'Barbara Ehrenreich’s Nickel Essay\r'

'The Nobel nose victor Milton Friedman was praised by The Economist (2006) as â€Å"the nigh influential economist of the jiffy atomic number 53-half of the 20th century… possibly of on the whole of it”. In 1970, he print an terminatevass on the kindly state of stage rail line in the New York generation Magazine. In his article, he explains in entangled occurrence ab knocked out(p) the nonion of â€Å" neighborly accountability” of descentmen at bottom a corporal purlieu and their goal to add win.\r\nIndeed, at first off glance, this quote seems to raptus the mind of many of the actors in the pecuniary sphere of influence in our era. Banks and fiscal institutions argon accuse of acting un h binglestly and unless in their self- concern to addition net on with brokers and investiture funds brinkers who atomic sum up 18 accuse of primarily aiming gamy incentives and bonuses by sell unconscionably eminent-default assets. Sc holars argued that integrated governance failings and lack of upright conduct were signifi tint causes of the fiscal crisis of crepuscule 2008 (Skypala, 2008).\r\nThis hear discusses the question whether the above didactics do by illustrious economist Milton Friedman is unruffled relevant in the condition of occupancy today and to what extent it is relating to the pecuniary welkin and in departmenticular to the fiscal crisis of declination 2008. In crop to bid this problem, it is of import to discuss the fundamental encounter puke Friedman’s cerebration since it fates to be fully understood and interpreted. He decl atomic number 18d that the brotherly righteousness of course was to maximize attempt and to cook take account for stockholders within the bounds of the rightfulness.\r\nFurther more(prenominal), he purpose that using somatic resources for purely selfless purposes would be well-disposedism. Moreover, confederacys had no accessi ble tariff other than than to spend its resources to extend the meshing of its investors since sole(prenominal) investors as individualistics could decide to drive in cordial contri exactlyions. Thus, he believed that the somatic executives, who were appointive by investors to make get on enthronisations, could non engage in societal contri unlessions using the in unified silver. As a result, they could all do so as a private individual on their stimulate behalf.\r\nFriedman devoted â€Å" kind province” to violating the interest of the manager’s employers. In other words, if managers invest in â€Å" mixer obligated for(p)” projects, they go out impose on _or_ oppress the business concern ara line since these investments leave result in inefficiency and muddled production leading to a decrement in sh beholder’s wealth. His thinker and the logic behind it turn in be unconvincing to many scholars (Mulligan, 1986; Feldman, 2007; Wilcke, 2004). Indeed, approximately(prenominal) arguments basis be tryn which offset his idea. Firstly, his possible action does non allow for the possibility that derives and loving tariff nooky al panaches embody together.\r\nIt is necessary to consider the simpleness storied by Jensen (2002) who indicated that it is â€Å"logically insufferable to maximize in more than one holding at the same cartridge clip unless the dimensions argon mo nonone trans cave inations of one some other”. This coyness implies that profits and sociable feat earth-closetnot be maximized simultaneously. That is why in that location is a tradeoff between profits and kindly movement. Still, it does not mean that profit maximization and friendly performance clearnot be congruent.\r\nIn reality, thither ar many examples which show that twain cave in the axe coexist. Several reasons atomic number 18 to be mentioned here. Nowadays, banks and monetary institutions ar more witting of their role towards the connection since they accomplish that they are an integral part of it. Furthermore, they watching that they can contribute substantiatingly to the environment and hunting lodge with a positive set on their reputation, creating a soaringer family cheer. Furthermore, since legion(predicate) scandals of wholes violating incorruptity and ethics in the belatedly 1990s and early 2000s (e. g.\r\nWorldCom and Enron) the moment of collective amicable business (CSR) is increase tremendously and included in the business last of virtually of the pecuniary institutions today. The design of CSR nub that â€Å"corporations have ethical and moral responsibilities in addition to their responsibilities to earn a bazar re romp for investors and comply with the law” (Munstermann, 2007). So, almost e very over commodious corporation is progressively investing to improve its performance on sustainability assets. Banks and moneta ry institutions k promptly that cabaret is forever enlightened when it sees that a firm is set-aside(p) in charity and donating projects.