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38 Am. Bus. L.J. 261

American Business Law Journal
Winter, 2001

Articles

*261 DECONSTRUCTING CORPORATE SOCIAL RESPONSIBILITY: INSIGHTS FROM LEGAL AND ECONOMIC THEORY


Daniel T. Ostas [FNa1]

Copyright (c) 2001 American Business Law Association, Inc.; Daniel T. Ostas

This article explores the concept of corporate social responsibility (CSR) [FN1] with an analytical perspective borrowed from linguistic *262 philosophy. [FN2] Linguistics emphasizes that people think in images articulated by words. [FN3] Words, in turn, guide and restrain both thoughts and the actions that derive from those thoughts. [FN4] Words also carry nuances in meaning, attaching preconceived notions to the language chosen. [FN5] Hence, by analyzing the words used to describe a *263 phenomenon, one gains insights into both the social construction of that phenomenon and alternative implications of it.
Milton Friedman's New York Times prescription for CSR motivates the analysis. [FN6] Friedman wrote that the appropriate social goal for a corporate executive was “to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.” [FN7] To just which ethical customs Friedman was referring has been a matter of speculation. [FN8] Friedman, himself, did not explain. [FN9] He did write, however, that having met the minimal requirements of law and ethical custom, the manager [FN10] should follow the dictates of the market so as to maximize the return on shareholder investment. Seeking any goal other than making money, subject to law and ethical custom, was illegitimate.
This article examines the notions of “law” and “markets” implicit in Friedman's prescription. The central thesis is that a manager's conceptions of both law and markets are socially constructed; hence, advising a manager to follow legal and market dictates provides too little guidance. A manager must first construct his or her view of legal and market issues before he or she can act responsibly. This article *264 provides a means. Drawing insights from legal and economic theory, it offers a view of CSR useful to well-intentioned managers.
The analysis proceeds in two parts followed by a conclusion. The first part deconstructs the formalist conception of law, advancing arguments as to why managerial discretion determines the way that law manifests itself in business settings. The second part deconstructs the concept of a “market” incumbent in economic theory, including partial and general equilibrium analysis. The conclusion collects these legal and economic insights, explaining the practical implications for management. A four-step heuristic is developed to explain what CSR might mean. Throughout the discussion, illustrations drawn from recent appellate court cases and economic case studies provide context.

I. Deconstructing “Law”


CSR advises the manager to follow the dictates of law. Yet, what is meant by “law” is open to debate. This part examines four competing conceptions of law-positive legal formalism, legal realism as embodied in Holmes' “prediction theory,” formal natural law jurisprudence, and legal pragmatism. Each philosophy is defined and its usefulness as a guide to CSR assessed. The part closes with a brief summary.

A. The Limits of Positive Legal Formalism

Legal formalism stands for the proposition that objectively correct answers to legal questions can and should be found through conceptual reasoning techniques. [FN11] The formalist identifies the central tenets that guide a particular body of law, and then deduces from those tenets the outcome of a particular case. [FN12] The positive version of formalism asserts that these tenets are found solely in legal *265 materials-statutes, regulations, precedents, and the like. [FN13] Law is or should be independent of morality. [FN14] Irrelevant also are empirical matters, such as the political leanings of the judge, trends in social policy, the power or wealth of the litigants, or any other referent external to legal texts. Law, properly conceived, is an autonomous set of rules and exceptions to rules.
Some who write on CSR matters may uncritically adopt a formalist perspective, implicitly assuming that “law” embodies a set of singular and well-definedcommands. When a CSR issue arises, the manager is advised to consult in-house counsel, and the legal consequences of alternative actions will be made clear. The manager has no real discretion; he or she must simply follow “the law.”

The problem, of course, is that law is much more than rules and exceptions to rules. Corporate counsel typically offers an opinion or prediction of the most likely outcome of various actions. [FN15] The manager facing a CSR issue is not given a definite yes or no, but a qualified maybe. The manager is told that the legal outcome depends, among other things, on how the court interprets evolving legal trends, resolves tensions and conflicts in legal rules, and/or interprets ambiguous legislative language. In such a world, judicial discretion is manifest, and managerial judgment becomes inevitable.
{ yang belum} *266 Consider first the evolving nature of legal rules illustrated in Pierce v. Ortho Pharmaceuticals Corp. [FN16] Ortho sought regulatory (FDA) approval of a new drug. Pierce, the sole medical doctor on Ortho's research team, refused to endorse the drug, claiming that the drug was unsafe and citing her ethical obligations embodied in her professional code of ethics. [FN17] Could Ortho remove Pierce from the research team so as to suppress her concerns before the FDA? Operating ex ante, the legal answer was unclear. [FN18] In 1980 New Jersey, like most states, embraced both “employment-at-will” and an evolving notion of the public policy exception to that doctrine. [FN19] Ortho removed Pierce and she sued for wrongful discharge.
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A second source of uncertainty derives from the conflicted nature of many legal rules. Consider the tension between the law of consideration and the conflicting doctrine of promissory estoppel. [FN24] In Smyth v. Pillsbury Co., [FN25] the employer repeatedly promised its employees that it would not monitor internal email correspondence, nor use inappropriate email as grounds for termination or reprimand. [FN26] Notwithstanding these promises, Pillsbury intercepted *267 an inappropriate correspondence and used it to fire Smyth. [FN27] The common law says that promises are not enforceable without an exchange of consideration. [FN28] Promissory estoppel looks not to consideration, but to the ethics of promising and the reliance interests of the promisee. [FN29] Pillsbury's corporate counsel, and hence its managers, could only guess which way the tension would be resolved. The court found for Pillsbury. [FN30]
The formalist's vision of law is also limited by the prevalence of imprecise statutory language that can only be given meaning on a case-by-case basis. Examples here are legion. What is a “reasonable accommodation” under the Americans with Disabilities Act? [FN31] What constitutes “fair use” under copyright law? [FN32] What is a “hostile work environment” under Title VII and EEOC regulations? [FN33] In each of these cases, the manager finds a legal rule, but is told that a court's interpretation of that rule depends on many factors.
The above examples illustrate that positive legal formalism provides an impractical guide to CSR. A manager cannot simply follow the rules and exceptions to the rules, because the rules themselves are constantly evolving, often conflicted, and typically imprecise. In such a world, the manager must work with corporate counsel so as to construct the very rules that advocates of CSR saymust be followed. Managerial discretion becomes unavoidable.

*268 B. Legal Realism and Holmes' Prediction Theory

Oliver Wendell Holmes, Jr. offered an alternative positive view of law. [FN34] Championing legal realism, Holmes wrote that law, properly conceived, is simply a prediction of what a court will do, nothing more, nothing less. [FN35] Whereas formalism limited one's inquiry to legal texts and conceptual reasoning, legal realism opened law to a host of factual inquiries, including but not limited to the political predilections of the judge, the financial resources of the litigants, and emerging historical trends fueled by changes in technology and cultural norms. [FN36]
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Perhaps CSR draws not on positive formalism, rejected by both Holmes and the analysis above, but on some variant of Holmes' prediction theory. In other words, perhaps CSR advises the manager to seek out corporate counsel, to get that counsel's best prediction as to how the court will react, and to use that prediction as the rule that should be followed. Rules may evolve, conflict, and be riddled with imprecise language, but surely legal reasoning will reveal a best prediction of what the law requires.
Unfortunately, this “prediction theory” of law is also inadequate to the present task. The difficulty with “prediction” as a guide to CSR, is that it admits too much. One's prediction of a legal outcome depends, at least in part, on the actions of the manager and his or her view of CSR. In other words, law, in its predictive sense, is a function of corporate power and corporate prerogative. [FN37] Hence, any attempt *269 to ground CSR on a prediction of judicial actions becomes circular at best, and possibly nonsensical. [FN38]
The key point for CSR is that managers do not merely take law as a given; they help shape legal rules and legal outcomes. Predict, for example, the likely effect on corporate liability of the following litigation tactics: (1) shifting jurisdictions to corporate-friendly venues; (2) hiring local counsel who knows the judge; (3) seeking juries sympathetic to the corporation's viewpoint; (4) intimidating under-funded plaintiffs in settlement negotiations with the prospects of long and protracted litigation; (5) narrowly reading discovery requests so as to keep sensitive data confidential; and (6) routinely shredding corporate documents that may provide evidence harmful to the corporate interest. Each corporate action reduces the likelihood of corporate liability and hence influences legal outcomes. Again, under a prediction theory of law, we can predict that the law will allow all of these tactics, so each reflects good CSR.
Regulatory law is particularly susceptible to corporate influence. Writing in the nineteenth century, Karl Marx cautioned that the concentration of wealth in corporate hands would subjugate the law to private control. [FN39] Writing in the early 1960s, Chicago-school free market economists reached the same conclusion, developing what has come to be called the “capture theory” of regulation. [FN40]
*270 Recall the FDA process referenced in Ortho Pharmaceutical. [FN41] Ortho claimed that Dr. Pierce's presence on the research team was not necessary to protect the public because the FDA provided an independent check on the drug's safety. [FN42] The dissent disagreed, noting that with Dr. Pierce's removal, the FDA would be left in the dark regarding her concerns. [FN43] Effective regulation, argued the dissent, depends on the input of corporate experts. [FN44] The dissent chastised the majority's “apparent ignorance of the past failures of the official regulation to safeguard against pharmaceutical horrors.” [FN45]
Recognizing a similar reality, the court in Campbell v. Eli Lilly & Co. [FN46] wrote:
The principal responsibility is imposed upon the manufacturer to develop the data upon which the FDA reviews, analyzes, classifies and finally determines the suitability for sale of a particular drug . . . The scheme requires the full cooperation of the manufacturer in reporting all relevant data, particularly that which may identify adverse reactions occasioned by the administration of the drug. Given that the responsibility is placed upon the manufacturer to so report, it follows that the responsibility is ultimately borne by the employees of the manufacturer. [FN47]
Hence, corporate managers shape regulatory law, and tying CSR to “law-as-prediction” appears circular at best.
Lobbying is yet another source of corporate influence on law. Most, if not all, major corporations employ legislative liaisons assigned to monitor legislative activities and to coordinate lobbying efforts to assure that the corporate viewpoint is heard. In addition, virtually every industry has some sort of trade association or manufacturer's association designed to present the common interests *271 of the otherwise competing firms. Managing the law and the legislative process has become a tool of competitive strategy. [FN48]
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Perhaps the most direct corporate influence on legal norms arises in the area of self-regulation. Advertising law provides an illustration. The Federal Trade Commission is officially charged with regulating false advertising, [FN49] yet most advertising disputes are subject to industry self-regulation. [FN50] It is largely left to the industry itself to set its own standards.
Defining CSR as an admonition to follow the prediction theory of law threatens to ignore the impact that corporate management has on the very law it istold to follow. CSR is a function of law, and law is a function of CSR. To avoid the potential for circular reasoning, one needs an external, or at least a more stable, referent than can be provided by legal realism.

