What Is a Business For? Is Profit a Dirty Word?

UnknownAt a recent social event, most guests sanctimoniously agreed it was somehow disgusting that anyone should make a profit providing health care. One woman said she had no problem with a store profiting from selling sweaters; but no one should profit from people’s hardship or suffering. I frankly thought that bizarre. Isn’t the relief of suffering a greater boon, more worthy of compensation, and incentivizing, than merely supplying sweaters? I sure as heck didn’t begrudge the profit of the dentist who cured my tooth ache; that’s what motivates people to go to dental school, invest in offices and equipment, hire staff, etc., to provide such service. Nor do I resent the profits of the pharmaceutical company producing the medicine that makes my wife’s life livable.

Unknown-1Calvin Coolidge said, “The business of America is business.” But what is a business for? There are two schools of thought. One says a business’s only purpose is to make money for shareholders (the owners) and anything detracting from that is indeed a dereliction of its primary duty. The other side says a business should serve the interests of all “stakeholders” affected by its doings – including employees, customers, and the broader public. They note that in olden times a business seeking a corporate charter from the state (allowing limited liability for shareholders) was required in exchange to have a public benefit purpose. But that model was dropped in the 19th century in Britain and America, allowing corporations to be chartered just to do business.

Thus critics of capitalism talk as though the first side won the argument and businesses do exist solely for profit – in disregard of any other consideration – and hence are ipso facto a menace. For example, Naomi Klein, whose recent book I reviewed, seemingly thinks profit is the sole reason energy companies extract fossil fuels – the fact that society uses, needs, fossil fuels doesn’t enter into it. As if, remove the profits, and no extraction would occur.

imagesThis tells us there’s something incomplete in the view of businesses as solely profit maximizing creatures. It leaves out the way they do that – by supplying something beneficial to customers*, creating value greater than what is paid (of course some predatory businesses do the opposite, but that’s cheating). The point is epitomized by Steve Jobs. He made tons of money, but that wasn’t his ultimate objective – rather, the profits were what enabled him to perfect products useful to purchasers. That was his true motivation.

People who bought his products valued them more than the money spent. That difference, or surplus value, created by Jobs, increased societal wealth. Had he never existed, all those people would have been worse off. His wealth would not have been somehow distributed among them; it would never have existed either. This is what the 99%-vs.-1% mentality misses.

Today it’s more true than ever that business is really all about customer value, with the internet leveling the competitive playing field, giving consumers far more choices and access to information. A business whose products aren’t great, that doesn’t satisfy customers, will not survive.

Anyhow, it’s too simplistic to say (legitimate) businesses are only concerned with profit. The real world isn’t like that. It’s certainly untrue to say they care only about shareholder returns. Shareholder ownership is merely notional; in reality a corporation owns itself, buying shares merely entitles one to certain rights, while management isn’t meaningfully beholden or accountable to shareholders, instead running the company for its own purposes. And while a firm’s profitability does benefit managers, mainly they care about profits because profits advance their other agendas (a la Steve Jobs).

Unknown-2Also, speaking of the real world, corporate denizens are human beings, and while money is surely a big motivator, nobody is exclusively mercenary. Another big motivator is how one appears to other people – and in the mirror. Most of us want to be seen as doing good, and even to actually do it. Back in the ‘70s I was a regulatory lawyer battling Con Edison over its rates. The company was in financial trouble; and I actually felt management was betraying shareholder interests to bend over backward for consumers.

images-2Corporate greed? It’s not so simple.

At the end of the day, the most successful and profitable businesses are those that are best at creating customer value – which of course means societal value. Adam Smith wrote of the market’s “invisible hand” thusly benefiting society. I heard a radio commentator say Smith might have been right in his simpler time (1700s) but not in today’s world rife with inequality. Really? In Smith’s day, the great mass of humanity everywhere lived in squalid poverty – whereas in the last century, worldwide average real dollar incomes quintupled. That colossal fact is not negated by the inequality of the few with great wealth. They haven’t stopped billions of people from seeing a quantum leap in living standards in modern times. And that vast enrichment is nothing other than the cumulation of customer value created by businesses seeking to profit thereby – i.e., free market capitalism. A stunning vindication of Adam Smith and his invisible hand.images-1

* To quote management guru Peter Drucker, “There is only one valid definition of a business purpose: to create a customer.”

