is the statement from the business roundtable from 2019, where they adopted what is often referred to as a stakeholder approach, which says that businesses have a responsibility to maximize value for its stakeholders. That's an idea that I'm sure is familiar to many of you. But it's important to understand where it comes from, and where it comes from really is as a reaction to the dominance of the Milton Friedman view. So what we're doing in this class in this week, and what we'll talk about during discussion sessions, is trying to understand what this idea is responding to, what its merits are, what its problems are, but also really importantly, what the structure of its argument is, and what it teaches us about the moral nature of business, like what things, what concerns are at stake, and importantly, what concerns are not at stake. So anyway, I thought it was a good conversation, I hope you did. [Music] All right, welcome to the first class podcast of this semester. This is your professor, Abraham Singer, and I'm here with a very special guest, my friend, Hasco von Freakstein. Is it Freakstein or Freakstein? It's Freakstein. Freakstein, that's what I thought. And so you've agreed to come and help me unpack and understand Milton Friedman's very famous article, the Social Responsibility of Business, is the Maximized Profit. Maybe first, just introduce yourself, tell my students about yourself. Yeah, so as Abraham said, my name is Hasco von Freakstein, and I'm also a professor in the Business School, a teacher, a business ethics, at the Ted Roger School of Management, at Ryzen University in Toronto, Canada. And I met Abraham when we were both pursuing our PhDs at the University of Toronto, so it's great to have this conversation. Great, yeah, you make me feel very, very fancy calling me Abraham. I always go by Abraham. All right. So yeah, so let's dive in with Freakstein. So I was actually, it's worth just trying to emphasize. So this is probably the most influential piece written about business ethics. Yeah. I mean, maybe you can count the Bible, but other than that, right? Like this is actually one of the things that is influenced, especially modern American, North American business ethics more than maybe anything else. Would you think that's fair to say? Yeah, I think that's certainly fair to say. And I mean, maybe not even like business ethics as practiced by, you know, academics like you and me, but like also in terms of like the public perception of business ethics, and the way that like a lot of people think what business ethics is and is not has been hugely influential. I think that's right. But the other aspect of it is that it's also a very misunderstood piece, I think. So a lot of people, I think it has, it suffers from its own success in this way. It has one of the catchiest titles because it's just a title that sort of says the thesis off the bat. Yeah. But it's also slightly misleading. So what we're going to do here is really try and move through this argument. There's really important, really influential argument and try and do it slowly and try and really get at the moving parts and how the argument works and try and understand why it's been so influential, as well as maybe some of the problems. One of the things I think that makes it a misunderstood piece is that there's like lots of different kind of arguments going on all at once. Right. And so it is kind of like hard to keep track of all the lines of argument that that the treatment alludes to. And so like later work has like cashed out a lot of these arguments in. So more explicit terms focusing on just like one or two of the lines of arguments was like treatment, I think like runs four or five things all at once. So it is, it's quite the two or four set article is. I think it's also maybe fair just to say off the bat. So everybody. So we have lay our cards on the table. We're both or maybe I shouldn't speak from you for you, but I'm certainly a critic of this argument of this position. Would you would you consider yourself that as well or yeah, absolutely. Right. So we're both very, very critical of this position, but and this is crucial, especially for this sort of class. We're both going to take very good care to try and read this as charitably as possible. Absolutely. So when I first encountered the article, I thought the conclusion was obviously right. So I read this in my first year undergrad and I was in a philosophy economics program and I was like very. Much in love with like the economic way of like looking at things and I thought that, you know, all this whole talk about business ethics that's obviously just going to be a way of doing public relations. And it's all going to be, you know, ultimately bullshit when people talk that way. And so then I read the this article and I thought, yes, that's finally somebody who is clear headed about this. But then like over the years of like really come to like almost the opposite kind of view where like now one of like my main goals and my business ethics research is to find these kind of arguments as well articulated as they as they can be and then refute them. And that's actually really funny because my my relationship with this piece is probably the is almost the opposite where or not almost not the opposite. But where I went the first time I read it, I was like, well, this is this is a piece of crap. Like this is obvious. This is just like, you know, right wing economic propaganda or something. You know, and then as I've had to read it and teach it and engage with it more, I still disagree with it. But I find there's a lot of stuff in it. It gets a lot of things right that a lot of people hadn't gotten right before. Yeah, even even if his conclusion is wrong. And so I think even those of us who would disagree with this piece, we have a lot to learn from it. Maybe a way to get at a misunderstanding about this piece or a thing that a lot of people get wrong is they often take Friedman to be saying so when he says the social responsibility of businesses to maximize profit. It seems like he's saying all you need to do is pursue your own self interest. Like it seems like he's saying morality ethics. It's just a bunch of nonsense. All that matters is, you know, people going in the market greed is good that that sort of stuff. And what they miss is a really crucial distinction. And that's the distinction between self interest on one hand and profit seeking on the other. These things can go together and often do, but they're not strictly speaking the same thing. Yeah. Yeah. I mean, I often have trouble sort of articulating the difference. I'll take a stab at it. Maybe you can correct me. But a way I think of a self interest is just you trying to do, you know, trying to do what it ever is that you understand to be in your own interest, whatever you understand to be in, you know, in line with what you want in the world. Whereas profit is something a bit more technical where it's, you know, it's often cashed out as a residual right the residual of an organization. So, you know, what's left over after all expenses are covered or something like that. So, you know, you're going at this much more technical than I would. So, I think the distinction can be drawn out in this way. So, if you