Abstract
Corporate Social Responsibility (CSR), the idea that business stewards have a broader range of societal obligations than maximizing shareholder value, is a mainstream theme in contemporary management research, education, and practice. Carroll points to one of its controversial aspects when he describes a clash between management scholars (who are generally pro-CSR) and their neoclassical economic contrarians. This has become an increasingly one-sided conflict with the pro-CSR side prevailing in both business and academia. CSR proponents have generally viewed Milton Friedman as an opponent of CSR. However, we argue that Friedman’s purported opposition to CSR is something of a caricature. We reveal that Friedman was concerned that his advocacy for free market operation would promote pro-social outcomes. Indeed, through his emphasis on creating value for consumers, being good stewards of scarce resources, and avoiding rent-seeking’s inefficiencies, Friedman has more in common with CSR proponents than is sometimes acknowledged.
Introduction
Corporate Social Responsibility (CSR), the idea that business stewards have a broader range of societal obligations than merely maximizing shareholder value, is a mainstream theme in contemporary management research, education, and practice (Carroll, 1979; 2015). Scholars such as Carroll (2008) point to one of its controversial aspects when they describe a clash between management writers (who are generally pro-CSR) and their neoclassical economic contrarians (who, as part of their epistemology, are unambiguously anti-CSR). This has become an increasingly one-sided conflict with the pro-CSR side prevailing in both business and academia (Carroll & Brown, 2018). As a consequence, modern executives typically embrace the orthodoxy that they should measure and evaluate the outcomes of their decisions for stakeholders other than shareholders (Mitchell et al., 1997; Henderson, 2018). Furthermore, within the academy, CSR research has come to prominence in prestigious journals and, often under the guise of ethics training, is well ensconced in Western business school curricula (Carroll & Brown, 2018; Ferrell et al., 2019).
Those who advocate for CSR always considered that they had a formidable opponent, Milton Friedman, winner of the 1976 Nobel Prize in economics (Carroll, 2008). As noted by Economist magazine, (the Economist, 2006) there is a measure of consensus across the ideological spectrum that through his public activism, scholarship, and training of economists at the University of Chicago, Friedman is amongst the most influential economists of the 20th century (2006: 79–80). The great man derives his CSR ogre status mostly from what he wrote in both his New York Times article (1970; cited 1972) and his book Capitalism and Freedom (1962), wherein he argued that corporations undermine the efficiency of markets when they pursue non-economic objectives at the expense of maximizing shareholder value. These works, in particular, have consolidated Friedman as the bete noire for CSR proponents (Andersen, 2020; Banerjee, 2008).
Friedman’s purported implacable opposition to CSR is something of a caricature. As such, in their attempts to summarize what he thought about the topic, CSR advocates have in key respects both misrepresented his perspective and failed to draw attention to areas where his view is similar to theirs. For example, comparable to modern pro-CSR writers, Friedman emphasized that there is a need for firm stewards to act legally, honestly, and ethically. He was a proponent—indeed pioneered—the idea that businesses should adhere to the “basic rules of the society, both those embodied in law and those embodied in ethical custom” (Friedman, 1972: 178). In some ways, the tenets he embraced with such sentiment—tenets that have been repackaged as the notion of enlightened self-interest—are essentially those routinely espoused by his CSR critics. In this regard, it is noteworthy that Freeman (2008a) interprets Friedman’s perspective as a version of stakeholder theory and, thus, as decidedly non-controversial.
As indicated, commentary on the worth of CSR within a business`s overall priority mix is overtly partisan. Indeed, it has come to resemble a clash of antithetical ideologies and become narrow in its focus. Along the way, CSR proponents have largely overlooked perhaps the most unethical practice a corporation`s stewards can engage in, rent-seeking. For practical purposes, rent-seeking refers to measures which are intended to increase an entity’s wealth through government manipulation of the market without creating any other (or widespread) consequential societal benefit (Krueger, 1974). The loss of efficiency resulting from rent-seeking behavior is partly why Friedman, like his intellectual forefather, Adam Smith, 1 preferred market economies over forms of (what was then called) mercantilism to generate and distribute wealth. Each recognized in a manner that their critics seemed reluctant to acknowledge that large businesses, in particular, aggressively seek to avoid competition and embrace state intervention when it suits their interests.
In this work, our purpose is to reconcile the differences between Friedman and his critics concerning the use of CSR by business stewards. We argue that pro-CSR scholars overstate discrepancy between Friedman and their camp on this matter. Such an overemphasis on difference has created a situation where the implications of rent-seeking have not been adequately exposed and explored. Unlike others (e.g., Henderson, 2001), we do not argue that CSR is inherently a pernicious practice. Rather, what we propose is that CSR, as both an applied philosophy and domain of research interest, has not been a driving force against rent-seeking on the part of big business in circumstances where it should have been. The paper includes a section on the benefits of CSR; criticisms of Friedman; what the criticisms get wrong; and a discussion of how the notion of rent-seeking has implications for better understanding the consequences of CSR and Friedman’s commentary on such consequences.
