The Third Pillar: How Markets and the State Leave the Community Behind

by Raghuram G. Rajan

corporations follow Friedman and focused solely on profits, they undermine the private sector’s ability to be a political force for social good. Friedman was right that a fair amount of corporate social responsibility substitutes for actions the state should take, and panders to the specific charitable interests of a firm’s top managers. This is not beneficial for the firm. Yet the firm exists in the community; if there is a local earthquake and the state is underprepared, the firm cannot keep its earthmoving equipment off the roads, regardless of whether it will ever get paid. More substantially, Friedman enjoined corporations to take the rules of the game as given, which meant they ought not to protest if a government turned authoritarian or despoiled the environment. Presumably, he believed nothing so drastic would happen in the United States. Yet, when an enormous source of independent power, the private sector, is passive, or worse, rendered suspect in the eyes of the community because its every action has to be in pursuit of corporate profits, there are fewer checks on the arbitrary power of the state. Clearly, corporations are not meant to be political organisations, and should not attempt to be so. Nevertheless, they ought to stand up and be counted when the fundamental tenets of society are at risk, for in the long run, this will affect everyone’s ability to make profits. An overly narrow focus on firm profit maximisation will ensure that when needed, many will be...

Corporations, community & state