profit motive
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In
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
, the profit motive is the motivation of firms that operate so as to maximize their profits. Mainstream
microeconomic theory Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
posits that the ultimate goal of a
business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
is "to make money" - not in the sense of increasing the firm's stock of means of payment (which is usually kept to a necessary minimum because means of payment incur costs, i.e. interest or foregone yields), but in the sense of "increasing
net worth Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...
". Stated differently, the reason for a business's existence is to turn a profit. The profit motive is a key tenet of
rational choice theory Rational choice theory refers to a set of guidelines that help understand economic and social behaviour. The theory originated in the eighteenth century and can be traced back to political economist and philosopher, Adam Smith. The theory postula ...
, or the theory that
economic agent In economics, an agent is an actor (more specifically, a decision maker) in a model of some aspect of the economy. Typically, every agent makes decisions by solving a well- or ill-defined optimization or choice problem. For example, ''buyers'' (c ...
s tend to pursue what is in their own best interests. In accordance with this doctrine, businesses seek to benefit themselves and/or their
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...
s by maximizing profits. As it extends beyond economics into
ideology An ideology is a set of beliefs or philosophies attributed to a person or group of persons, especially those held for reasons that are not purely epistemic, in which "practical elements are as prominent as theoretical ones." Formerly applied pri ...
, the profit motive has been a major matter of contention.


Economics

Theoretically, when an economy is fully competitive (i.e. has no market imperfections like externalities, monopolies, information or power imbalances etc), the profit motive ensures that resources are being allocated efficiently. For instance,
Austrian economist The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian school ...
Henry Hazlitt Henry Stuart Hazlitt (; November 28, 1894 – July 9, 1993) was an American journalist who wrote about business and economics for such publications as ''The Wall Street Journal'', ''The Nation'', ''The American Mercury'', ''Newsweek'', and '' ...
explains, “If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself." In other words, profits let companies know whether an item is worth producing. Theoretically in free and competitive markets, if an individual firm maximizes profits, it ensures that resources are not wasted. However, the market itself, should minimize profits as it is the cost to the
value chain A value chain is a progression of activities that a firm operating in a specific industry performs in order to deliver a valuable product (i.e., good and/or service) to the end customer. The concept comes through business management and was firs ...
. Competition is the key tool by which markets overcome the individual firm's profit maximization incentive. The profit motive is a good of value to the economy. It is needed to provide incentive to generate efficiency and innovation. However, over-remuneration of the profit motive creates profit inefficiency. With massive reductions in competition in many industries due to consolidation and mergers, the US economy has become profit inefficient, with record profits occurring in recent years. This creates a deadweight loss to the economy.


Criticisms

The majority of criticisms against the profit motive center on the idea that profits should not supersede the needs of people or the environment. Michael Moore’s film
Sicko ''Sicko'' is a 2007 American political documentary film by filmmaker Michael Moore. Investigating health care in the United States, it focuses on the country's health insurance and the pharmaceutical industry. The film compares the for-profit no ...
, for example, attacks the
healthcare industry The healthcare industry (also called the medical industry or health economy) is an aggregation and integration of sectors within the economic system that provides goods and services to treat patients with curative, preventive, rehabilitative, a ...
for its alleged emphasis on profits at the expense of patients. Moore explains: :We should have no talk of profit when it comes to helping people who are sick. The profit motive should be nowhere involved in this. And you know what? It’s not fair to the
insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
companies either because they have a fiduciary responsibility to make as much money as they can for their shareholders. Well, the way they make more money is to deny claims or to kick people off the rolls or to not even let people on the rolls because they have a pre-existing condition. You know, all of that is wrong. Another common criticism of the profit motive is that it is believed to encourage selfishness and greed. Critics of the profit motive contend that companies disregard morals or public safety in the pursuit of profits.


Counter-criticisms

Free-market In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ot ...
economists argue that the profit motive, coupled with competition, often reduces the final price of an item for consumption, rather than raising it. They argue that businesses profit by selling a good at a lower price and at a greater volume than the competition. Economist
Thomas Sowell Thomas Sowell (; born June 30, 1930) is an American author, economist, political commentator and academic who is a senior fellow at the Hoover Institution. With widely published commentary and books—and as a guest on TV and radio—he becam ...
uses supermarkets as an example to illustrate this point: "It has been estimated that a supermarket makes a clear profit of about a penny on a dollar of sales. If that sounds pretty skimpy, remember that it is collecting that penny on every dollar at several cash registers simultaneously and, in many cases, around the clock." Economist
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
has argued that greed and
self-interest Self-interest generally refers to a focus on the needs or desires (''interests'') of one's self. Most times, actions that display self-interest are often performed without conscious knowing. A number of philosophical, psychological, and economi ...
are universal human traits. On a 1979 episode of ''
The Phil Donahue Show ''The Phil Donahue Show'', also known as ''Donahue'', is an American television talk show hosted by Phil Donahue that ran for 26 years on national television. Its run was preceded by three years of local broadcast on WLWD in Dayton, Ohio, and i ...
'', Friedman states, "The world runs on individuals pursuing their separate interests." He continues by arguing that only in capitalist countries, where individuals can pursue their own self-interest, people have been able to escape from "grinding poverty". Author and philosopher
Ayn Rand Alice O'Connor (born Alisa Zinovyevna Rosenbaum;, . Most sources transliterate her given name as either ''Alisa'' or ''Alissa''. , 1905 – March 6, 1982), better known by her pen name Ayn Rand (), was a Russian-born American writer and p ...
defended selfishness on ethical grounds. Her nonfiction work, ''
The Virtue of Selfishness ''The Virtue of Selfishness: A New Concept of Egoism'' is a 1964 collection of essays by the philosopher Ayn Rand and the writer Nathaniel Branden. Most of the essays originally appeared in ''The Objectivist Newsletter''. The book covers ethical ...
'', argues that selfishness is a moral good and not an excuse to act with disregard for others: :The
Objectivist Objectivism is a philosophical system developed by Russian-American writer and philosopher Ayn Rand. She described it as "the concept of man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement ...
ethics holds that the actor must always be the beneficiary of his action and that man must act for his own rational self-interest. But his right to do so is derived from his nature as man and from the function of moral values in human life—and, therefore, is applicable only in the context of a rational, objectively demonstrated and validated code of moral principles which define and determine his actual self-interest. It is not a license “to do as he pleases” and it is not applicable to the altruists’ image of a “selfish” brute nor to any man motivated by irrational emotions, feelings, urges, wishes or whims.{{cite book, author1=Ayn Rand, authorlink1=Ayn Rand, author2=Nathaniel Branden, authorlink2= Nathaniel Branden, chapter=Introduction, title=The Virtue of Selfishness: A New Concept of Egoism, publisher=New York: Signet Book, year=1964, edition=Ix. Print, url=https://www.e-reading.club/bookreader.php/137212/Rand_-_The_Virtue_of_Selfishness.pdf


See also

*
Incentive In general, incentives are anything that persuade a person to alter their behaviour. It is emphasised that incentives matter by the basic law of economists and the laws of behaviour, which state that higher incentives amount to greater levels of ...


References

Profit Motivation