The concept of social responsibility in terms of business activity is a controversial, complicated and quite miscellaneous issue, especially in the current course of time. The notion of business activity has often been regarded as being rather far from any ethical norms and moral principles. Then there has happened a significant shift in the business oriented consciousness, and set of virtues and values which have been considered to be of the primary importance and tremendous relevance to every business venture. The criticism provided in the articles by Arrow and Calkins and Wight is of great significance in the course of comprehension the relevant and appropriate outlook on the issue.
First of all, it is necessary to dwell on the doctrines presented by Milton Friedman. According to Calkins and Wight (2008), The first is in regard to the proper role and use of corporate profits. The second is in regard to the moral foundations required for a stable society. Unfortunately, Friedmans doctrine on profit is often applied without reference to his second doctrine on ethics. Moreover, there is a significant resemblance to the frequent miscomprehension of the economic theory by Adam Smith which is presented in his work The Wealth of Nations. The reason for this misunderstanding is the absence of direct reference to the morally relevant underpinnings which are presented in his other work, The Theory of Moral Sentiments.
As Calkins and Wight (2008) underline,
The key problem with Friedmans mandate on profits is that it gives rise to
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a fundamental inconsistency: on one level Friedman utilizes a largely consequentialist ethic to explain how markets and economic actors behave, yet he simultaneously relies upon managers to uphold an internal ethic based on duty and virtue. The psychological dissonance created may produce both hypocrisy and inefficiency.
Arrow (1973) also discusses the assumption that the main target of the company is to increase its efficiency and as a result its profitability. He emphasizes the fact that this assumption refers more to the empirical side than to the ethical norms and standards. Though, these norms are supposed to form the basis of such an assumption. Moreover, he argues the impulse to gain and to achieve the higher profits as the significant, but not quite efficient and conclusive one. The reason is that the process of revenue maximization appears to be consistent only in case its conditions and limits are properly defined. Otherwise, its effects may be excessive and at the same time inefficient for the company. Furthermore, Arrow (1973) underlines the harm and pollution the company tends to make to the society and to the environment. It is an inevitable effect and ramification of the corporate activity. Though, not every firm pays for elimination or mitigation of the negative effects. This is a topical issue to which it is relevant to implement the concept of social responsibility.
One more socially relevant effect in terms of profit maximization is the issue of quality of the offered goods or services. The real level of quality is obvious only to the producer whereas the customer always remains in slight unawareness: Defenders of unrestricted profit maximization usually assume that the consumer is well informed or at least that he becomes so by his own experience, in repeated purchases, or by information about what has happened to other people like him (Arrow, 1973). Though, the presented assumption is not also quite conclusive. The obvious capacity of the customer to analyze the aspects and subsequent ramifications of their own past buying experience may be limited, especially when the potential purchase involves a complicated mechanism or innovative technology. The knowledge and experience of the customer are, as a rule, rather narrow and insufficient to judge objectively. Therefore, this aspect influences the level of credit and the level of trust to the company and its business activity. Once a profit is successfully increased without proper regard to the aforementioned issues of concern, the efficiency will not appear to be long lasting and consistent.
Both these assumptions are quite significant and appear to be especially relevant in the current course of time. The issue of pollution appears to be one of the most urgent and serious problems nowadays. It demonstrates the necessity to correspond the actual revenue maximization and the level of potential harm to the environment and society. This point is one of the strongest and most persuasive in the whole argument presented by Arrow. It proves that criticism of the theory presented and developed by Milton Friedman is quite relevant.
Calkins and Wight (2008) pay special attention to one of the most quoted and popular at times of Milton Friedman line in the economic sphere: Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible (Friedman, 1970). Friedman (1970) also regards any activity which distracts the attention and efforts of the employees of the corporation as one that is to be avoided by all means. He considers it to be a social responsibility of every employee.