ask yourself, if you're a corporate executive and you're asking yourself, okay, what is, if you're maximizing your own self interest, what you're maximizing basically is your own compensation package and perks. Whereas, like, if you're maximizing profit, you're maximizing other people's money, right, because the profits don't come to you. I mean, maybe a share of it does and we'll have to talk about this a bit more, but like. So, in the first instance, right, so there's like what you take home and that's your compensation and maximizing that would be maximizing self interest, whereas maximizing profit is maximizing the money of other people, namely the shareholders. Right, and so there's sort of like the difference, right, that's why the treatment view is like a genuine like ethical view, right, it's not the view that there are no ethical rules. It's the view that there is one ethical rule, namely make money for the shareholders, right, and that's different because the people that this rule is supposed to apply to are not the shareholders themselves, but the people who are supposed to work for those shareholders. Okay, that's I think a great way of understanding it, right, and yeah, and I think this is a really important point because a lot of people when they read this article, they take freedman to being like a skeptic about morality, they take him to sort of be dismissing that morality has anything to do with business. And, you know, if we understand morality very crudely is just a constraint on your own self interest, you know, a principled constraint on your own self interest. Then this is still a moral view, right, because what he's going to say, and we're going to get into the weeds about this later, but what he's going to say is, if you're at the helm of a business, if you're a manager or CEO. You have the responsibility not to pursue your own self-interest. You have the responsibility to pursue the interest of those who have hired you or those, you know, for whose interest you're running the business in some way. That's right. So that being said, the article being as influential as it was, kind of like has blurred this distinction and practice. Because a lot of people, like especially, sort of like in finance theory, became very convinced by the kind of arguments that Friedman was making. So they ended up thinking, well, the main ethical problem that we have to somehow fix in business is that executives don't rip off shareholders, right? And the solution to this that was widely adopted then, so like in the in the later parts of the 20th century, was to tie executive compensation to shareholder value. So as to align those two things more closely, right? So conceptually, they're very different, right? As we have just laid out. But there's been like a movement to say, okay, why don't we just compensate executives with stock? That way, the two things like become together and this problem goes away where like we might have to worry that executives don't follow this ethical rule of having to maximize profit, because now that's also in their self-interest. And so because of the influence that this article has had, it actually has kind of itself like had this like weird effect of like blurring the distinction that we just worked so hard to kind of like draw. Yeah, no, no, I think that's right, right? Self-interest and profit are different, but people have tried to make it so that it's in your interest to pursue profit. That's right. So it's important to keep in mind the difference. Absolutely. I mean, so at the time that Friedman is writing, so this hasn't happened yet, right? So at the time, a lot of like corporate executives didn't own much of the stock of the companies that they were running and weren't compensated significantly in terms of the stock of the companies that were running. And so for them, there was this like really big difference, right? Between, okay, should I spend money on a corporate jet and like a nicer headquarter so that I can enjoy my working hours more, or should I pay like a higher dividend to the shareholders? And to that person, right? So the Friedman view really tells them, don't spend this money on yourself, give it to your employer. And so that's like a really kind of like an ethical thing to say that has some bite. And we'll talk about some more of these things as we go. But one thing we've already started to allude to, and it's worth maybe spending some time because it's it's actually a really, you know, in the sort of history of the development of business ethics as a theory. Friedman introduces this one piece of terminology that really, really is really important and sort of changes the game a little bit. And that's the idea of a principal agent relationship. So I'm sure students are familiar with this idea. I've heard it before, but it's worth sort of spelling it out. So a principal agent relationship exists when one person, the principal, tries to get another the agent to do something that is in the principal's interest, but not necessarily the agents. Right? So in the business setting, the, you know, in this is sort of in some ways the archetypical example, the corporate executive is the agent. And on Friedman's account, the shareholders are the principles. Right? Correct. And so what you have is the situation where CEOs and business managers are in this very, it's sort of an interesting perspective from the perspective of moral theory, at least in an intuitive way, where they are charged with acting on behalf of another, not on behalf of themselves. Right. So if you, if you read like more classic and by classic, I mean stuff that's really influenced by religion, you know, so like Christian business ethics or Jewish business ethics or Muslim business. This idea isn't that central. I mean, it's central in certain parts of it. But really the idea is, you know, doing virtuous things with your money, doing virtuous things with your funds. That's right. And what Friedman tries to do right off the bat is he says, look, the first thing you need to know, if you want to understand the ethics of business, you have to recognize that it's a principal agent relationship. And what that means is what you happen to think is moral or good, isn't actually the point right now, right? Because what you're charged with is the interests of other people, specifically making good on their investment. That's right. So let's say it's, you know, we have class on Monday, Wednesday and Friday and on Wednesday, I'm like, hey, guys, if everybody gives me five bucks, then on Friday, I'm going to bring in donuts and coffee and breakfast for everybody. Right? And everybody sort of does that. And then I come in on Friday and I'm empty handed. I don't have any breakfast. And I'm like, hey, what did you do that? What did you do with all the money? I'm like, oh, I gave it to this charity. Wow. You know, I thought it was a good idea, right? Like it was a really deserving charity. And they'd be like, well, you know, that was a nice thing to do, but you should have done that with your money, not with hours. That's right. When we gave you money, we charged you with the responsibility of doing what we hoped you would do with that money. Namely, get us, you know, donuts and coffee. Yeah. No, that's a