C. An External Referent-Natural Law Jurisprudence

Natural law reasoning begins with the premise that law and morality are distinct. [FN51] Law is a command of the sovereign. Morality comes from God, from nature as revealed by pure reason, or from some other timeless and unchanging source. [FN52] When law and morality diverge, one's duty is to follow morality, not law. Corollaries include the duty to bring positive law in line with moral reasoning and the duty of civil disobedience to follow one's conscience regardless of legal consequences. [FN53]
*272 Natural law, like positive legal formalism, promises a means of grounding CSR to a referent immune to corporate power; hence, it eliminates the circularity of Holmes' realism. But unlike positive formalism, natural law looks not to the dictates of legal texts, but to the dictates of morality. Employing natural law jurisprudence, CSR becomes an admonition to look to the moral principles that guide, or should guide, the law and to follow those principles.
Although such a prescription promises a more workable guide to CSR than either of the two competing versions discussed above, natural law is not without problems. First, note that there are several variants of natural law reasoning. [FN54] In assessing the morality of law, does a manager look solely at the procedures used to enact the law, to the substance of the law enacted, or to both? Second, if the manager looks to substance, does he or she look to the consequences generated by the law or the purpose underlying the law? Of course, most laws impact on, or draw upon, a number of principles. [FN55] How is a manager to prioritize these principles? Whose version of morality is he or she to use in a pluralistic society?
Consider the dilemma faced by Johnson Controls. [FN56] Johnson used lead in manufacturing batteries. Prior to 1964 women were not allowed on the manufacturing line. [FN57] Following the passage of civil rights laws, Johnson changed its policy and allowed women workers, but only after advising them of the health risk posed by lead. [FN58] By 1982, scientific research had begun to demonstrate that lead could be damaging to an unborn fetus. [FN59] Looking to morality, management *273 found both a moral charge to end discrimination underlying the civil rights legislation, and a moral commitment to human health and safety underscoring OSHA standards and traditional tort principles. Siding with health, Johnson refused to allow fertile women to work on the line. [FN60] The union sued, citing discrimination. [FN61] The U.S. Supreme Court ruled in favor of the union. [FN62]
The difficulty with natural law is that it presupposes that there is a moral right and wrong that is clearly defined and universally held. [FN63] Law is then deduced from those central principles. Yet, in pluralistic society, people often differ on moral questions. A manager needs a more practical means of directing moral inquiry, one that is open to context and less didactic in tone. [FN64] In this light, the idiosyncratic moral predilections of an individual manager are relevant to his or her conception of law, and hence to CSR, but cannot end his or her inquiry.

D. The Promise of Legal Pragmatism

Legal pragmatism views law as an instrument of social policy. [FN65] Policy goals, or ends, derive from public dialogue. [FN66] Once consensus is identified, laws are proposed as means to achieve those ends. Both means and ends are tentatively held, re-examined and modified *274 through experience. [FN67] If a given rule does not achieve the given ends, or the ends change, then the rule is changed. [FN68] Law takes on an organic quality, ever evolving. The process is complex and conflicted and imprecise rules are to be expected. But where these complexities befuddle a manager attempting to follow the dictates of positive legal formalism, and even condemn the philosophic utility of the approach, the same complexities liberate the creative energies of a manager embracing legal pragmatism. Imperfect laws empower, and indeed require, the manager to first construct and then to follow the social spirit of the law.
Echoing legal realism, pragmatists readily admit that law is a function of corporate power. [FN69] But legal pragmatism, unlike Holmes' prediction theory, proposes a means to channel managerial discretion. [FN70] It asserts that law incorporates democratically determined values. Those values are discovered through creative reflection, empirical inquiry, and open dialogue with affected stakeholders. [FN71] Some values may be procedural, insisting on notice to affected parties and an opportunity to be heard. Other values may be utilitarian, insisting that the consequences to all affected parties be weighed. Others may be Kantian, such as a duty to recognize the sanctity of human life. To a pragmatist, such values are context *275 dependent and subject to re-evaluation, but nonetheless, they provide a value-based, as distinct from power-based, referent to CSR.
The question for pragmatism is whether it is sufficiently precise to provide a practical guide to management faced with CSR issues. At first blush an admonition to seek out and cooperate with the social policies that underscore law appears rather vague. Yet, when compared with the alternative philosophies, pragmatism fares better. The question is not whether legal pragmatism is perfect, but whether it is better suited than the competing philosophies to guide CSR issues. There is reason to believe it is.
Consider, for example, a hypotheticalfirm facing environmental (EPA) regulations. The firm has information not recognized by regulators nor properly reflected in EPA standards. In the expert opinion of the firm, some of the regulations are inane, prohibiting pollutants that have little adverse effect on relevant stakeholders. Other regulations do not go far enough, allowing the firm to expel dangerous levels of toxic materials. According to CSR, what is the manager to do? [FN72]
Legal pragmatism would direct the manager to consider the values that underscore law. The primary value would appear to be the preservation of human health. Hence, like natural law, pragmatism would impose a duty on management to seek ways to close the loophole permitting the dangerous toxin. Legal pragmatism assumes *276 that law is imperfect, but celebrates that imperfection, rather than condemning or exploiting it. Thus, CSR would include a tentatively held duty to work with competitors and with regulators to rewrite the law so that it better met human health concerns. [FN73]
A pragmatically based version of CSR would also permit civil disobedience of the inane law. Recognizing that EPA regulations not only seek to protect human health, but also seek to balance environmental values with economic efficiency, pragmatism would allow the corporation to use its own judgement on how best to balance those secondary values. Since the first set of pollutants are not harmful, pragmatism would allow the corporation to dump the relatively safe pollutants at night and to shred documents to limit the potential of being caught. Pragmatism imposes no duty to follow the letter of the law, absent referents to empirical consequences. [FN74]
Although inspired by natural law, legal pragmatism would differ from traditional natural law in important respects. First, pragmatism reminds the manager that the values that underlie law are a product of consensus, not the dictate of a sole conscience, and thereby exhorts the manager to be skeptical of his or her own system of moral thought. Second, pragmatism, unlike natural law, is anti-formalist. In a pragmatic world, values change, and must be evaluated in an empirical context, rather than in a Platonic world of timeless concepts. Third, recognizing that law is typically the product of compromise, pragmatism promises more flexibility than natural law reasoning, facilitating the balancing of profit with social good.

E. Summary

It is not adequate to simply advise a manager to follow “the law.” Managers need a vision of law that is sufficiently robust to simultaneously recognize the vagaries in legal rules and provide a means of exercising the discretion generated by those vagaries. *277 Neither a formal commitment to the letter of the law, nor to a universal set of moral principles can adequately guide management. Nor will a liberation of unfettered corporate power suffice. Pragmatism promises a middle-ground “between the natural lawyer's view and the legal nihilist's view.” [FN75] It is within this middle ground that responsible management finds it guide. Legal pragmatism embraces managerial discretion while offering a way to channel it.
A remaining question for CSR is whether a pragmatic prescription to seek out and cooperate with government policy can be good for corporate profitability. To answer this query, we need to carefully consider market economics and the pursuit of profit.

II. Deconstructing the “Market”


The above analysis demonstrates that one's view of CSR depends on what one means by the word “law.” The following analysis offers a critique of the word “market.” By analyzing alternative conceptions of a market, one gains insights into a CSR admonition to follow market dictates. The inquiry begins by restating the classic defense of the market mechanism. It then explores the vision of a market incumbent in economic theory-first partial, then general, equilibrium analysis. The part concludes by examining two recent trends in the economic literature. Each provides insights into what it might mean to “socially construct” market activity.

A. The Classic Defense of the Market Mechanism

The notion of a market carries strong rhetorical and emotional appeal in a liberal society. [FN76] Whereas law is often viewed as a constraint on freedom, markets are thought to enhance freedom. [FN77] In his prescription for CSR, Friedman writes: “The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can compel any other, all parties benefit or they need not participate.” [FN78] Hence, *278 engaging in market activities can be defended on libertarian grounds, and any profit that results from a market transaction is presumably grounded in the justice of freedom and individual autonomy. [FN79]
The market mechanism is also defended on utilitarian grounds. [FN80] Guided by a Smithian “invisible hand,” societal reliance on decentralized markets tends to generate more bounty than one organized through a command and control economy. [FN81] Faith in the invisible hand enables a corporate manager to seek private gain, while assuring that manager that private and social goals converge. [FN82] Given the convergence of libertarian and utilitarian appeals, one is hard pressed to disfavor markets. The question at hand, however, is whether the brilliance of this rhetorical appeal conceals more than it illuminates. Does faith in the market provide an adequate guide for managers faced with CSR issues? Do managers discover markets and react to them, or do managers create markets out of the social and cultural norms of a society? And if the latter is true, then how does a manager socially construct a market? How does he or she spot, organize, and consummate a market transaction? For insights, we turn to the vision of markets offered by neoclassical theory, beginning with the theory of the firm.