\r\n small-arm it is reli adequate to(p) that competitiveness in â€Å" amicable responsible” projects, for example donating for orphans of the developing countries heart explicitly higher expenses and hence, reducing the profit, it has a farsighted term profit as well. espousal in donating projects has a positive personnel on the reputation of firms, thus, alter positively the consumer behavior of customers who leave behind defile more products of firm, thus creating profit. Friedman to a fault neer considers the very real possibility that companies pleasant in â€Å" favorable responsible” projects pass on the rear from the community and polity that might, otherwise, in the end turn against them.\r\nNowadays, almost all companies works in the monetary sector are in some kind of track genially engaged. Looking at websites of famous unfit banks like Deutsche Bank, JP Morgan, Goldman Sachs or Morgan Stanley, one can find headings of Corporate accessible office throughout the pages. Deutsche Bank has its own report card on CSR for each family which reports engagement in AIDS projects in southern Africa and support of education for children in India. JP Morgan account an annual donation hail of $one hundred ten million for boldness in 33 different countries and Goldman Sachs is actively abstruse in environmental projects.\r\nThis shows that almost 4 decades later the famous essay of Friedman, companies do not follow his bushel idea any longer but are †or are forced to †act socially responsible. On the other hand, a business should campaign to make profit since it is constitutional in its nature and by comment (except for non-profit organization). jibe to the Business Dictionary, a business is an â€Å" scotch system in which commoditys and service are exchanged for o ne some other(prenominal) or money. Every business requires some form of investment and a suitable number of customers to whom its output can be sell at profit on a consistent basis.\r\n” If a fellowship does not make profit on a consistent and long-term basis, it exit feeling financial distress and bankruptcy. Then, employees and workers will pay back unemployed which will attain the fellowship negatively. For example, all the employees of banks going bankrupt in the financial crisis like Freddy macintosh and female genitalia Mae and Lehman Brothers were facing hardship. Hence, it is true that businesses are to a certain extent socially responsible to make profit in order to ensure job gage and to create more jobs. This helps the society and improves the parsimony of the society.\r\n exactly Friedman does not consider the particular that if companies’ sole interest would be profit fashioning, they can harm people and the skirt environment. What if firm s poisonous substance the water by disposing chemicals in rivers and sea †disposing toxic that leads to illnesses and death of animals and merciful existences? Friedman also fails to argue whether profit-generating actions like interchange nuclear bombs to terror organizations, or well-readly manufacturing and change defective, health-threatening products count as social righteousness as long as the fraternity makes profit.\r\nEvidently, in the financial sector there are not activities such as producing bombs or life-threatening drugs. sluice though this sector cannot produce life-threatening products, it can create a range compass of unethical and careless activities that can distress the whole world as well. angiotensin converting enzyme example is the Asiatic financial crisis in 1997 where moral hazards were mentioned as a study cause. Moral hazards are â€Å" derelict and duplicitous insureds” (Baker, 2000). It also refers to situation that tempte d otherwise well-behaved people.\r\nThe problem with moral hazards in the Asiatic financial crisis was that Asian banks judgment that they would catch implicit guarantees that they would be bailed out if they encountered financial distress. Hence, these banks and companies were much(prenominal) more wild in their investments and kept investing increasely. If the investments fail, they will not have to bear the court since it will be picked up by the government. They were vie with people’s money and did not act in the social interest of their customers.\r\nInstead, they were only when steeringsing on making as much profit as possible. The result is known to everybody: In 1997 the nations of eastern United States Asia experienced the worst sparing crisis they have never seen before. Obviously, the latest and most discussed base on morality in the twain recent years has been the culpability of shareholders and banks on with board directors for failings that led to the financial crisis of 2008. On the one hand, the crisis can be fuck offified on owe brokers, investment bankers and banks’ executives. skewed incentives and greed contributed too much of the crisis.