great example. That really illustrates the point there. I mean, he often, I don't know, I mean, at least a couple of times, like throughout the article, right? He talks about this idea of like spending other people's money, right? And that that's really sort of like his, like one of the central objections he has, right? And to, to the idea that like a corporate executive would follow like that conscience or something like that while in the role of being the corporate executive, it's fine. You know, like as soon as they close the office door and like use their own funds, you know, be, you know, whatever, like a Christian, with all with all your heart and all your funds. But once you go back into the office, you're not working with your own funds anymore. And so you're not supposed to just like follow your conscience there. You just like you follow the instructions that you get from the people who employ you. That's the idea. Exactly. Right. And the way he puts it, I think it's exactly right. Like he says, the CEO who gives to the chair who uses corporate funds for charity, a charity they believe in is acting as a principal not as an agent, right? They're acting. That's right. In terms of what they think is right, not in terms of what is in the interest of their, their principles, namely, their shareholders in this regard. Right. Right. And so with this comes another little piece of a terminology that's important for us to understand, which is the idea of a fiduciary obligation. So a fiduciary obligation is it's very, it's closely related to a principal agent problem. But it's basically the legal and moral idea that an agent has the responsibility to act in the care of their principal. So the notion of the fiduciary is so like more familiar in other contexts, right? So so if if you, for example, like if you sibling dies and they have undead children and you hold the money that you're that you're sibling left behind in trust for your niece and nephew. Right. That's the kind of situation where we like where you have fiduciary duties towards your niece and nephew. So where the idea is this money you you ought to just like deal with that money in whatever is in their best interest, right? Rather than like what you would like to do with it. And so typically, I mean what this example shows is that like often we think fiduciary duties or fiduciary relationships arise when the person whose interest is to be protected or is to be served is rather vulnerable and like they can't really kind of like by themselves check on what the other person is doing or they don't really have have ways of effectively control what the other person is doing. And so we think this like principal agent relationship that exists there has gets like morally more significant because it's so right for abuse because of like the imbalance of you know power and control. It's this fiduciary obligation. It's this idea that has great more weight because we think of doctors abusing their patients or we think of priests not you know abusing their clergy or we think of parents you know not taking care of their children or whatever. And then he sort of takes that and he says oh that that's actually even though it looks different that's actually the relationship at at bar when we're talking about the corporation right. That's right. Even even if if power differential looks a little different it's still fundamentally what's going on. There's still somebody who's in the position to take advantage of somebody else. And so they have this fiduciary obligation. Okay good so that's that's really covers one of the big terms or concept that I want to make sure we get from this piece right. This idea of the principal agent relationship that it bears in the corporation and that comes with it comes with this moral idea of a fiduciary obligation. And with that Friedman's going to build out these arguments and I say that plural because as you pointed out earlier Friedman's actually making a number of arguments in this piece at once and they often get confusing. And for our purposes we can maybe split this into two. So on the one hand, Friedman wants to argue against what he calls corporate social responsibility, and we'll just use the short-hand CSR sometimes for that. And then the other thing he wants to do is argue for the ethic of profit maximization. So there's a negative argument in a positive argument, right? The negative argument against corporate social responsibility, and then this positive argument for profit maximization. Yeah. And so we'll talk about both of these things in turn. Yeah. So first, his argument against CSR. The first thing he does is he gives an understanding of what corporate social responsibility is. And it's worth noting here, because corporate social responsibility is like a very, very hot topic, and it's a big buzzword these days. So businesses have CSR statements. People, you know, the NBA is talking about its corporate social responsibility. We have all these things. I mean, he doesn't actually use the term CSR, right? He says what he says is social responsibility of business. Right. Right. So I think the big buzzword, CSR, actually only becomes popular later on, and he doesn't really use that. Right. But I mean, it's basically the same thing, right? So social responsibility is of business. But then he, of course, like also goes on to say that he thinks it's also only very marginally useful to speak of the responsibilities of businesses, of individual businesses. But like he rather thinks that if we talk about responsibilities, we ultimately always going to go back to like some individual human, who will have this responsibility, and then he focuses in on like the corporate executive. And he says, well, social responsibilities of businesses that could refer also to, you know, sole proprietors or people who run their own business. But really what he's most interested in is the corporate executives, who as we said earlier, runs the, in Friedman's view, runs the firm on behalf of shareholders. Yeah, that's exactly right. Right. So today we're more comfortable thinking of Microsoft as having social responsibilities. And for Friedman, it's really importantly that it's the CEOs, the executives of maybe not just CEOs, but the executives, the people who are making decisions on behalf of these corporations that have such responsibilities. Yeah. But so, but one of the little clever things I have to admit, I always kind of like this part, and this gets to something that you were talking about earlier on, is the way he understands what it would mean to say that businesses have a social responsibility. And for him, what it has to mean, if you say a manager or a business has social responsibility, it means that it's something they have to do in spite of profit. Right. It's, it's, it must mean that there are times where you have to go beyond or sacrifice profit for the purpose of pursuing some social responsibility, be it poverty alleviation, environmentalism, you know, rectifying racial injustice, whatever social responsibility will on say businesses have. The first thing he does is say, okay, if that means anything at all, then what that has to mean is sometimes you don't pursue profit in order to pursue for that. Yeah. A lot of things that