*279 B. The Neoclassical Theory of the Firm-Seeing the Invisible Hand

Neoclassical economics offers a highly stylized and abstract conception of market activities. [FN83] Within the neoclassical theory of the firm, managers face two markets, one for factors of production, such as labor and capital, and another for the firm's end product. [FN84] The theory assumes that managers seek to maximize profits, and predicts that a firm will produce its product as cheaply as possible and sell for as much as the market will bear. [FN85]
Three relationships, or functions, reside at the core of neoclassical market theory. [FN86] It is from these three functions that predictions of *280 firm behavior are derived. [FN87] The first is the utility functions of consumers-specifying consumer preferences for various products. [FN88] The second is the firm's cost schedule-specifying the price the firm must pay for various levels of inputs. [FN89] The third is the firm's production function-specifying the combination of inputs that will generate a given output. [FN90] Combining the production function with the cost schedule generates the firm's supply curve. [FN91] The firm's demand curve is an aggregation of the utility preferences of consumers subject to their ability to pay. [FN92] The forces of supply and demand dictate profit-maximizing behavior. [FN93]
The critical point for CSR is that within the neoclassical model each of the above three functions is exogenous, that is, each is independent of the actions of management. [FN94] These functions, taken collectively, describe Smith's invisible hand in a language reducible to mathematical terms. Neoclassical theory views the market as an *281 independent force dictating profit-maximizing actions. There is no room for managerial discretion, and without such discretion, issues of CSR appear as a non sequitur. [FN95]
Consider first the exogenous nature of the neoclassical utility function. The model assumes that consumer preferences exist absent any influence of the firm. [FN96] Preferences are data which the firm takes as a given. Within such a market, consumers emerge as sovereigns dictating what is to be produced. Causation flows only one way-the consumer influences firm decisions, but the firm cannot modify consumer tastes. [FN97] In addition, the value of a product is defined by the price the consumer is willing to pay. [FN98] If the consumer is willing to pay for a product, then it has value. A profit-maximizing firm takes this notion of “exchange value” as the sine qua non directing its behavior. [FN99] The profit-maximizing manager has no control over what *282 is produced; he or she simply reacts to an exogenously determined market demand for his or her product.
A set of exogenous utility functions also drives the manager's input decisions. Neoclassical market theory assumes that workers have preferences for work and leisure. [FN100] To entice a laborer to work, the firm must offer an acceptable wage given the laborer's tastes and his or her options within the labor market. The worker's other employment options are taken as a given and are not within the manager's power to influence. [FN101] The laborer, like the consumer, is sovereign. The worker's tastes and work options dictate the terms of employment, including both pecuniary wage demands and demands for safety, privacy, or other CSR issues in the workplace. The profit-maximizing firm takes these wage demands as a given and reacts to them.
The final function-the production function-is similarly outside the control of management. A production function captures technological realities. [FN102] It specifies the combination of inputs that will generate a given output. [FN103] Technological possibilities are driven by scientific fact that in a static equilibrium model are taken as a given. [FN104] Combining exogenous production possibilities with exogenous wage demands determines the firm's supply curve. The supply curve specifies the minimum price required to cover the costs of producing a given level of output.
*283 Taken collectively these three functions define a market as an external force over which a profit-maximizing manager has no control. Both the forces of demand and the forces of supply are outside of managerial discretion. A profit-maximizing manager takes these forces as a given, and reacts accordingly.
The question is whether this vision of exogenous markets is of any practical use to a manager facing a CSR issue. The answer is probably best structured as a “qualified yes.” If fully specified the model could, at least in theory, remove managerial discretion while simultaneously addressing CSR concerns. The qualification comes from the inability to fully specify the model, or particularly, from a failure to recognize this inability and to account for it.
Consider, for example, the CSR issue of privacy in the workplace. Suppose a manager wanted to set the firm's privacy policy so as to maximize profit. To find the “best answer” using the neoclassical theory of the firm the manager would need a lot of data. First, the utility preferences of workers would have to be sufficiently nuanced to reflect not just a wage demand, but a disaggregation of that wage into its constituent parts, including the value the worker placed on various manifestations of privacy. To fully specify this function the manager would need to know the long run shifts in worker preferences if a new policy were enacted. [FN105] Similarly, the firm's production function would specify the effect on productivity, both in the short and long run of implementing various privacy policies. [FN106] Presumably consumer preferences would be independent of labor issues. But it is possible that consumers would prefer to purchase products from firms with a progressive view of worker privacy rights. [FN107] A fully specified model would capture these and other *284 details. Hence, in theory, the neoclassical model could address CSR concerns.
The problem, of course, is that the utility and production functions of neoclassical theory are never fully specified. Managers do not know exactly how much utility a worker receives from any given privacy policy, [FN108] nor do they know the exact effect such policies will have on productivity. The manager must make a prediction, or best guess, on many fronts. These guesses involve discretion, which in turn, motivates both a social construction of the market and gives room for CSR. In this light, the neoclassical model may provide a heuristic for organizing thought, but ultimately the manager creates markets through his or her personal construction of the data necessary to complete the neoclassical vision. [FN109]
The theory of the firm also poses a danger. The danger derives from the rhetorical structure of the model. Note that the model asserts a passive and reactive role of management. [FN110] This rhetorical *285 device threatens to cut off managerial thought and imagination. When pressed on a social issue, such as employing the working-poor in Indonesia, neoclassical rhetoric encourages the manager to take the going wage and working conditions in the poor nation as an exogenous wage demand generated by the “market.” If the manager is to maximize profit, the manager must take the wage demand as a given and produce its output at the lowest possible cost. Defining value in terms of exchange, neoclassicism posits laborers as sovereigns, free to specify the wage required to hire them. Hence, the neoclassical market, much like the formalist vision of law previously discussed, [FN111] threatens to deflect attention from the manager's role in shaping market transactions. [FN112]
In sum, the language of exogenous markets leaves little room for CSR. Yet, upon closer inspection, one discovers that the “data” necessary to use the neoclassical model are a function of managerial imagination and experimentation. Hence, managerial discretion plays a role after all. To further appreciate the rhetorical appeal of neoclassicism, we next turn to the theory of general equilibrium, a theory that describes an economy of pure competition. This model also helps illuminate the nature and sources of profit in a market economy.

C. General Equilibrium Theory and the Social Construction of Profit

The neoclassical theory of the firm focuses on two markets-the input and output markets for a single product offered by a particular *286 firm. All other markets are held constant. General equilibrium theory, by contrast, describes a world in which all markets for all inputs and all products are considered simultaneously. [FN113] The model describes a world in which free markets reign supreme. Hence, it provides a benchmark of what a world of pure markets might look like.
Modeling all markets simultaneously is a Herculean task. To make this possible, general equilibrium analysis employs a set of highly restrictive assumptions. [FN114] These assumptions include: (1) perfect and complete information for all firms, factor holders, and consumers, [FN115] (2) fully specified production functions capturing the productivity effects of all combinations of all factors, [FN116] (3) a fully specified property system eliminating the potential for externalities and public goods, [FN117] (4) a fully specified set of utility preferences for both factor holders and consumers, [FN118] (5) technological assumptions that enable *287 production at the minimum efficient scale for all products, [FN119] and (6) an equilibrium or static state of the world. [FN120] In partial equilibrium analysis, such as the theory of the firm, the economist may relax one or more of these assumptions. This is not possible for general equilibrium theory. In fact, if any of the assumptions is relaxed, then the model is no longer tractable.
When these and other assumptions hold, however, general equilibrium theory produces an imaginary world with a remarkable set of characteristics. First, within this fictional world, all available technologies are fully employed to produce each good at its lowest possible cost-the economy is productively efficient. [FN121] Second, no other combination of products can satisfy more consumer wants given societal resources-the economy is allocatively efficient. [FN122] Third, general equilibrium is also a world in which there are no economic profits-or economic rents. Economists distinguish between a normal profit and an economic profit. [FN123] The normal profit is that *288 level that is necessary to keep a firm in business given its other opportunities in the marketplace. An economic profit is a profit that exceeds the normal. The assumptions of general equilibrium eliminate such rents. [FN124] Finally, each factor holder, such as a laborer, is rewarded strictly in accord with his or her marginal productivity, eliminating the potential for wage discrimination or similar cries of prejudice in the workplace. Hence, the model addresses issues of distributional fairness as well. [FN125]
Graduate students of economics have been exploring the niceties of general equilibrium for decades. The model formally describesa world of liberty and bounty. Hence it buttresses the rhetorical appeals of the classical call for markets. When coupled with the partial equilibrium call for a passive and reactive management, it helps to suppress any need for managerial discretion on the basis of CSR. [FN126]
General equilibrium theory also helps clarify the concept of “profit.” Recall that Friedman calls upon managers to seek CSR by *289 maximizing profit. Note that the model of general equilibrium eliminates the potential for economic rents-every firm earns only a normal return. To account for profit as a motivating force, one needs to make the static model of general equilibrium dynamic. For example, suppose a firm discovers a new technology reducing production costs. In a dynamic world of trade secrets and patents, the firm can hoard this knowledge and gain a competitive advantage over its competitors-earning an economic profit. In the benchmark world of general equilibrium there are no technological secrets; hence, no economic profits.
Economic profits derive from market power, which in turn is a function of market structure. In general equilibrium, each market is competitive, denying market power to any single firm. [FN127] In a dynamic world, by contrast, barriers to entry can and do produce market power-defined as the ability to restrict output so as to generate monopoly returns. [FN128] Some barriers derive from technological imperatives, dictating that there must be few producers for a given product to achieve a minimum efficient scale of production. [FN129] Examples here include “natural monopolies” such as the production and delivery of electricity or natural gas. Technology can also dictate the formation of oligopolies, the dominant market type in the U.S. economy, with the potential for collusion, either overt or tacit. [FN130] Market power, and resulting economic profits, can also be achieved through product differentiation resulting in “monopolistic-competition.” [FN131] Here it is not technology that generates power, but effective marketing and “framing” of the firm's product. [FN132]
*290 The question for CSR is whether the admonition to make profit includes the hoarding of new technologies and other information asymmetries and the strategic creation and/or exploitation of market power. For Milton Friedman, the answer is probably a qualified yes. The profit motive drives the business enterprise qualified by an admonition to follow law and ethical custom. [FN133] Hence, for Friedman, legal and ethical norms distinguish between responsible and irresponsible notions of profit seeking.
Legal and ethical norms also define the “market.” To see this, ask whether a market exists absent legal and ethical norms. [FN134] This question threatens to embroil the analysis in metaphysics. What does it mean for a market to exist? [FN135] For practical purposes, however, the answer to this metaphysical inquiry does not matter. Friedman's admonition to make profit subject to legal and ethical norms has the same practical effects as an admonition to make profit through market activities as defined by these norms. The difference resides in the rhetorical structure of the advice. The classical prescription poses law and ethics as constraints on profit. The alternative structures law and ethics as sinew that define market activities, and thus enable responsible profit making. D. Relaxing Neoclassical Assumptions-The Social Construction of Markets
Combining the libertarian and utilitarian appeals of classical economics with the passive role of management envisioned by partial equilibrium and the aesthetic beauty of general equilibrium creates a uniquely powerful, perhaps even seductive, view of the market. [FN136] *291 Armed with this view, management is encouraged to defer issues of social responsibility to others-most notably to a government which sets the legal foundations for market activities. [FN137]
The question for CSR is whether the assumptions employed by neoclassical economists in describing markets obscure more than they illuminate. [FN138] Addressing the role of assumptions in economic analysis, Milton Friedman writes:
[T]he relevant question to ask about the “assumptions” of a theory is not whether they are descriptively “realistic,” for they never are, but whether they are sufficiently good approximations for the purposes in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions. [FN139]
Hence, for Friedman the formal assumptions of economics are to be judged by their pragmatic usefulness and their ability to direct, frame, and predict empirical observations. [FN140]
Many economists have begun to challenge neoclassical assumptions on these very grounds. [FN141] Each of these challenges generates an *292 alternative conception of a market and suggests a more dynamic role for CSR. Of particular importance for present purposes are two recent trends in the economic literature-the assault on the exogenous nature of revealed preferences and the assault on the rationality assumption of human behavior.

1. Endogenous Preferences

The first trend involves a recent assault on the notion of exogenous preferences. [FN142] As discussed above, neoclassical economics assumes that preferences are exogenous; that is, preferences are temporally primary and subjectively derived from the nature of the individual. [FN143] These preferences determine which market transactions will be consummated. An alternative assumption is that preferences are endogenous to the market settings in which people interact. [FN144] In this view, markets and individuals are co-dependent, evolving together. Neither is temporally primary nor any more “intrinsic” than the other. Preferences shape markets, and markets shape preferences-causation flows both ways.
Opening the “black box” of exogenous preferences promises to transform the concept of CSR in a fundamental way. Managers are no longer simply responding to consumer and worker preferences, but helping to shape those preferences with corporate policy both internal to the firm and with regard to the firm's external market. The notions of consumer and laborer sovereignty erode.
Recent empirical work in behavioral economics points to the endogenous nature of preferences. [FN145] To illustrate, consider the *293 preferences-shaping role documented by the endowment effect. [FN146] Considerable empirical evidence now demonstrates that the price people are willing to pay to acquire a right is less than the price needed to relinquish that same right once it is attained. [FN147] For example, ask a worker how much he or she is willing to pay (forgo in wages) for additional due process rights in the workplace. The price will be less than the price needed to give up those due process rights once attained. [FN148]
The practical implications of endogenous preferences can be seen in a recent scholarly debate surrounding racial discrimination in the workplace. [FN149] A central question was whether a corporate policy forbidding racial discrimination in hiring would lead to greater profits. [FN150] If it did, then there would be no need for a law addressing the issue-the market should eradicate racial discrimination. [FN151] The fact that markets seemed so slow to address discrimination suggested *294 that managers perceived the costs of a heterogeneous workforce to exceed the costs of a homogenous one. For example, perhaps existing workers were prejudiced against racial minorities and would demand a higher wage before accepting co-workers of a different race. [FN152] In that case, removing discrimination would raise production costs. A profit-maximizing manager who accepted such a preference as a given, would be unable to address discrimination, unless forced to do so by law. On the other hand, if that manager perceived preferences as malleable, then he or she reasonably could argue that once an anti-discrimination policy were enacted, workers would learn that diversity was nothing to fear and their preferences (prejudices) would shift. [FN153] Armed with this argument the manager could propose an enlightened CSR policy that would enhance, rather than detract from, firm profitability.
The power of a manager to affect preferences is also seen in the context of “framing.” [FN154] Neoclassical theory assumes that preferences are subject to a stable rank ordering. [FN155] Yet this is often not empirically verifiable. For example, a consumer presented with two options-a small or a large box of popcorn-may prefer the small. But when presented witha choice between a small, large, or extra large box, choose the large. This empirical observation is inconsistent with an assumption of stable preferences. The availability of a non-selected option (extra large) should not affect the choice between small and large, but it does. [FN156] Marketing departments know that *295 they, at least in part, construct rather than react to markets demands. [FN157]
In constructing market transactions, the manager must be alert to second order or meta-preferences within consumer and worker utility orderings. [FN158] Many of these second order preferences are hard to quantify. In the above popcorn example, the consumer may have a second-order preference for “moderation.” [FN159] The racial discrimination example may involve preferences for “status.” [FN160] Other meta-preferences include a desire for fairness, human dignity, and liberty. [FN161] Such preferences can confound orthodox calculations, with the incumbent bias towards the dollar as a metric. [FN162]
But the presence of the meta-preferences, endowment effects, and issues of framing can also liberate the creative ingenuity of well-intentioned managers. These empirical realities suggest that managers shape preferences rather than simply react to them.

