Validation of Milton Friedman View of Profit Maximization - Coursework Example

Validation of Milton Friedman view of Profit Maximization Name Institution Date Validation of Milton Friedman view of Profit Maximization According to Friedman (1970), a business sole social responsibility is to revenues for its stakeholders. Over the past few decades, many have supported that idea that the business should be solely based on achieving shareholders returns. Currently, businesses have emphasized on corporate social responsibility compared to the exclusive focus on profit maximization. However, CSR is perceived as a way of increasing profit maximization. Friedman argues that directors should act in a way to maximize shareholders profit. A manager should not divert the company funds to in a manner that is not approved by the shareholder, as it would be termed as a breach of fiduciary duties as an executive (Schwartz & David, 2012). The manager is solely responsible to the shareholders who have entrusted their money for the exclusive purpose of increasing profits. However, advocates of CSR argue that business should have a broader set of duties than just making profits (Christopher, 2009). However, Freidman deception and fraud are prohibited in pursuit of profit. This paper will indicate the situations where Friedman's view holds that the only social responsibility of business is to increase stakeholders' revenues by staying within what he refers to 'the rule of the game.' Friedman Milton has set two broad arguments, the fiduciary duties and argument against business taking on social responsibilities. Friedman view may be a strong theory in defending business goal of profit maximization, but in some situation, it may have some weaknesses that should be resolved if it should be regarded as a viable alternative to broad CSR. Profit Maximization and Social Responsibility The aim of any business, excluding nonprofit organization is to make profits (Hammond, 2003). However, it may have a social function with specific purposes. Profit or loss tell the business owners or shareholder how the company is performing in meeting the needs of the society. When a business start making losses, it may fail along with the functions it was performing (Butler, 2011). According to Friedman, profit maximization is the only role, and the executive fiduciary duties were given to the shareholders. Therefore, if an executive act willingly against shareholders responsibility to seek profit, he would be in a breach of his fiduciary duties. For example, a manager may get a proposal from a local charity to donate money to provide some basic need for homeless, or to help clean up the city. However, there is no benefit in this doing. A manager is contractually bound to the employment contract and not to divert the corporation funds, as this would be regarded as theft. They would be said to have failed in their primary duties. The only way business increase profit is providing value to their customers. In other words, businesses benefit the society, hence acting responsibly. However, Friedman indicates that profit must be obtained without initiation of force. According to him, there is one social responsibility of business to increase profits as longs it stays within the rule of the game. In other words, engage in business without deception or fraud. For instance, Enron corporate manager hides the company debt through creative financial reporting to keep the prices of stocks high and ensure people continues to invest in the company. Unfortunately, when the scandal was discovered, and the company stocks fell from 90 dollars to 4 cents. Freidman argues that deception and fraud should not be used in pursuit of profit. Enron company behaviors are acceptable in the pursuit according to Milton Friedman view of social responsibility. He argues that social responsibility of a corporation is to earn revenues for its shareholders, which is a crucial responsibility with vast consequences. A company stakeholder includes people who invest in the company stocks in order to earn profits. The scandal also affected the employees who lost their jobs. Making profits without initiation of force is what open, and free competition without deception of fraud is built on. Friedman also argues that businesses need to focus on purposes that give employment opportunities and generate wealth, that is, to make a profit. Firms should make goods and services available to the public at a fair price, thus earning more profit to attract more investors. When a firm is attractive to investors, the business enterprise is enhanced creating more job opportunities and building the country's economy. In other words, long-term corporation viability depends on its social responsibility to ensure the well-being of the society, which in turn depends on upon profitable and responsible business (Gallagher, 2005). Argument against Friedman View Friedman clearly indicates that profit maximization is a moral imperative for the corporate executive. He lays four basic arguments to underpin his position. First, a manager's function is to pursue the interests of the shareholders, and thus, it would be inappropriate to pursue other functions. When two people enter into a contract, it cannot be reasonably argued that the agreement releases from the responsibility of a third party (Meijer & Schuyt, 2005). However, Friedman argues that pursuing its interest corporation results in contributing to the welfare of the community. In other words, the corporation is paying taxes so do the shareholders. Broad CSR argues that as