look like, or that people will discuss a social responsibility on Friedman's account, they're not really social responsibility, right? So, yeah, absolutely. If a business, you know, if a, if a business wants to make, you know, brand themselves a green company, right? And they pursue these social responsibilities because consumers will respond to it. Friedman wants to say, you're not really pursuing the social responsibility of environmentalism. You're just, you're just engaging in very enlightened, very thoughtful, very smart profit maximization. Like that's just good strategy that has an ethical veneer. That's right. Right. So, you know, so for him, like, you know, when Nike embraced Kaepernick, right? Or what, you know, like on if you look at it through a Friedman lens, he's, he's, oh, are you pursuing your social responsibility to racial injustice or to alleviate racial injustice? Or are you did that just suddenly become profitable for you? Yeah, right. I mean, so, so when you look at the Nike case, right, it's, it's, it's very plausible to think that from Nike's point of view, taking that side of like the divide in American society is going to be the smart bat for them, right? Even from their own economic perspective. I mean, I have to say, so I think it's important to keep in mind also, they're like that dozens of like impune in my mind, the people who are working on these, on these campaigns, like at Nike, you know, so like it's, it's very plausible that I think that the people who actually run those kind of campaigns at a company like Nike genuinely care about these cases about these issues, right? It's just that from from Friedman's point of view, it's, it doesn't really matter because like they, whether or not they cared, they would do this because it is profitable for Nike to do it, right? But when we look at so like the individuals that are hired and to run these campaigns at Nike, it's pretty likely that those are actual people who who care deeply about these issues. I don't know, I don't know any of them personally, but that would be my suspicion. No, no, I think that's right. And it's important not to, the reason why I like Friedman's point here isn't because it leads to cynicism, but because it's a very clever way of screening out a large argument in favor of doing things that get labeled socially responsible. So in the management literature, there's a ton of stuff about the business case for social responsibility, right? And so there's this idea of like you should be an ethical company, you should respect, you know, you should try to pursue environmental sustainability and you should have good hiring practices and all these things because it will do better for your bottom line. And Friedman's point is like that maybe true, maybe not, but that's not social responsibility. That's not you doing something novel or ethical. That's just you pursuing profit. Like that's still you're still in my in my world, baby. That's right. Right. So so his point, the reason why he does that is to say this is to say if you if you want to say businesses have ethical responsibilities, if you want to say there's such a things corporate social responsibility, then what that must mean is there's things that supersede profit, right? There's things that override profit seeking. There's obligations that you have in spite of its effect on your bottom line. Which and then this this this next part of it is really important for him. If you put that in terms of the principal agent problem that we laid out before. What that means is to say that businesses have social responsibility on Friedman's terms must mean that there's times where executives corporate executives don't fulfill their obligations to their principles. That's right. Right. Because because right, just just to make this explicit right because they have to take the money that would be profit and spend it on some social cause. Right, which means so so the idea of like social responsibility goes directly against this idea of like being a fiduciary to the shareholders, right. The shareholders are supposed to like get as much profit as you can give them. And here you are like sort of by definition pursuing social responsibility, taking that money and spending it on something else. Exactly. So this is this is the quote from the article. So he says quote, the stockholders or the customers or the employees could separately spend their own money on the particular action if they wish to do so. The executive is exercising a distinct social responsibility rather than serving as an agent of the stockholders or customers or the employees. Only if he spends the money in a different way than they would have spent it. Right. So in some ways to say what he wants to say is to think of businesses as having social responsibilities is to ask them to do precisely what I was doing when I didn't buy the doughnuts before. Right. It's saying you have to take money that was given for you for some end and use it for a different end. Yeah. So we have this idea of a principal agent relationship. And then we have this idea of what it means for businesses to have social responsibility. It means for them to sometimes not pursue profit in order to pursue some other good, which for Friedman necessarily means that if you think that a business has social responsibilities, it means that you think the executive should sometimes not pursue the interest of its principles. It should not pursue the interest of the shareholders sometime. And so that's just him definition that definition of that's what it means to talk about corporate social responsibility. And so he wants to say there's a couple of things wrong with this. And so the first is that he thinks there's just it's wrong on principle in a couple of ways. So one is sort of what we've already been hinting at that in some ways you're taking money that someone has given you for some purpose and given it to another and use it for some other purpose. The way he captures this is very weird though and it fits into the Cold War. period that he's writing in. Because the way he captures this is he says that it's socialism, which is, you know, a dumb thing like that's, it's quite strictly speaking not true that it's socialism. Um, but I think what he means by this and this isn't an uninteresting point. Like I think there's something to this is when an executive says, oh, I'm taking shareholders money and using it for charity or using it for urban redevelopment or using it for environmental sustainability or whatever. It's in a certain sense, an involuntary tax that the executive is imposing on the shareholders. Right. And his point is what we have this whole thing set up that we use to legitimize taxation that's used for social purposes. It's called democracy and it's called democratic government. You know, like if we think that our money should be our tax money should be spent on, you know, urban renewal or whatever, then we elect people who then tax us through the normal, you know, congressional means of, you know, of creating laws that tax us. This is just doing the run around on that whole thing. This is just some guy who happens to be in the C suite saying this is the right thing and then taking people's money and putting it towards that end. That's