2. Economic Rationality

Opening the black box of exogenous preferences invites a richer view of human psychology than that offered by the hyper-rationality *296 assumption of neoclassicism. [FN163] Not surprisingly, economists have begun to modify their models with alternative behavioral assumptions. [FN164] One trend has been the reemergence of institutional economics and the importance of habit in explaining human behavior. [FN165]
Institutional economists view people as creatures of habit. [FN166] People do what they do today in large part because they did the same thing yesterday. Yesterday's decision may very well have been based on a rational evaluation of yesterday's problem. But as things evolve, yesterday's solution may be applied to today's problem in an inappropriate way. People do not re-evaluate solutions on a daily basis-they are creatures of habit.
The notion of habit applies to all market actors, including management itself. Responsible managers revisit assumptions eradicating those that no longer hold. For example, a U.S. firm may market its product domestically based on certain assumptions of consumer demand. When it sells that product overseas, the cultural norms that form the basis of U.S. marketing strategies may need to be re-evaluated. Similarly, a change in technology or a shift in consumer or worker preferences calls for re-evaluation of corporate policy.
Studying the cultural foundation of business activities in evolutionary terms is difficult to track. Yet, a continual process of evaluation and re-evaluation of habitual processes is completely consistent with a goal of profit maximization. It also gives vent to a creative imagination committed to social good. In this way, a *297 relaxation of equilibrium assumptions liberates a more robust notion of CSR.

III. Conclusion
A deconstruction of the twin concepts of “law” and “markets” generates a complex world-view. This conclusion seeks to organize these complexities in a tractable fashion. It briefly highlights four aspects of CSR, offering a four-step heuristic for well-intentioned management. The central question is what might a reconstructed notion of CSR mean.

Beyond Oxymoron

At a minimum, CSR seems to be a clarion call to take business ethics seriously, [FN167] and to avoid the shortcuts in thought offered by legal formalism and neoclassical economic thought. Managers facing CSR issues find two easy outs. First, they can deny discretion, claiming that the law both defines and constrains CSR forcing them to behave the way that they do. Second, managers can deny discretion, citing the dictates of competitive market pressures. A deconstruction of the twin concepts of law and markets denies the manager these shortcuts in thought. Both law and markets are influenced by managerial choice. Neither provides a totally external referent on which to base a corporate decision. Hence, the first step toward a reconstructed notion of CSR is to recognize choices incumbent in both legal and market decisions, and to accept responsibility for those choices. This calls upon the manager to use his or her creative moral imagination.

Beyond Orthodox Economics

The analysis also suggests what a socially constructed market may look like. In particular, it demonstrates that an embrace of a holistic approach to markets can be good for corporate profitability. One approach is to employ a traditional micro-economic framework, but to recognize that consumer and worker preferences are never fully *298 specified, nor are production possibilities fully known. [FN168] The manager must be creative in assessing a set of unknowables, including the productivity effects and long-run costs and benefits of alternative CSR policies. [FN169] In making these assessments, the manager must avoid unwarranted reliance on habits of thought and past practices, and seek creative ways to combine good ethics and good business. [FN170] He or she does this, in part, by inquiring into the values and preferences of consumers and workers, imagining and testing alternative ways to discover, nurture, and satisfy those values.

Beyond Law

A more ambitious notion of CSR emphasizes the role played by firms in shaping legal rules and the outcomes of legal disputes. As discussed in the first part of this article, an embrace of the ambiguities inherent in law can be viewed as a liberating force. [FN171] Firms shape law through lobbying practices, [FN172] by providing information to regulators, [FN173] and through self-regulation. [FN174] They also face legal choices in determining when and how to fight legal battles. [FN175] In this light, a call for CSR asks the firm to cooperate with government officials and to improve the law, focussing on long-term profitability achieved through improvement in the law, rather than on short-term gains promised by circumventing it.

Beyond Profit

The most ambitious call for CSR demands that a firm sacrifice profit to achieve social ends. [FN176] Such a view is not advanced in this *299 article. On the contrary, the above analysis suggests that CSR and the profit motive are compatible. The analysis demonstrates that when legal and market issues are properly framed, there is much social gain to be achieved without sacrificingprofit. The key is to throw off ill-fitting habits of thought and to look closely at one's own values and those of one's trading partners so as to propose new and creative market exchanges. By better meeting consumer and worker values, one enhances, rather than detracts from corporate profitability.
[FNa1]. Professor of Legal Studies and James G. Harlow, Jr., Chair in Business Ethics and Community Service, Michael F. Price College of Business, University of Oklahoma. B.S. (Purdue University); M.B.A. (Indiana University); J.D. (Indiana University School of Law); Ph.D. (Business Economics & Public Policy, Indiana University). The author gratefully acknowledges the thoughtful comments of Professors M. Neil Browne, James R. Ostas, and Nim M. Razook, Jr., and the research assistance of Christopher K. Shields. Any errors remain my own.

[FN1]. Scholarly debate over CSR dates back to the 1960s. See Edward M. Epstein, Business Ethics and Corporate Social Policy: Reflections on an Intellectual Journey, 1964-1996, and Beyond, 37 Bus. & Soc'y 7 (1998); S. Prakash Sethi & Paul Steidlmeir, The Evolution of Business' Role in Society, Bus. & Soc'y Rev., Summer 1995, at 9, 10 (noting that interest in CSR predates the 1960s, but gained momentum in that decade). Although there is no single definition of CSR, the general proposition is that (1) society is replete with social ills such as poverty, racism, and environmental degradation, (2) corporations have the power to address these ills, and (3) corporations should do so. See Christopher D. Stone, Where the Law Ends: The Social Control of Corporate Behavior 111-18 (1975). Recent legal scholarship has addressed CSR in the context of corporate constituency statutes, asking whether a manager violates legal and ethical duties to shareholders when using corporate assets for the public good. See, e.g., Timothy L. Fort, Corporate Constituency Statutes: A Dialectical Interpretation, 15 J.L. & Com. 257 (1995); Timothy L. Fort, The Corporation as Mediating Institution: An Efficacious Synthesis of Stakeholder Theory and Corporate Constituency Statutes, 73 Notre Dame L. Rev. 173 (1997); Al Myers, Whom May the Corporation Serve? - An Argument for the Constitutionality of Non-Stockholder Constituency Statutes, 39 N.Y.L. Sch. L. Rev. 449 (1994). See generally Symposium, Corporate Social Responsibility: Paradigm or Paradox?, 84 Cornell L. Rev. 1195 (1999). Management scholars tend to focus on the mechanisms for institutionalizing social concerns within the corporate hierarchy. See, e.g., Peter F. Drucker, Converting Social Problems into Business Opportunities: The New Meaning of Corporate Social Responsibility, Cal. Mgmt. Rev. 54 (1984); Abagail McWilliams & Donald Seigel, Corporate Social Responsibility and Social Performance: Correlation and Misspecification, 21 Strategic Mgmt. J. 603 (2000); Gary R. Weaver et al., Integrated and Decoupled Corporate Social Performance, 42 Acad. Mgmt. J. 539 (1999). See generally Symposium, Dispatches from the Front Lines of Corporate Social Responsibility, Bus. & Soc'y Rev., Spring 1992, at 22; Symposium, Is the Good Corporation Dead?, Bus. & Soc'y Rev., Fall 1993, at 9. For further citation to CSR literature, see Jeffrey Nesteruk, Corporations, Shareholders, and Moral Choice: A New Perspective on Corporate Social Responsibility, 58 U. Cin. L. Rev. 451, 451 n.2 (1989).

[FN2]. The terms “linguistic philosophy,” “linguistic analysis,” and “analytic philosophy” can be used interchangeably. See Thomas Baldwin, Analytic Philosophy, in 1 Rutledge Encyclopedia of Philosophy 223, 225-26 (Edward Craig ed., 1998). The present analysis borrows from what is commonly called “ordinary language philosophy.” See generally id. Ordinary language philosophy originates in the later works of Ludwig Wittgenstein. See Norman Malcolm, Wittgenstein, in 8 Encyclopedia of Philosophy 327, 335-37 (Paul Edwards ed., 1967). See generally Ludwig Wittgenstein, Philosophical Investigations (G.E.M. Anscombe trans., 1953). Wittgenstein argued that the meaning of a word is determined by its use. See Malcolm, supra at 337. The analytic philosopher explores the ways that words are used, finding that many disputes originate in alternative uses of some of the key words involved. Id. The present analysis is offered in this spirit. It analyzes the language used to describe CSR in hopes of better understanding alternative constructions of the concept.

[FN3]. See generally Dictionary of Philosophy 164 (Dagobert D. Runes ed., 1960) (distinguishing various branches of linguistic philosophy and linking each to a central proposition that language shapes thought); Henry M. Hoenigswald, Linguistics, in 3 Dictionary of the History of Ideas 61-73 (Philip P. Wiener ed., 1973) (tracing the history of linguistic analysis).

[FN4]. For an excellent discussion of the power of language to channel and restrain thought see George Myerson, Rhetoric, Reason, and Society: Rationality as Dialogue (1994).

[FN5]. See generally M. Neil Browne & Nancy K. Kubasek, A Communitarian Green Space between Market and Political Rhetoric about Environmental Law, 37 Am. Bus. L.J. 127 (1999) (deconstructing the language employed in environmental debates, both by environmentalists and by free market advocates, and seeking a common ground in a unifying language of “communitarianism”).

[FN6]. Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, N.Y. Times Mag., Sept. 13, 1970, at 32. Many contemporary business ethics textbooks continue to reprint Friedman's article. See, e.g., David M. Adams & Edward W. Maine, Business Ethics for the 21st Century 41-45 (1998); Tom L. Beauchamp & Norman E. Bowie, Ethical Theory and Business 51-55 (6th ed. 2001).

[FN7]. Friedman, supra note 6, at 33.

[FN8]. Discussions of CSR typically reference Friedman's seminal work, finding it provocative, yet incomplete. See, e.g., Robert C. Solomon, A Better Way to Think About Business: How Personal Integrity Leads to Corporate Success 30-31, 34 (1999); Stone, supra note 1, at 74-77.

