We Are All Partners, and We Have the Rights of Partners

What is the Traditional Social Responsibility of a Business Firm?

The COVID-19 pandemic has highlighted many questions of social justice. Some of them – like the question of who should receive federal aid while our economy is shut down - demand answers right away. Such questions will receive practical answers in the form of legislation. However, behind these immediate questions lie bigger questions about the responsibilities of business firms in a society where business firms cannot survive without periodic injections of public cash. How should business firms in a such a society behave? Should we demand that they behave in ways that promote social justice? In the light of the COVID-19 pandemic and of our government’s response to it, we must rethink all of our ideas about business firms and their relationship to us and to the rest our society as a whole.

The traditional view of business firms comes from the work of Adam Smith. In this view, they are private organizations that offer goods or services that people want to buy, and our relationship to them consists solely of transactions in which we buy the things that they sell to us. The firms are assumed to act purely in their own self-interest, but market competition ensures that their self-interested activity will redound to the benefit of all of us.[1]  They want to maximize their profit, but to do that, they have to attract us to buy from them. If their prices are too high or their products are of poor quality, we will not buy from them, and they will lose money. Thus, the “invisible hand” of the free market ensures that the firm that offers the best products at the market price will get our business.  Its competitors must either come up to the standard of the competition or fail. Each individual firm is small in relation to the size of the market as a whole, and so, can allow firms to fail because others will arise to take their places. The failure of an individual firm will not damage the economy as a whole, and social justice need not be a concern of a business firm, which acts in its own interest. As Milton Friedman, put it,

There is one and only one social responsibility of business–to use it 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.

The Traditional View of Firms is No Longer Sufficient

The traditional view of firms has never been an adequate description of the large firms that dominate their markets in a modern economy, and today, that view has become absurdly inadequate. Today, some firms have become so big and important that we cannot allow them to fail. The consequences for their employees, for the communities where the firms operate and for our society as a whole would be too severe. Consequently, we can no longer allow the invisible hand of the free market to do its job of disciplining business firms, and in fact, we do not allow it to do so. In 2008, we extended billions of dollars of assistance to large firms to prevent our economy from collapsing, and now, in the face of the COVID-19 pandemic, we are about to do it again.

Moreover, the current crisis has shown us that we must also see small businesses as too big collectively to fail. Just as the failure of a large firm could bring down our economy, so, could the simultaneous failures of thousands of small businesses. We now live in a world where big events – like the current pandemic – can cause many small businesses to fail at once. Today in the United States, millions of small restaurants and other “main street” businesses may fail in the current crisis, and the effect on our economy would be disastrous. We can see what would happen in this story of one restaurant in New York. So, our most recent aid bill includes loan guarantees for small businesses as well as large ones.

We Are Now Partners in Every Firm

The need to provide public assistance to prevent many businesses from failing in the current crisis has in effect made all of us into partners in all of the firms in our country, and as such, we take responsibility for their survival. We did so in 2008, and we are doing it now. In fact, whenever companies in an important sector of our economy are in danger of failing, they come to us for an injection of cash to keep them afloat, and we oblige because we must.  In Adam Smith’s view of the firm, this could never happen because in that view, we would not care if a particular firm failed. Other firms would arise to take its place, and there would be no danger to the rest of us or to the economy as a whole. Therefore, we could allow the free market to impose its discipline.

In the current crisis, no one thinks that we should allow the failure of millions of businesses. We argue over how much help to give to them; we argue over which companies to help; we argue over the conditions under which aid should be given; and we disagree about whether it is better to provide money directly to companies or whether it is better to give money to workers, who will then spend it; but no one says that we should do nothing. No one believes that we should simply allow our hotel chains, our airlines or our small, local restaurants to go under. Too many people would lose their jobs; too many small suppliers to those companies would also fail. No one believes that the free market should be allowed to impose its discipline.

Twice in a single generation, we have seen some of our largest companies turn to us for injections of cash to prevent them from failing, and today, we see small companies doing the same. Moreover, we can be sure that events like the crash of 2008 or the COVID-19 pandemic will recur. We will get through the current crisis, but we can be confident that in a few years, some other major event will shake the economy, and our firms will again come to us hat in hand.

If firms depend on periodic, public assistance, we who provide that assistance – the people of the United States – are entitled to have a say in the ways that the firms are run. If we must act as partners, we have the right to tell the companies that we will help them only if they operate in ways that benefit us, and we are entitled to enact regulations to ensure that they do so. Such regulations must be considered a standard and unavoidable part of the economic system we live in because, in that system, firms cannot survive without public assistance.

What Should We Demand of Our Business Firms?

So, we must think seriously about how firms should operate. What does our commitment to social justice demand? What should we require of firms in our society? How should they behave? Here are a few of the things we should think about.  This is not a complete list, but it is a start.

1. We should think about climate change and our environment. Perhaps, we should not allow firms to operate in ways that put our planet at risk. Perhaps, firms should act positively to maintain and restore our environment.
2. We should think about the distribution of income. Perhaps, our firms should be required to operate in a way that provides an equitable distribution of income among our people.
3. We should think about our national interest. Perhaps, we should not allow our firms to operate in a way that is contrary to our national interest.
4. We should think about the distribution of the burden of taxation. How should the cost of government be apportioned among various sectors of our population?
5. We should think about racial justice. Perhaps, a country that has prospered by exploiting people of color should now require its companies to promote racial equity.
6. We should think about human rights. What things are human rights? What goods and services should be provided to all of our people, and what goods and services should be apportioned by the free market? For example, is health care a human right? Is housing?

We should begin a national conversation on these topics, and the conversation should be based on the idea presented here: firms cannot survive without public assistance, and therefore, we who provide the assistance are entitled to a say in the running of the firms. We must think about the requirements we want to place on them. What do social justice and our shared, common interest require?

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[1] Heilbroner, Robert, The Worldly Philosophers, New York, Simon and Schuster, 1961, p. 40