Investing and Financial Markets
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Why is profit maximization by itself an inappropriate goal?

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February 10, 2016 6:37PM

The behavior should not be governed by egoistic thinking but rather by an understanding of what has future for the society (for nature, for the planet) as a whole. We can call them moral rules. Also are called ethics.

We have such rules already coded in our emotions as a result of evolutionary selection, because, due to the dependence of the individual from the group, behavior that is beneficial for the group is also beneficial for the individual. If the group did not prosper/survive, the individual did not prosper/survive. Contrary to other social animals we can also derive such rules rationally.

Is "maximizing profit" beneficial for the society? What are its consequences?

It leads to inflation and uneven distribution of wealth, because of non-perfect competition, and many, many tricks.

Unequal distribution distorts the economy, because many will not be able to buy any more, what they need, while others will be able to by luxury products. Economy does not any more satisfy the needs of all society, but of a few only. Since there are fewer consumers, there is also a recession, then an economic crisis and, if without political reaction, also social unrest. We observe these economic cycles. They are faster if the economy does not comply with moral rules.

What we want is a stable economy and a stable society. Maximizing profit is against these goals.

From a business standpoint, profit maximization is not always the primary goal.

  1. A company may be seeking to gain market share by lowering its prices and squashing competition.
  2. It may be seeking to use working capital that might otherwise be used for marketing or expansion to pay back debt thereby lowering its debt-to-income ratio.
  3. it may also be trying to buy back its shares from the public or private market thus lowering potential profits, but increasing profit-per-share to remaining investors. This is what pushes up a company's stock price.

Many would argue that seeking profit maximization IS an appropriate goal. However, there are instances where profit maximization strategies hurt overall public welfare. In the case of a monopoly, a business will overcharge consumers for goods or services. While the monopolist is only seeking to maximize his or her profit, public welfare is actually decreased and many argue that government regulation in this area is desirable.

Maximize your income, minimize your outgo. Maximization of profit is not inappropriate. It is inappropriate to plunder, but this is not maximization of profit because it's plunder and then the so called "profit" becomes theft. It is inappropriate to try and convince people that it is inappropriate for a business to maximize their profits. Maximization of profits is the purpose of doing business.

First off, profit maximization has no meaning for a non-profit organization (though margins do), so I assume this question was aimed at the private, for-profit sector. Assuming that's the case, there are two valid ways of looking at this question. The first, most well-known, and least valid is that a for-profit organization's purpose is to maximize shareholder value. Often, this has nothing to do with profits.

For example, a consulting firm is set up as a corporation with company stock sold only to employees who have reached the level of "principal." At the end of the year, the return on sales is 40%. If all of that is taken as profit, then the company will owe taxes on all of it. Instead, the company distributes some of it as end-of-year bonuses to principals and invests some more in equipment, software, etc. which can be spent or capitalized, reducing return on sales to only 10%. That 10% is run through the books as net operating income (profit, in many cases) and taxes are paid only on that amount. If 6% of sales is left over, that 6% is retained as cash and, along with any investments made in equipment, increases shareholder equity, which increases the share price and, thus, shareholder value. So, as you can see, in this case, maximizing profit would not maximize shareholder value.

There are other examples, as well. For instance, cable companies have long sought to maximize cash flow, and it is cash flow that had the highest relationship to stock price, because cable companies that are expanding are taking on substantial capital costs that can reduce net income to a net loss in the short term, but turn into pure profit in the long term.

The second, and more useful, way to look at organizations is that the real issue is long-term survival. In order to survive, every for-profit company must satisfy all stakeholders, including shareholders, customers, vendors, employees, and society at large. As Peter Drucker says, profit is a cost of doing business. Other costs are attached to satisfying other stakeholders, any of which can kill your business if those stakeholders believe that they are not getting enough value back from what they give to the organization.

This approach to business tends to lead to better long-term decision-making as management balances stakeholder needs and desires against each other.

We definitely have to understand that companies should not operate of maximization of profit reasons only, for profit maximizing only leads to true greed. The reason being is that you will try to compromise on your companies ethics and it also does not solve any problems within the company. The problem of any business is not the maximization but the gain of sufficient profit to cover risk of economic activity and thus to avoid loss.