What is the business of business?

On Sunday, The Economist hosted a debate in New York on the motion, “The business of business is business.” For the motion, Clive Crook, of the Financial Times and the Atlantic, and Will Wilkinson, of the Cato Institute, argued that this simple rule is a necessary “constitution” for business, to ensure that its managers can be held to account and encouraged to focus on profits, rather than pursuing the sorts of personal social crusades that should be the business of government.

Opposing the motion, John Ruggie, of Harvard’s Kennedy School, and Bennett Freeman, of the social investment firm Calvert, argued that, whilst Milton Friedman’s claim that “the business of business is business” might make sense in a perfect world, it does not do so in the imperfect world in which businesses actually operate. If governments do not adequately address social ills – which is often the case, especially in the emerging economies – then business must. Moreover, Ruggie argued that the rise of the corporate social responsibility movement in recent years has been a direct response to the more laissez-faire government policies toward business of the past 30 years. He also predicted that the pendulum is now going to swing back toward greater government oversight of business, which seems more than plausible.

The debate trod much the same ground as the recent online conversation about Bill Gates’s theory of “creative capitalism”.

One puzzle is how those who support Friedman’s line, because it helps deal with the agency problems rife in business (ie. how do owners get managers to act in their best interest?), seem to care so little about the agency problems rife in government, even in democracies (how do voters get politicians to act in their best interest?). Yet to admit that government can and does often fail is surely to concede that the world is too complicated for a simple rule like “the business of business is business” to be of much practical use.

In the book, we argue that companies can play an important role in philanthrocapitalism, but that what they can do to solve society’s problems is necessarily constrained by the fact that they need to make some money rather than just give it away, like individual philanthropists such as Gates.

What is needed now is a pragmatic, practical debate about the most effective division of labour between firms (public and private), government, mass charities and philanthropists, and which roles each should play in the partnerships that will often be the best way to get things done.

Instead of black and white ideological positions, this is the time for a flexible, empirical approach focused on finding out what works. Where better to start than two examples of effective corporate citizenship cited by Freeman during the debate, which we discuss in the book: the different approaches to the threat of climate change recently taken by two of the world’s biggest companies, General Electric and WalMart?

Neither of these firms have traditionally enjoyed a reputation for good corporate citizenship, yet both are now embracing a green strategy driven largely by its potential to make them money. Of course, there will be many situations where doing well and doing good will be at odds with each other – in which case, yes, here’s hoping there will be some effective government intervention – but it is surely worth encouraging firms to look for what ought to be the low-hanging fruit of opportunities to do well by doing good.