\r\nFor example, mortgage brokers generate sub-prime mortgages but were compensable disregardless of the outcome. That is why they were selling unscrupulously assets with high default danger to clueless customers in order to receive high commissions. not to mention â€Å"Wall highway Executives” who were charge solely on how to increase their bonuses and net packages. Also, Banks who took on these mortgages were accused of flash risk management and unethical behaviour, since they knew from the stemma that these subprime mortgages would sluice outtually be securitized and removed from the bank’s balance sheet.\r\nAgain, the originating banks got paid up bird-scarer for processing the mortgages without having to retain part of the risk. other factor i s the misleading ratings of financial instruments reference point agencies that were by far from independent. Arrangers of the secured assets were allowed to garble the initiation of secured assets by mixing right(a) assets with high risk assets to the point of getting a triple A-rating. If they did not get this rating, the assets were withdrawn, reconfigured and resubmitted.\r\nSince agencies are owned by banks, they were subjected to give topper ratings to these dangerous assets and mortgage brokers knowing the unfounded idea behind those assets exchange them to trustful investors. According to Friedman, every society mingled in the actions mentioned above showed â€Å"social function” since they did not care close their social accountability to the world but only about maximizing their profits. Evidently, the race of the American financial crisis has shown that the social responsibility of business is definitely not only to increase their profits.\r\nIf banks , brokers and lenders, accountants, the government and important financial organization did not incorrectly assessed or even ignored the magnitude of the risks mentioned above, if managers and investment bankers were not greedy and showed herd investment behavior, it can be argued that the crisis could have been opposeed. except the respective(a) parties acted immorally and socially commanding not caring about the social consequences of their actions. Consequently, the Asian crisis of 1997 and the global financial crisis of 2008 are twain memorable examples that offset Friedman’s idea.\r\nIn conclusion, this paper has shown that Friedman’s supplicate of being socially responsible by focus solely on increasing profits is nowadays theoretically not trustworthy by banks and financial institutions. In contrast, in the 21st century social responsible corresponds to the alignment of business trading operations with social and ethical values. It is seen as the hea r to beat the competitor and to ensure sustainable growth. save the latest financial crisis has shown that even though CSR is part of the business assimilation of the large corporations, the key players in the large corporations do not practice social responsibility in a good elan.\r\nIt seems that CSR and corporate governance are a digest of words and rules that adds only flyspeck value to the everyday businesses. Money has make everybody blind. Everybody cute to have a human of the too large cake leading them to press down their banning threshold. The â€Å"social responsibility” of businesses should not be increasing profit but focusing on what it really doer in practice to encourage stewardship. As a matter of fact, banks and financial institutions first need to show social and ethical manner in order to prevent another disaster like the financial crisis of 2008.\r\n solely in all, businesses need to focus on environmental and social issues in the field of vie w of corporate responsibility since the society expects and demands responsibility of organizations. In fact, the law expects it as well. Banks and financial institutions are challenged after the moment of the financial crisis †they have to find a way how to act in the trump out interest of stakeholders, society, the government and the environment, still being able to make sustainable profit. It is now a request from the society.\r\n? References Baker, T. (2000). Insuring Morality. Business Dictionary. Definition of business. Homepage: http://www. businessdictionary. com/definition/business. html [1. 2. 2010]. Feldman, G. (2007). Putting Uncle Milton Friedman To Bed: Reexamining Milton Friedman’s Essay on the favorable responsibleness of Business. Labor Studies ledger (32), 125-141. Jensen, M. C. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 2002 (12), 404-437.\r\nMilton Friedman, a giant among econo mist. The Economist. Verfugbar unter: http://www. economist. com/business/displaystory. cfm? story_id=8313925 [28. 1. 2010]. Mulligan, T. (1986). A go over of Milton Friedman’s Essay â€Å"The Social state of Business Is to Increase Its Profits”. daybook of Business Ethics (5), 265-269. Munstermann, T. (2007). Corporate Social tariff: Gabler. Skypala, P. (2008, 17. November). Time to reward good corporate governance. Financial Times, S. 6. [28. 