Abstract
The paper examines the issue of corporate social responsibility (CSR) from the perspective of constitutional economics, focusing on the distinction between a political community’s constitutional choice of the rules of the “market game,” and the market players’ sub-constitutional choice of strategies within these rules. Three versions of CSR-demands are identified and discussed, a “soft,” a “hard”, and a “radical” version. The soft version is concerned with the issue of how “socially responsible” corporations ought to play the market game within existing rules. The hard version is about how the rules of the market ought to be changed in order to induce “socially responsible” corporate behavior. And the radical version questions the compatibility of CSR and the logic of the market game, calling in effect for adopting some alternative economic regime.
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Notes
Economist, 2005: 3.—One example is the London-based Ethical Corporation (www.ethicalcorp.com) which regularly organizes two-day “networking conferences” with corporate rates of £ 995 + VAT and non-profit rates of £ 595 + VAT.
For a detailed review see Henderson, 2001.
Commenting on the notion of “social responsibility of business” Friedman stated there: “This view shows a fundamental misconception of the character and nature of a free economy. In such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase 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” (Friedman, 1962: 133).
On the term “catallaxy” Hayek (1976: 108f.) notes: “Since the name ‘catallactics’ has long ago been suggested for the science which deals with the market order …, it would seem appropriate to adopt a corresponding term for the market order itself. The term ‘catalactics’ was derived from the Greek verb katallatein (or katallassein) which meant, significantly, not only ‘to exchange’ but also ‘to admit into the community’ and ‘to change from enemy into friend’. From it the adjective ‘catallactic’ has been derived to serve in the place of ‘economic’ to describe the kind of phenomena with which the science of catallactics deals. The ancient Greeks knew neither this term nor had a corresponding noun; if they had formed one it would probably have been katallaxia. From this we can form an English term catallaxy which we shall use to describe the order brought about by the mutual adjustment of many individual economies in a market. A catallaxy is thus the special kind of spontaneous order produced by the market through people acting within the rules of the law of property, tort and contract.”
Hayek (1976: 115): “The best way to understand how the operation of the market system leads not only to the creation of an order, but also to a great increase of the returns which men receive from their efforts, is to think of it … as a game which we may now call the game of catallaxy.”
Friedman (1962: 13): “The possibility of co-ordination through voluntary co-operation rests on the elementary—yet frequently denied—proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed. … A working model of a society organized through voluntary exchange is a free enterprise exchange economy—what we have been calling competitive capitalism.”
Hayek (1976: 115): “It is a wealth-creating game (and not what game theory calls a zero-sum game), that is, one that leads to an increase of the stream of goods and of the prospects of all participants to satisfy their needs, but which retains the character of a game in the sense in which the term is defined by the Oxford English Dictionary: ‘a contest played according to rules and decided by superior skill, strength or good fortune’.”
Hayek (1978: 137): “The individuals have reason to agree to play this game because it makes the pool from which the individual shares are drawn larger than it can be made by any other method. But at the same time it makes the share of each individual subject to all kinds of accidents and certainly does not secure that it always corresponds to the subjective merits or to the esteem by others of the individual efforts.”
I leave aside here the difference between ‘accounting profit’, i.e. the difference between revenue and explicit costs, and ‘pure economic profit’, i.e. the difference between revenue and opportunity costs. The more intense market competition is the more speedily it will tend to erode pure economic profits while still allowing producers to earn accounting profits.
Individuals are involved in the market game in both capacities, as consumers as well as producers (i.e. as entrepreneurs, as investors, as employees etc.). The question may be raised, therefore, why they should opt for the market game that favors consumer- over producer-interests. A. Smith considered the answer to this question to be self-evident: “Consumption is the sole end and purpose of production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it” (Smith, 1981:660).—From a constitutional economics perspective one could, nevertheless, answer this question by pointing out that an economic constitution that gives preference to consumer interests in competition is preferable for all persons involved over an economic constitution that accommodates protectionist interests of producers (Vanberg, 2005:39ff.).
This perspective on profit-seeking is in line, for instance, with such approaches in modern moral philosophy as Gauthier’s (1986) theory of morality as “constrained maximization.” According to Gauthier, moral conduct is about pursuing one’s self-interest within moral constraints, not about acting against one’s own interests.
Hayek (1948: 110f.): “That a functioning market presupposes not only prevention of violence and fraud but the protection of certain rights, such as property, and the enforcement of contract, is always taken for granted. Where the traditional discussion becomes unsatisfactory is where it is suggested that, with the recognition of the principles of private property and freedom of contract … all the issues were settled, as if the law of property and contract were given once and for all in its final and most appropriate form, i.e. in the form which will make the market economy work at its best. It is only after we have agreed on these principles that the real problem begins.”
“Systematically” produced undesirable outcome patterns are to be distinguished from the occasional undesired outcomes that players must unavoidably cope with in any game.
I shall return to this issue below when I examine more closely the different kinds of demands that are voiced under the CSR label.