right. Right. And that's just kind of illegitimate on principle. You know, and I don't think it's socialist. It's a very weird thing to think of like the empowerment of corporate executives as socialist. But there is a case that it's kind of undemocratic. My sympathetic reconstruction of this idea that this will lead to socialism is that you say the current situation is kind of like normatively untenable, right? It's like, it's unethical. Something unethical is going on here. And like if you don't resolve this in the way that Friedman suggests, namely by killing corporate social responsibility, the other way to solve it is to actually bring in socialism, namely have like the state run all the businesses. Right. Like I think what he means when he says this is socialism is he saying we have this commercial market sphere. And if we think that they, you know, businesses have the social responsibility to take on, you know, these sorts of issues, we're inviting the political and governmental sphere into the market, right? And that sense, it gets away from pure capitalism. The reason why I think it's silly is because all capitalist societies, of course, do something like that, right? Like, yeah, right. Like, there is no capitalist society, including the one he was living in that didn't have, you know, government involvement in the economy. Yeah, I mean, you know, so he, he generally was always worried that like as soon as that invitation is offered, it will like lead to a slippery slope where you, you know, end up with like the Soviet Union and basically, right? I mean, that was just like his, his overall worry all the time. That's why he thought like you couldn't have like a social welfare state like in Scandinavia because like it would inevitably lead to Soviet Russia. And I mean, he was just wrong about the slippery slope that just places where you can stop. But he just didn't see that. No, that's exactly right. So that sort of that's the first argument against, against this idea of social responsibility, right? He thinks that there's something illegitimate on its face. Like on principle, you're taking money, you're taking money for some purpose and using it for some other purpose. And the only institution that has the moral legitimacy to do this is a democratically controlled state, essentially. I mean, so the way that I think about it is, you know, so this is like the ownership argument, right? So, so this money isn't yours. So you don't get to just like do with it what you want, right? This, and then he gives us like in just, he gives a similar argument, which I think of as the contractual argument. And he only like mentioned this like twice in some of like a half sentence, but it becomes like much more important in like newer iterations of these arguments, you know, 20, 30 years later. What the idea is, well, who knows, you know, who what ownership means, you know, that's a complex concept. But there's a contract, right? And so like you signed up as the CEO of this company or like, or or any kind of like executive for this company, and you just like have to do what your contract tells you, and the contract's not going to tell you to spend the money on like environmental protection. You know, so that's the other thing that he mentions a couple of times. I think like two or three times he says like, oh, there's like a clear contractual arrangement or something like that. So there's these two, two ways of like that you can spell out this, this principled argument in terms of either like the contracts that need to be fulfilled or in terms of like the ownership relationship that needs to be respected. Right, right. And yeah, that's perfect. And so then very quickly, he also gives a kind of consequential, a consequentialist argument and they use that term sort of visibly. But it and again, I always find this sort of interesting where he says, you know, there's also this reason to be suspicious of businesses having social responsibility. Because to ask businesses to pursue social responsibility is to assume that business managers and business executives have the expertise and the positional knowledge to pursue these things. And in some ways, it's sort of like, well, why the hell would you assume that? Right? Like, you know, like Zuckerberg made his bones because he's a really good computer programmer because he's good at, you know, figuring out these niches or whatever. But do we want him making decisions about how democracy works or how, you know, or any of these other things? Yeah. You know, and you can say this about anything, right? And so he does have this point where he says like, this sort of has this to say businesses have a social responsibility assumes that they have the knowledge and the ability to pursue this responsibility. And that's a pretty big assumption. Yeah. I mean, so I think the Zuckerberg example, you know, like as vivid as it is, is not the best because like he is kind of like he founded his own company and then still the CEO of it, right? So he isn't like the kind of person who's like hired by somebody else. And so, and so the argument here, like, it's a little, has a little bit of like a circular feel to it. Because you say, oh, you know, why are executives hired? Well, because they can make a lot of money. So therefore, they don't have, we have no reason to assume that they're good at pursuing these social responsibilities. But of course, if we think that their role also includes pursuing social responsibility, then we would think, well, you know, they're probably being hired also in light of having those qualifications. And so Friedman's argument here is a little helped by the kind of things that he focuses on with social responsibility. So he talks about unemployment or like inflation, right? It's kind of like macro economic issues that like really go beyond probably like almost anybody's like expertise, except for like maybe like a couple of economists that even that's doubtful in terms of like how to handle it. But if you think about, you know, more the kind of issues that we usually worry about when we talk about business ethics, namely like, will the business pollute excessively? You know, there's much less reason to be like that suspicious of the capability of the people who run the business, right? Often we're like really worried about the business itself doing like bad things in like their area of like activity. And there's every reason to think that somebody who knows how to make money while running a paper mill also knows like whether, you know, what it will take to put like some additional things in so that like you don't pollute like the nearby river. Yeah, you know, I think that's true, right? And in some ways, today we face the kind of the exact opposite problem where especially when it involves, you know, digital companies and you know, like web based, web based companies and social media platforms and stuff where you have legislators and executive agents trying to regulate these things. And they really don't know anything about the industry, right? The people who know the most about the algorithms, who know the most about how Facebook work, you know, and again, I take your part. Yeah, Facebook isn't the best example, but how YouTube works or whatever, or it's