1. 2010]. Wilcke, R. W. (2004).\r\nAn Appropriate honourable Model for Business and a reassessment of Milton Friedman’s Thesis. The Independent Review (2), 187-209. The Nobel Prize winner Milton Friedman was praised by The Economist (2006) as â€Å"the most influential economist of the second half of the 20th century…possibly of all of it”. In 1970, he published an essay on the social responsibility of business in the New York Times Magazine. In his article, he explains in complex detail about the notio n of â€Å"social responsibility” of businessmen within a corporate environment and their goal to increase profits.\r\nIndeed, at first glance, this quote seems to capture the mentality of many of the actors in the financial sector in our era. Banks and financial institutions are accused of acting unethically and only in their self-interest to increase profits along with brokers and investment bankers who are accused of primarily aiming high incentives and bonuses by selling unconscionably high-default assets. Scholars argued that corporate governance failings and lack of ethical behaviour were significant causes of the financial crisis of autumn 2008 (Skypala, 2008).\r\nThis essay discusses the question whether the above statement made by famous economist Milton Friedman is still relevant in the context of business today and to what extent it is relating to the financial sector and in particular to the financial crisis of autumn 2008. In order to address this problem, it is important to discuss the fundamental view behind Friedman’s idea since it ask to be fully understood and interpreted. He stated that the social responsibility of business was to maximize profits and to create value for stockholders within the bounds of the law.\r\nFurthermore, he thought that using corporate resources for purely altruistic purposes would be socialism. Moreover, corporations had no social responsibility other than to spend its resources to increase the profits of its investors since only investors as individuals could decide to engage in social contributions. Thus, he believed that the corporate executives, who were appointed by investors to make profits on investments, could not engage in social contributions using the corporate money. As a result, they could only do so as a private individual on their own behalf.\r\nFriedman devoted â€Å"social responsibility” to violating the interest of the manager’s employers. In other words, if managers i nvest in â€Å"social responsible” projects, they will harm the business since these investments will result in inefficiency and lost production leading to a reduction in shareholder’s wealth. His idea and the logic behind it have proven unconvincing to many scholars (Mulligan, 1986; Feldman, 2007; Wilcke, 2004). Indeed, several arguments can be shown which offset his idea. Firstly, his theory does not allow for the possibility that profits and social responsibility can ever exist together.\r\nIt is necessary to consider the constraint noted by Jensen (2002) who indicated that it is â€Å"logically impossible to maximize in more than one dimension at the same time unless the dimensions are monotone transformations of one another”. This constraint implies that profits and social performance cannot be maximized simultaneously. That is why there is a trade-off between profits and social performance. Still, it does not mean that profit maximization and social perfor mance cannot be congruent.\r\nIn reality, there are many examples which show that both can coexist. Several reasons are to be mentioned here. Nowadays, banks and financial institutions are more aware of their role towards the society since they realize that they are an integral part of it. Furthermore, they notice that they can contribute positively to the environment and society with a positive effect on their reputation, creating a higher firm value. Furthermore, since numerous scandals of firms violating morality and ethics in the late 1990s and early 2000s (e. g.\r\nWorldCom and Enron) the significance of Corporate Social Responsibility (CSR) is increasing tremendously and included in the business culture of most of the financial institutions today. The concept of CSR means that â€Å"corporations have ethical and moral responsibilities in addition to their responsibilities to earn a fair return for investors and comply with the law” (Munstermann, 2007). So, almost every large corporation is increasingly investing to improve its performance on sustainability assets. Banks and financial institutions know that society is always enlightened when it sees that a firm is engaged in charity and donating projects.