Since Milton Friedman’s argument on the issue of CSR is the reference point for my reasoning in this paper it may be useful to quote what he has to say on the role of government in the market economy: “The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the ‘rules of the game’ and as an umpire to interpret and to enforce the rules decided on” (Friedman, 1962: 15). “It is important to distinguish the day-to-day activities of people from the general customary and legal framework within which these take place. The day-to-day activities are like the actions of the participants in a game when they are playing it; the framework, like the rules of the game they play. And just as a good game requires acceptance of the players both of the rules and of the umpire to interpret and endorse them, so a good society requires that its members agree on the general conditions that will govern the relations among them, on some means of arbitrating different interpretations of these conditions, and on some device for enforcing compliance with the generally accepted rules” (ibid.: 25).
The classic contribution on this is Coase 1937.
For a more detailed discussion of this concept see Vanberg 1992.
“Stakeholders in the broad sense” include, in Sacconi’s (2004: 7) understanding, not only individuals “who have an interest at stake because they have made specific investments in the firm”, but also “those individuals or groups whose interest is involved because they undergo the ‘external effects’, positive or negative, of the transactions performed by the firm, even if they do not directly participate in the transaction, so that they do not contribute to, nor directly receive value from the firm.”
Sacconi (2004: 13) appears to conflate these two kinds of social contracts when, in discussing the ethical criterion that he applies to “the ‘social contract’ among the stakeholders of the firm,” he speaks of this contract as “the agreement that would be reached by the representatives of all the firm’s stakeholders in a hypothetical situation of impartial choice.”—Sacconi (ibid.: 14f.) draws a distinction between a “first social contract” and a “second social contract,” but this distinction is different from the one I want to emphasize here.
For a more detailed explanation of this outlook at the firm as a ‘corporate actor’ see Vanberg (1992).
That would be different, of course, in a workers’ cooperative in which the managers would be the agents of the workers and where contributors of financial capital would be hired as recipients of contractual income by the managers.
A political community may, of course, be a shareholder or co-owner of a corporation and it may also purchase products or services from a corporation. But in this capacity its relation to the corporation is that of a shareholder or customer. What is of interest here is the relation between a political community in its capacity as political authority and a corporation.
The issue of how effectively the owners of large corporations actually control management has long been discussed, but it can be left aside here because what is of principal interest in the present context is not how well managers can be expected to serve the profit-earning interests of shareholders but whether ‘social responsibility’ requires them to pursue other ends than to earn profits. —It may be worth quoting, though, the Economist’s and G.S. Becker’s comments on the issue of managers’ accountability to shareholders. The Economist (Economist, 2005: 17) notes: “In many of the corporate scandals of recent years, it has seemed that managers have acted as though they were accountable to nobody—not even, and in some cases least of all, to the firms’ owners. This has been rightly recognized as a problem, and a lot of time and effort has been spent on trying to make accountability to shareholders—on matters such as executive pay—more effective. Muddled thinking on CSR, and on supposed accountability to non-owners, only makes it harder to put this right.”—In a similar spirit G.S. Becker (Becker and Posner, 2005) notes: “But surely an important goal of any reform in corporate management is to reduce entrenchment of management, and inject more competition into the market for CEO’s and other top corporate leaders. … Entrenched managers do not have to fully consider stockholder interests in their decisions …. Perhaps they will be ‘socially responsible’, but surely we do not want to rely on entrenched management to set the standards for corporate behavior? Entrenched and powerful management was at the heart of the problem with World Com, Enron, and most other companies that had corrupt leadership.”
That such “fiduciary duties” exist is implied by Sacconi (2006: 6) when he proposes to define CSR as “a model of extended corporate governance whereby who runs a firm (entrepreneurs, directors, managers) have responsibilities that range from fulfillment of their fiduciary duties towards the owners to fulfillment of analogous fiduciary duties towards all of the firm’s stakeholders.”
Friedman (Reason Online, 2005) alludes to this ‘knowledge problem’ when he notes in regard to ‘charitable giving’ of managers: “But what reason is there to suppose that the stream of profit distributed in this way would do more good for society than investing that stream of profit in the enterprise itself or paying it out as dividends and letting the stockholders dispose it?”—Commenting on the role that tax laws play in this context Friedman (ibid.) adds: “The practice makes sense only because of our obscene tax laws, whereby a stockholder can make a larger gift for a given after-tax cost if the corporation makes the gift on his behalf than if he makes the gift directly. That is good reason for eliminating the corporate tax or for eliminating the deductibility of corporate charity, but it is not a justification for corporate charity.”
Rules, as Hayek (1964: 11) argues, “abbreviate the list of circumstances which we need to take into account in the particular instances, singling out certain classes of facts as alone determining the general kind of action which we should take.”
I am paraphrasing here John Mackey, the founder and CEO of Whole Foods who (in Reason Online, 2005) says about his vision of CSR: “The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the ‘invisible hand’ to generate positive results for society.”—In commenting on his “business model” Mackey (ibid.) expresses his conviction that it “is simply good business and works for the long-term benefit of the investors.“
For a discussion of this view of CSR see e.g., Preston and Sapienza (1990) who conclude from their survey of empirical evidence: “Moreover, most of these indicators of stakeholder performance are also associated with conventional measures of corporate profitability and growth. Thus, there is not in this data any significant evidence of strong trade-offs among stakeholder objectives.”
