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social consequences of management

A guest post by Ray Fisman

One deficiency Fabio called out in his Org Theory review of The Org is the paucity of discussion on the social consequences of management. With our single-minded focus on if and how organizations are set up to promote their own objectives, Tim and I will admit that we lost sight of the bigger picture of whether they do so at the expense of social concerns that lie outside their objective function.

The critique immediately brings to mind the still-influential 1970 essay of Milton Friedman, “The Social Responsibility of Business is to Increase Profits.” The title gives away Friedman’s basic argument, which is one that’s certainly been internalized by America’s managerial class. And one that’s abetted by the business schools that train them. A recent Aspen Institute survey found that 69% of mid-program MBA students agreed with the statement that maximizing shareholder value is the primary purpose of business, up from 60% of students at the time of enrollment.

The shareholder-centric view of the firm is only one way of organizing production – even of the for-profit sort. But its prevalence, combined with the way that many equate it with efficiency or even optimality, it’s worth revisiting Friedman’s claims, and the assumptions on which they rest.

Friedman’s classic argument was at least a partial invocation of Adam Smith’s Invisible Hand: market actors will produce the best – or at the most efficient – of all possible worlds when freed to follow their own individual self-interests. Companies that deviate from self-interest are the enemy of optimality.

What of the damage that companies can inflict by poisoning the air, colluding on prices to the detriment of consumers, or by creating dangerous yet superficially attractive products? According to Friedman, solving these problems of externalities and information asymmetries are the domain of government rules to constrain and regulate firms’ decisions. But managers’ responsibility was to obey the law (and “ethical custom”) and go no further.

What about corporate charity that focused specifically on the social good? Friedman had no qualms with the “doing well by doing good” philosophy that characterizes so much of the contemporary corporate citizenship debate – if customers or employees valued a company’s charity and were willing to pay for it through higher prices or lower wages, it was all good. Yet Friedman saw this as the exception rather than the rule: executives aren’t hired to be social planners, and didn’t have the expertise to decide what is and isn’t good for society; they would inevitable end up “misdirecting” firm resources to their pet causes. Better to return profits to shareholders to let the “market” for charities work its magic as well.

Just as libertarians (and MBA students) have been too quick to accept the primacy of Friedman’s thesis, his detractors haven’t always focused on what precisely is wrong with his argument.

Libertarians should heed the fact that Friedman’s argument relies, as a matter of principle, on government to constrain businesses in the interests of the social good. Yet Friedman tended to see government as the problem, and markets as the solution: in Freedom to Choose, Friedman, with his wife Rose, argued that government is “the vehicle whereby special interests can achieve their objectives and an important special interest in its own right.” It’s hard to reconcile this worldview with the claim that executives should rely on politicians and bureaucrats to set the constraints that govern what businesses can do.

On the other hand, Friedman had a point that more liberal-minded thinkers should keep in mind. As my thesis advisor George Baker once put it, “Do you really want a bunch of old white guys deciding what constitutes the social good?” (Baker was himself an aging white man at the time.) When you think of cases like AIG’s channeling of corporate foundation dollars to board members’ causes, you start to see Baker’s – and Friedman’s – point. (You might also take it as yet another reason we need more racial and gender diversity on boards and in top management.)

Where does that leave us in the business-meets-social interest debate? Mostly with a lot of conflicting opinions. At least some of these questions could be resolved with a few more facts on the table. That’s where Tim and I hope you can come in. For example, it would be great to know when Doing Well By Doing Good is a reality and when it’s selling a false bill of goods. Maybe companies get enough of a productivity boost from providing healthcare or decent wages to employees, maybe not. Getting some well-evaluated case-studies could help to indicate where the almighty profit motive will guide companies to do good, and when the guiding hand of government (or enlightened self-intervention) is required. And if neither profit motives nor government can be relied upon, can we do a better job of training future managers to consider the social consequences of their business decisions?

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Written by orgtheoryguest

April 1, 2013 at 4:56 am

Posted in uncategorized

4 Responses

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  1. Libertarian here; adviser was a personal friend and colleague of Friedman’s. The above is a misrepresentation of both Friedman and current libertarianism, unless you take MBA students to be libertarians, which they’re not. I sat Fogel’s ethics class at Booth the other day. The kiddies were on their Facebook the whole lecture – not contemplating the wonders of liberalism in business ethics (classical sense).

    1. Friedman argued that the government should enforce contracts.

    2. Economists who have worked on externalities nearly unanimously agree that defining tradeable poperty rights are the best way to mitigate externalities — the lefty New Atlantic columnist version of solving externalities with big regulatory bodies is a bastardizatiom of the theory (though may not be incorrect – I dunno).

    (1) and (2) are perfectly consistent with one another.

    3. Modern libertarian thinkers on externalities and business ethics, say for instance the smart guys and gals over at bleedingheartlibertarians.com, do not rely on the midcentury welfare theorems from economics being attacked above. In fact the first and second welfare theorems are taught even in graduate theory courses only to be ripped apart and challenged for the rest of an economist’s career in the journals. Nobody in possession of three years of graduate training in economics or liberal philosophy relies on these welfare theorems to legitimate the ethics of business anymore.

    4. Friedman had a strong training in liberal arts and firmly believed in the ethically embedded nature of civil society. His belief that most of these ethics need not be, and are especially poorly, mitigated by coercion is not contradictory unless you – like you impute Friedman to believe – believe people are at bottom knaves, and especially so when they’re “old and white.”

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    Graham Peterson

    April 1, 2013 at 5:25 am

  2. Sorry. “Welfare theorems” was a fancy dance thing to say. They’re the teched-up version of Smith’s enlightened self interest.

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    Graham Peterson

    April 1, 2013 at 5:29 am

  3. Adam Smith’s invocation of the invisible hand is widely misinterpreted the world over. The leading scholar of Smithian thought – he reads the whole ouvre rather than just reading a few oft-cited paragraphs – reports that Smith meant something entirely different with the use of the metaphor:

    http://adamsmithslostlegacy.blogspot.kr/2013/02/inappropriate-use-of-invisible-hand.html

    That does not mean a priori that the ideas Friedman is espousing – and seeking to provide legitimacy for by invoking Smith – is wrong. Rather, by ridding ourselves of the myth of the meaning of Smith’s “invisible hand” metaphor, we can think more clearly about Friedman’s own ideas on their own merits.

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    andrew

    April 1, 2013 at 6:17 am

  4. […] social consequences of management | orgtheory.net […]

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