History of CSR
CSR is a relatively new area of scholarly inquiry, only emerging in course curricula and as a topic of research interest in the 1970s. However, in various guises, it was commonly practiced prior to this time (Carroll, 2008). For example, in the 1930s, the Western Electric company used welfare programs to “win the hearts and minds of the public” (Gillespie, 1991: 17). Furthermore, scholars such as Bowen (1953) thought that human relations practices could resolve, or at least mitigate, industrial disputation. In addition, firm stewards during the Progressive through to the New Deal eras often sought to reduce prices through both natural and/or artificial means as consumers at the time—a period that included the Great Depression—were especially sensitive to changes in their cost of living (Jacobs, 2005). A natural means to lower prices comes from increased efficiency or economies of scale. Indeed, part of the appeal of Classical-epoch approaches, especially Taylorism (Nelson, 1980) and Fordism (Meyer, 1981), was the perception (based on solid rationale) that such production systems reduce prices. By contrast, artificial means of price reduction mostly boil down to corporations lobbying governments to intervene in industries and markets through initiatives such as price and production controls, ostensibly to correct for instability caused by competition (Gordon, 1992; Kennedy, 1999).
Carroll (1991) offered a view of CSR that has been widely embraced and incorporates four kinds of responsibilities that businesses have towards society: economic, legal, ethical, and philanthropic. This conception will be invoked later in the current paper to illustrate the differences between unambiguously pro-CSR scholars and those from the Friedman camp. However, by way of preamble, it is empirically the case that corporations with commitment to CSR generally have better financial performance than those that do not (Aguinis & Glavas, 2012; McGuire et al., 1988). 2 Aside from vague notions of being an appealing/attractive corporate citizen, it appears that one reason for this disparity is that key elements of CSR serve as a strategy to minimize legal risk. Specifically, in the absence of CSR commitment, stakeholders have greater scope to increase a firm’s liability exposure through turning implicit claims (e.g., expectation of product quality and safety) into explicit claims such as contracts/settlements (McGuire et al., 1988).
Firm stewards (and entities themselves) have financial incentive to behave ethically and responsibly other than concern to minimize legal risk (Laplume et al., 2008). Such latent benefits include enhanced corporate reputation (Cui et al., 2018; McWilliams et al., 2006); increased employee motivation and engagement (Flammer & Luo, 2017); improved strategic positioning within multi-firm industries (Saiia et al., 2003); better customer relationships (Ellen et al., 2006; Mishra & Modi, 2016); cheaper equity financing (El Ghoul et al., 2011); reduction of information and data asymmetry between an employer and their employees (Milgrom & Roberts, 1992, 273–4) and lessening of asymmetrical data and information between an entity and its other stakeholders, especially investors (i.e., Lopatta et al., 2016).
A conspicuous theme within relevant literature is that firms utilize CSR-type policies as a form of enlightened self-interest, rather than primarily for altruistic motives (Sheehy, 2015). For current purposes, altruism occurs when a person or entity acts to aid another party without concern for its self-interest. The argument often made in CSR literature draws on this conception. However, the rationale for CSR-type practices is typically somewhat incoherent: when implemented, they have an altruistic character and also (perhaps paradoxically) lead to enhanced corporate performance. In essence, there is more benefit to virtue than it just being its own reward and (revealing the old adage`s limitation`s) by doing good a firm will be enriched.
The various theoretical underpinnings of CSR-the resource-based view of the firm, stakeholder theory, resource dependence theory, institutional theory, and legitimacy theory-highlight the need for corporations to perform legally, ethically, and even philanthropically. According to orthodoxy, a corporation that does not behave well will lose legitimacy, will be sanctioned by institutional forces, may be deprived of necessary resources, and will do relatively less well at attracting, and developing relationships with, customers (Frynas & Yamahaki, 2016). As such, with some exceptions, perhaps for example, the Merck River Blindness pharmaceutical (to be further discussed), firm stewards should engage in CSR to ensure their profitability and survivability, even if return on their effort is indirect (Schwartz & Saiia, 2012). 3
Professor Friedman: The Created CSR Bad Guy
CSR scholars largely reject the substance of neoclassical economics as embodied in the work of Milton Friedman (Carroll & Shabana, 2010). In fact, Friedman is something of a bête noire for CSR proponents. (Husted & de Jesus, 2006; Ferrero et al., 2014). Friedman (1970, 1972) notoriously put forth the supposedly CSR-antithesis: that the sole ethical obligation of business stewards is to “make as much money as possible” (p. 178) and that benevolent-type corporate initiatives are inclined to create agency problems. Whatever the case, he has earned a place in history (and in popular culture) as possibly CSR`s most vociferous critic.