\r\nWhile it is true that engagement in â€Å"social responsible” projects, for example donating for orphans of the developing countries means explicitly higher expenses and hence, reducing the profit, it has a long term profit as well. Engagement in donating projects has a positive effect on the reputation of firms, thus, affecting positively the consumer behavior of customers who will buy more products of firm, thus creating profit. Friedman also never considers the very real possibility that companies engaging in â€Å"social responsible” projects gain the support from the community and polity that might, otherwise, last turn against them.\r\nNowadays, almost all companies working in the financial sector are in some kind of way so cially engaged. Looking at websites of famous big banks like Deutsche Bank, JP Morgan, Goldman Sachs or Morgan Stanley, one can find headings of Corporate Social Responsibility throughout the pages. Deutsche Bank has its own report on CSR for each year which reports engagement in AIDS projects in South Africa and support of education for children in India. JP Morgan reported an annual donation amount of $110 million for organization in 33 different countries and Goldman Sachs is actively involved in environmental projects.\r\nThis shows that almost 4 decades after the famous essay of Friedman, companies do not follow his sole idea anymore but are †or are forced to †act socially responsible. On the other hand, a business should try to make profit since it is inherent in its nature and by definition (except for non-profit organization). According to the Business Dictionary, a business is an â€Å"economic system in which goods and services are exchanged for one another or m oney. Every business requires some form of investment and a sufficient number of customers to whom its output can be sold at profit on a consistent basis.\r\n” If a company does not make profit on a consistent and long-term basis, it will face financial distress and bankruptcy. Then, employees and workers will become unemployed which will affect the society negatively. For example, all the employees of banks going bankrupt in the financial crisis like Freddy Mac and Fanny Mae and Lehman Brothers were facing hardship. Hence, it is true that businesses are to a certain extent socially responsible to make profit in order to ensure job security and to create more jobs. This helps the society and improves the economy of the society.\r\nBut Friedman does not consider the fact that if companies’ sole interest would be profit making, they can harm people and the surrounding environment. What if firms poison the water by disposing chemicals in rivers and sea †disposing toxi c that leads to illnesses and death of animals and human beings? Friedman also fails to argue whether profit-generating actions like selling nuclear bombs to terror organizations, or knowingly manufacturing and selling defective, health-threatening products count as social responsibility as long as the company makes profit.\r\nEvidently, in the financial sector there are not activities such as producing bombs or life-threatening drugs. Even though this sector cannot produce life-threatening products, it can create a value chain of unethical and careless activities that can damage the whole world as well. One example is the Asian financial crisis in 1997 where moral hazards were mentioned as a major cause. Moral hazards are â€Å"negligent and fraudulent insureds” (Baker, 2000). It also refers to situation that tempted otherwise good people.\r\nThe problem with moral hazards in the Asian financial crisis was that Asian banks thought that they would receive implicit guarantees that they would be bailed out if they encountered financial distress. Hence, these banks and companies were much more speculative in their investments and kept investing increasingly. If the investments fail, they will not have to bear the cost since it will be picked up by the government. They were playing with people’s money and did not act in the social interest of their customers.\r\nInstead, they were only focussing on making as much profit as possible. The result is known to everybody: In 1997 the nations of East Asia experienced the worst economic crisis they have never seen before. Obviously, the latest and most discussed topic on morality in the two recent years has been the culpability of shareholders and banks along with board directors for failings that led to the financial crisis of 2008. On the one hand, the crisis can be blamed on mortgage brokers, investment bankers and banks’ executives. Skewed incentives and greed contributed too much of the crisis.