Regional President Speech

VOLUNTARY INFLATION RESTRAINT AND CORPORATE SOCIAL RESPONSIBILITY* By David P. Eastburn, President Federal Reserve Bank of Philadelphia What responsibility does a corporation the question which has been overlooked. have voluntarily to fight inflation? I suppose This is the impact of inflation on activities of there is not a corporate official in the country corporations to improve social conditions. who is not asking this question today. The High inflation rates threaten to reduce these answer will largely determine the success of activities severely. President Carter’s anti-inflation program. To explain why this is so, let me paint with The arguments pro and con have been a rather broad brush a contrast between two made for years. Pro: corporations stand to eras. A decade or so ago, perhaps a little less, gain along with the rest of us if inflation can a debate was raging about corporate social be brought under control. Con: a corporation’s responsibility. Business journals were full of main job is to make profits for its stock­ articles about whether corporations should holders, and competition prevents it from help solve such problems as hard-core un­ waging the inflation fight on its own (Presi­ employment, slum housing, and lack of dent Carter’s analogy of one person’s sitting minority participation in business, or whether, down in the stadium while everyone else is simply, the “business of business is business.” standing). The New York Times Magazine published an I have nothing to add to these arguments, article by the Nobel prize winning economist, but I believe there is an important aspect of Milton Friedman, which argued that corpo­ rate officials who use their corporate power to try to solve social problems are playing ’Adapted from remarks delivered before the Business fast and loose with stockholders’ money and Honor Society Colloquium, La Salle College, Philadel­ phia, Pennsylvania, November 14, 1978. hastening the day of socialism. The Com­ 3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BUSINESS REVIEW JANUARY/FEBRUARY 1979 mittee for Economic Development cast its lusion, and inflation uncertainties make them enlightened eye on the question and con­ more cautious. Furthermore, if the President’s cluded that corporations should actively try program fails, a likely course would be to to improve social conditions because it is in fight inflation by overall monetary and fiscal their long-run self-interest to do so. action alone. And success in bringing infla­ The debate was interesting, especially be­ tion under control along that course Would cause of the environment in which it took require a recession or at least very slow place. The nation had just gone through an growth for a long period. What all this adds exciting, if stormy, period. Civil rights had up to is an unpromising outlook on the taken a tremendous forward stride, a war on wherewithal for corporate social action. poverty had been declared, and the Vietnam The other development is the impact of war had raised sensitivity about moral issues inflation on corporate willingness to engage to new heights. The economy was growing in these activities. Inflation spawns an atti­ so rapidly that the material well-being of tude of inward-looking and selfishness. those in lower income groups was measurably Businessmen accuse labor of pushing Up improved; official definitions of poverty were wages; labor accuses business of raising successively revised upward. prices to make bigger profits; all accuse In short, the debate about corporate social government. There is nothing new here, but responsibility took place in an era of great inflation aggravates it. What is new, and social concern and considerable social im­ even more symptomatic of the mood of the provement. It was a time when people were country, I believe, is the emergence of a looking outward to other people’s problems. variety of proposals to slash taxes. I am At the risk of overdrawing the point, one convinced that many sincere advocates of might say it was an era of growth and these proposals are motivated by a concern generosity. to limit the growth of government or a desire Since then, corporate social responsibility to stimulate economic growth. But I am also has become an accepted fact. It is seldom convinced that at least as many are concerned debated. It has become institutionalized. only about how inflation is picking their Corporations are engaging in a myriad of pockets. activities to improve their communities and Corporations cannot help but be touched by to help the disadvantaged. all this. Inflation forces them to look to their But now we have serious inflation and the immediate self-interest rather than their long- threat of serious inflation into the indefinite run welfare. It could force them to take the future. In contrast to the expansionary, position that their business is only business outward-looking environment of the earlier It could win the ideological war for Professor period, we face the prospect of two develop­ Friedman after all. ments, both of which would be inimical to the So, for those who would like to see society exercise of corporate social action. continue to move ahead in solving its many One is the pressure of inflation on real social problems and who are eager to continue corporate profits. Although it might appear harnessing the power of corporations to that that profits are rising, this appearance is end, there is real reason for fighting inflation I illusory, because profits are overstated as a would hope that corporate executives win result of current accounting practices. Cor­ find this rationale further justification fQr porate officials see through this money il­ entering the lists. 4 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

David P. Eastburn (1978, December 31). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19790101_david_p_eastburn

@misc{wtfs_regional_speeche_19790101_david_p_eastburn,
  author = {David P. Eastburn},
  title = {Regional President Speech},
  year = {1978},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19790101_david_p_eastburn},
  note = {Retrieved via When the Fed Speaks corpus}
}