[FN9]. Friedman has discussed CSR elsewhere, see Milton Friedman, Capitalism and Freedom 133 (1962); Milton Friedman, Playboy Interview, Playboy, Feb. 1973, at 59, but has not amplified or explained his notion of “ethical customs.”

[FN10]. Discussions of CSR typically focus on top level management, assuming, either implicitly or explicitly, that the role of a middle level manager is simply to do what he or she is told to do by superiors. Freidman uses the word “executive,” rather than “manager.” See Friedman, supra note 6. The present discussion of CSR applies to all managerial levels, though the constraints faced and powers enjoyed vary widely with one's status within the corporate hierarchy.

[FN11]. See Ernest J. Weinrib, Legal Formalism: On the Immanent Rationality of Law, 97 Yale L.J. 949, 951-57 (1988) (defining formalism).

[FN12]. Richard Posner observes that formalists seek answers to legal questions from “a handful of permanent, unchanging, indispensable principles of law imperfectly embodied in the many thousands of published opinions.” Richard A. Posner, The Problems of Jurisprudence 14-15 (1990). He continues: “Once these principles [are] brought to light the correct outcome of a case could be deduced.” Id. at 15.

[FN13]. Positive legal formalism took shape in the United States during the late-nineteenth century, most notably in the hands of Christopher Langdell. See Daniel T. Ostas, Postmodern Economic Analysis of Law, 36 Am. Bus. L.J. 193, 198-99 (1998). Langdell's version of legal formalism has three defining characteristics: (1) law is autonomous, that is, not dependent on moral or social inquiries; (2) reasoning is conceptual, rather than empirical; and (3) objectively correct legal answers exist. See id. It is this strand of positive legal formalism that is critiqued in this section.

[FN14]. Natural law reasoning also employs the conceptual reasoning techniques of legal formalism. See generally Posner, supra note 12, at 10-11 (1990) (using the term legal formalism to refer to reasoning techniques which may or may not exclude morality). But natural law locates the central tenets of law in morality, rather than legal texts. See infra notes 51-53 and accompanying text. The Langdellian version of legal formalism employed herein is distinctively positivistic. See generally Michael Corrado, The Place of Formalism in Legal Theory, 70 N.C. L. Rev. 1545, 1545 (1992) (equating formalism with the notion that legal inquiry is immune from moral inquiry or other external referent).

[FN15]. The outcome of many legal disputes is predictable. This is particularly true when the law is stable and the facts of the case are not in dispute. See Posner, supra note12, at 30-31 (resisting the notion that law is radically indeterminate). The assertion here, however, is that most interesting cases involving CSR issues reside in less stable arenas. See id. (admitting that a form of probabilistic prediction is the best that can be hoped for in many cases).

[FN16]. 417 A.2d 505 (N.J. 1980).

[FN17]. See id. at 506-07.

[FN18]. See Deborah A. Ballam, Employment-At-Will: The Impending Death of a Doctrine, 37 Am. Bus. L.J. 653, 661-65 (2000) (discussing the evolving public policy exception to employment-at-will circa 1980).

[FN19]. See id.

[FN20]. See Pierce v. Ortho Pharm. Corp., 417 A.2d 505, 508 (N.J. 1980).

[FN21]. See id. at 514.

[FN22]. See id. (Pashman, J., dissenting) (rejecting a holding that would force a decision between employment, on the one hand, and statutory policies and national and international codes of professional conduct, on the other).

[FN23]. See generally Ballam, supra note 18, at 682-87 (assessing the current dynamics associated with employment-at-will).

[FN24]. See generally Grant Gilmore, The Death of Contract 61 (1974) (“[T] hese two contradictory propositions cannot live comfortably together: in the end one must swallow up the other.”).

[FN25]. 914 F. Supp. 97 (D. Pa. 1996).

[FN26]. See id at 98.

[FN27]. See id.

[FN28]. See Gilmore, supra note 24, at 18-22.

[FN29]. See id. at 70-73.

[FN30]. Smyth, 914 F. Supp. at 101 (summarizing the reasons for granting Pillsbury's motion to dismiss).

[FN31]. 42 U.S.C.A. § 1211(9) (West Supp. 1995). See generally Alan D. Schuchman, Note, The Holy and the Handicapped: An Examination of the Different Applications of the Reasonable-Accommodation Clauses in Title VII and the ADA, 73 Ind. L.J. 745 (1998) (exploring alternative interpretations of “reasonable accommodation”).

[FN32]. 17 U.S.C.A. § 107 (West Supp. 1996). See generally Michael G. Frey, Note, Is It Fair to Confuse? An Examination of Trademark Protection, the Fair Use Defense, and the First Amendment, 65 U. Cin. L. Rev. 1255 (1997) (assessing alternative views of “fair use”).

[FN33]. 48 U.S.C.A. § 2000e (West Supp. 1994); 29 C.F.R. § 1604.11 (1999). See generally James C. Chow, Sticks, Stones, and Simple Testing: The Jurisprudence of Non-Cognizable Harassing Conduct in the Context of Title VII Hostile Work Environment Claims, 33 Loy. L.A. L. Rev. 133 (1999) (examining ambiguities in interpreting the term “hostile work environment”).

[FN34]. The literature addressing the thoughts of Holmes is immense. For useful discussions of Holmes' views on positivism see Frederick Rogers Kellogg, The Formative Essays of Justice Holmes: The Making of an American Legal Philosophy, 58-62, 72-74 (1993); G. Edward White, Justice Oliver Wendell Holmes: The Law and the Inner Self 221 (1993).

[FN35]. See Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457, 461 (1897) (“The prophecies of what the courts will do in fact, and nothing more pretentious, are what I mean by the law.”).

[FN36]. See generally Neil Duxbury, Patterns of American Jurisprudence 9-64 (1995) (discussing Holmes' role in dismantling formalism and championing realism).

[FN37]. See Oliver Wendell Holmes, Jr., The Gas-Stokers' Strike, in The Essential Holmes: Selections from Letters, Speeches, Judicial Opinions, and Other Writings of Oliver Wendell Holmes, Jr. 120-23 (Richard A. Posner ed., 1992). “The more powerful interests must be more or less reflected in the legislation, which, like every other device of man or beast, must tend in the long run to aid the survival of the fittest.” Id. at 122.

[FN38]. The tobacco industry provides an apt illustration. For decades managers at tobacco companies shredded documents, concealed damaging medical reports, and engaged in elaborate public relations programs to successfully reduce the potential for legal liability. See Jon D. Hanson & Douglas A. Kaysar, Taking Behavioralism Seriously: Some Evidence of Market Manipulation, 112 Harv. L. Rev. 1420 (1999) (chronicling decades of deception). Yet, under a “prediction” notion of law, one cannot condemn such activities as poor CSR. Given the successful tactics of tobacco managers, the law has been very slow to hold tobacco companies liable for addiction and premature deaths, and tobacco shareholders have reaped decades of profits. If law is a mere “prediction” of judicial actions, and CSR an admonition to make money subject to that prediction, then deceiving, addicting, and killing people becomes good CSR. One cannot condemn the tobacco industry for poor CSR, if one's notion of CSR rests solely on a prediction of legal liability.

[FN39]. See generally Tom Gerety, Why Good Lawyers Make Bad Mad Marxists, in Marxism 196, 196-224 (J. Roland Pennock & John W. Chapman eds., 1983); Colin Summer, The Ideological Nature of Law, in Marxism and Law 225, 225-61 (Piers Beirne & Richard Quinney eds., 1982).

[FN40]. See generally Stephen Breyer, Regulation and Its Reform 9-10 (1982) (contrasting the “capture theory” with the “public interest theory” of regulation); Richard A. Posner, Theories of Economic Regulation, 5 Bell J. Econ. & Mgmt. Sci. 355 (discussing the genesis of the capture theory).

[FN41]. Supra notes 16-17, 20-23 and accompanying text.

[FN42]. See Pierce v. Ortho Pharm. Corp., 417 A.2d 505, 513-14 (1980) (holding that any potential danger to the public was “not imminent” because the FDA provided an independent check on drug safety).

[FN43]. Id. at 519 (Pashman, J., dissenting).

[FN44]. See id.

[FN45]. See id.

[FN46]. 413 N.E.2d 1054 (1980).

[FN47]. Id. at 1056.

[FN48]. See generally Sharon Oster, Modern Competitive Analysis 320-23 (2d ed. 1994); Brian Shaffer & Amy Hillman, The Development of Business-Government Strategies by Diversified Firms, 21 Strategic Mgmt. J. 175, 175 (2000).

[FN49]. See 15 U.S.C.A. §§ 52-55 (West Supp. 1997).

[FN50]. See Terry Halbert & Elaine Ingulli, Law & Ethics in the Business Environment 334-35 (3d ed. 2000).

[FN51]. For a useful introduction to natural law reasoning see Jeffrie G. Murphy & Jules C. Coleman, The Philosophy of Law: An Introduction to Jurisprudence 13-22 (1984).

[FN52]. See generally Lloyd L. Weinreb, Natural Law and Justice 56-60 (1987) (discussing St. Thomas Aquinas' four types of law); Lloyd L. Weinreb, The Natural Law Tradition: Comments on Finnis, 36 J. Legal Ed. 501 (1986) (discussing the work of John Finnis, a leading contemporary proponent of natural law reasoning).

[FN53]. On the notion of civil disobedience see Saint Thomas Aquinas, Summa Theologica Qu. 90, Art. 4.3 (“[L]aws may be unjust through being opposed to the Divine good: such are the laws of tyrants inducing idolatry, or to anything else contrary to Divine law: and laws of this kind must nowise be observed.”); Martin Luther King, Jr., Letter from a Birmingham Jail (1968), in Law and Morality: Readings in Legal Philosophy 453, 459 (David Dyzenhaus & Arthur Ripstein eds., 1996) (“I submit that an individual who breaks a law that conscience tells him is unjust and willingly accepts the penalty . . . is in reality expressing the very highest respect for the law.”); R.A. Wassertrom, The Obligation to Obey Law, in Essays in Legal Philosophy 279 (R. Summers ed., 1968).

[FN54]. See Manual Valasquez & F. Neil Brady, Natural Law and Business Ethics, 7 Bus. Ethics Q. 83 (1997) (detailing four natural law traditions: traditionalist, proportionist, right reason, and historicist). See generally Timothy L. Fort, Corporate Makahiki: The Governing Telos of Peace, 38 Am. Bus. L.J. 301 (2001) (distinguishing various approaches to natural law).

[FN55]. See generally Michel Rosenfeld, Pragmatism, Pluralism and Legal Interpretation: Posner's and Rorty's Justice Without Metaphysics Meets Hate Speech, 18 Cardozo L. Rev. 97 (1996) (discussing competing moral norms associated with regulating speech).

[FN56]. See Int'l Union v. Johnson Controls, Inc., 499 U.S. 187 (1991).

[FN57]. See id. at 190.

[FN58]. See id.

[FN59]. See id.

[FN60]. See id.

[FN61]. See id.

[FN62]. See id. Justice Brennan, delivering the opinion, was joined by Justices Marshall, Stevens, O'Connor, and Souter. Justice White concurred in part and concurred in the judgment, joined by Justices Rehnquist and Kennedy. Justice Scalia concurred in the judgment, filing a separate opinion.

