Naked Self Interest

This second box from my recent Fund Strategy cover story on responsible capitalism shows outlines the free market opposition to Corporate Social Responsibility (CSR). The point is not to endorse this outlook but to contrast it with what has become the mainstream view.

The free market view of capitalism involves the explicit rejection of what is sometimes called “enlightened self-interest”. Its advocates, who are few in number, argue that businesses should focus on their core business of making profits. This perspective does not reject philanthropic initiatives, on the contrary it welcomes them, but seems them as a proper matter for individuals rather than companies.

Free marketeers take their inspiration from Adam Smith who in The Wealth of Nations, his classic work published in 1776, argued that: “It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.”

In other words, Smith argues that society progresses precisely because firms pursue their own interests rather than because they are willing to go beyond their commercial concerns. Critics of free market economics often counter that this quote was not representative of Smith’s overall view.

The best-known modern advocate of the free market view was Milton Friedman. In Capitalism and Freedom (1962) he argued that: “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.” In his view the proper role of corporate management was to represent the interests of the owners of companies. Friedman, who won the Nobel prize for economics in 1976, died in 2006.

One of the most articulate living advocates of this view is David Henderson, a former head of economics and statistics at the Organisation for Economic Cooperation and Development. In Misguided Virtue (2001) he makes many telling criticisms of CSR. In his view its advocates lack a proper understanding of the market economy and particularly its considerable social benefits. The imposition of CSR undermines its strengths by bringing higher costs and lower profits.