Daryl Koehn
Philosophy Department
DePaul University

The economist Milton Friedman argued that business has only one ethical
responsibility: Business has a responsibility to employ all available legal means
to increase corporate profits owed to stockholders ( Friedman, 1993). In this
article, I explore why business students find this argument so attractive. I then
argue that, as an account of business ethics, Friedman's legalism is both
theoretically and practically unsound. I close with some suggestions as to what
would constitute a truly ethical understanding of business practice.

Key words: business ethics, education, law

Perhaps the most often quoted view of business ethics comes from a man who
is not an ethicist and who has never actually worked in a business. I refer to
the economist Milton Friedman. In his article "The Social Responsibility of
Business Is to Increase Its Profits," Friedman (1993) argued that "there is one
and only one social responsibility of business -- to use its resources and engage
in activities designed to increase its profits so long as it stays within the rules
of the game, which is to say, engages in open and free competition without
deception or fraud" (p. 60). These "rules of the game" are to be understood
as that particular society's laws. In a nutshell, Friedman is arguing that busi-
nesspersons are ethical if and only if they struggle to ever increase their profits
and that they are entitled as part of that struggle to do whatever the law
permits. As long as a person's profit-maximizing actions conform to the law,
he is, in Friedman's view, acting morally correctly.

Although I think Friedman's position is both naive and dangerous, 5 years
of teaching business ethics to undergraduate and graduate students has con-
vinced me that it is the view held by most students and would-be business

Requests for reprints should be sent to Daryl Koehn, Philosophy Department, DePaul
University, 1150 Fullerton Avenue, Chicago IL 60614-3298.

persons. In this article, I address three issues. First, if the view is, as I claim,
naive and dangerous, why does it hold such appeal for students? Second, what
precisely is wrong with the position? I want to especially focus on the position's
legalism, a dimension other critics have tended to ignore ( Evan & Freeman,
1993; Goldman, 1980; Goodpaster, 1993) Finally, if this understanding of
what makes for morally right behavior in business is suspect, what constitutes
a more adequate understanding?

PART ONE: VALID AND INVALID SOURCES OF THE
THEORY'S APPEAL

Some of the appeal of Friedman's position regarding ethical behavior within
business derives from valid sources. Some of the appeal stems, however, from
invalid sources. I discuss the two valid sources first.

 

Valid Source 1

Friedman's position is attractive because it is partially true. We do have limited
expectations regarding professional performance. For example, we do not
expect that our doctors must write wills or invent new products in order to act
morally as doctors. Instead, we think that they have acted well if they are
competently trained and make a good faith effort to use their skills to heal us
when we become sick. Indeed, we would likely condemn the doctor for med-
dling in our affairs if he tried to write a will for us. That is a task for a trained
lawyer. By analogy, we might argue, as Friedman (1993) did, that the business
manager need not try to be some sort of general do-gooder but should instead
make a good faith effort do that which he or she is trained to do -- namely, to
produce economic goods and services and to earn profits by doing so.

Extending the analogy a bit further, we might condemn the firm as med-
dling if it starts trying to act altruistically. Take a nonhypothetical example:
Many of my fellow bankers at First National Bank of Chicago were somewhat
disturbed by the requirement of Community Reinvestment Act that the banks
make loans to people in the community from which the banks draw their
profits. Although it may very well be a good thing for banks to fund, say,
public housing, it is less clear that the banks should be deciding where public
housing is located for the next 30 to 50 years. Because the people who will live
in this housing need schools and other support services, it seems as though
housing decisions should be made in the public arena after a thorough discus-
sion of housing, education, medical needs, and so forth. As it now stands, the
law results in backroom deals among a bunch of bankers and community
activists, neither of whom has an eye on the larger public policy issues. From
the whole community's point of view, such social activism by the corporation

could be judged as an overstepping of the bounds of legitimate business
activity.

 

Valid Source 2

In addition, Friedman (1993) was right to emphasize the important role the law
plays in making moral decisions by the citizenry. Those of us who teach ethics
are wont to lose sight of this fact. We tell our students again and again that
what is legal does not equal what is moral, because we are only too aware of
the examples history provides of laws that were unjust. I know of no ethicist
today who would argue that the laws in Germany allowing for the expropria-
tion of property belonging to Jews or the laws in this country leading to World
War II internment of U.S. citizens of Japanese descent would count as just laws
either at the time they were passed or when viewed from today's perspective.
We also remember Alexis de Tocqueville's comments about American democ-
racy and the way in which Americans, for all of their talk about self-made men,
dislike it when one citizen exhibits more virtue or excellence than others and
try to control such citizens by a kind of legalized tyranny of the majority
( Tocqueville, trans. 1969).

