Asked what a business is, the typical businessman is likely to answer, “An organization to make a profit.”
The typical economist is likely to give the same answer, “to maximize profits.”
This answer is not only false, it is irrelevant.
The danger in the concept of profit maximization is that it makes profitability appear to be a myth.
Profit and profitability are, however, crucial—for society even more than for the individual business.
We are a multi-institutional society.
Public-service institutions are supported by the economic surplus produced by economic activity.
They are social overhead.
The growth of the public service institution in the twentieth and twenty-first centuries is the best testimonial to the success of business in discharging its economic task—producing economic surplus.
Yet, unlike the early nineteenth-century university, the service institutions are not a luxury or an ornament.
They are essentials of a modern society.
They have to perform if society and business are to function.
These service institutions are the main expense of a modern society.
Approximately half of the gross national product of the United States (and of most of the other developed countries) is spent on public-service institutions.
Every citizen in the developed, industrialized, urbanized societies depends for survival on the performance of the public-service institutions.
These institutions also embody the values of developed societies.
Education, health care, knowledge, and mobility—not just more food, clothing, and shelter—are the fruits of our society’s increased economic capacities and productivity.
Yet the evidence for performance in the service institutions is not impressive, let alone overwhelming.
Colleges, hospitals, and universities have grown larger than an earlier generation would have dreamed possible.
Their budgets have grown even faster.
Yet everywhere they are in crisis.
A generation or two ago their performance was taken for granted.
Today they are attacked on all sides for lack of performance.
Services that the nineteenth century managed successfully with little apparent effort—the postal service, for instance, or the railroads—are today deep in the red and require enormous subsidies.
National and local government agencies are constantly being reorganized for efficiency.
Yet in every country citizens complain loudly of growing bureaucracy in government.
What they mean is that the government agency is being run more for the convenience of its employees than for contribution and performance.
This is mismanagement.
Yet profitability is, not the purpose of, but a limiting factor on business enterprise and business activity.
Profit is not the explanation, cause, or rationale of business behavior and business decisions, but the test of their validity.
If archangels instead of businessmen sat in directors’ chairs, they would still have to be concerned with profitability, despite their total lack of personal interest in making profits.
The root of the confusion is the mistaken belief that the motive of a person—the so-called profit motive of the executive—is an explanation of his behavior or his guide to right action.
Whether there is such a thing as a profit motive at all is highly doubtful.
It was invented by the classical economists to explain the economic reality that their theory of static equilibrium could not explain.
There has never been any evidence for the existence of the profit motive.
We have long since found the true explanation for the phenomena of economic change and growth that the profit motive was first put forth to explain.
It is irrelevant for an understanding of business behavior, profit, and profitability whether there is a profit motive or not.
That Jim Smith is in business to make a profit concerns only him and the Recording Angel.
It does not tell us what Jim Smith does and how he performs.
We do not learn anything about the work of a prospector hunting for uranium in the Nevada desert by being told that he is trying to make his fortune.
We do not learn anything about the work of a heart specialist by being told that he is trying to make a livelihood, or even that he is trying to benefit humanity.
The profit motive and its offspring maximization of profits are just as irrelevant to the function of a business, the purpose of a business, and the job of managing a business.
In fact, the concept is worse than irrelevant:
it does harm.
It is a major cause for the misunderstanding of the nature of profit in our society and for hostility profit, which are among the most dangerous diseases of a society or (of) organizations.
It is largely responsible for the worst mistakes of public policy—in this country well as in Western Europe—which are squarely based on the failure to understand, the nature, function, and purpose of business enterprise.
And it is in large part responsible for the prevailing belief that there is an inherent contradiction between profit and a company’s ability to make a social contribution.
Actually, a company can make a social contribution only if it is highly profitable.