Some scholars have proposed that Friedman’s ethical stance is best interpreted as a rationalization for undue corporate greed (Marcoux, 2008). For example, Bandura (2016) argues that the values that informed his work are the same as those that lead to moral disengagement on the part of executives who manifest unethical behavior under the guise of being pro-competition. In this vein, Carroll (1979: 499) suggests that Friedman ignored that business decision makers have a duty to their society. Similarly, Sheehy (2015 : 627) contends that Friedman’s belief that business’s only responsibility is to turn a profit is “a politically conservative view, although espoused as economic science by like-minded neo-classical economists, is at least as political as it is economic.” In fact, Freeman (2008b: 39) contends that Friedman’s position on profit maximization is not “consistent with the law and, for the most part, simply ignores matters of ethics” Rajan (2019: 196) summarizes this strain of thinking when he concludes that Friedman’s work justifies “avarice as a duty.” However, defending unethical behavior on the grounds of belief in competition overlooks that “moneymaking activities adversely affect the lives of people who are not involved in those activities but nevertheless bear the penalty of collateral harmful life conditions” (Bandura, 2016 : 373).
Straw Meets Man
The interaction between Friedman and his critics represents a clash of ideologies (Steinmetz, 2005). An inevitable consequence of such horn-locking is a tendency for protagonists to talk past each other. For context here, neoclassical economics is a positive science in that it focuses on market efficiency, largely deemphasizing ethical-type dilemmas (Hirshleifer et al., 2005: 20–21). By contrast, management is normative, with dual emphasis on efficiency (broadly conceived) and ethics (once again broadly conceived to include consideration of effectiveness, etc.). Moreover, each discipline embraces dissimilar epistemological-type commitments and assumptions. For example, neoclassical economists mostly presuppose near perfect information and near rational actors; management scholars, imperfect information and, at best, boundedly rational actors. Economists typically believe there are “no rules for riches,” in other words that wealth does not come through rigid application of inviolate protocols. By contrast, management scholars are inclined to be more doctrinaire in their orientation (Joullié & Gould, 2022). As such, a lost in translation effect occurs when economic and management theorists communicate, a phenomenon that is likely exacerbated for practitioners from each discipline (Joullié & Gould, 2022). Specifically, critics of Friedman often cite his work out of context. For example, Carroll (1979) makes much of Friedman’s statement that (1962 : 133): “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.” However, there is more to this quote. Indeed, in providing relevant nuance decades later and (partly) remedying the malaise he (Carroll) created, the full passage is given by Carroll and Brown (2018) who concede that what Friedman actually said was “to make as much money as possible while conforming to the basic rules of society, both those embodied in the law and those embodied in ethical customs.” It seems therefore that Friedman embraced commitment to the so-called basic rules construct of good corporate citizenship, addressing, at least three levels of Carroll’s pyramid: economic, legal, and ethical.
Friedman was indeed concerned with ethics and notions of right and wrong (Marcoux, 2008). Such concern is especially evident in his non-economic scholarship (e.g., Free to Choose): freedom from coercion and deceit. This corpus emphasizes that a behavior is unethical if one party uses coercion to gain benefit from another or impose costs on that other without its consent or knowledge. For example, Cosans (2009) points out that Friedman believed that a corporate action that creates externalities for others without due consent is unethical because it reduces the liberty of still other third parties who do not participate in the exchange. As such, rather than viewing profit as the sole consequential objective, Friedman, like his critics (contemporaneous and subsequent), argued that market transactions which impose externalities on others are inherently wrong, even when they buttress return on capital. Furthermore, even if externalities have potential for short-term firm benefit, such advantage soon abates and ultimately is replaced by harmful consequences. Specifically, the profit driven from levying externalities is typically ephemeral because their eventual transaction costs are inclined to escalate. For example, if a corporation imposes externalities on another party without its consent, that other party will potentially be able to litigate for damages, thus exposing the levying corporation to risk of legal and associated cost (i.e., due to facts gained through discovery, etc.). Largely for this reason, private-sector executives typically seek to internalize an externality through establishing reciprocal contracts intended to mitigate legal liability.
Lawsuits are not the only method for sanctioning unethical firm behavior. For example, stakeholders sometimes punish a recalcitrant corporation through imposing non-legal penalties on their target, including boycott measures. In this regard, Friedman, much like Suddaby and Greenwood (2005), recognized the subjective nature of notions of right and wrong—noting that society sets a game`s rudimentary rules and embeds these in ethical custom and more formalized law—hence his expression those embodied in ethical customs. 4 From Friedman’s perspective, a firm that violates community-implanted standards will meet with chastisement of one kind or another. In developing this thesis, it is noteworthy that he (Friedman) was indeed troubled by social problems and reflected on moral dilemmas. In relation to such matters, he concluded that malaise is generally best dealt with through decentralized and freely entered into commercial exchange. In a similar vein, Wagner-Tsukamoto (2007) argues that Friedman’s framework is sufficiently versatile to embrace conceptions of moral agency, the notion that voluntary (non-coerced) good corporate citizenship is rewarded by the market. Such a view is similar to the one posited by Carroll (2008); Freeman (2008a).
