The Morality of Capitalism

A discussion here a couple of weeks ago focused on a joint statement signed by over 180 CEOs, Statement on the Purpose of a Corporation, of major US companies about what social responsibilities, if any, that companies have toward anything other than making profit for owners. The guiding moral principle, articulated by economist Milton Friedman, had been anything that needlessly reduces profits is immoral. Thus, it would be moral for a company to donate money to a charity if it helped build public goodwill, thereby increasing profit. But, donating and not getting a profit would be immoral.

Friedman published an essay in 1970, The Social Responsibility of Business Is to Increase Its Profits," argued that the best type of CEO was not one with an enlightened social conscience. CEOs with an enlightened social conscience were considered to be “highly subversive to the capitalist system,” at least in Friedman’s opinion.

An essay in the Economist magazine, What companies are for, comments on the joint statement. The essay argues it probably arose in part as a means to begin a defense against rising public sentiment that corporations should have some responsibility to society, the environment, business suppliers and workers. One source of concern is the rise of younger workers who feel that the businesses they work for should have a broader responsibility.

Also, democratic proposals for a broader corporate social conscience include a plan that would require U.S. corporations to turn over part of their board of directors to members chosen by employees and prohibiting corporations from buying back their own stock unless they offer a certain level of pay and benefits for workers. Another proposal is to require federal chartering of companies and revocation of their licenses if they unreasonably abuse the interests of staff, customers or communities. Such proposals would underpin a system where business determines and pursues social goals and not just narrow self-interest. Presumably, most corporations do not want that kind of regulation.

The Economist opposes efforts to impose a broader social conscience because it would risk “entrenching a class of unaccountable ceos who lack legitimacy,” arguing that would be a threat to long-term prosperity. The essay points out that some companies now endorse social causes popular with staff and customers or deploying capital for reasons other than efficiency, citing Microsoft financing $500 million for housing in Seattle. The Economist argues that such a broader social conscience creates two problems: a lack of accountability for the business elites who make decisions and a “lack of dynamism.” The essay asserts that “ordinary people would not have  a choice” in where resources are deployed. The implication is that special interests, politicians and business elites would corrupt the effort in the name of self-interest. To inject more citizen power into social conscience, the Economist proposes

The other problem, lack of dynamism, would arise from an alleged tendency of collective capitalism to not change. As evidence, the essay cited abuse of customers and poor quality products by AT&T and General Motors in the 1960s as being shielded in part by various claims of social benefit, e.g., jobs for life.

Not persuasive or realistic

The Economist’s libertarian arguments are not persuasive. Business elites already are not accountable. For example, no executive was prosecuted for any financial crime after the 2007-2009 financial crisis. American citizens already have no influence over policy, so that situation cannot get any worse. If it is true that collective capitalism turns out to dampen dynamism, then competitors will impose dynamism or the business will go away. The essay admits that businesses with a social conscience will continue to maximize profits. If laws are passed that impose a social conscience, the playing field will be leveled and no one will be allowed to play self-serving games shielded by false assertions of social conscience.

Finally, the essay argues that corporate accountability will be enhanced by broadening ownership so that more Americans own stocks by tinkering with the tax code. The essay admits that stock market power is heavily skewed toward rich people, so changing the tax code to expand the numbers of small investors will make no difference. In essence, the Economist raises concerns over the rise of problems that already exist and proposes solutions that will make little, if any, significant difference.

For the most part, most corporations will continue to have as little social conscience as they can for as long as they can. The major owners, not small shareholders, have power and they will fight to keep social conscience from damaging their investment. The only way to grow social conscience is to impose it by law. Corporations are already building their defenses to fight off social conscience. The the Statement on the Purpose of a Corporation is an early step in the defense against social conscience. The next steps? Most likely, the most obvious ones: bring on the campaign contributions and call out the lobbyists.