the legislators, it's the people working at YouTube, right? That's right. And so they're actually best positioned to figure out how, you know, how to use their capabilities for some end. And, you know, so we promised that we were going to give a charitable reading. And so like I just wasn't doing that, I think. So I should say a bit more about the expertise argument. Right? I mean, so even if we believe as you, I think as we absolutely should and you just said that like the people in the industry often like know much more about the industry than anybody else, we might still worry about, well, do they have the kind of like knowledge of like what the best use of it should be, right? So maybe like the guys at Google know more about like how to protect privacy or not to protect privacy than anybody who works in government. But we should still be like somewhat suspicious of thinking that they also have the knowledge of like how desirable what level of privacy for protection would be like from like a societal or I think a point of view. So there's something to that expertise argument, despite the criticisms I made up. Those are the two main arguments he makes against the negative arguments that against corporate social responsibility, right? So there's something illegitimate in principle with corporate social responsibility because you're either defying a contract or illegitimately acquiring or using funds that aren't for a purpose that you don't have the right to use them for. And then a little less strongly, there's this consequentialist argument which is to ask business managers to do these sorts of things is probably going to lead to bad outcomes because they're not well positioned or well, well versed in precisely the issues that we're talking about. Okay, so that's good for his arguments against CSR so much for that. So now let's get to the the thing that he promises us in the title, which is this positive argument for profit maximization. And again, the thing that people always get hung up on and it's worth just reiterating is he's not saying morality is nonsense in business. He is saying that to maximize or to pursue profit is moral, right? There is an ethical responsibility and there is something ethical to profit maximization, which just strikes most people as, you know, not obvious, right? And it becomes way more obvious when you think of it in terms of acting in another's interest, right? Acting in the interest of your principles. And so he gives us two justifications for the morality of profit seeking, for the morality of profit maximization. And the first is sort of, we've already said it a number of times in various ways, but he at some point in the article kind of states this more straightforwardly, which is to say the fiduciary obligation argument, right? That is, if one has a fiduciary obligation to do something, there is a moral imperative for them to do it, right? So if you think that executives have a fiduciary obligation towards their shareholders and you think shareholders tend to want profit, then there is something like a moral imperative for executives to pursue profit. Yeah, I think that's exactly right. Right. And so that's the first justification for it. And the second which he sort of dances around it, but he says this in various parts of this article is he wants to say there's also an instrumental reason why we should want businesses to pursue profit. And that's because it tends to make for a more efficient market. That's right. That is, if you, you know, they should pursue profit because they have a fiduciary obligation to do so. But even if you put that aside, Friedman wants to say executives to pursue profit because by doing that, they contribute to the effectiveness of the invisible hand. Right. So here, there's a real belief in that markets tend to produce benefits for everybody. If everybody within a market pursues profit. That's right. Right. So you make the, you make the price signals work like really unimpededly and strongly by just pursuing profit, right, pursuing the things that like you have like hard evidence that people want, right? That hard evidence being their willingness to pay for it. And that leads to like an overall like efficient allocation of scarce resources and that's what we really want out of the economy. Right. And that's why we want to have a market economy in the first place and pursuing profit, like just really helps that system along. Exactly. Exactly. Right. And so, so another way of putting all of this is he wants to say, look, if, if you understand CSR as meaning, sometimes not pursuing profit, then he wants to say it's immoral to pursue CSR for two reasons. On the one hand, if you do that, you're violating your fiduciary obligation, right? Because you are not pursuing profit and you have a fiduciary obligation to pursue profit. And secondly, it's immoral because you're undermining the efficient allocation of goods and resources that a properly functioning market will, will do. Whereas if you were to pursue profit, you'd be good on both of these scores, right? You'd be fulfilling your fiduciary obligation and you'd be producing all of these benefits that come from an efficient free market. That's right. And of course, this assumes a frictionless functioning of the market that we don't really observe in the real world. And so then, because the argument really is, look, what's so bad about giving money to the local school, like that, rather than to my shareholders. And the answer to this in the frictionalist market is, well, if the money was more needed in the local school, then those people would be more willing to pay for it. And so the question then becomes, how close are we to this kind of market, in which every important social objective is matched up with corresponding willingness and ability to pay? So that's the argument, right? And again, as we've been at pains to point out throughout, this has become a really influential argument, right? But it's important to understand the structure of it. And the structure is really based on this principle agent relationship, which creates this this type of fiduciary obligation that shareholders have. And on Friedman's account, when you pursue things other than profit, you're violating that fiduciary obligation and you're producing harms to the rest of society by undermining the effectiveness of a market. And so he says, look, there's a moral imperative to maximize profit, both because it fulfills your fiduciary obligation and because it contributes to an efficient market. And this is moral, right? It's because it means sometimes you shouldn't be trying to, you know, get the bigger corporate jet or make your office nicer or give yourself more vacation time or whatever, right? You have to dedicate yourself to pursuing profit, not your own self interest. Right. Okay, so we began this by saying that we're both critics of this piece. And we've been charitable now for about an hour. So let's, and it's important because again, I've learned a lot from engaging with this argument, but that doesn't mean that there aren't big problems with this piece and big problems in the assumptions he makes and some of the moves he makes. So, so let's talk about some of these. So one of them is something that you've