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Furthermore, the author of this theory completely excludes even the probability of the employees or companys involvement into certain significant and socially relevant issues such as aid to the homeless, poverty and unemployment, racial disparity problems, etc. He obviously states that every person is to perform only the job he or she is the best at and never apply to other activities as far as they distract from the initial target the profit maximization. If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is? (Friedman, 1970). Though, Milton Friedman does not exclude the basic rules and ethical norms the society tends to stick to from the overall canvas of business performance. The appeal to laws and so called rules of justice are regarded as the inseparable part of any business activity. This aspect may be regarded as one of the defending points in the course of Friedmans theory against the criticism of Arrow, Calkins and Wight. It provides the evidence that Friedman proclaims certain boundaries and limits in the process of revenue maximization. Actually, the outlook of Friedman upon the general image of the ideal employee and corporate duties he or she is to perform in terms of the revenue maximization corresponds sufficiently with the model and opinion presented by Adam Smith.
Furthermore, it is essential to dwell on the role of the CEO of the company in the course of discussion. According to the theory of Friedman, the CEOs main target is to prioritize the wishes of the corporate shareholders. Moreover, the CEO is to motivate the employees and provide proper conditions for the profit maximization. Though, a significant controversy appears at this point. In case the major target of the company and its every member is the revenue maximization, the CEO possesses a moral obligation to produce as much revenue as it may be possible provided no fraud is committed within this process. There is a vivid sample Calkins and Wight (2008) present:
Accordingly, the CEO should command that doctors prescribe the procedures, tests, and surgeries that will generate the most profit for the HMO. Because backache symptoms indicate a number of possible causes, some of which could be serious, the doctor could select the priciest treatment options while still not violating the law or ethical customs.Doctors who overtest can argue that they are being risk-averse to provide better care or to avoid lawsuits.
The whole picture makes sense and still does not interfere with the major thesis made by Milton Friedman about the profit maximization: the revenues are increased, the law is not broken, and the customer is provided with the proper service. Though, the scheme does not correspond to the ethical and moral norms and standards. This is the so called ethical lacunae of the theory presented by Milton Friedman. It is an obvious violation of trust of the customer and indignant basis for further activity. This vivid sample serves as well persuasively in terms of the aforementioned aspect of the quality of the goods or services the company offers and relative unawareness the customer has to face. Moreover, this sample also concerns the issue of ethics and moral values.
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Calkins and Wight emphasize the controversy and limited essence of the model presented by Milton Friedman. The criticism is relevant and consistent, especially in the current course of time. The innovative version of the Friedmans model should be presented in order to correspond properly to the contemporary economics.
Friedmans model is limited for one because he argues that maximizing profits should direct the managers activities without explaining the reasons for profit maximizing being the single and best motivator for managers and entrepreneurs. The notion that profit is or should be the overarching motivator is problematic for several reasons (Calkins & Wight, 2008). These reasons involve a stark contradiction to the generally accepted and appropriate motivation the contemporary leaders tend to display as well as the fact that the model presented by Friedman fails to provide certain explanation concerning behavioral data as a direct result of relying on the neoclassical model of economics Milton Friedman tends to implicate.
The inadequate status of the Friedmans model in the current course of time is as well confirmed by the numerous better alternatives. For example, the recent intellectual history of entrepreneurship presented by Kalantaridis positions the concept of profit as significant, but not the only one and exclusively major element of the efficient motivation. Managers and risk-taking mavericks tend to be motivated by the desire to achieve, build, overtake competitors, produce the best, be first to market, or attain some self-actualizing goal or set of goals. Rivalry, for one, is a potent motivator (Calkins & Wight, 2008).
Thus, the criticism presented by Arrow, Calkins and Wight is relevant, consistent and sufficiently helpful in the course of proper comprehension of the concept of social responsibility in terms of business activity. The criticism and the detailed explanations provided by the authors altered and even qualitatively improved my comprehension of the issue. Moreover, it presents a profound insight into the notion of efficient business activity.