Fritz Machlup, “Corporate Management, National Interest, and Behavioral Theory” (1967)

This file is a single-authored satirical economic essay. Machlup stages a fictional corporate meeting and then comments on it to expose the ambiguity of “social responsibility” and the limits of behavioral theories of the firm. The opening contrasts the older owner-manager world, where profit-seeking seemed compatible with social welfare, with modern managerial capitalism, where executives speak as trustees for many constituencies.

The story is one of divided loyalty and split personality.

The body consists of “minutes” from XYZ Corporation. A chairman asks how to use increased funds while insisting that owners, creditors, employees, suppliers, customers, society, and the nation must all be served. The phrase “national interest” becomes the essay’s comic and analytic lever.

The national interest, indeed, must be served by anything we do.

Each officer then proposes a different use for the same surplus: plant expansion, debt retirement, dividends, advertising, product development, basic research, university support, management bonuses, worker benefits, and price cuts. The joke is that every proposal can be defended as both good business and public service. Even mutually inconsistent choices—more investment and less investment, higher wages and anti-inflationary restraint, larger dividends and avoidance of taxable distributions—are all made to sound civic-minded. Machlup’s satire shows that “national interest” is not a decision rule; it is a rhetorical resource.

The concluding observations make explicit what the fictional minutes demonstrate. Machlup’s target is not the idea that business decisions have social effects, but the claim that managers can be instructed to pursue “responsibility” without a determinate criterion for choosing among rival social goods.

Those who proclaim, as a tenet of normative economics, that businessmen ought to meet their “responsibilities” to society have not been sufficiently explicit on just what this means.

His conceptual move is to separate legal compliance, profit discipline, managerial discretion, and public welfare. If managers are not merely to obey the law, whose view of the public good should they follow—government officials, journalists, shareholders, labor, customers, or their own consciences? The XYZ meeting dramatizes the resulting problem: social responsibility multiplies objectives without supplying a method of ranking them.

Machlup’s preferred constraint is competition. Competitive pressure narrows managerial discretion, forcing firms toward efficiency and product improvement rather than discretionary moral balancing.

Effective competition from existing producers, domestic and foreign, and from firms newly entering the industry relieves managers of all worry about the social-bliss function and forces them to strive continuously to improve their products and the efficiency of production.

The essay then turns from normative economics to positive economics. Machlup asks whether the minutes teach anything about actual corporate behavior. His answer is skeptical: the diversity of plausible proposals makes prediction of a single firm’s decision nearly impossible.

Perhaps they illustrate the enormous difficulties of “behavioral theories”: ten participants in corporate decision making propose ten different courses of action, and there is no warrant for any generalization as to what they are likely to decide after the coffee break.

The relevance of the essay lies in its early critique of corporate social responsibility and managerial-behavioral theorizing. Machlup does not deny that firms may spend on research, wages, education, or price reductions in socially valuable ways. His point is sharper: once profit maximization under competition is replaced by an open-ended mandate to serve society, almost any managerial preference can be redescribed as public duty. The final irony is that the only modest generalization left—affluent firms spend more on “good things”—is so broad that it can be explained by either abstract utility theory or empirical behavioral observation. Machlup’s essay therefore uses comedy to defend conceptual discipline: without clear criteria, “national interest” becomes a cloak for indeterminate corporate choice.