already brought up, which is when he says that pursuing profit will contribute to just a more efficient market and a better allocations of goods and services and resources. He's making a pretty heroic assumption about how well the market works. Right. The way you put it is he's assuming there's a frictionless market. Yeah. And, and what we know, of course, is that markets don't always work this well. In fact, often, or not often, they always work imperfectly is maybe that's a bit too strong. They often work imperfectly. Well, I mean, so they always work imperfectly in the strict sense of like what a what a perfect market would look like because that's kind of just like physically impossible, right? To actually, uh, here with like the, the assumptions of like what an actual frictionalist market would look like because he would have like absolutely no transaction costs, for example, which is just like physically impossible. Right. You have perfect information of everything. There would be unlimited amount of competitors of our every good in every location. That's right. Yeah. Yeah. It gets really big. Yeah. Right. But, but yeah, like, but even less technically, right? We just know that markets don't, market prices don't always reflect all the costs that go into making a good. That's right. Um, and so because of that, there's going to be many times when we should expect, um, the way a market works to, to be suboptible, to be less good than some other alternative. And so his argument that while pursuing profit contributes to these great things, uh, is not quite as strong as he makes it out to be because again, markets don't really work as well as he assumes they do. That's right. Right. I mean, so here's like one way of like thinking about right? So, um, when people think that the, uh, the, the, the, it's weird to say that like making profit is like, is, uh, is, uh, it's sort of like a moral imperative. I think there's, I think it's Churchill who has this quote that like, who says like, you know, people think that making profit is a vice, but the real vice is to make a loss. Right. And so the idea is, look, I mean, the profit is just the difference and value between my input and my output. Right. So like, I take a bunch of stuff. I run it through like whatever I do in my corporation and I give it back to society afterwards and it's worth more. So, and the, the difference is just like what I make and profit. And that's why it's good because I'm creating new value, right. Um, where's like if I, uh, you know, to stay with the Churchill thing, like if I make a loss, right, I take an input and I make it worth less afterwards. And so that's, that can't be, can't be right. Um, but so then once we have, uh, abandoned this idea of this like ideal frictionless market, um, so the most obvious thing is that like not all inputs are paid for, right? And so, we think of environmental degradation, a whole lot of stuff that companies use in order to produce their products in order to make profit is actually not paid for just because society hasn't figured out a way to put a price on it. And that really puts a big damper on how convincing that part of treatment's argument can be, because if the assumption is, profit just like is an indication of increased social value, that will only work if there hasn't been any inputs that just haven't been fairly compensated for. So if we have the kind of situation where we impose great costs on the environment and ultimately on our kids and grandkids, our generations in terms of climate change as we now know, that is just not accounted for. And the market price. And so we can't actually like assume anymore just because of something that's profitable that overall social value has been added. Right. Yeah, I think that's a perfect explanation. And next week, we're going to be talking more about this when we read the market failure's approach to business ethics, which really takes this fact about markets and uses it to give a very different understanding of business ethics than what treatment gives us. So that's one big problem with this argument. Right. This overly optimistic assumption about how well markets work. Another big, another problem, and this is sort of a smaller thing, but it is worth mentioning because it also signals the difference with the times, is a big assumption that Friedman makes with the principal agent problem and the way he thinks it works for his argument, is the assumption that all shareholders care about is profit. And generally speaking, there's obviously something to that assumption, but it is worth noting, especially in this day and age, that that assumption isn't always true and some would argue that it's getting less true every year that investors are more concerned with. And so if ethical investment in that, they're making a return, but also a return in a way that sort of respects other obligations and other sorts of values and social concerns. And so if you take that seriously, his argument loses some force, right? Because there's often going to be situations where an executive is charged by his principles to concern himself or herself with social responsibilities of various kinds. Yeah, I mean, so I forget what the name is, but the CEO of BlackRock, is it Larry Fink? I'm not sure. Yeah, I always forget that. Anyway, so BlackRock, right, for those of your students who don't know, is like a company who is the biggest stockholder in a lot of really important companies that you know about. And so they have a large influence on what corporate executives actually do, because they often hold either for themselves or for their clients, like 15 to 20% of the stock of the company. And so those are people that are being listened to. And the CEO has kind of like become like famous over the last couple of years for writing these letters every year to all the CEOs of companies that he is a BlackRock is a big shelter in by like asking them to take their social responsibilities seriously. Often like shareholders will not just look at money, but they have other objectives as well. But there's also sort of like a more subtle way of understanding what's going on there. And that also undermines not so much treatment's assumption. See about that shareholder's one profit, but about what kind of concluency can draw from that. Because if you are a big universal investor like BlackRock, right? So BlackRock doesn't just like hold shares in like three or four companies, but they have like a slice of corporate America or like even like the corporate world really. So they are invested in like in every industry and every country everywhere. And so what they're really interested, they what they don't have an interest in is an individual company that they invested in making profits in such a way as to take more money away from the competition than the company themselves make. So if they if the company is proposing to make extra profits through like some shady deals that undermine the industry as a whole or that like produce such environmental degradation that other industries will be very negatively affected. Those kind of universal investors are not going to want that because they want money from this company, but they also want all the other companies that they're invested in to be