[FN63]. See Steven R. Salbu, Law and Conformity, Ethics and Conflict: The Trouble with Law-Based Conceptions of Ethics, 68 Ind. L.J. 101, 110 (1992) (noting an “inability of natural law to convince either that there is one truth or that we can know what that truth is”).

[FN64]. See id. at 108 (observing that natural law offers coercive punishments for those who deviate from its prescriptions).

[FN65]. See generally Symposium, The Revival of Pragmatism, 18 Cardozo L. Rev. 1 (1996) (providing several complementary but distinct views of pragmatism); Symposium, The Renaissance of Pragmatism in American Legal Thought, 63 S. Cal. L. Rev. 1569 (1990) (same).

[FN66]. Richard Posner describes pragmatism as a public “conversation” in search of both end-values and instrumental means for achieving those values. Richard A. Posner, Overcoming Law 4-15 (1995).

[FN67]. See Steven D. Smith, The Pursuit of Pragmatism, 100 Yale L.J. 409, 444-49 (1990) (summarizing legal pragmatism as an “exhortation to skepticism” as to both the ends sought in law and means employed to achieve those ends).

[FN68]. See generally Michael L. Seigel, Pragmatism Applied: Imagining a Solution to the Problem of Court Congestion, Hofstra L. Rev. 567 (1994) (discussing pragmatic methods).

[FN69]. The fact that legal pragmatism echoes legal realism is not a coincidence. Realism was born as a revolt against formalism that characterized early-twentieth century jurisprudential debates. See Morton White, Social Thought in America: The Revolt Against Formalism 11-18 (1949). Realists split into two camps, with the more radical members emphasizing the indeterminate nature of law (Holmes' prediction theory), and the less radical seeking to ground law to empirically based social policy (legal pragmatism). See Gary Minda, Postmodern Legal Movements: Law and Jurisprudence at Century's End 28-33 (1995) (distinguishing two forms of realism: radical and progressive); Gary Peller, The Metaphysics of American Law, 73 Cal. L. Rev. 1151, 1219-26 (1985) (same). See generally Ostas, supra note 13, at 198-210 (discussing the historical antecedents of legal pragmatism).

[FN70]. See Posner, supra note 12, at 130 (asserting that a “fact-bound, policy-soaked, instrumental concept of reasonableness” can provide a sufficient “lodestar” to legitimize law).

[FN71]. Posner describes a pragmatic search for legal values as “a grab bag that includes anecdote, introspection, imagination, common sense, custom, memory, experience, intuition, and induction.” Id. at 73.

[FN72]. Each of the four competing philosophies offers a CSR prescription. The pragmatic prescription is presented in the text. Positive legal formalism, see supra notes 11-14 and accompanying text, would say follow the letter of the regulations-emit the more dangerous material, do not emit the less dangerous. Unless there were a direct legal command to the contrary, the firm would have no duty to inform EPA officials of the dangers involved, nor any duty to reform the laws. Holmes' prediction theory, see supra notes 34-38 and accompanying text, would similarly permit the emission of the dangerous material. It might also permit emission of the less dangerous. The latter would depend on the predicted consequences of the act. If the cost savings of violating the letter of the law exceeded the likely fine, discounted for the potential of the violation being detected, then the manager would violate the letter of the law. To reduce the likelihood of the fine, the firm should pollute at night and shred any damaging documents. The prediction theory would also counsel lobbying efforts and similar uses of corporate resources to block the reform of the law, if such a block led to greater firm profitability, narrowly defined. Natural law, see supra notes 51-53 and accompanying text, would mirror the advice offered by the pragmatic analysis above, but the reasoning would differ. Natural law would focus on a moral duty to protect human health; hence, the manager would not emit the dangerous toxin, but would be free to ignore the inane law.

[FN73]. The pragmatic vision of law advocated here would probably not permit dumping the more dangerous toxin prior to reform of the law. The issue would have to be debated among corporate management and the interest of all stakeholders, including but not limited to shareholders, weighed. Ultimately the debate would likely depend on just how dangerous the pollutants were.

[FN74]. Adherence to inane laws has pragmatic value by providing a baseline of stability, but beyond that baseline, there is no overriding reason to follow law. See Posner, supra note 12, at 259-60 (noting that a pragmatically oriented judge recognizes legal stability as one among many practical concerns).

[FN75]. Id. at 7.

[FN76]. See generally Robert Kuttner, Everything for Sale: The Virtues and Limits of Markets (1997) (discussing the rhetorical strength of an appeal to the market and its effect on public discourse); Robert E. Lane, The Market Experience (1991) (same).

[FN77]. See, e.g., Friedman, supra note 9, at 1-6 (recognizing the need for a minimal set of laws to enable market freedoms, but characterizing most laws as a restriction on freedom).

[FN78]. Friedman, supra note 6, at 126.

[FN79]. The notion of individual autonomy that underscores the classical vision of freedom is far from self-evident. Many cognitive scientists and business ethicists insist that human autonomy has no meaning outside of its cultural context. See generally Richard L. Lippke, Radical Business Ethics 27-77 (1995) (linking the language of autonomy to a “radical theory” of human agency); Jeffrey Reiman, Justice and Modern Moral Philos-ophy (1990) (same).

[FN80]. See generally Richard A. Epstein, Unconscionability: A Critical Reappraisal, 18 J.L. & Econ. 293, 293-95 (1975) (articulating and distinguishing libertarian and utilitarian defenses of laissez faire).

[FN81]. The most articulate defense of decentralized markets can be found in the works of the Austrian economists, Mises and Hayek. See generally Ludwig von Mises, Economic Calculations in Socialism (1922), reprinted in Morris Bornstein, Comparative Economic Systems (1969) (complexities of modern economies doom central planning to failure); Friedrich von Hayek, Socialist Calculation: The Competitive Solution, 7 Economica 125 (1940) (identifying information problems as the source of planning failures); Friedrich von Hayek, The Use of Knowledge in Society, 35 Am. Econ. Rev. 519 (1945) (explaining how free markets facilitate coordination).

[FN82]. See Jacob Viner, The Intellectual History of Laissez Faire, 3 J.L. & Econ. 45 (1960) (analyzing the rhetorical appeal of laissez faire reasoning). But see Warren J. Samuels, Interrelations Between Legal and Economic Processes, 14 J.L. & Econ. 435 (1971) (arguing that laissez faire reasoning is essentially vacuous).

[FN83]. “Neoclassical economics may be conveniently defined as an approach which (1) assumes rational, maximizing behavior by agents with given and stable preference functions, (2) focuses on attained, or movements toward, equilibrium states, and (3) excludes chronic information problems.” Geoffrey Hodgson, The Approach of Institutional Economics, 36 J. Econ. Lit. 166, 169 n.4 (1998) (parenthetical omitted). The neoclassical approach originates in the nineteenth-century works of Alfred Marshall and Leon Walras. See Robert B. Ekelund, Jr., & Robert F. Hebert, A History of Economic Theory and Method 328 (1983) (citing Marshall and Walras as the “twin founders of neoclassical analysis”). Some scholars define economics with sole reference to neoclassical techniques. See, e.g., Gary S. Becker, The Economic Approach to Human Behavior 4-5 (1976) (defining any question that can be addressed with neoclassical techniques as an “economic question”). For a useful summary of alternative approaches to economics including Austrian, Institutional, and Marxian see Nicholas Mercuro & Steven G. Medema, Economics and the Law: From Posner to Postmodernism (1997).

[FN84]. The neoclassical theory of the firm suppresses the market between a manager and his or her employer, assuming that the interests of manager and the firm match. The implications of a divergence between managerial and firm goals were first explored in the 1930s. See generally Adolf A. Berle, Jr., & Gardiner C. Means, The Modern Corporation and Private Property (1932); Ronald H. Coase, The Nature of the Firm, 4 Economica 386 (1937). These seminal works spawned what today would be called “agency theory.” See generally Eugene F. Fama, Agency Problems and the Theory of the Firm, 8 J. Pol. Econ. 288 (1980); Michael C. Jensen & William H. Meckling, The Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976).

[FN85]. The assumption of profit maximization is axiomatic within the neoclassical approach. See Hodgson, supra note 83, at 169 n.4. The model does not suggest that managers should maximize profit, rather it predicts how they will do so, given an assumption of maximizing behavior. See Milton Friedman, The Methodology of Positive Economics, in Essays in Positive Economics 3, 15 (1953) (emphasizing the role of prediction in neoclassical analysis).

[FN86]. The theory of the firm is presented in virtually every microeconomic textbook at either the graduate or undergraduate level. The conceptual content does not change, but the reliance on mathematics increases for the more advanced student. See, e.g., Milton Friedman, Price Theory: A Provisional Text (1962) (providing a conceptual approach with little mathematics); Hal R. Varian, Intermediate Economics (1987) (drawing on elementary algebra and numerical examples while delegating calculus to appendices); James M. Henderson & Richard E. Quandt, Microeconomic Theory: A Mathematical Approach (3d ed. 1980) (employing differential and integral calculus and matrix algebra).

[FN87]. Neoclassical economics is deductive, assuming certain central axioms as inviolate and deducing the logical ramifications of those axioms. See Daniel M. Hausman, Economic Methodology in a Nutshell, 3 J. Econ. Persp. 115 (1989). Although neoclassicism dominates contemporary economic thought, not all economists embrace its deductive technique. Id. at 116 (tracing an inductive method to John Stuart Mill).

[FN88]. See generally Henderson & Quandt, supra note 86, at 8-18, 32-33 (discussing utility theory); Varian, supra note 86, at 52-62 (same).

[FN89]. See generally Henderson & Quandt (discussing cost theory), supra note 86, at 74-84; Varian, supra note 86, at 339-42 (same).

[FN90]. See generally Henderson & Quandt, supra note 86, at 64-73 (discussing production functions); Varian, supra note 86, at 310-11 (same).

[FN91]. See generally Friedman, supra note 86, at 85-87 (discussing supply curves); Varian, supra note 86, at 367-82 (same).

[FN92]. See generally Friedman, supra note 86, at 37-39 (discussing demand curves); Henderson & Quandt, supra note 86, at 18-24 (same); Varian, supra note 86, at 20-31, 70-75 (same).

[FN93]. See generally Henderson & Quandt, supra note 86, at 64, 83 (specifying optimal firm decisions given supply and demand); Varian, supra note 86, at 325-27 (same).

[FN94]. Hal Varian defines an “exogenous variable” as “predetermined by factors not discussed in this particular model.” Varian, supra note 86, at 2. He defines an “endogenous variable” as “determined by the forces defined in the model.” Id. James Henderson and Richard Quandt provide a superb summary of which variables within the neoclassical model are assumed to be outside the control of management, describing such variables as “data.” See Henderson & Quandt, supra note 86, at 230-31.

[FN95]. It would seem that discretion is a prerequisite for responsibility. Hence, if a manager has no control over a given decision, the notion of CSR for that manager becomes moot.

[FN96]. See Friedman, supra note 86, at 12-13 (“Wants are to be taken in our analysis as givens, or data . . . . The economist has little to say about the formation of wants; this is the province of the psychologist. The economist's task is to trace the consequences of any given set of wants.”); Varian, supra note 86, at 34-38 (expressing the same view).

