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May, 02, 2024  |    |  

Ethical Custom: A Conservative’s Case for Purpose-Driven Business?

Milton Friedman was among the most influential economists of the 20th century, influencing world leaders and neoliberal economic thought. But was he really a stakeholder advocate?

Mike Rowlands
Partner and CEO of Junxion, Mike has spent more than 20 years working to catalyse social responsibility and sustainability.

In their December 2023 review of Jennifer Burns’s biography of Milton Friedman, The Economist described him as the most influential American economist of the twentieth century. One of Friedman’s most famous contributions to public economic discourse was the op-ed he published in the New York Times in 1970, where he argued that the social responsibility of business is to increase its profits.

While many would like to think Milton Friedman’s era has come to an end, The Economist observes that “we are still living in it.” Even though more than half a century has passed, Friedman’s doctrine also continues to haunt corporate leadership, legislation, and efforts toward social responsibility.

The op-ed also held other assertions about society that later became commonplace in public discourse and the political sphere. These include the notions that society consists only of individuals and that businesses are artificial persons that have neither the competence nor the mandate to engage in acts of social responsibility—that these must remain in the hands of private individuals and governments. The latter still grounds the thinking of those who argue against corporate social responsibility and by extension social purpose.

However, Friedman has often been quoted incompletely: in its entirety, it caveats the pursuit of profit must be done while “conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.”

There is, of course, a vast body of literature dedicated to what has become known as the Friedman doctrine. Economists have also considered what Friedman meant by ethical custom. It turns out that this is a concept he left unexplored, although it is clear that he did not mean that the drive to profit should be absolute and unconstrained.

Laws apply to everyone (including corporations) in a democratic society. Custom derives from and is practised by many. Shareholders by definition are few, but stakeholders include a great many—in some cases all of us. And the natural environment in which we live.

If the entire passage is taken into account, Friedman says that stakeholders matter, just as shareholders do. The concept of ethical custom releases us from individualistic views of society and opens the door to a more interdependent view.

Custom derives from and is practised by many

What Is Ethical Custom and What Contributes To It?

Ethical custom must be related to a society’s collective consciousness and informed by its values, beliefs, joys, concerns, aspirations, biases, practices, and habits. Collective consciousness—or more simply, widely held opinion—stems from the individuals’ experiences of happiness and pain. Hence the greater public outrage over grocery store prices than climate change, a general ambivalence about foreign policy, and an apparent indifference to the United Nations Sustainable Development Goals (SDGs).

The opposite, however, is also true: No one lives in isolation, and society and culture clearly exert tremendous forces that shape human lives and destinies. Today, climate change, biodiversity loss, income inequality, racial inequities, ableism, ageism, and generational differences must surely all contribute to ethical custom, as does social media and popular culture.

While ethical custom may seem a fuzzy term, it is not entirely unexamined.

Ernesto Dal Bó and Richard Lyons are faculty members at Haas Berkeley, who have studied the meaning of the caveats at the end of Friedman’s quote and offer another interpretation.

While ethical custom may seem a fuzzy term, it is not entirely unexamined

They note that “[t]hough ‘ethical custom’ can be a tricky term, in most societies it matches principles from two schools of thought in moral philosophy, both of which incorporate the interests of other stakeholders. The Utilitarian school defines the moral path as one where actions promote the well-being of society at large. The Kantian school defines the moral path as one where actions respect the autonomy of others.”

In essence, Friedman’s ideas about a market free of governmental control privileges a Kantian ethic while repudiating Utilitarian ideals. He takes a hard stance on autonomy and sees anything that detracts from that as an irredeemable slide into (gasp!) socialism or communism.

The Friedman doctrine explains the rhetoric around socialism and communism that still rings out in the United States. However, it is a very narrow view of communism and a limited understanding of what made communist countries such terrible places to live. Both Soviet Russia and Communist China were imperial regimes with revolutions that overthrew ethical custom and ambitions that extended far beyond government control of markets.

Yet Friedman’s rhetoric still resonates in certain parts of American society, indicating that we are still living under his influence—as The Economist observed.

