Changing Social Responsibilities

John S. McClenahen, writing in Industry Week (Cleveland, Ohio), “Manufacturing & Society: Practicing The Principles” (“Company social responsibility, appropriately, remains a serious work in progress”), quotes Jerrey R. Immelt, CEO, General Electric Co., on his company’s “ecomagination” initiative:

"This is not just good for society, it's good for GE investors -- we can solve tough global problems and make money doing it," Immelt said.

Not so incidentally, Immelt is more than refreshingly clear. He's also challenging the economic wisdom of Adam Smith and Smith's latter-day disciples. In 1776, in "The Wealth of Nations," Smith wrote, "I have never known much good done by those who affected to trade for the public good."

Smith wrote in the mid-18th century about an economy that was primitive compared to the 21st century. His manufacturers were tradesmen, journeymen, producing relatively simple tools and products for agricultural use and households, not multi-billion dollar enterprises, mobilising thousands of employees, sub-contractors and sales staff as is common today. His markets were akin to street fairs, not today’s long and complex supply chains. Few entrepreneurs working in these older technologies were sophisticated engineers, and those that were such, were moving beyond existing technologies towards what was to become known as the ‘industrial revolution’ (though it was a ‘revolution’ more like the hundred years war than a two-week violent event).

By ‘Smith’s disciples”, Immelt, is probably referring to the likes of Milton Friedman, who characteristically rejected social concerns as appropriate for a corporation in the 1970s (he was writing a column for the New York Times weekly magazine):

“That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

Note the ‘get-out’ reference to ‘basic rules’ .. ‘law’ .. and ‘ethical custom’). Readers at the time would take away Friedman’s rejection of ‘social responsibility’ in favour of ‘profits’; he too quotes Smith’s on “affecting to trade for the public good.”

Recently, Friedman and two capitalist entrepreneurs featured in a debate on www.reasononline.com (October 2005): “Rethinking the Social Responsibility of Business”. In it, Friedman sticks to his guns but does so in a manner that widens his 1970 ‘get out’. He says the difference between his 35-year-old ‘profits only’ presentation and modern practices of some CEOs (under social and political pressure) is one of ‘rhetoric’ only.

If they spend money of philanthropy and get helpful publicity for it, higher employee morale, and better customer loyalty, etc., fine, as long as they realise what they are doing: appearing ‘to trade for the public good’, but really using another means to increase profits. If appearing ‘to trade for the public good’ enhances profits, they should do so, but seriously aiming to do so at the expense of profits would not be the proper exercise of their charge of shareholders’ cash.

Where does this leave Adam Smith’s view? The well-worn quotation comes from the “Wealth of Nations” at the end of the more famous quotation on the invisible hand. Recall that Smith illustrated the power of unintended consequences of traders preferring to invest locally than abroad, and how this helped the domestic economy to grow faster than otherwise. It affected the public good and was beneficial on those grounds, albeit unintentionally. He considered this a more powerful force than if they deliberately set out to do so. But supposing they were to set out to do so by persuading each other only to invest locally (leave how this would be done aside for the moment) would it negate the benefits of investing locally by intention, instead of unintentionally?

Of course not, but that was not Smith’s point. He was sceptical that trying to organise a persuasion campaign (in mid-18th century Britain) would be in any way as likely to as successful as leaving the traders to arrive at the same result unintentionally. Using his quotation to suggest he was against ‘trading for the public good’ on principle is a ‘stretch’.

Their very actions achieve the desired result at that stage in the evolution of the age of commerce. In a different stage of the evolution of the age of commerce – the 21st century – society faces different and Friedman’s original 1970 prescription allows for the difference:

“That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

The contents of his ‘get out’ have changed. How and to what extent that is recognised by CEOs (and legislators who decide what is ‘embodied’ in law and electors who decide what is ‘embodied’ in ‘ethical custom’) is part of the rich fabric of social life. Recognising these changes is not barred by Adam Smith’s view, and his so-called ‘disciples’ (another specious allusion) should understand the difference.