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Dec 7, 2017

No, Free Markets and Business Don’t Require Moral Compromise

Business needn’t involve setting aside all other concerns and purposes for the pursuit of profit.

The Purposes of Business

Another widely-held thesis that feeds into this unlovely image of business is that the only social responsibility of business is to increase its profits (Milton Friedman, “The Social Responsibility of Business is to Increase its Profits”). In spite of its title, Friedman’s argument in this essay is directed not at all businesses, but only corporations, and only against the notion that corporate executives have social responsibilities that they may discharge by using shareholders’ money without their consent. Still, his argument has come to be seen as an endorsement of whatever a corporation might do to maximize its profits, so long as it abides by the law and “ethical custom”. And such an endorsement omits, as John Mackey points out in a debate with Friedman and T.J. Rodgers, that businesses are created by entrepreneurs for all kinds of purposes, purposes of which investors are aware before they invest in the firm. Mackey argues that profits are a means to the fulfillment of a company’s purpose, not the other way around.

Mackey has a point. Henry Ford’s aim in creating his company was to make a good quality, affordable car, not simply to make a profit any-old-how. Profit enabled him to keep innovating and producing better and better cars. The thesis that the only purpose of business is to make a profit is analogous to the thesis that the only purpose of a novelist is to write novels that sell, or that the only purpose of a doctor with a private medical practice is to make a lot of money.

But must we choose between Friedman’s and Mackey’s descriptions of a company’s purpose? I don’t think so. There is a third alternative: profit is a means to producing the good the business was created to produce, and the good is a means to making a profit. Entrepreneurs start businesses in order to make money by doing something that inspires them, or engages their interest, or at least fits their skill set. The substantive goal of a business, the one that differentiates one business from another, is the product it exists to create or sell. If you ask your friend why she opened a garden center, given that it’s expected to make less money than, say, a café in that spot, she is not answering your question if she says, “In order to make money”. This is the right answer to the question for those shareholders or employees who don’t care about the product, but not, typically, for the entrepreneur or the initial investors in the company. Omitting the fact that businesses exist in order to make or sell a good or service leaves us with the “soulless” view of business that partly explains why business people are held in low regard by society as money-grubbers. The mere fact that the really successful ones make a lot of money doesn’t fully explain this low regard, since people in other professions who earn big bucks and own multiple mansions, such as Hollywood stars or athletes, are not held in low regard.

Market Virtue

In recent years, economists have been writing defenses of market activities and market societies in virtue ethical terms. Sometimes, however, they end up supporting this soulless view of business. A case in point is the well-meaning defense by Luigino Bruni and Robert Sugden of what they call the “market virtue” of respect for one’s trading partners’ tastes. They argue that this market virtue implies that the manufacturer or seller ought not to patronize the customer by making or selling only what he is intrinsically motivated to make or sell. The business person should treat his trading partner as an equal. Hence, if he is a craftsman or professional, he might have to compromise his standards of excellence when he engages in market transactions. But according to Luigino and Sugden, this is acceptable because market exchange has its own standards of excellence. The customer is always right.

But is respect conceived thus a virtue? How can the manufacturer or seller be equal to the customer if he has to compromise his standards to please the customer? The attitude that Bruni and Sugden recommend is compatible with equality and mutual respect if the product in question is just a matter of taste, such as blue walls or berber carpets or sour candies. There is no reason why the producer should not cater to his customers’ tastes, because pleasing their taste is the whole point of producing a variety of paints, carpets, or candies. But surely crafts and professions involve more than just would-be customers’ tastes. They involve standards of excellence that the craftsperson or professional must meet out of self-respect and respect for her craft or profession. The attitude Bruni and Sugden endorse entails that Howard Roark, the famous hero of The Fountainhead, was wrong to refuse to build buildings without integrity in order to please his customers. By the same logic, it entails that, qua business people, novelists are wrong to refuse to write formulaic novels guaranteed to sell well just because they don’t meet the novelists’ standards, and actors are wrong to refuse roles in movies expected to be box office hits just because they violate their artistic standards. In short, Bruni and Sugden’s thesis entails that integrity is incompatible with market transactions, an implication they would surely not welcome. But there is no reason to accept their premise that the standards of excellence for market exchange may require compromising the standards of excellence for craftsmanship and professionalism. When Roark explains to his customers why he doesn’t build buildings that are a hodge-podge of styles from different centuries, styles that no longer serve the purpose they once served, he treats both his customers and himself with respect.

A final problem is the tendency among utilitarian defenders of free markets to whitewash the behavior of businesses when they actually do greedy and unjust things by pointing to the benefits they produce for society, and blaming the law or the government for their injustice. For example, it is sometimes said that if the government uses the doctrine of eminent domain to seize someone’s property without her consent, or without due compensation, in order to help a business, the fault is the government’s, not that of the business. But if the government’s actions are instigated by a business, how can it not be the fault of that business as well? No one is forcing the business to get the government to make a land grab on its behalf. The business’ responsibility to maximize profits is meant to be constrained by the demands of justice. In India, such land grabs are one of the reasons that thousands of farmers have committed suicide.

Business activities are neither inherently soulless nor inherently greedy. Indeed, widespread prosperity requires entrepreneurial passion, rational self-interest, and trust, and trust requires justice, honesty, integrity. Defenders of free markets must recognize this if they wish to succeed in defending them.

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