Precisely because we are so keen to get students to see the difference between
what is moral and what happens to be legal, we sometimes overstate the
distinction between law and morality and wrongly minimize or neglect the
important senses in which the law is moral. The law does grow out of
the community. If the law has received a thorough public discussion by mem-
bers of that community and if the citizen is free to participate in that debate
and also free to leave the country if he disagrees with the law, then perhaps the
law should be obeyed. It certainly should not be lightly dismissed. If a person
treats the law with contempt, then he elevates him- or herself into a superior
moral being who knows a truth that his or her fellow citizens do not ( Friedman
, 1993). This claim is, as Socrates saw, internally self-contradictory insofar
as all of us receive our education from precisely these fellow citizens on the
terms and in a context provided for by these very laws we are dismissing ( Plato,
trans. 1971). It would be ironic, for example, for an agent to argue that he or
she does not have to obey a country's laws because it does not protect his or
her rights when the very language of rights is one that he or she has by virtue
of these same laws.

In other words, although what is legal is not identical with what is moral,
it is equally true that all law is moral to the extent that it makes for the
development of persons who necessarily come to understand themselves using
concepts drawn from the larger community of language users, concepts re-
flected in and formed by its laws. Friedman (1993) was rightly worried, there-
fore, about businesspeople setting themselves up as moral superbeings who
know better than others which citizens groups or causes deserve to be sup-

ported in the community and who then pride themselves on being socially
responsible when they act in this hubristic fashion.

If the truths Friedman articulates were the main source of his position's
appeal, this appeal would not be worrisome. But I fear that people are at-
tracted by what Friedman says for three other more sinister reasons.

 

Invalid Source 1

There is a part in each of us that is a bit lazy, and it is hard work to think. We
resist thinking, yet when we do think about Friedman's position, it immedi-
ately becomes clear that there is something seriously wrong with it. It might,
for example, become legal in this country to print, distribute, and possess child
pornography. No doubt there would be huge money to be made in such a
business. Yet, with rare exception, students never want to be the CEO of Child
Pornography, Inc. Students' resistance can be read as a sign that when persons
think about morality, it turns out that in fact they do not believe that business-
people will qualify as morally good agents simply by virtue of maximizing
profits within the bounds of the law. Unfortunately, we do not always think.
And, because the model has a superficial plausibility because of its half-truth,
we endorse it too readily.

 

Invalid Source 2

In addition to our laziness, it must also be admitted that we humans have a
tendency to minimize our own personal responsibility for wicked actions. In
the Nicomachean Ethics, Aristotle (trans. 1941 ) observed that when people
choose viciously, they are prone to argue that they really had no choice in the
matter and consequently should not be blamed for their actions. But when
these same people act virtuously, suddenly they desire to take responsibility for
their actions and choice and to claim some share of the praise. Some recent
events illustrate Aristotle's point only too well. During and after the Reginald
Denny trial, many commentators argued that those who beat Denny were not
responsible for their actions because they were caught up in mob psychology.
Yet these same persons did not turn their reasoning around and ask what it
implied regarding the behavior of those who stayed calm and tried to prevent
others from robbing, beating, or murdering one another. Were these folks just
caught up in the mob psychology of virtuous people? Questions of this sort
need to be asked, yet they tend not to be precisely because of our reluctance
to think coupled with our tendency to evade responsibility for actions when
they are vicious ones.

Friedman's theory is dangerous to the extent that it both permits and
encourages people to think along the following lines: "Well, I might feel a bit
of shame regarding the act I have just done to maximize my profits, and others

may condemn me. But my act was a legal one and therefore I am in the right."
For those of us who are not sociopaths, it is painful to think we may have acted
badly. Consequently, we try to come up with some extenuating account of our
behavior, saying, "I couldn't help myself" or "I got caught up in mob psychol-
ogy." Legalism, too, is a doctrine in which the scoundrel in each of us takes
refuge. The argument "Well, there's no law against what I am doing, and
therefore what I am doing must be right" is not really very different from these
other sorts of excuses offered. All of them represent the all too human attempt
to wriggle off the hook of moral responsibility.