Aside from the aforementioned criticisms, Friedman’s intellectual opponents have challenged his contention that firms should use market-based pricing for disposing of their output, often labeling such an approach as unduly greedy (Carroll, 2008). However, Friedman’s epistemology concerning market operation is decidedly nuanced. Specifically, he pointed out that, in free exchange scenarios, prices are determined through supply and demand interaction and, as such, serendipitously reflect pertinent information. Unless a business gains a monopoly, either government-sponsored, strategically (e.g., via predatory-pricing, etc.) or through straightforward forms of superior performance, what gets paid is largely beyond its control. In this vein, when firms charge below the market, they deemphasize the efficiency imperative. For example, if an enterprise takes a loss to undercut its competitors, then price will not be the means for rationing a particular good and a shortage ensues. By contrast, high prices signal to aspiring entrepreneurs that, perhaps with a bit of innovation, an opportunity exists to enter an industry.
The bottom line is that Friedman did not oppose corporate philanthropy if it was reconciled within a broader strategic framework. In fact, quite the opposite. For example, he (1970, cited in 1972: 182) wrote: To illustrate, it may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.
This quote suggests that Friedman supported favorable actions towards employees and the community if those actions also benefit firm owners in the form of marketing-related initiatives such as corporate branding and the creation of goodwill. Taking up this point, Orlitzky notes that Friedman, in circumscribing a role for corporate philanthropy, was really advocating a type of strategic CSR. Porter and Kramer (2006, 2011) argue in the same vein, citing, for example, the case of the New Belgium Brewing Company which explicitly embraces environmental sustainability and employee friendly policies as elements of its strategic plan. In so doing, the firm simultaneously attracts better employees, has improved efficiency, and is recognized for being a good environmental steward. These attributes appeal to a market segment. Indeed, and as mentioned, part of the rationale for CSR can be that its outcomes have wide ranging benefit, impacting customer, employee, and investor satisfaction. In fact, Friedman (1962) made essentially this point when he noted that the choice between ethical and financial performance is a false one. 5
Some scholars (e.g., Carroll & Shabana, 2010) have suggested that Friedman’s position on CSR would not be compatible with, for example, the Merck initiative to develop and distribute to impoverished populations (mostly in sub-Saharan Africa) a pharmaceutical product for river blindness. River blindness is a colloquial term for a condition wherein the nematode—worm—from blackflies invades the eye’s soft tissues causing sight loss. Merck’s project, undoubtedly of worth, lost money (at least in a direct sense) because of its limited market. However, such a narrow view likely misrepresents Friedman’s philosophy. Indeed, he (Friedman) would not necessarily have been inclined to condemn what Merck actually did. Specifically, the Merck initiative, as an act of philanthropy, delivered for the firm tax reduction benefit and enhanced its public image. Moreover, it had an even more hardcore strategic dimension. Specifically, it acted as something of a loss leader in that it placed more medical practitioners in situations where they were justified in prescribing other Merck products.
Of course, it is hard to deny that there are CSR-type programs that Friedman opposed. For example, in invoking the principal-agent dilemma, he made the case that corporate philanthropy is typically not desirable when it does not, at least in the long run, enrich owners. Somewhat axiomatically, if proprietors, in full awareness of the implications of their decision, opt to forgo profit for another party’s benefit (and so instruct their agents), they are doing nothing untoward. However, problems arise when agents, often opportunistically, pursue corporate philanthropy for their personal benefit; the so-called “doing good with other’s people’s money” syndrome and a malaise for which there is considerable evidence (e.g., Adhikari, 2016; Cheng et al., 2013). In this regard, it is noteworthy that pathology such as narcissism on the part of CEOs intent on portraying themselves as omnibenevolent are inclined to diminish the utility of correctly practiced CSR (Petrenko et al., 2016).
Another facet of CSR that met with Friedman’s ire concerns instances where corporations manipulate market prices in the name of benevolence (Ferrero, et al., 2014). 6 For example, in Capitalism and Freedom, Friedman argues that the decision by the management of US Steel in the early 1960s, under pressure from the Kennedy administration, to reduce the price of their product is an example of bad CSR. The context here was that, previously, the company had raised steel prices by six dollars a ton to offset an increase in union negotiated wages (Hoopes, 2011). This action was congruent with prevailing American industrial relations policy at the time, summarized as “the right to manage” in exchange for better wages. To implement such an approach, corporations routinely defrayed increased labor cost through setting higher prices. President Kennedy sought to thwart US Steel’s price hike due to his belief-commonly held at the time but now widely regarded as mistaken (e.g., Friedman, 1992)-that inflation is caused by corporate overpricing (i.e., cost push), rather than an increase in the money supply. Kennedy (Hoopes, 2011: 106) said US Steel betrayed him, colorfully noting that: “My father always told me that all businessmen were sons of bitches.”