Kirk O. Hanson (Stanford Business, 2000): “I would say that most business ethicists in the United States spend their time trying to convince people that being ethical actually will help you win in the long run.”
T.J. Rodgers (Reason Online, 2005): “It is simply good business for a company to cater to its customers, train and retrain its employees, build long-term relationships with its suppliers, and become a good citizen in its community.”
Playing the market game in a ‘fair’ manner involves, in this sense, clearly more “than mere obedience to the law’s minimal demands” (McCann, 2000: 111).
The EU Commission seems to come close to voicing demands of this kind when, in its Green Paper Promoting a European Framework for Corporate Social Responsibility, Brussels, July 18, 2001, it defines CSR as follows: “By stating their social responsibility and voluntarily taking on commitments which go beyond common regulatory and conventional requirements, which they would have to respect in any case, companies endeavor to raise the standards of social development, environmental protection and respect of fundamental rights and embrace an open governance, reconciling interests of various stakeholders in an overall approach of quality and sustainability” (quoted from Sacconi, 2004: 6).
The ‘group’ for which CSR-demands are claimed to be in the ‘common interest’ may, of course, be more inclusively defined to include not only a particular polity, but several polities or, in the limit, the world community.
Corporate Social Responsibility Watch (http://www.csrwatch.com/) looks out for cases of CSR-demands that would fall into this category.
This issue has been explicitly discussed by Walter Eucken, the founder of the Freiburg school of law and economics (Vanberg, 1998). He emphasized that reconciling individual self-interest and common interest is the task of “Ordnungspolitik”, i.e. a policy that takes care of the institutional framework within which the market game is played. As he put it, “the individuals should not be required to do what only the economic constitution can accomplish, namely to reconcile individual self-interest and common interest” (Eucken, 1990: 368).
McCann (2000: 110): “(S)takeholder groups … can easily mimic the ICCR’s (Interfaith Center for Corporate Responsibility, V.V.) successful strategy of mobilizing religious communities to use their investment portfolios for leveraging various corporate social responsibility agendas through proxy battles and other insurgencies at annual shareholders’ meetings. … Top management is usually willing to negotiate with those who organize such efforts precisely because the one thing they abhor above all is bad publicity.”
As Doane (2005: 24), chair of the CORE (Corporate Responsibility) coalition of NGOs in the UK notes: “(T)here are some strong business incentives that have either pushed or pulled companies onto the CSR band-wagon. For example, companies confronted with boycott threats, as Nike was in the 1990s …, may see CSR as a strategy for presenting a friendlier face to the public.”
As the Economist (Economist, 2005: 9f.) comments: “Companies under NGO scrutiny have been dissuaded from investing in manufacturing operations in developing countries such as India or Bangladesh, or have decided to end such operations, faced with charges that they are employing ‘sweatshop labour’. … Many development NGOs are pushing for labour standards that would mandate this kind of ‘best practice’, and want these standards written into future trade agreements. The evidence clearly shows that policies of this kind … are not in the interests of the workers they purport to help. … Capitulating to the ill-judged demands of the NGOs may be rational, profit-seeking behaviour on their (the companies’, V.V.) part. But in this case, what is good for profits is bad for welfare.”
In his 1970 article Friedman noted on the claim that “the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems”: “We have established elaborate constitutional, parliamentary and judicial provisions to … assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public … . What it (the above claim, V.V.) amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of the like mind, and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures.”—In the same spirit the Economist (Economist, 2005: 18) writes: “(B)usinesses should not try to do the work of governments, just as governments should not try to do the work of businesses. … Managers, acting in their professional capacity, ought not to concern themselves with the public good: they are not competent to do it, they lack the democratic credential for it, and their day jobs should leave them no time to think about it. If they merely concentrate on discharging their responsibility to the owners of the firms, acting ethically as they do so, they will usually serve the public good in any case. … The proper guardians of the public interest are governments, which are accountable to all citizens. It is the job of elected politicians to set goals for regulators, to deal with externalities, to mediate among different interests, to attend to the demands of social justice, to provide public goods and collect taxes to pay for them.”
In her above (fn. 36) quoted article, an article that appeared in a Review published by the Stanford Graduate School of Business, Doane appears to advocate the ‘hard’ version of CSR when she notes: “(U)ltimately, trade-offs must be made between the financial health of the company and ethical outcomes. … Currently in Western legal systems, companies have primary duty of care to their shareholders, … profit-maximization is the norm. So, companies effectively choose financial benefits over social ones” (Doane, 2005: 24, 28).
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Vanberg, V.J. Corporate social responsibility and the ‘game of catallaxy’: the perspective of constitutional economics. Constit Polit Econ 18, 199–222 (2007). https://doi.org/10.1007/s10602-007-9022-4
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DOI: https://doi.org/10.1007/s10602-007-9022-4