Invalid Source 3

This comment brings me to yet a third reason why I think students find
Friedman's view attractive. I submit that they do so because they have not yet
had many opportunities to exercise real power in corporations. My firsthand
experience in business showed me that few senior managers in corporations who
do have real power and responsibility subscribe to Friedman's view. These folks
know they have to live with the history and reputation their acts bring them.
Although managers legally may lay off or fire unneeded workers and although
providing these workers with job search aid and extra time to find a job costs the
corporation money, many managers have spent this money precisely because
they think it unjust to dismiss loyal workers lightly. It is the individual managers,
not the legal fiction of the profit-maximizing corporation, who must look
employees in the eyes and deliver the bad news. These same managers know how
they would feel if they were dismissed in a cavalier, uncaring fashion. When
present, this capacity to see ourselves in and through the eyes of the other -- the
other who participates in the writing of our history and thus the determination
for all time of who we are in the public realm -- means that human beings find it
far more difficult and disturbing to actually put Friedman's view into practice
than Friedman -- who, let us remember, has never exercised any managerial
power -- lets on. This is tantamount to saying that Friedman's theory does not
regulate these people's behavior, or equivalently, is not an ethic in the eyes of
those who exercise power with respect to real-life business problems.

 

PART TWO: ENVIRONMENTAL SOURCES OF THE
THEORY'S APPEAL

The last three invalid reasons just discussed could all be termed "personal" in
the sense that they account for the model's appeal by pointing to character
traits or features of people holding the Friedmanian legalistic position. In
addition to these strictly personal reasons, there are extrapersonal, environ-
mental, and institutional reasons for the widespread appeal of the position.

Environmental Source 1

Those of us who teach business ethics need to remember that the majority of
our current students grew up in the Reagan and Bush era. More people in
government were indicted for criminal behavior during that era than in any
other time during American history. When confronted with charges of acting
wrongly, those accused consistently argued that they had not done anything
illegal. Of course, even if they were within the bounds of the law, it would not
follow that they acted ethically properly for reasons I have already stated. But
note as well the way in which our public servants have made it a central tenet
of their defense that they had acted well because they acted legally. It should
surprise no one then that our students, when asked whether a certain type of
behavior is right, consistently respond by asking whether it is legal. Because
they grew up hearing this conflation of the legal with the moral, it is hardly a
matter for wonder that they parrot it in class.

 

Environmental Source 2

The discourse of the Supreme Court of recent years has not helped matters
much. In her fascinating book Rights Talk, Mary Ann Glendon ( 1991 ) showed
how Americans have increasingly come to look to the Supreme Court for
guidance in moral matters. She demonstrated how the court has routinely
addressed moral issues in quite narrow legal terms and then left the matter
there, leaving Americans with the impression that just because an act in ques-
tion was not illegal, it was, therefore, moral. Take one of her examples: In
Jackson v. the City of Joliet ( 1983 ), the question arose as to whether an on-duty
policeman has an obligation to assist persons in trouble. Officer Taylor had
come upon an accident that had happened a few minutes before his arrival.
The car was upside down and burning. Taylor did not call an ambulance,
although he did contact the fire department and directed traffic around the
burning car. The two occupants in the car burned to death. The family of one
of them, Sandra Jackson, sued Taylor and the City of Joliet. The court ruled
that one does not have a duty, even if one is an on-duty policeman, to rescue
a stranger in distress.

The court's decision is not totally incomprehensible. Courts in general have
been concerned that public service would not be improved if one created a
tortious duty to help ( Glendon, 1991). They reason that there would probably
be a slew of lawsuits in which private citizens sued public officials for failure
to help. The public purse would be drained, and public officials facing such
lawsuits would leave public service. This reasoning is not without force. But,
as Glendon noted, the court has left matters there, implying that the policeman
had done nothing wrong. In other words, the court, like my students, failed to

distinguish two issues: the legal one of whether it would be judicious to em-
power private citizens to successfully sue public officials for a failure to try to
rescue the citizens they are supposed to be serving and the moral one of
whether what the policeman did was just. By consistently failing to acknowl-
edge that there are distinct questions of what is legally judicious and what is
moral, our courts have perpetuated the false impression that the moral issue
is decided when the legal one is.

