Should government force companies to be responsible?

Headnote

No, argues Kesten Green. Enforced corporate social responsibility restricts the choice of firms and individuals.

Since at least the 1960s, advocates have called for firms to be socially responsible. Governments have responded. But what does it mean for firms to be socially responsible? And do government subsidies and regulations help?

Calls for firms to be socially responsible suggest that they are not. But firms are perhaps the greatest social invention after families. Firms are a way for people to cooperate to earn incomes and create wealth. They are able to do this by providing goods and services that people want and need. Firms invest in infrastructure, land improvement, capital equipment, and people. Firms encourage innovation by spreading entrepreneurial risk and sharing the rewards. Finally, the activities of firms provide dignity and meaning to the lives of the people that work in them.

Firms have a strong incentive for doing good: they are rewarded by profits. They are also punished for causing harm: by losses, by penalties from contract and tort laws, and by damaged reputations. Regulators, on the other hand, seldom receive clear and timely feedback about the effects of their regulations.

To determine whether efforts by advocates and regulators to force firms to be even more socially responsible are justified, I looked for evidence on the effects of corporate social responsibility regulations with my colleague Wharton Professor Scott Armstrong. We started by asking what conditions would need to be met in order to...