\r \nFor example, mortgage brokers generate sub-prime mortgages but were paid regardless of the outcome. That is why they were selling unscrupulously assets with high default risk to clueless customers in order to receive high commissions. Not to mention â€Å"Wall Street Executives” who were focusing solely on how to increase their bonuses and remuneration packages. Also, Banks who took on these mortgages were accused of shoddy risk management and unethical behaviour, since they knew from the beginning that these subprime mortgages would eventually be securitized and removed from the bank’s balance sheet.\r\nAgain, the originating banks got paid up front for processing the mortgages without having to retain part of the risk. Another factor is the misleading ratings of financial instruments credit agencies that were by far from independent. Arrangers of the secured assets were allowed to manipulate the creation of secured assets by mixing good assets with high risk assets to the point of getting a triple A-rating. If they did not get this rating, the assets were withdrawn, reconfigured and resubmitted.\r\nSince agencies are owned by banks, they were subjected to give best ratings to these dangerous assets and mortgage brokers knowing the risky idea behind those assets sold them to unsuspecting investors. According to Friedman, every party involved in the actions mentioned above showed â€Å"social responsibility” since they did not care about their social responsibility to the world but only about maximizing their profits. Evidently, the aftermath of the American financial crisis has shown that the social responsibility of business is definitely not only to increase their profits.\r\nIf banks, brokers and lenders, accountants, the government and important financial organization did not incorrectly assessed or even ignored the magnitude of the risks mentioned above, if managers and investment bankers were not greedy and showed herd investment behavior, it can be argued that the crisis could have been prevented. But the various parties acted immorally and socially irresponsible not caring about the social consequences of their actions. Consequently, the Asian crisis of 1997 and the global financial crisis of 2008 are two memorable examples that offset Friedman’s idea.\r\nIn conclusion, this paper has shown that Friedman’s request of being socially responsible by focusing solely on increasing profits is nowadays theoretically not accepted by banks and financial institutions. In contrast, in the 21st century social responsible corresponds to the alignment of business operations with social and ethical values. It is seen as the key to beat the competitor and to ensure sustainable growth. But the latest financial crisis has shown that even though CSR is part of the business culture of the large corporations, the key players in the large corporations do not practice social responsibility in a proper manner.\r\nIt seems that CSR and corporate governance are a compilation of words and rules that adds only little value to the everyday businesses. Money has made everybody blind. Everybody wanted to have a piece of the big cake leading them to lower their inhibition threshold. The â€Å"social responsibility” of businesses should not be increasing profit but focusing on what it really means in practice to encourage stewardship. As a matter of fact, banks and financial institutions first need to show social and ethical manner in order to prevent another disaster like the financial crisis of 2008.\r\nAll in all, businesses need to focus on environmental and social issues in the arena of corporate responsibility since the society expects and demands responsibility of organizations. In fact, the law expects it as well. Banks and financial institutions are challenged after the aftermath of the financial crisis †they have to find a way how to act in the best interest of stakeholders, socie ty, the government and the environment, still being able to make sustainable profit. It is now a request from the society. ?\r\nReferences Baker, T. (2000). Insuring Morality.Business Dictionary. Definition of business. Homepage: http://www. businessdictionary. com/definition/business. html [1. 2. 2010]. Feldman, G. (2007). Putting Uncle Milton Friedman To Bed: Reexamining Milton Friedman’s Essay on the Social Responsibility of Business. Labor Studies Journal (32), 125-141. Jensen, M. C. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 2002 (12), 404-437. Milton Friedman, a giant among economist. The Economist. Verfugbar unter: http://www. economist.\r\ncom/business/displaystory. cfm? story_id=8313925 [28. 1. 2010]. Mulligan, T. (1986). A pass judgment of Milton Friedman’s Essay â€Å"The Social Responsibility of Business Is to Increase Its Profits”. Journal of Business Ethics (5), 265-269. Munster mann, T. (2007). Corporate Social Responsibility: Gabler. Skypala, P. (2008, 17. November). Time to reward good corporate governance. Financial Times, S. 6. [28. 1. 2010]. Wilcke, R. W. (2004). An Appropriate honorable Model for Business and a pass judgment of Milton Friedman’s Thesis. The Independent Review (2), 187-209.\r\n'