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THE MORALITY OF PROFIT



Some may argue that business is fundamentally immoral and has no ethics since in economic theory firms are driven by the greed of maximisation of profit.



Some argue that businessman can never be truly ethical since they act with self-interest in their pursuit of profit.



Maximisation of profit is of course at the centre of the capitalist of free market model of the economy. In this model firms pursue the maximisation of profit and in so doing set there output and prices, within the constraints of the market, to levels that ‘satisfy’ the market and when taken together support and optimal solution in terms of economic welfare.



Firms interact with workers and consumers in market places. To achieve the optimal output that maximises profit workers are hired to the point where their marginal contribution to production just equates to the incremental wage payment. Workers in effect are able to offer their contribution such that they maximise their utility or satisfaction. If wage rates are insufficient workers will pursue leisure rather than work and they will continue to offer more until the marginal payment of wages equals their marginal loss of satisfaction from work. Consumers on the other hand will attempt to maximise their satisfaction and will demand goods and be willing to pay up to the point where the marginal utility gained from consumption of the last unit just equals the price they pay for the last unit consumed.



In effect the motives of firms, consumers and workers drive the economy in a free market towards optimal welfare. Demand is satisfied at the market clearing price throughout the markets for goods and for labour.



So far from being an immoral motive the very act of seeking profit supports Adam Smith’s invisible hand that brings markets to the optimal solution.



However we do need to think where the profit goes. The profit goes to the entrepreneur, the seeker of hidden opportunities, the individual who has the managerial capability to put land, labour and capital together but in such a way as to earn above normal profits. The entrepreneur is in effect rewarded for his unique capability to see and take opportunities before others.



Classical economists like Adam Smith and David Ricardo extolled the virtues of the free market with its invisible hand. Profit is a virtue.



Critics however point to the unfairness and exploitation in the solution. Karl Marx argued that by paying labour up to its marginal contribution to production is a scant reward for the efforts, creativity and risks taken by workers. Capitalists receive the lion’s share of value created by business activities since the profit and super profit accrues to the entrepreneur. Marx also argued similarly that much value went to those who possessed land. In essence the bourgeoisie gains at the expense of the proletariat. Marx argued that capitalist free markets were inherently unstable and cited evidence of the troubled and turbulent markets. In the long run markets will fail and therefore he could justify revolution to bring down the bourgeoisie and to turn private ownership into public ownership. Profit or the pursuit of profit is therefore immoral.



Unfairness is also maybe an issue with the capitalist model since the allocation of goods and services to consumers depends on their ability to pay.



This is an argument that really goes to the heart of economic theory and to the premise that resources are scarce and demand is not. Scarce resources need to be rationed and the market mechanism does that in a rational way. Of course in the real world income distribution and wealth distribution are far from even not all workers contribute the same marginal contribution.



Some argue a different case of morality suggesting that morality is about right and wrong and that firms in their pursuit of profit may do wrong. If society values clean air and water and sustainability of the resources on our planet then firms that pollute, create products that pollute and use up natural resources without replacement compromise the planet for future generations. Equally if society believes in the dignity of people then firms that employee children or fail to offer safe and clean working environments with reasonable pay and conditions are being unethical and are driven to it be the pursuit of profit. In essence environmental and social wrongs have no economic cost to firms directly and environmental and social improvement, yield no revenue for them. Faced with this firms will do little or nothing.



The social and environmental costs are costs to society not to the firms. If the public is not willing to pay then there will be no improvement. This then paves the way to argue for intervention to solve the market imperfection, government moves in democratically with a mandate to tax and penalise those who fail to meet social and environmental standards. Firms then pay for their wrongs and then incorporate these costs into their cost of production and as a result will meet the standards even when attempting to maximise profit. Profit is still moral.



We might also consider another issue of morality in business and that is honesty. Some may argue that business can never be moral because dishonesty is part of the natural negotiations between entrepreneurs and in negotiations between workers and entrepreneurs. This is however a potentially false premise since in essence markets require information to work efficiently and without trust will fail. Markets work when there is trust and a free market with some regulatory framework either as self-regulation or imposed by government will deal with the issues.



What we conclude is that markets are by no means perfect and require government intervention or self-regulation. It is not the job of firms to do good but the job of government to prevent them from doing bad.



If we take the argument one step beyond we might even argue that the inherent morality of many human beings also creates a philanthropy that goes beyond mere compliance and creates a social responsibility to do good. It may even be that profit creates the potential for the philanthropist to give.



Conclusion



These are arguments that should help you to articulate in the exam.

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