In summary, there are institutional as well as personal reasons why business
students are inclined to believe that they have acted morally correctly as long
as they stayed within the law while discharging their professional duty of
maximizing profits. Having explored some reasons why this position appears
attractive to American business students who grew up in the era of the Rea-
gan-Bush presidencies, I now explain why I think the Friedman view is
theoretically unsound and practically unworkable. I then conclude by offering
a few brief remarks regarding an alternative and, I think, more promising way
to think about what makes for ethical behavior in business.

 

PART THREE: THEORETICAL DIFFICULTIES WITH
LEGALISM IN BUSINESS ETHICS

There are substantial theoretical difficulties inherent in the Friedmanian view
of business ethics.

 

Theoretical Difficulty 1

Friedman (1993) told businesspersons that they will have discharged their
moral responsibilities to society if they maximize their profits within the
bounds of current applicable business law. Such legalism totally ignores the
possibility that the current applicable laws are immoral. If this possibility were
merely hypothetical, Friedman's silence could be excused. However, the possi-
bility is only too real. There are many extant corporations in Germany today
whose products and contracts were entirely legal during the Third Reich and
whose production made the Holocaust possible. Truck manufacturers, for
example, were encouraged to develop ways to gas passengers in transit and to
do so in a fashion which led to as little panic as possible. These manufacturers
worked quite conscientiously and then billed the government for these en-
hanced and improved trucks. The fact that these same firms continue to
prosper today certainly shows these profit-maximizing manufacturers to be
adaptable, but fails to prove that it is moral to collaborate with a government
committed to exterminating its own innocent citizenry.

Theoretical Difficulty 2

Even when extant laws are not immoral, they will at best state what it is
practicably possible to require of a citizenry. As I noted in the Jackson case, it
may very well be practically imprudent to give private citizens the right to sue
public officials for refusing to help or for hurting them during the discharge of
public duties (e.g., if during a high-speed chase a police car smashes into innocent
bystanders and maims or kills them). The court must balance various concerns,
for example, the effects of new litigation on the court system, on the morale of
public officials, on the public purse, and so forth. Outlawing the behavior may,
on reflection, look like a poor option, and the court may decide against it. But
this does not relieve people of moral responsibility for their actions. On the
contrary, it merely means that every time we consider whether our actions
conform to a given law we must remember that the law in question does not tell us
what is morally right. It tells us only what that court has decided is the minimally
enforceable responsibility it is prudent to impose on those to whom the law
applies. It would be fallacious to conclude as Friedman (1993) did that a profit
maximizer's compliance with the law settles the moral question.

 

Theoretical Difficulty 3

Other important features of the law equally cast doubt upon the theoretical
soundness of Friedman's legalistic approach to business ethics. In the first place,
the law is general. As Aristotle (trans. 1941) noted, this generality is not a defect
of the law but merely a fact about what the law is. The good judge of practice
knows that the particulars will always differ from the particulars envisioned by
lawmakers writing the law. They inevitably differ in some respects because to be
a particular is to be both like and unlike other particulars. Thus the good judge
always will have to rethink the general law in light of the particular before him if
he is to judge well (i.e., act morally). To engage in such thinking is to proceed with
equity. Consequently, some actions that do not conform to the letter of the law
may in fact turn out to be permitted by the society even though they are
technically illegal. Conversely, some acts that seem technically legal may be ruled
illegal by an equitable judge. To tell businesspeople that they need only look to
the letter of the law to see if they have acted socially responsibly is thus grossly
irresponsible given that the good judge will look beyond the law to what is just in
the cases that come before him or her.

 

Theoretical Difficulty 4

Friedman's view assumes that the law is always clear. If it is not always clear,
it is hard to see how the law will be the infallible guide and guarantor of social
responsibility he takes it to be. What owner of a nut shop would feel assured
that his purchasing of nuts was moral given the following law:

In the Nuts (unground) (other than ground nuts) Order, the expression nuts
shall reference to such nuts, other than ground nuts as would but for this
amending order not qualify as nuts (unground) (other than ground nuts) by
reason of their being nuts (unground). ( Matthews, 1994 , p. 469).

