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Brooke Laughlin
BUS 101
Professor Tholke
9/9/13
Friedman vs. Freeman
In Milton Friedman’s article, he separates responsibility of self and business. “‘Business’
as a whole cannot be said to have responsibilities... they are the social responsibilities of
individuals, not of business (Friedman p.2). He disagrees with reformers who believe that
business has a “social conscience”, taking on responsibilities of the community. His belief is
business should strive to make as much money as possible so as to increase profits. If the
business is a sole proprietor, then it is justifiable to spend his or her own money for social
responsibility. If a corporation were to do so, then they would be spending other people’s money.
They have a fiduciary duty to the owners to carry out the desires of the business. Friedman
believes in a free market economic system without government intervention, or as little as
possible. He is an advocate of economic system being self-correcting and that the key to business
is to take care of the stockholder, take care of profits, and then with a strong business it will take
care of other stockholders.
Friedman deems the corporate responsibility of business is to make money in a lawful
way. In terms of society, he believes it “is a collection of individuals and of the various groups
they voluntarily form” (Friedman p.5). For that reason, “cooperation is voluntary, all parties to
such cooperation benefit or they need not participate” (Friedman p.5). In other words, free
advertising is necessary when a business is supporting a certain cause. For example, water bottles
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sent to hurricane disaster areas with a logo on them. Friedman states that the social responsibility
of corporate executives is a responsibility to the business owners.
The significance of Friedman’s article is to discuss the social responsibility and what that
entails from a business standpoint. He wants to make the point that “the doctrine of ‘social
responsibility’ involves the acceptance of the socialist view that political mechanisms, not
market mechanisms, are the appropriate way to determine the allocation of scarce resources to
alternative uses” (Friedman p.3). In other words, political mechanisms drive social
responsibility. Socialism is dependent on such political mechanisms to distribute resources.
There is more government intervention and the government determines societal needs. He
believes social responsibility is “unadultered socialism” (Friedman p.1) and that it weakens free
society. Capitalism, on the other hand, thrives from market mechanisms to distribute resources. It
is dependent on factors such as competition, supply and demand, and costs of production.
In Edward Freeman’s article, he professes the stakeholder theory. Freeman states that
managers should act for all of their stakeholders because they have a fiduciary duty to them. The
idea of top management means stakeholders’ interests must be balanced for the good of the firm.
Within the stakeholder theory of the firm, stakeholders are protected by the business and there is
more government intervention. Freeman expresses the idea of the “invisible hand” doctrine,
saying, “it creates the greatest good for the greatest number, and therefore government need not
intervene. However, we know that externalities, moral hazards, and monopoly power exist in
fact, whether or not they exist in theory” (Freeman p.39). Therefore, because of these factors,
some government intervention is inevitable. Externalities are other parties affected by decisions
who are not given a choice in the matter, such as the environment. Moral hazards occur when it
is more likely an individual will make riskier choices than intended. Monopoly power is power
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of the market in the hands of one producer or supplier. Freeman states that this abuse hinders
competition so regulation is needed.
Freeman’s legal argument to uphold his opinions is the following, ”the law has evolved
to effectively constrain the pursuit of stockholder interests at the expense of other claimants of
the firm. It has, in effect, required that the claims of customers, suppliers, local communities, and
employees be taken into consideration, though in general they are subordinated to the claims of
the stockholders” (Freeman p.39). Consequently, the firm’s duty is for the benefits of the
stakeholders. For example, the fair labor act places importance on employees as well as the clean
air and water acts highlights the value of community.
The significance of Edward Freeman’s article is redefining the power of the stockholder.
He offers an alternative theory to managerial capitalism because he feels that the way
corporations view their stakeholders is incomplete. He views the “invisible hand” doctrine as an
ideal situation that is not true to reality due to the selfish nature of humans that requires
government intervention. Freeman believes that no stakeholder is more important than another,
because if so the business cannot sustain itself. If a business were to place more importance on
profit over stakeholders for a long period of time, then the business is likely to fail. He believes
more in the overall picture rather than what is good for just the business, because what is good
for the business is keeping all the other stakeholders’ interests at heart.
Both articles speak of responsibility, specifically social responsibility. Social
responsibility is bettering society through business decisions. Freeman believes business is
accountable for society. He makes this evident with the discussion of tragedy of the commons
and the free-rider problem. Freeman states, “the cost must be borne by all, through taxation and
regulation; hence we have the emergence of the environmental regulations of the 1970s”
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(Freeman p.39). However, Friedman believes only individuals, not the business, have social
responsibilities. Under Friedman’s beliefs, social corporate responsibility is okay as long as it’s
in a cloak of self-interest. “There is one and only one social responsibility of business – to use its
resources and engage in activities designed to increase its game, which is to say, engages in open
and free competition without deception or fraud” (Friedman p.5). Friedman does not believe
social responsibilities can be used properly because it makes individuals responsible for their
actions but “difficult for them to ‘exploit’ other people for either selfish or unselfish purposes.
They can do good—but only at their own expense” (Friedman p.3). He then makes the point that
what some view as good could be also seen as evil.
When Friedman poses the question “What does it mean to say that the corporate
executive has a ‘social responsibility’ in his capacity as a businessman?” (Friedman p.2), he said
“it must mean that he is to act in some way that is not in the interest of his employers” (Friedman
p.2). This is completely opposite of what Freeman justifies as the fiduciary duty of the business
to act for their stakeholders. Freeman believes it is the up to the company to take care of their
stakeholders, such as the employees. If the employees give hard work then the “corporation is
expected to provide for them and carry them through difficult times” (Freeman p.40). The give
and take philosophy Freeman suggests allows for better relationships among stakeholders and
keeps their interests more in line with the interests of the business.
Both of the articles state whom they see as important stakeholders in business and how
the relationships between stakeholders should be carried out. The varying viewpoints concretely
lie in the responsibilities of the way a business should conduct their policies.