profitable. And so the fact that even if you grant that all they want is money, you still can't can to do is that like they want money with like any means. A profit made like at any means, right? Because they also want to make sure that like the overall economic picture stays, stays good and stable because they are invested in all the other parts of the economy as well. Right. Right. No, no, no, that's really important, right? Like when you think about institutional investors, all of this gets way, way more complicated. In a way that it's sort of surprising that Friedman doesn't really take account of in the argument because he was not a not a simplistic thinker. But in this he sort of he kind of just glosses over a lot of the complexities. I mean, it is a it is a journal article in like a newspaper, right? He's probably more careful in in the book that he references at the end of the piece. Okay. So good. He assumes markets are more efficient and better functioning than they usually are. He assumes that what shareholders want is just to maximize profit when that's not always true. And then third, and this is sort of the more technical moral criticism of his argument. And it's an important one is he engages in what philosophers often call question begging. So he begs the question and we'll talk about what that means in a second. So basically a way of understanding his argument is to say CEOs have the responsibility to pursue profit because their shareholders want them to do it, right? That's what they were hired to do. And the sort of criticism is it says, well, it begs the question as to, you know, what right the shareholders had to just pursue profit in the first place. Yeah. So the technical definition of begging the question is that you put the conclusion you want to argue for already in the premises that you start from. Right. So, you know, so a sort of example of it is like, let's say you're arguing about the existence of God. And I'm like, well, you know, I know that God exists because the Bible says God exists, right? And the Bible was written by God. It's like a very, you know, silly or not a silly example, but a very simple example where that won't convince somebody who was doubting the existence of God because they'll say, well, how do you know that the Bible comes from God, right? That was precisely the thing you needed to prove. And the reason it's a bit, so with Friedman, it's a bit more technical, but the reason why he's begging the question is, so somebody who is suspicious of the idea that there's a moral responsibility, maximize profit. If you say, well, the, you know, person A, you know, the executive has a responsibility, maximize profit because shareholders hired them to do so and they have a future obligation to pursue their shareholders interests. It begs the question because now they're going to say, oh, well, okay, but who said that shareholders had the right to hire somebody to just concern themselves with profit? Right. Like, like a really dumb example of it is like, let's say, Costco, let's say one of your students hires me to, you know, to break your legs to keep you from giving them an exam, right? And they give me a lot of money. I'm very, they compensate me very well to do it. And then when I'm arrested, I say, well, no, I didn't do anything wrong. I was just fulfilling my fiduciary obligation to Costco students. That would be very, that wouldn't move anybody, right? Because they would say, well, yeah. But what gave them the right to do that in the first place? Yeah. And so in some way, obviously, it's a very different sort of scenario, but Friedman leaves unexplained this sort of the main question, which is, why would we think that shareholders or any group had the moral license or the moral right to hire somebody whose sole drive or sole productive was just to think about profit with the funds that they were given? So you can't just like use a fiduciary obligation to make like the immorality of like an action go away, like in the way that you example illustrates really nicely, right? So if I promise to murder somebody and then I murder them, I like, I can't kind of like appeal to the promise as like something that somehow made makes the whole thing okay. - I'm a man of my word. (laughing) - Exactly. And so like obviously the real question that people are gonna be interested in the morality of business is, is it okay to like single-mindedly pursue profit? And so if we can somehow establish that that's okay, then we can go to the argument and say okay, since that is an okay thing to do, if somebody hires you to do that on their behalf, then you should do it, right? But most people are not gonna be interested in that part of the argument. Most people are gonna be more skeptical about the first step, that they're gonna be more interested in like, well, was it actually, is that like a moral thing to do in the first place, right? To just single-mindedly pursue profit. And then the whole bit about agency afterwards, that's just like tagged on like, and gets off the ground only when we have like a justification for the pursuit of profit in the first place. And in a way, right, that's why it's like, that's why the example from like market efficiencies is like so important for him, right? Because that argument could potentially do the job. If that argument works, right? Then we have like a reason to think it's okay to single-mindedly pursue profit, right? It's grounded in this efficiency argument. And once we have a reason to think that that's okay, then it's also okay to hire people to do that on your behalf. And then we can talk about if people, if you hire people to do that on your behalf that they should do the thing that they promised you to do. - Precisely, right? This is like, so you know, there's this fiduciary argument, and in some ways that doesn't work, 'cause you actually need to prove the initial thing, right? You need to approve the thing that the fiduciary is hired for. And so then Friedman could say, okay, well, I didn't provide that, but here, let me give you an explanation. It's market efficiency. You should pursue, they can share holders can pursue profit, they can hire somebody on their behalf to pursue profit, because it will be good for society generally, because of an efficient market. But of course, then the problem is that markets don't work that well, or as well as he assumes, right? So you can fall back to that assumption, but it doesn't quite work. - Yeah, and from what I understood, from what you said earlier, your students will learn much more about that than next week when you talk about heat spade. - Exactly, so this is actually maybe a good place to stop, because this is precisely where we're gonna pick up next week. So basically, the argument we're gonna look at next week is this view that takes all of these shorts, takes seriously the principal agent relationship that Friedman lays out, but then tries to overcome all of these problems, right? And sort of say, if we take these problems seriously, it should lead us to a very different understanding of what business ethics is. - Thank you for having me. This was a fun conversation. - Yeah, Haska, this was awesome. Thank you so much. I really, really appreciate it. (upbeat music) (upbeat music)