Take another example: Who berates themselves for immoral irresponsible
behavior simply because they prove to have misfiled their taxes and thereby
broken the law? Given that my tax attorney friends who work in the largest tax
firm in Chicago tell me that they do not understand the personal income tax
code, I certainly do not think that the morality of my tax filing and taxpaying
behavior turns on my compliance with that law. What matters instead is
something like my good faith effort to have read, considered, and conformed
to a law that is not obviously unjust. In other words, the presence or absence
of good faith deliberation rather than compliance to the law seems to be the
ground of morality, a point I will return to at the end of this article.

 

Theoretical Difficulty 5

Assuming that the law is clear, the Friedmanite is still not home free. Why?
Because we may have two perfectly clear laws that conflict with one another.
This possibility is not merely hypothetical. Many of today's businesses operate
in the international arena. A country such as the United States may have a law
prohibiting the sale of a pesticide (e.g., DDT), but another country may permit
it. While a U.S. citizen might be able to earn large profits selling this chemical
abroad, acting morally surely entails thinking about which law should govern
his behavior. I do not presume to answer this question. I simply want to insist
that the question must be considered by those who would act morally responsi-
bly. The businessperson cannot blindly follow the law when two or more
conflicting laws apply to that behavior. It is striking that Friedman (1993)
never got around to telling us which law exactly it is that businesspeople must
conform to if they are to act rightly.

This problem is not merely one for international businessmen. It is well
known that laws often conflict within the United States as well. Suppose for
a moment that one's business is a mom and pop butcher shop. The Occupa-
tional Safety and Health Act requires that the floor of the shop be slatted to
allow juices to run to a subfloor so that employees will be protected from
slipping. The Food and Drug Administration, by contrast, requires that the
floor not be slatted so that the floor can be thoroughly scrubbed and disease
minimized. The businessperson is clearly going to have to think through his or
her options and cannot get by merely obeying the law.

Caught in this sort of bind, the socially responsible agent may very well have
to take on the government and insist upon clarification of the law or a change
in it. The agent must be active in forming the law when the existing law results,

perhaps unintentionally, in placing that agent and his or her firm in an impossi-
ble or unfair situation. Banks were hard-pressed when the law was changed to
allow stockbroker firms to offer money market accounts. Congress did not
intend to drive banks into dire financial straits with this law. Nevertheless, the
law proved quite detrimental to the banking industry. People removed their
deposits from the banks and placed these funds into money markets. The
banks were left unable to attract money back into the bank because, by law,
they were prohibited from offering money market accounts with their higher
interest rates. Yet the banks somehow had to fund the loans they had promised
to their borrowers. The banks clearly were put at an unfair disadvantage
vis-à-vis other financial institutions. Although the banks did obey the law, they
certainly did not ask themselves "Well, how do we maximize profits under the
law?" Instead, they launched a massive campaign against the unfair law. To
stay in business, the banks had to fight to change the law and did so in the
name of what was just, not merely legal.

 

Theoretical Difficulty 6

This last comment about the dynamic interrelation between business and the
laws regulating it introduces yet another theoretical difficulty with Fried-
man's position. If Friedman (1993) were honest, he would have admitted
that his model of businesses passively submitting to the morality of the com-
munity as expressed in the community's laws is a parody of the true relation
that exists between businesspeople and the government. Almost every major
U.S. corporation has a political action committee. These committees fight
tooth and nail to get laws most favorable to their corporation, lobbying
representatives and senators at every turn. One cannot logically say, there-
fore, that a business acts morally if it maximizes profits subject to the com-
munity's laws if and when that same corporation is writing the laws for itself
sometimes without regard for the community. It becomes highly debatable in
such cases whether the laws belong, in any robust sense, to the community
anymore. The laws begin to look a lot like the product of backroom deals
between corporations and citizens' groups, the very deals Friedman (1993)
decried as immoral.

There are then many features of the law that, taken collectively, cast grave
doubt on the theoretical soundness of Friedman's view. To recapitulate, these
are: (a) the potential immorality of the law to which Friedman would have
business conform; (b) the fact the law expresses only the minimally acceptable
standards for behavior, not standards for genuinely and fully moral behavior;
(c) the law's need to be modified in light of the particular; (d) the law's lack of
clarity; (e) the potential for international and domestic laws to be conflicting;
and (f) the dynamic interaction of the law and business, a dynamic Friedman
either forgot or chose to suppress.