Friedman wrote Capitalism and Freedom during the Kennedy-US Steel controversy. In this work, he indicated that price manipulation is not an appropriate means for supporting “the common good” and, as such, why he came to believe, at least in a narrow sense, that CSR is a “subversive doctrine.” CSR advocates have criticized Friedman’s view that corporate benevolence is inherently “socialistic” and undermines free market functioning (Friedman, 1976). However, these same detractors have typically not paid due heed to broader conceptions of Friedman’s epistemology. Specifically, a bedrock tenet of his (and others including those from Keynesian and Austrian schools) philosophy is that prices are consequential because they enable coordination of business activities (Friedman, 1976: 9–11). F. A. Hayek (1945) addressed this matter directly, noting: “The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it.” This quote indicates that a key (and broadly shared) benefit of the price framework is that it allows for synchronization of supply-chains, as well as optimization across an industry, in often complex and ambiguous circumstances and in the presence of division of labor (Hayek, 1945: 528).
The orthodoxy of CSR from 1910 until into the 1970s was price reduction for consumers through either increased efficiency or price controls (please see Bowen, 1953; Jacobs, 2005) 7 . This approach had a salient advantage, at least when done through the increased efficiency route: it allowed for working class people to purchase cheaper (and better) goods. Smith, Keynes, Hayek, and Friedman would have prioritized this benefit, in particular. However, each of these thinkers was generally unenthusiastic about price controls set by either cartels and/or the government. Moreover, each did not support corporate collusion in circumstances where it fosters low productivity and thus (often) higher prices. 8 It is noteworthy that (in contrast to much commentary portraying the State as the natural friend of consumers), large commercial entities often lobby for government regulatory intervention, indeed their owners (in particular) frequently benefit from it (Wiebe, 1967; Schwarz, 1994). For example, some business leaders, such as General Electric chairman Gerard Swope, unabashedly push for industrial policies that simultaneously (and paradoxically) keep prices and competition low, ostensibly as a means of smoothing out peaks and troughs in the economic cycle (Kennedy, 1999).
Rent-Seeking: Capitalism’s Real Peril
Generally speaking, business ethicists have not paid due heed to a consequential aspect of corporate malfeasance, rent-seeking. 9 In fact, on the contrary, it is commonly suggested in textbooks (e.g., Ferrell et al., 2019) that it is competition which is inclined to create ethical dilemmas. In going a step further, several authors (e.g., Andersen, 2020; Appelbaum, 2019) attribute (at least partial) responsibility for such malaise as economic inequality to unbridled free market operation. In the same vein, scholars such as Conn (2019) and McDonald (2017) go so far as to blame elements of the academy including specifically business schools (to the extent that they emphasize competition) for producing commercial sociopaths (McCloskey, 2006: 3). Such a position is controversial inasmuch as (as noted) economics is typically touted as a positivist, not normative, endeavor. In this regard, economists generally embrace the axiom (applied in one form or another) that an action is either efficient or inefficient but assign no value judgment to it (Blaug, 1992).
An impediment to efficiency is rent-seeking, sometimes referred to in popular parlance by its critics, as crony capitalism. 10 Rent-seeking describes situations where firm agents lobby public officials (elected or employed within government agencies) to receive unearned benefits (Stiglitz, 2012). By way of background, a rent is a payment received by a corporation for a product it provides that exceeds that product’s cost. In free enterprise contexts, this is referred to typically as profit and is created through innovation, control of valuable resources, or natural monopolies. It is noteworthy that rent creation is the raison d'être for aspects of management and all of entrepreneurship. However, when surpluses are not created through value creation and come, for example, artificially through political influence, the expression rent-seeking is invoked.
In some respects, the phenomenon of rent-seeking exemplifies a modern-day paradox. Specifically, the widespread rejection of capitalist ideology and reemergence of a commitment to the construct of socialism among young people (at least in the United States) has been influenced by a perception that corporate insiders unduly (and unfairly) benefit at the expense of other stakeholders (Saad, 2019). Whatever the case, much contemporary animosity has not been directed towards the capitalist ideals embodied in the writings of Smith, Friedman, and even Keynes, but rather capitalism as portrayed by Karl Marx.
