PHIL103-lecture-20201028

Corporate Social Responsibility #

Markets, recap… #

  • Market mechanisms vs political mechanisms for resource allocation
  • You get (more!) effecient coordination without central direction in a system of property, contract, and consent.
  • Private vices translate into public benefits
  • Social obligations?

CSR #

  • Friedman’s main complain: “socially responsible” business amounts to a kind of fraud
  • A violation of the fiduciary relatioinship between principal (owners, shareholders) and agent (CEO, management).

Examples #

  • Reducing emissions more than the law requires to offset global warming
  • Using more expensive domestic suppliers to keep American indsutry strong
  • Keeping on unproductive workers to save jobs
  • Keeping a failing, obsolete factory open to save a local community
  • A business executive needs to decide whether or not to close an unprofitable division. Who would be affected?
  • Stakeholders: shareholders of corporation, but also employees, customers, suppliers, and local community of the company.
  • “Creative destruction”
  • Larry the Liquidator

So who’s the better fiduciary?

Principal-agent problems #

  • Separation of ownership (shareholders) and control (CEO, management).
  • Gekko says “greed is good.” Why?
  • Problems in corporations are primarily the result of a lack of managerial accountability.

What happens if managers are told to serve multiple masters? #

  • Endangers incentives that encourage managers to make very poor decisions.
  • Makes it difficult to detect the rent-seeking behavior of corporate managers because they aren’t scrutinized according to the profitability of the firm.
  • And Friedman’s position actually makes the actions of managers more tractable – prevents corporate managers from being able to concentrate benefits on themselves, while dispersing costs on unsuspecting shareholders.

A diagnosis #

  • The problem is a stakeholder-type approach that makes it very difficult to detect the rent-seeking behavior of corporate managers because they aren’t scrutinized according to the profitability of the firm.

Friedman’s claim #

“There is one and only one social responsibility for business – to use its and engage in activities designed to increase its profits so long as it stays within the rules of the game.”

Friedman’s argument implies either

  1. Managers (CEOs) should do whatever it takes to maximize profit (shareholder interests), so long as they don’t break the law, OR
  2. Managers should maximize profit, but only in ways that observe their pre-existing moral duties.

Option 1 makes the view false, or option 2 makes the view vacuous.

Heath’s market failures approach to ethics in business #

Thesis #

  • The market will force firms to be ethical (or, ethical enough). Really?

“Pharma bro” Martin Shkreli #

Shkreli bought the rights of a drug that started at $13 per pill, and raised the price to $750 per pill. He was able to take the monopoly situation because there was only a certain group of people who needed the situation. Other companies had to go through a long rigaramole to create their own version of the drug, so he had a monopolized market for a while.

Typical argument (in reponse to market failure) #

  1. Idealized perfectly competitive economic model of a market would achieve some socially optimal (or Pareto efficient) outcome.
  2. Real world market fails to achieve that outcome: “Market failure!”
  3. Implement an interventionist solution.

What is a market failure? #

  • Not just a market outcome that you don’t like
  • A (free) market failed to generate an efficient outcome.
  • Not all the costs associated with a private transaction are internalized?
  • Or, certain goods/services will tend to be under-provided by the market because of a lack of incentives.
  • An institution failed in some way: the market.

Heath’s argument #

  1. Idealized perfectly competitive economioc model of a market would achieve some socially optimal (or Pareto efficient) outcome.
  2. Real world market fails to achieve that outcome: “Market failure!”
  3. Business have a morally responsibility to act in ways that correct for these inefficiencies.

Three kinds of rules #

  1. Recognition rules: rules about the making of rules, rules that rules have to answer to.
  2. Rules of the game: formal rules governing “play.”
  3. Rules in the game: informal rules governing “play.” This third area is where business ethics is important.