[FN97]. Recent work in economic thought is beginning to open up the “black box” of exogenous preferences. See, e.g., Gary S. Becker, Accounting for Tastes (1996) (exploring the implications of evolving preferences); see also infra notes 142-62 (same). But see Geoffrey M. Hodgson, The Approach of Institutional Economics, 36 J. Econ. Lit. 166, 117 n.8 (1998) (arguing that Becker's analysis reveals a “meta-preference” that remains temporarily primary and inviolate in Becker's analysis).

[FN98]. The model posits that the only way that a firm can infer preferences is through the actions of its trading partners as revealed by offers to pay or offers to accept. See Paul A. Samuelson, Consumption Theory in Terms of Revealed Preference, 15 Economica 243 (1948) (seminal work); Varian, supra note 86, at 114-21 (discussing the theory of revealed preferences). But see Jeffrey L. Harrison, Egoism, Altruism, and Market Illusions: The Limits of Law and Economics, 33 UCLA L. Rev. 1309, 1316-19 (1986) (critiquing tautological nature of revealed preference theory); Cass R. Sunstein, Incommensurability and Valuation in Law, 92 Mich. L. Rev. 779, 794 n.48 (1994) (arguing that offers to pay or to accept do not warrant conclusions about underlying values).

[FN99]. The search for a theory of value provides a core theme in the history of economic thought. See generally Ekelund & Hebert, supra note 83 (contrasting the “labor theory of value” associated with classical economists such as Adam Smith, David Ricardo, and Karl Marx with the exchange theory developed by Alfred Marshall and Leon Walras). Neoclassical economics offers no notion of objective value, content to reveal the mysteries of relative values as revealed in market prices. See Wendell Gordon & John Adams, Economics as Social Science: An Evolutionary Approach 83-99 (1989) (critiquing use, labor, and exchange theories of value).

[FN100]. See Henderson & Quandt, supra note 86, at 24-25; Varian, supra note 86, at 170-72.

[FN101]. The neoclassical theory of the firm is a “partial equilibrium” model in which the prices and wages in all markets other than the one being examined are held constant. See Ekelund & Herbert, supra note 83, at 369 (discussing the ceteris paribus assumptions of partial equilibrium). Relaxing this assumption and assuming instead that the actions of one market actor will influence the actions of another spawned game theory. See generally John Von Neumann & Oskar Morgenstern, Theory of Games and Economic Behavior (1944) (seminal work on game theory); Varian, supra note 86, at 466-78 (discussing game theory).

[FN102]. See Varian, supra note 86, at 309 (“Nature imposes the constraint that there are only certain feasible ways to produce outputs from inputs.”). See generally Henderson & Quandt, supra note 86, at 230 (stating that production functions are exogenous).

[FN103]. See generally Henderson & Quandt, supra note 86, at 67 (defining the “marginal product” of an input as the “rate of change in total product with respect to variations in the quantity” of that input); Varian, supra note 86, at 314-15 (same).

[FN104]. See supra note 102. For an example of a dynamic model in which technology evolves, see Gordon & Adams, supra note 99.

[FN105]. Empirical evidence suggests that once an entitlement (such as privacy) is experienced, preferences for that entitlement change. See Daniel Kahneman et al., Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. Pol. Econ. 1325 (1990) (referencing 11 studies); see also infra notes 146-48 and accompanying text.

[FN106]. A choice of technology is made under conditions of uncertainty. Experience with the chosen technology will suggest alternative advances, also made under conditions of uncertainty. Hence, “progress” depends on the various paths chosen, rather than on some ultimate and inevitable telos. See generally Gordon & Adams, supra note 99, at 41 (exploring the notion of path dependence as applied to technological change).

[FN107]. See generally Sunstein, supra note 98 (discussing second-order preferences as preferences about preferences).

[FN108]. One source of uncertainty may be information asymmetry between the firm and its employees, but it is more complex than that. Workers themselves may not know the value of privacy until they experience it. See supra note 105.

[FN109]. In a metaphysical sense, utility preferences and production possibilities may indeed exist without reference to the free will or creative imagination of managers. It may be reasonable, for example, to assume that preferences and technologies pre-exist creative imagination, and that the role of the manager is to discover these preferences and technologies. So viewed, utility and production functions are exogenous, but unknown. Note, however, that it is also reasonable to assume that preferences and technology do not exist outside of their material manifestations. Compare Richard Taylor, Reality Consists of Matter, in Classic Philoso-phical Questions 347 (James A. Gould ed., 1971), with George Berkeley, Reality Consists of Ideas, in Classic Philosophical Questions, supra, at 365. These manifestations, in turn, can be seen as a product of free will and human intervention. Hence, managers truly create, rather than simply discover markets. The practical manager, however, has no need for such metaphysical inquiries. In the practical world in which CSR decisions are made, it makes no difference whether the manager is discovering a technology (or preference) from a Platonic menu of pre-existing ideas or creating that technology (or preference) through an act of free will. Discovery and creation, in a practical sense, conflate. They have similar practical implications. Both direct an inquiry into the unknown. Both encourage the manager to seek out new and better ways to identify and satisfy worker and consumer demands and new means of increasing productivity. Both call for an active role for managerial discretion and imagination.

[FN110]. There is no harm, per se, in assuming that utility and production functions are exogenous. These assumptions help organize thought and unravel the mysteries of relative prices in a rigorous way. See generally Judith A. Lachman, Knowing and Showing Economics and Law, 93 Yale L.J. 1587, 1598-1603 (1984) (arguing that the advantages of more realistic economic assumptions may be outweighed by losses to tractability); Posner, supra note 12, at 366 n.11 (citing the virtues of reductionism). The threat comes from the repeated use of the rhetorical device and the limits on thought generated by that use. See supra notes 2-5 and accompanying text; see also Donald N. McCloskey, The Rhetoric of Economics (1985).

[FN111]. See supra notes 11-13 and accompanying text.

[FN112]. The rhetoric of exogenous preferences can also influence a firm's output decision. Witness, for example, the current debate concerning Hollywood's role in promoting unhealthy attitudes about sex and violence. See, e.g., Roger Kimball, A Little Censorship Would be Good for Hollywood, Wall St. J., Oct. 2, 2000, at A34. Censors argue that Hollywood does not simply react to consumer preferences, but shapes preferences through the films it produces. See id. Such critics call upon the industry to recognize the power it has and to look for creative ways of combining profits with less explicit sex and violence. See id. The neoclassical response, at least in part, is to deny responsibility, insisting that consumer demand drives the content of Hollywood films.

[FN113]. The model of general competitive equilibrium originates in the nineteenth century works of Leon Walras. See generally Ekelund & Hebert, supra note 83, at 368-93 (providing a nontechnical exposition of Walrasian general equilibrium); Leon Walras, Elements of Pure Economics, Or, The Theory of Social Wealth (William Jaffe trans., Irwin Press 1954) (1874).

[FN114]. See generally Henderson & Quandt, supra note 86, at 136-37, 230-31; Varian, supra note 86, at 480-81, 501, 516-17.

[FN115]. Partial equilibrium models often include an assumption of asymmetric information. General competitive equilibrium, given its more ambitious task, does not. See generally Henderson & Quandt, supra note 86, at 136-37 (noting that model of general equilibrium assumes perfect information).

[FN116]. See generally Henderson & Quandt, supra note 86, 230-31; Varian, supra note 86, at 516-18.

[FN117]. An externality is a cost generated by an exchange that is not borne by the parties to the exchange. The classic example is pollution. See generally Varian, supra note 86, at 542-61. A public good is benefit generated by an exchange that is not exclusively enjoyed by parties themselves. The classic example is education. See generally id. at 563-73. Given the mathematical techniques of general equilibrium, one can simply assume that all property rights are fully specified-anyone who receives a benefit must pay for it and anyone who accepts a cost will be compensated. See id. at 516 (stating the model of general equilibrium assumes that there are no externalities or public goods in either production or consumption).

[FN118]. See Henderson & Quandt, supra note 86, at 230-31. Using the mathematical techniques of matrix algebra and vector analysis, these preferences could be modeled as fully nuanced. See supra notes 105-07 and accompanying text (discussing nuanced preferences).

[FN119]. For a definition of “minimum efficient scale” see Varian, supra note 86, at 428 (defining the term as “the level of output that minimizes average cost”). See generally Varian, supra note 86, at 507-25 (discussing the technological assumptions of general equilibrium analysis).

[FN120]. Positing a static state of the world is a defining characteristic of neoclassical economics generally, not just general competitive equilibrium. See Hodgson, supra note 83, at 169 n.4. Neoclassical economists may introduce time into their models, see, e.g., Henderson & Quandt, supra note 86, at 322-57, but the models are still organized around an equilibrium paradigm, rather than an evolutionary one.

[FN121]. An economist would describe this condition as productive efficiency. This result derives from technological assumptions. See supra note 119 (defining productive efficiency); see also infra note 126 (noting that the world of pure competition is fictional).

[FN122]. Economists refer to this state of the world as “allocatively efficient,” or alternatively as “Pareto efficient.” See generally Ekelund & Hebert, supra note 83, at 387-89 (discussing the nineteenth-century contributions of Vilfredo Pareto). In a simple exchange economy, people exhaust all mutually beneficial trades reaching a Pareto optimal condition where no additional trade can make one person better off without making at least one other worse off. Bringing production into the model generates an even more dramatic result. Perfect competition not only exhausts mutually beneficial exchanges of existing goods and services, it also dictates precisely which basket of goods and services will satisfy the most consumption preferences given societal resources. See Varian, supra note 86, at 520-22 (offering an intuitive proof of this theorem); Henderson & Quandt, supra note 86, at 286-91 (offering a mathematical proof).

[FN123]. See Henderson & Quandt, supra note 86, at 151-52 (defining rent as “that part of a person's or a firm's income which is above the minimum amount necessary to keep that person or firm in its given occupation”); see also Varian, supra note 86, at 393-97 (noting that an economist's notion of zero profits includes an ordinary return).

[FN124]. See Henderson & Quandt, supra note 86, at 245-46.

[FN125]. Economists distinguish between notions of allocation (what goods are produced), production (how the goods are produced), and distribution (who gets what). One notion of a fair distribution is that all members in an economy are rewarded according to their productivity, that is, their respective abilities to satisfy the desires of others. In general equilibrium this condition holds. See generally infra notes 149-53 and accompanying text (revisiting the issue of whether free markets will eliminate wage discrimination in a competitive workplace). Members unable to produce, for example the sick and disabled, would receive little or no reward. Hence, the model addresses distributional concerns, but is incomplete.

[FN126]. No economist actually believes that the world described by general competitive equilibrium exists or has ever existed. Virtually every discussion of general equilibrium is quickly followed with a discussion emphasizing the myriad of conditions that frustrate the model. If any one of the assumptions of the model is incorrect, then no implications regarding social welfare can be drawn from the model. In fact, if all markets are competitive save one, the analyst cannot even safely say that moving that remaining market toward a competitive solution is unambiguously a good thing. See Henderson & Quandt, supra note 86, at 315-17 (offering a formal proof of this assertion known as the “theory of second best”). Yet, notwithstanding this knowledge, economists routinely state that pure competition does not exist, and then immediately use the model as a source of advice directing public policy prescriptions. See, e.g., Varian, supra note 86, at 500-04 (providing only one of many examples of the phenomenon). This bears evidence to the rhetorical appeal of the model of pure competition. Once the economist has seen the aesthetic appeal of the model, particularly in its mathematical form, it may be difficult not to want the model to be accurate.

[FN127]. See Henderson & Quandt, supra note 86, at 175, 292.