the business executive one has the power to do so much good, thus they are obligated to do so. But, it does not show how the power to enact change is moral to put aside the fiduciary duties that a manager has with the contract. This argument may be only relevant at a personal level, but cannot be applied to a goal that is openly against increasing profit. Therefore, in this case, the shareholders and managers agreement cannot claim that it precludes responsibilities for the society. Secondly, it argues that pursuing another end is the detriment of shareholders returns. However, the question is whether the shareholders should give some of the profit another end; and the manager being the one to put it in practice (Kolstad, 2007). According to Friedman, being accountable for one's action means taking responsibility for consequences for its actions regarding third parties. However, Davis attacks Friedman arguing that when it comes to the responsibility for corporations' actions, it should make restitution in equal size to the damages incurred or replace the products. Corporation obligations for social responsibility should be more that where power decisions lie. But, Davis argument does not give a sound reason beyond what Friedman agrees in terms of remedying "social harm" that it itself has caused (Davis, 1973). Thirdly, the business would become less sufficient if they focus on other tasks beyond their core functions. However, some government particularly in the third world countries, they are unwilling or incapable of assuming many of the duties to help the society. Given such imperfections or restrictions, it is not justifiable that these functions entail a greater responsibility for the company than focusing on its core functions. It is argued that business will benefit from a better society just as its citizen, thus corporation has a responsibility to recognize social problems and find solutions. For example, the Coca-Cola Company was accused of creating water shortages in India since the company was extracting large quantities of water in the Kerala area hindering the society right to use water (Nick, 2013). This is against another side-constraint of the Friedman view that a corporation should avoid exposing others harm and also abide by the law. Friedman argues that the individuals that are involved in a corporation are citizens who pay taxes. Finally, assuming more responsibilities beyond maximizing profits would result in increased costs thus business will no longer be competitive. However, a firm that acts responsibly can also remain competitive. If a company value corporate responsibility, it may also strive. Broad CSR proposes that business has extended a set of responsibilities is based on the assumption that society entrusts its resources to business to meet its goal, that it is expected to manage these resources. This is the opposite of Friedman view of the corporation, where individuals pools resources to generate wealth. However, the assumption that everything is owned by the society cannot be asserted. There is no justification that a company acts as a trustee of the society resources. Conclusion This paper tried to show that Friedman view is still a viable position and that it is an ethical view, as well as economic argument. The paper has shown Friedman view ethical view and how it can be applied in business situations. Friedman strongest argument is on the fiduciary duties, and opponents of his views lack non-grounded validations. Therefore, if an executive act willingly against shareholders responsibility to seek profit, he would be in a breach of his fiduciary duties. However, one of the major weaknesses of his views lies on the side-constraints since they lack justifications. A major problem with his view is that it define the business goal as profit maximization without clearly defining how the executive should maintain the stakeholders interests (Porter & Mark, 2002). Therefore, applying some basic social principles in certain circumstances becomes very difficult to implement. Corporate social responsibility in most cases refers to those activities with a good outcome. Thus, the solution would be carefully defining executive duties, including those of making profits and making them aligned with executive duties to the society. References Butler, E. (2011). Milton Friedman - a Concise Guide to the Ideas and Influence of the Free Market Economist. Hampshire: Harriman House Ltd. Christopher, C. (2009). Does Milton Friedman Support a Vigorous Business Ethics? Journal of business ethics 87(3), 397. Davis, K. (1973). The Case for and against Business Assumption of Social Responsibilities. Academy of Management journal 16 (2), 312-22. Gallagher, S. (2005). A Strategic Response to Friedman's Critique of Business Ethics. Journal of Business Strategy 26(6), 55-60. Hammond, J.D. (2003). Remembering Economics. Journal of the History of Economic Thought 25(2), 133–143 Kolstad, I. (2007). Why Firms Should Not Always Maximize Profits. Journal of Business Ethics 76 (2), 137-45. Meijer, M.M., & Schuyt, T. (2005). Corporate social performance as a bottom line for consumers. Business & Society 44(4), 442–461. Nick, M. (2013). Coke 'Drinks India Dry', The Guardian, Retrieved from http://www.theguardian.com/money/2006/mar/19/business.india1. Porter, M. E., & Mark, R. K. (2002). The Competitive Advantage of Corporate Philanthropy. Harvard business review 80(12), 56-68. Schwartz, M.S., & David, S. (2012). Should Firms Go “Beyond Profits”? Milton Friedman Versus Broad Csr. Business and Society Review 117, (1): 1-31 Read More