In 1967, Gordon Tullock, even though he did not use the term, was the first to systematically examine the construct of rent-seeking and formalize it within modern economic literature. The expression itself was later coined by Anne Krueger in 1974, who defined it as “the socially costly pursuit of wealth transfers” (Tollison, 1997: 506). 11 One way to think of rent-seeking is as artificially created wealth, using legal or illegal means. Tullock argued that the resources used to capture such ill-gotten rent (wealth transfer) are “a form of social cost” (Tollison, 1997: 507). Specifically, to make this kind of resource commitment represents an inherently inefficient opportunity cost (the capital allocation could have been elsewhere deployed). As noted, rent-seeking is a sub-category or kind of profit creation. James Buchanan developed this point when he emphasized that productive profit seeking (activity that results in positive sum social gains) does not qualify as rent-seeking because it (the former) entails unambiguous generation of value (Buchanan, 1980: 12–14). 12
Traditionally, economists, in invoking their own distinctive parlance, have characterized rent-seeking as a situation where an entity (or individual) deploys resources to capture an artificially created monopoly-style benefit. This kind of economic advantage occurs when the constraining natural impacts of a competitive market arena are mitigated or suspended because of an external intervention (Tollison, 1997: 508). For example, hiring a lobbyist to persuade government officials to intercede for one’s own benefit or a lawyer to exploit a regulatory loophole are rent-seeking strategies. To use the vernacular, costs incurred in such endeavor are assigned exclusively to the goal of capturing rent (Tollison, 1997). 13
Several generic (and sometimes seemingly benign) kinds of rent-seeking exist. For example, certification and licensing, often hailed as being for the public good, in fact often do little more than to create a barrier to industry entry and, for this reason, artificially restrict supply of a good or service (Stigler, 1971). The net result is increased profit for sellers and higher prices for buyers. Another generic example of rent-seeking is sometimes known as regulatory capture. This occurs when an industry, cartel or corporation so manipulates its external environment that it is able to have laws and regulation drafted or modified for its benefit. An early and high-profile example of regulation capture was the case of the National Recovery Act of 1933, passed ostensibly to address price decline caused by the Great Depression. This intervention represented a clear-cut abandonment of the market price system. It was supported by big business, the leaders of which viewed it as a means of largely doing away with competition (Kennedy, 1999). A more modern, and perhaps more duplicitous, variant of regulatory capture occurs when lobbyists persuade legislators to pass laws that are prima facie neutral in tone but, in fact, provide loopholes that are able to be exploited (Konishi & Managi, 2020). An historical case in point here would be the US Interstate Commerce Commission (ICC)`s aggressive stance on limiting new entrants into the nation`s trucking industry from approximately the 1930s until approximately the 1980s. 14 This situation was trumpeted by Friedman and Friedman (1980) himself (in a work authored with his wife, Rose) as being an exemplar of the malaise of regulatory capture and, as such, of instructional value.
The modern construct of rent-seeking (crony capitalism) had an earlier instantiation in the business practices of the mid-18th century that were opposed by Adam Smith. Smith’s overarching argument was that market systems of capital allocation, whilst not ideal, produce greater value and are more ethical than alternatives that entail mercantilism. At the time, mercantilism (e.g., the idea that governments sometimes enrich a few politically connected individuals at the expense of the many) denoted a phenomenon that is somewhat akin to today`s notion of crony capitalism. As such, it was a pejorative term emphasizing nefarious forms of central intervention for the benefit of privileged insiders.
It is noteworthy that Smith, much like his subsequent intellectual disciples, penned with nuance about matters of economic meddling. This is a key point which often gets lost. Specifically, Smith’s purported quote “let business be business” is in fact misattributed to him. Indeed, he explicitly rejected the nostrum that the market is a universal panacea, arguing, for example, that governments need to develop and maintain certain kinds of public utilities in circumstances where business cannot (Smith, 1776: iv, ix, 51). However, Smith counseled that it is illegitimate for corporations to exploit government contacts to quarantine themselves from the pressures of competition and as a means of enrichment (Donoghue, 2020). He wrote about this practice in commenting on the case of the British East India Company which had a monopoly on trade, ostensibly to protect the Crown’s imperial interest in India (Collins, 2019). He (Smith, 1999: Book X, Part II, para. 17) noted that: “this prerogative … seems to have been reserved rather for extorting money from the subject than for the defense of the common liberty.” Similarly, Smith was critical of British policies concerning its American colonies, prosecuting a compelling case that they were lopsided and intended to provide undue advantage to British producers at the expense of American consumers (Coase, 1976).
Much like Smith, Friedman argued as a public intellectual that free market autonomous operation is superior to other kinds of economies (e.g., corporatism, etc.). Specifically, the perspective of both men is that the unencumbered trading-related activity of buyers and sellers optimizes: fairness in competition, product quality, ethical behavior on the part of corporations and their agents, and more broadly, levels of social strife (Friedman, 1962). This kind of optimization occurs principally because free exchange provides incentives that align interests between parties. For example, profit-motivated firm owners offer inducements to their agents (managers) when such agents provide quality products. While economic purists generally argue from a value free perspective, this interest-alignment phenomenon suggests (philosophically) that firms have moral agency and (more technically) that the inefficiencies rent-seeking creates impede the downstream social benefit of prudent stewardship (Wagner-Tsukamoto, 2005: 78).
It is sometimes tempting to view rent-seeking as legitimate in that it is mostly sponsored by the State and generally achieved through government regulation of one sort or another (e.g., trade quotas or licensing requirements). However, as noted, economists often argue that the practice is inefficient and inclined to impede value creation. Aside from such technical considerations, it is also true that rent-seeking has a moral dimension. For example, Wagner-Tsukamoto points out that “stockholders might be happy to ‘self-tax’ in order to enact their ethical decisions” (Wagner-Tsukamoto, 2007: 213). Applying such rationale to rent-seeking, the conclusion would be that firm administrators take the ethical highroad when they refrain from the practice. In essence, rent-seeking (at least in one of its guises) is unprincipled because it rewards an industry`s artificially favored corporations whilst deemphasizing recognition of value creation (Jaworski, 2014).