Ethical custom has also surely changed since 1970. Today, most people would agree that regardless of whether a business is an artificial person or not, it does have responsibilities. There is widespread understanding that businesses can cause harm and must take responsibility for the harms they bring to society.

No company, like no individual, exists in isolation and current ethical custom draws us all to greater mutuality and reciprocity in our relations with each other, non-human beings, and the environment.

Businesses do not operate siloed from society—they are as integral to the health of the community as any other organization or group.

Businesses must take responsibility for the harms they bring to society

They contribute to the development of social capital, which leads to economic growth and poverty reduction, which in turn improves business performance. In 1970, autonomy was Milton Friedman’s highest ethical value, but in 2024 we live with an expanded ethical understanding that well-being lies in an interrelated web that must surely have altered the meaning of ethical custom.

Most people would now agree that regardless of whether a business is an artificial person or not, it does have responsibilities. There is widespread understanding that businesses can cause harm, and they must take responsibility for the harms they have brought to society. The idea that business can be a force for good has also expanded as have ideas about the possibility of increasing overall well-being for all (find sources). In fact, studies show that businesses that embrace doing good in addition to earning a profit, do better than those that do not. Steven Salop calls that “prosocial behavior.” B Lab calls it ‘business as a force for good.’

The annual Edelman Trust Barometer, a study of public opinion in over 30 countries, indicates that most people trust businesses more than they trust governments and expect businesses to “both improve the economic and social conditions in the community as well as increase profits.” This trust factor can make or break brands. Company leaders are also increasingly expected to become community leaders as some have already done.

And then there’s the movement toward social purpose in business, which itself builds on decades of thinking in labour advocacy, environmental sustainability, corporate social responsibility, and more. Dr. Victoria Hurth of the Cambridge Institute for Sustainability Leadership defines a social purpose business as one that makes “an optimal strategic contribution to the long-term well-being of all people and the planet.” It is doubtful that Friedman would have enthused about such a definition—although if that understanding should enter the realm of ethical custom, he would by his own definition have to concede that it would be binding for corporations. And it has been adopted by the British Standards Institution—surely a sign that it’s beginning to penetrate ethical custom.

Friedman’s highly individualistic ideology of humanity placed autonomy far above considerations of societal well-being. It is unlikely he would favour working toward a set of goals for sustainable development unless they were enshrined in law or part of ethical custom. Despite our sense that we are (or used to think we were) on an inevitable trajectory toward improvement, in fact, neither biological nor cultural evolution are inherently progressive. To blaze a trail toward a broad consensus on a purpose for society requires deliberate action to shape ethical custom. The unanimous adoption of the SDGs by all UN member nations is surely such a deliberate action!

Since evolutionary mechanisms cannot be expected to give us a social purpose economy, it must come from culture and the stories we tell. To that end, social-purpose business must tell stories that are better and stronger than the ones that say businesses are responsible only to their shareholders. Stories that counteract the glories of oligarchy and the myth of ‘self-made,’ individual achievement.

At the same time, the social-purpose movement must also seek to do no harm. Individual autonomy and freedom should not be sacrificed on an altar of collective well-being. History shows us how troublesome such logics can be. Perhaps the practice of impact measurement can serve not only as a measure of progress toward a social-purpose economy, but also as a safeguard against unintended harms.

A thriving economy is essential to a healthy society, but the two are not synonymous. How might business cultivate well-being for all, while also protecting and preserving individual freedoms? What is truly the role of business in society—and what should be its legal and customary limits?

The social-purpose movement must seek to do no harm

The writing of laws always follows from shifts in social custom—so effective leaders will always look to stakeholders’ viewpoints to understand the changes ahead.

Friedman was undoubtedly a deep thinker, but even he could not complete the analysis of his own views, leaving the release valve of ‘ethical custom’ for others to explore.

In a time of great challenge and change—the ‘polycrisis’—we must all do our part to share new stories about society, new ideas about the role of business. And we must all recognize and uphold our interdependence.

Are you determined to be a success story of the purpose economy?

If so, we’re here to help.

Let’s Be Audacious, Together…