Profit-maximization
Half-baked questions on the pursuit of profit-maximization
While reading some analyst reports, a question struck me: are profits a desirable aspect of a capitalistic society?
On first glance, it seems obvious that the goal of each firm is to be profit-maximizing. But, that’s not the question. What about society as a whole? Should we want a society in which companies make minimal profits or one in which they make monstrous profits (which I would argue we are much closer to now)?
In a world of monstrous profits, I think the pros are: companies are able to weather economic storms, they are able to invest in R&D (and thus spur innovation), and they are rewarded for their excellence or risk-taking. On the other hand, the cons are: by definition, consumers are paying higher prices, firms can create greater barriers to entry, and the reward system creates greater inequity (rich get way richer).
In a world of minimal profits, it seems that the logic is just the inverse. The pros would be: consumers pay lower prices, greater competition within industries, and less inequality in terms of pay. The cons: there would be greater job loss and turnover due to firms starting and going out of business more, there would be lower incentives for innovation as the rewards are not commensurate with the risks.
I’m not sure which of these two systems is preferable, but I have to admit I am leaning towards the minimal profits model. I think of Amazon currently as a prime (no pun intended) example of what a minimal profit model could look like - one in which low prices to consumers does not stifle grand innovative schemes to further lower costs and reach new industries. On the other hand, one could easily point to the airline industry as an example where the minimal profits model hasn’t worked - I think there’s a relatively compelling argument that most consumers are unhappy with the airline experience and would argue more innovation is needed in the sector.
The part I can’t fully wrap my head around is the effects on inequality in society. If you look at rising inequality, it has been fundamentally driven by the market - salary growth has not caused the rise of the 1%, it has been the growth of investment income and equity from startups. This, in turn, is a direct result of the marketplace, where investors make massive bets on the future profits of companies. I’m not sure if it’s true, but it feels to me if that society was re-calibrated such that revenue or market share replaced profits as the primary goal of companies, this would drastically reduce the power of the marketplace in determining wealth.
At the end of the day, it seems to me that the salient question is - Do we value ourselves primarily as employees or as consumers? If the answer is employees, then it makes sense to drive wealth creation through profit-making. If, on the other hand, we value ourselves as consumers, then doesn’t it make more sense to allow us to realize our wealth in a more accessible and equitable way?