Curiously, the subject of rent-seeking typically does not have a high profile in ethics textbooks. Indeed, contrary to free enterprise orthodoxy, business ethicists are inclined to view corporate malfeasance as arising from and because of competition (Balch & Armstrong, 2010; Bennett et al., 2013). Whatever the case, the issue of rent-seeking creates something of an elephant in the room for those with ideological commitment to state-based intervention as a default solution to externalities caused by business practice. For example, Ferrell et al. (2019) note (correctly in our view) that childhood obesity is both a health and social concern. Arguably, a key contributor to this problem is the low price of high fructose products such as corn syrup. The same authors (2019) characterize the situation as being caused by executives prioritizing the short-term profit imperative over their firm’s longer-term sustainability. Others, commenting on the matter (e.g., Walvin, 2018) view malaise as being due to—the, somewhat ill-defined, notion of—corporate power. These latter authors overlook the fact that sugar and fructose products are available at low cost principally and, in a classic case of rent-seeking, because they are subsidized so as to favor (mostly large) industry ensconced providers (Franck et al., 2013).
Despite lacking prominence in ethics textbooks, business students should have greater opportunity to reflect on the construct and impact(s) of rent-seeking. In a similar vein, businesspeople become more sophisticated (and arguably even better at doing the substance of their job) when they take time to ponder whether the inefficiency created by rent-seeking`s market distortions is a genuine ethical concern. As Boatright states, “it is necessary for a corporate decision maker to be able to determine prospectively whether proposed activities are instances of rent-seeking” (2009, 546).
A Wolf in Sheep’s Clothing: CSR as a Means of Rent-Seeking
To this point, we have argued that a paucity of coverage of the topic of rent-seeking in business ethics and CSR literature is a consequential omission in that it denies students exposure to disparate perspectives of what it means to operate with integrity in commercial contexts. In this section, we go further. We propose that CSR is often something of a Trojan horse strategy; used by corporations to disguise what, in reality, is rent-seeking. As indicated, our position on this matter does not apply to all CSR activity.
Rent-seeking is often associated with pseudo-rationale such as broad commitment to an ill-defined common good but, in fact, instituted for arbitrary reasons (or, at least, reasons that have much to do with who is best able to be heard). In practice, it invariably allows established incumbent firms and licensed workers within an industry to earn more and, in various ways, receive disproportionate other benefit. As noted, one version of rent-seeking is contriving to increase barriers to industry entry to restrict competition. The rationale often proposed for these kinds of measures is the, somewhat-parochial, idea that livelihoods and lifestyles need protecting within a jurisdiction. However, in reality, a corporation’s owners and agents (and/or perhaps a subset of privileged employees) in such circumstances are typically the real beneficiaries of purportedly worker and community friendly regimes. For example, licensing often leads to higher wages for those who get over the hurdle of certifying requirements. Indeed, Gittleman and Kleiner (2016: 147) found that, in an overall sense, licensed workers typically are paid roughly 15% more than their non-licensed counterparts. Federman et al. (2006: 238) estimate “100 hours of additional required training reduces the number of Vietnamese manicurists by 0.019 per 1000 residents, a 17.6% decrease relative to the sample mean.”
The discussion so far has delineated two broad, somewhat overlapping, categories of CSR. The first, we label as legitimate CSR corporate practices that are instituted without consideration of their consequences for profit (at least in the short-term) and other elements of financial performance. The second is subversive CSR, where a corporation disingenuously decouples an ostensive philanthropic agenda from its actual business practice (with the key word here being “disingenuous”). The idea in this latter situation is that a firm intentionally seeks to exploit, for short-term commercial gain, the goodwill that inevitably comes with creating a perception of doing good. For example, Bertrand and coauthors make the case that so-called altruistic giving is often synonymous with tax-free lobbying. They note Bertrand et al. (2020: 2065) that “6.3% of corporate charitable giving may be politically motivated, an amount 2.5 times larger than annual PAC contributions and 35% of federal lobbying.”
It is possible for commercial entities (particularly large ones) to simultaneously pursue legitimate CSR initiatives and other measures that are duplicitous or even nefarious. It is also the case that firms, as part of their DNA, act generally to diminish competition in the same way they act to minimize tax liability. An example from history of such heterogeneity is that of the National Cash Register company in the early 20th century. This firm was renowned during the era for its excellent corporate welfare but, at the same time, so aggressively anti-competitive that both its president and the corporation itself were sued by the federal government under the Sherman Anti-trust Act. Certainly, this kind of within-firm corporate incompatibility in ethical conduct exists. However, in developing our position that there are two categories of CSR, we draw attention to the fact that an initiative itself is what should be analyzed. As such, a measure can be instituted under the umbrella of CSR when, in fact, both its motive and result(s) are not of benevolence or even enlightened self-interest, but rather of opportunism. It is in these instances, for us at least, where a case can be made that CSR is prone to be subversive.
