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Is Market Self-Interest Socially Responsible?

Harold Demsetz

• University of California, Los Angeles

“Social Responsibility in the Enterprise Economy.” Southwestern University Law Review 10 (1978): 1–11.

Are self-interested market activities compatible with social benefits and social responsibility?

Free enterprise firms and corporations face the problem of evaluating which “individual choice opportunities” they should select in an economic context of resource scarcity. Market enterprises employ two criteria in selecting their behavior: (1) the competitive profit and loss signals of the market, and (2) the preferability of voluntary market transactions over coercive, fraudulent, non-market transactions. Demsetz, from a cost-benefit analysis, reveals that coercive, non-market transactions fail to allocate resources to their highest value use as is done in voluntary, profit-seeking transactions. Ethically considered, the free and voluntary market is superior to the governmentally-controlled command economy: “The command economy by virtue of its restrictions of choice opportunities strips observed behavior of ethical significance.”

Market self-interest is socially responsible. As Adam Smith observed, the self-interest of profit-seeking is superior to altruism as a motive for securing “the cooperation and assistance of great multitudes” who have no personal knowledge of each other. The “profit and loss system creates a prima facie case in terms of the net benefit criterion in support of those activities that survive the market test.” Furthermore, profitability in the market is highly ethical if we value freedom over coercion.

Government solutions seek to challenge the social responsibility of the market's profit and self-interest motivation by appealing to: (1) the need of paternalism to correct individuals' tendency toward unenlightened self-interest; (2) the need to correct underlying inequitable distribution of wealth; and (3) the problem of externalities by which businesses pass on costs to unwitting parties. Demsetz's detailed analysis finds each of these critiques of the market unpersuasive. After scrutinizing anti-market attacks on high prices, the evils of large monopolistic corporations, and the separation of corporate ownership and control, he concludes: “the charge of social irresponsibility runs a considerable risk of being irresponsible itself.”