It’s been my view for a while now that the Milton Friedman view that “the social responsibility of business is to increase its profits” has introduced a kind of cancer into the normative substrate of capitalism by implying that practical business executives are morally obligated to commit frauds and engage in predatory rent-seeking through the political system.
Today in Bloomberg View, business school professor Luigi Zingales makes the case for putting real ethics back in the system by exploring the Friedman quote at greater length:
When the economist Milton Friedman famously said the one and only responsibility of business is to increase its profits, he added “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” That’s a very big caveat, and one that is not stressed nearly enough in our business schools.
Lobbying to secure a competitive advantage from the government certainly does not represent “open and free competition.” Similarly, preying on customers’ addictions or cognitive limitations constitutes deception, if not outright fraud. Not to mention using clients’ confidential information for personal gain, manipulating a major interest-rate benchmark such as Libor, or selling financial products you know to be flawed.
I’m not really certain that Zingales’ proposed reading of Friedman is the most accurate read of the text, but I certainly think this Zingales/Friedman is putting forward a much more attractive view than the one that’s conventionally taught. Any real-world political framework is going to contain both legally exploitable loopholes and the potential for creating new ones. But the question of whether or not a person should try to enrich himself and his employers’ shareholders by exploiting a logistical flaw in the mechanism for calculating Libor is different from the question of whether or not it’s legal or something you can get away with.