[FN128]. For an insightful discussion of economic power see John R. Commons, The Legal Foundations of Capitalism 56-59 (1924) (defining economic, or monopoly power, as the ability to withhold property from others).

[FN129]. See Varian, supra note 86, at 428-29 (linking monopoly power to technological imperatives).

[FN130]. See generally Henderson & Quandt, supra note 86, at 199-227 (providing an extensive discussion of non-competitive equilibria in the presence of an oligopolistic market structure).

[FN131]. See generally Joan Robinson, The Economics of Imperfect Competition (1933) (seminal work demonstrating that “degrees” of monopoly power exist); Varian, supra note 86, at 436-39 (defining product differentiation and identifying it as a source of market power); Henderson & Quandt, supra note 86, at 193-97 (discussing the rents that derive from monopolistic competition).

[FN132]. See infra notes 154-57 and accompanying text (discussing the issue of framing).

[FN133]. Friedman, supra note 6.

[FN134]. A sharp separation between the market and the law is a distinguishing characteristic of neoclassical economics. Both partial and general equilibrium analysis take the law as a given, leaving the underlying legal assumptions typically unexplored. Yet those assumptions are nonetheless present, and alternative assumptions will generate alternative conceptions of the market. See generally Daniel T. Ostas, Economics and the Law of Unconscionability, 27 J. Econ. Issues 647 (1993) (distinguishing the jurisprudential assumptions that underscore classical, neoclassical, institutional, neo-institutional, and Marxian market theories).

[FN135]. See supra note 109.

[FN136]. For an excellent assessment of the rhetorical nature of the economic paradigm see McCloskey, supra note 110, passim. The power of language is also a theme in attempts to bring feminist insights to economic analysis. See generally Myra H. Strober, Rethinking Economics Through a Feminist Lens, 84 Am. Econ. Rev. 143 (1994) (explaining how feminist narratives can contribute to economic thought).

[FN137]. The inability of a manager to transfer total legal authority to the government is discussed in the first part of this article.

[FN138]. Thomas Cotter observes that “whatever paradigm the analyst employs carries with it a set of value judgments that direct her choice of an appropriate topic of study, that suggest which phenomena are significant and which are not, and that delimit the boundaries within which she may interpret the results of her research.” Thomas F. Cotter, Legal Pragmatism and the Law and Economics Movement, 84 Geo. L.J. 2071, 2114 (1996). This postmodern insight echoes that offered by Thomas Kuhn. See generally Thomas Kuhn, The Structure of Scientific Revolutions (2d ed. 1970).

[FN139]. Milton Friedman, The Methodology of Positive Economics, in Essays in Positive Economics 3, 15 (1953).

[FN140]. Friedman's view of positive economics has drawn considerable criticism. Several commentators have noted that economists do not seek to falsify the underlying assumptions of neoclassical theory or offer alternative explanations for a given phenomenon. See Cotter, supra note 138, at 2117 nn.198-201 (citing several writers who have leveled this charge). Without empirical evidence one way or the other, a researcher may be more confident if the assumptions of the model are at least descriptively accurate. See Herbert Simon, Problems of Methodology-Discussion, 53 Am. Econ. Rev. 229, 229-31 (1963). If realism matters then neoclassicism is at distinct disadvantage. Friedman's view is that the realism of an underlying assumption is largely irrelevant for social science inquiry. Friedman, supra note 139.

[FN141]. See, e.g., Behavioral Law & Economics (Cass R. Sunstein ed., 2000) (reprinting recent scholarship that challenges orthodox economic assumptions). See generally Daniel T. Ostas, The Evolution of Economic Analysis of Law: Is Pragmatic Institutionalism Displacing Orthodoxy?, 33 J. Econ. Issues 287, 290-91 (1999) (citing several trends in the economic literature and assessing their impact on economic analysis of law).

[FN142]. Exploring the source of preferences and the implications of endogenous preferences was a hallmark of institutional economic thought prevalent in the early-twentieth century. See generally Allan G. Gruchy, Modern Economic Thought: The American Contribu-tion (1947) (recounting the origins of institutional economics). Institutional insights are making a resurgence in the economic literature. See Hodgson, supra note 83; Ostas, supra note 141.

[FN143]. The notion of individual autonomy that underscores the libertarian concept of freedom has been widely challenged by cognitive psychologists. See supra note 79.

[FN144]. For a thorough review of recent economic literature on endogenous preferences, see Samuel Bowles, Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions, 36 J. Econ. Lit. 75 (1998).

[FN145]. See id.

[FN146]. See generally Kahneman et al., supra note 105; Harrison, supra note 98, at 1358-61.

[FN147]. See Russell Korobkin, Note, Policymaking and the Offer/Asking Price Gap: Toward a Theory of Efficient Entitlement Allocation, 46 Stan. L. Rev. 663 (1994).

[FN148]. One possible explanation of this endowment effect is the development of tastes through experience. But see Kahneman et al., supra note 105, at 1342 (noting that empirical evidence suggests that endowment effects can occur instantaneously). Another explanation focuses on the elimination of social taboos associated with seeking greater workplace liberties. See Robert C. Ellickson, The Case for Coase and Against “Coaseanism”, 99 Yale L.J. 611, 622-23 (1989).

[FN149]. The debate is cited in Cotter, supra note 138, at 2120 n.213. Scholars suggesting that anti-discrimination laws were inefficient included Richard Epstein, Thomas Sowell, and Richard Posner. Id. Compare Richard A. Epstein, Forbidden Grounds: The Case Against Employment Discrimination Laws (1992) (arguing that anti-discrimination laws are inefficient), Thomas Sowell, Race and Culture: A World View 87-92, 96-98 (1994) (same), and Richard A. Posner, The Efficiency and the Efficacy of Title VII, 136 U. Pa. L. Rev. 513 (1986) (same), with John J. Donohue III, Is Title VII Efficient?, 134 U. Pa. L. Rev. 1411 (1986) (arguing that anti-discrimination laws are efficient), John J. Donohue III, Further Thoughts on Employment Discrimination Legislation: A Reply to Judge Posner, 136 U. Pa. L. Rev. 523 (1987) (same), Richard H. McAdams, Cooperation and Conflict: The Economics of Group Status Production and Race Discrimination, 108 Harv. L. Rev. 1003 (1995) (same), and Richard H. McAdams, Relative Preferences, 102 Yale L.J. 1 (1992) (same).

[FN150]. More precisely, the debate focussed on whether anti-discrimination legislation was efficient. Recasting the debate to emphasize managerial discretion does not alter the central point about endogenous preferences.

[FN151]. See Robert Cooter, Market Affirmative Action, 31 San Diego L. Rev. 133 (1994) (arguing that the forces of perfect competition force a discriminating firm to absorb the costs of discrimination).

[FN152]. This argument illustrates the tautological nature of projected preferences. Virtually any behavior can be rationalized as rational and maximizing, limited only by the creative imagination of the analyst who posits the preferences. See Amartya K. Sen, Rational Fools, in Philosophy and Economic Theory (Frank Hahn & Martin Hollis eds., 1979).

[FN153]. There is empirical evidence that suggests that enactment of the Civil Rights Laws affected social values regarding discrimination. See Sunstein, supra note 98.

[FN154]. Research in cognitive psychology suggests that decisions depend on the context in which a question is posed. See generally Robert C. Ellickson, Bringing Culture and Human Frailty to Rational Actors: A Critique of Classical Law and Economics, 65 Chi.-Kent L. Rev. 23, 43-54 (1989); Russell Korobkin & Chris Guthrie, Psychological Barriers to Litigation Settlement: An Experimental Approach, 93 Mich. L. Rev. 107, 129-30 (1994).

[FN155]. See Varian, supra note 86, at 34-36.

[FN156]. See generally Richard H. Thaler, Quasi-Rational Economics (1991) (exploring this and similar paradoxes presented by assuming economic rationality).

[FN157]. See Roger Mason, Interpersonal Effects on Consumer Demand in Economic Theory and Marketing Thought, 1890-1950, 25 J. Econ. Issues 871, 881 (1995) (observing that marketing analysts have always tempered economic rationality assumptions with insights from cognitive and emotive psychology).

[FN158]. See Cass R. Sunstein & Edna Ullmann-Margalit, Second-Order Decisions, in Behavioral Law and Economics 187 (Cass R. Sunstein ed., 2000); Cotter, supra note 138, at 222 (discussing preferences about preferences).

[FN159]. See Amartya Sen, Internal Consistency and Choice, 61 Econometrica 495, 498-503 (1993).

[FN160]. See McAdams, Cooperation and Conflict, supra note 149, at 1007-08; McAdams, Relative Preferences, supra note 149, at 91-103.

[FN161]. One commentator lists a set of “blocked exchanges” including slavery and free speech as evidence of “incommensurables,” that is, things that cannot, or should not, be measured in terms of dollars. See Michael Walzer, Spheres of Justice: A Defense of Pluralism and Equality 96-103 (1983). The slavery example may be well taken, but the notion that one may not sell one's rights to free speech seems to go too far. The relinquishment of speech rights is typical in an employment setting with a private employer. In this light, one's wage or salary includes one's civil liberties; they are a subject of negotiation. In short, most incommensurables are difficult, but not impossible, to quantify.

[FN162]. See Sunstein, supra note 98.

[FN163]. Recall that many economists define the economic discipline with reference to neoclassical techniques, including assumptions regarding rationality. See supra note 83 (citing as an example Nobel Laureate Gary Becker). An alternative and more historically accurate means of defining the discipline is with reference to subject matter. See John K. Galbraith, Economics in Perspective 5-8 (1987) (defining economics as the study of economic systems and identifying the central questions asked of the discipline). The alternative definition is not tied to any particular view of human psychology or other aspect of human nature or culture.

[FN164]. See Matthew Rabin, Psychology and Economics, 36 J. Econ. Lit. 11 (1998) (reviewing recent attempts to improve economics with insights from cognitive psychology); Jon Elster, Emotions and Economic Theory, 36 J. Econ. Lit. 47 (1998) (reviewing recent works seeking to borrow from the psychology of the emotions).

[FN165]. See Hodgson, supra note 83.

[FN166]. See id. at 170-73; Gordon & Adams, supra note 99, at 17-41.

[FN167]. The topic of business ethics is sometimes characterized as an “oxymoron.” The suggestion, often couched as a joke, is that business and ethics are incompatible. Jokes often contain a kernel of truth; that is often why they are funny. Mature discussions of CSR require, at a minimum, taking the subject seriously.

[FN168]. See supra text following note 104.

[FN169]. See supra notes 149-53 and accompanying text.

[FN170]. See supra note 166 and accompanying text.

[FN171]. See supra notes 68-71 and accompanying text.

[FN172]. See supra notes 47-48 and accompanying text.

[FN173]. See supra notes 43-47 and accompanying text.

[FN174]. See supra notes 49-50 and accompanying text.

[FN175]. See supra text following note 38.

[FN176]. Such a call would seem to necessitate an objective theory of value beyond “exchange theory of value” measured by market transactions. See supra note 99 and accompanying text. A notion of “objective value” may shape the legal and ethical norms that form the basis of a market and distinguish between responsible and irresponsible profits. See supra notes 133-35 and accompanying text. It may also help explain the source of preferences. But for practical purposes, the manager discovers these values through the process of market exchanges. In this way, market prices remain the sine qua non of value and the profit-maximizing firm generates objective value by seeking exchange value.




38 AMBLJ 261

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