Rent Seeking As A Corporation's Social Responsibility


Matt Yglesias of the Center for American Progress Action Fund ponders the logical endpoint of Milton Friedman's famous declaration that "the social responsibility of business is to increase its profit."

This implies that a business executive has not only the right as a citizen of a democratic country but amoral obligation to dedicate his energy and that of the firm he manages toward erecting regulatory barriers to competition and to begging for bailouts and subsidies. The Friedman view is that an entrepreneur who's obsessed with creating great products is not just in some loose sense a sucker compared to the one who's more focused on creating a politically entrenched monopoly, but that he's also guilty of some kind of ethical failing.

Yglesias suggests that, in the end, Friedman's notion that profit is the goal is effectively a "social responsibility to rent-seek." I'm not so sure, for a couple of reasons. 

The first—one espoused by any number of free-market business owners—is that most folks who subscribe to a basically Friedmanite view of the world also believe that the short- and medium-term profits earned through rent-seeking tend to come at the expense of a firm's long-term profits and sustainability. Perhaps a firm initially makes some money by lobbying for taxes and regulations that push smaller firms out of the market. But in the long run, those profits are the products of market distortions, and thus not healthy for the firm, which becomes increasingly reliant on favoritism and intervention rather than price signals over time. That sort of rent-seeking behavior also encourages a competitive regulatory environment, in which other firms and interested parties (bureaucrats, special interest groups, politicians, etc.) will soon seek to use similar tactics against your firm. Eventually those parties will be successful. The underlying idea behind this view is that it's bad business to work toward making rent-seeking a greater part of the regulatory environment.

The second thing to note is that Yglesias is at least partially right in that many businesses do end up accepting and embracing the notion that rent-seeking is simply part of their business. But if you think this is a problem, then the most effective response is to look for ways to make rent-seeking behavior more difficult. And since one of the basic premises when it comes to rent-seeking is that rules and regulations will almost always be gamed in favor of one party or another, and that more rules leads to more gaming, you don't accomplish this through regulation. Instead, you make rent-seeking harder by making government smaller, and simpler, and less powerful, and therefore 1) harder to manipulate and 2) less enticing, thanks to the limits on its influence, to those looking to exploit its rules. The less advantageous it is to game the government, the fewer businesses will attempt to do it.

In 2005, Reason hosted a debate over the meaning of corporate social responsibility between Milton Friedman, Whole Foods' John Mackey, and Cypress Semiconductor's T.J. Rodgers.