An axiom of capitalist orthodoxy, as embodied in the writings of Smith, Friedman, and even Keynes, is that there is nothing wrong with above-market (so-called “supernormal”) returns when driven by superior insight, more talented workers, and/or innovation; in the end, better offerings. Indeed, higher than average bounty should be a prioritized corporate objective. A further axiom of free enterprise is that exceptional performance, when ethical, occurs within circumscribed conditions. Specifically, super normal profits cannot be certified as legitimately gained when facilitated by rent-seeking as opposed to rent creation. Friedman (1972: 182) summed-up the nature of the conundrum when he wrote: “Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.”
Conclusion
In management literature, Friedman’s stance on CSR is often dealt with harshly. It appears that some of the criticisms made of his perspective have their origins in an ingrained epistemological difference between economists and management theorists. Specifically, CSR scholars portray Friedman as unduly obsessed with profit. They are also inclined to view prioritizing wealth accumulation as tantamount to endorsing greed. However, their interpretation does not well embrace the perspective of many economists: in a free market, a firm achieves a surplus if its offerings produce increased economic wellbeing (e.g., a desire or necessity that needs addressing) as judged according to the subjective values of consumers. In making profit, Friedman clearly believed that businesses should adhere to, not just legal, but also ethical standards. Indeed, he (Friedman) was not unconcerned with social problems or moral dilemmas but merely considered that such malaise is best addressed through free market operation (c.f. Carroll, 2016). In this regard, he made much of the axiom that consumers sanction business by voting with their money.
It is historically noteworthy that Milton Friedman, as a professional, fulfilled two partially conflictual roles. In his first, as an academic economist, he like other scholars in his discipline, was driven by an unambiguously positivist epistemology and, as such, motivated to discover facts about the world. His second role was that of a public intellectual where his central interest was normative, about what ought to be. Friedman’s critics often assume that the former of these roles unduly informed the latter in that he deemphasized the import of ethical conduct in economics (Friedman, 1953). For example, Freeman et al. (2010: 272) argue “Friedman’s writings suggest that he views the inner workings of capitalism as amoral.” However, such conjecture overlooks the nuance that inevitably exists when a thinker operates in different modalities. Specifically, while Friedman avoided taking ethical positions in his academic work such as in his study of monetarism, he patently did make value judgments as a public intellectual, prioritizing, for example, freedom. Indeed, a careful reading of Capitalism and Freedom, reveals that he actually opposed profit when it is produced by coercion and deceit as such tactics diminish unduly, at least one party’s, liberty.
In coming to terms with how Milton Friedman viewed CSR, another issue of consequence is the role played by collective memory in interpreting historical phenomena. One school of thought, referred to as the Whig interpretation, highlights how the past is inevitably interpreted through the lens of the present (Butterfield, 1965). An implication of this perspective is that the best of what has been delineated across millennia is inclined to be contained, perhaps in a debased or caricatured form, in contemporary writings (Boettke, 2021). Accordingly, there is little reason to read great works from previous eras other than for antiquarian interest. At least insofar as CSR is concerned, Friedman’s position on the matter has often been simultaneously parodied and imbued with unnecessary ideology. As a result, some habitually view economic malaise through the lens of market failure. A case in point here is the 2008 Global Financial Crisis which has been interpreted by authors such as Gould & Lokrou (2018) as, not so much being due to undue greed, guile, duplicity or inadequate regulation, but rather of well-intentioned external (i.e., State-based) intervention. Moreover, a compelling case exists that, in fact, it was rent-seeking on the part of major banks (the “too big to fail” doctrine, etc.) that prolonged the crisis. Specifically, prior to the so-called bubble-bursting, the orthodoxy was that benefit generated from the finance-sector is private property and not to be shared however, in its aftermath, solutions (invariably in the form of costs) are socialized through taxpayer-funded bailouts.
Debate about the merit of CSR has been exacerbated and, in some respects, made unnecessarily controversial due to the academy`s politics (small “p”). The issue here is often that scholarly disciplines gain legitimacy either by copying the methods of domains which appear more epistemologically rigorous (e.g. physics envy) or through high-profile, and often strident, rejection of those same methods (Joullié & Gould, 2022; Steinmetz, 2005) In this regard, as a Nobel Laurate and arguably the most consequential influence on libertarian economics of the 20th century, Friedman won the usual plaudits as both a scholar and public intellectual. Through criticizing him, early exponents of CSR and stakeholder theory achieved much of their credibility within the academy because, to the extent their narrative gained traction, they were slaying a giant. Notwithstanding such context, CSR has become mainstream in business school curricula and, in these circumstances, both Carroll and Brown (2018) and Freeman et al. (2010) have recently emphasized overlap between their perspectives and Friedman’s.
Friedman’s critics have sometimes mischaracterized his position as that of an unfaltering apologist for big business. However, we suggest that he is more aptly described as an advocate of free enterprise in the tradition of his intellectual predecessor, Adam Smith. In practice, this perspective means that both men opposed business tactics that denied others their liberty. An archetypal example of such intrusion is rent-seeking by politically influential corporations. In the final analysis, and as argued in this paper, several of the generic criticisms of capitalism create a strawman version of free market economics. Such criticisms are best saved for one of its more debased forms, namely, crony capitalism. We urge business ethicists to pay closer heed to this perspective.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