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13 Responses to “What Is a Business For? Is Profit a Dirty Word?”

  1. DAN Says:

    Cutting through al the BS, PROFIT is not a dirty word. I am an old East Texas country boy and am very plain spoken and do not mince words . Words such a COMMUNISM, TRYANT, DICTATOR, FAR LEFT, are dirty words.
    Anyone who thinks that PROFIT is a dirty word, has never run a business or depended on themselves. I have worked since I was 12 years old during the 1940s, during jobs that would be considered
    illegal today due to age. Those that consider PROFIT a dirty word, i.e. the Liberals, do not want to work, but want entitlements, i.e., Liberal handouts.

  2. Herb Van Fleet Says:

    Spoken, er, writtenlike a true capitalist. I do have a couple of issues though.

    First, you seem to mix profit with compensation. Doctors, dentists, lawyers and others with professional licenses charge for their services. Organizations, the ones in it for the money, are after profits.

    Second, health care is not subject to Adam Smith’s “invisible hand.” If you have a health emergency — wreck, heart attack, etc. — you don’t get a choice of hospitals and if you could, you are usually more concerned about your health issue than about calling around to find the cheapest hospital. Same is true with your doctor. You going to refuse to pay the cardiac surgeon until he/she gives you an itemized billing for his charges? So, with the exception of medical equipment and supplies, there is no invisible hand at work in the health care business. And that is why we have the most expensive system in the world with less than exceptional health outcomes.

    And there are companies, especially the big ones, that favor their stockholders over the other stakeholders. That’s why the heads of the executives of those companies explode at the mention of minimum wage. Likewise, if the Chinese or the Bangladeshians can make it cheaper, then, sorry American workers, you lose.

    Lets not forget the too-big-to-fail banks. They collectively cost Americans over $7 trillion starting in 2008. Much of this activity was, by all accounts, illegal. But the leaders of those companies have not been charged with their crimes. And the too-big-to-fail banks are still operating and making lots of money. Whatever happened to the Sherman Anti-Trust laws and the banking laws that FDR put in place back in the 30’s?

    Then there are the cowardly and immoral pharmaceutical companies that charge pretty much what the market will bear, and then some. And with their patents, they have a virtual monopoly, which means no competition. It used to be that you could buy drugs much cheaper in Canada than here. Then the pharmaceutical companies bought off Congress and that little loophole is now closed.

    I could go on but you might want to check out this Washington Post article http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/26/21-graphs-that-show-americas-health-care-prices-are-ludicrous/

    Yes, there are many companies that are more holistic in terms of balancing the interests of all the stakeholders. Southwest Airlines and Starbucks come to mind. But they are certainly in the minority.

    Well, I’ve gone on way too long. But I appreciate your forbearance. In the meantime, you might want to pick up a copy of “23 Things They Don’t Tell You About Capitalism,” by Ha-Joon Chang. It’s quite an education on capitalism.

  3. Lee Says:

    I think pretty much everyone agrees that a transaction between two willing participants increases wealth and is good. The disagreement comes in defining the word “willing.” If the transaction is a purchase of an addictive substance then the transaction might be prohibited (and carry long prison sentences) because an addicted person is not “willing” in the positive sense that most of us desire. Likewise, a person emerging from several days in the desert might turn over neir entire fortune for a glass of water but, despite the verbal affirmative, the desperation is a signal that this is not “willing” in the positive sense that most of us desire.

    Those who bemoan certain forms of wealth production are not upset about the production of wealth. They are assessing the positive-sense willingness of the actors and are finding it wanting.

  4. rationaloptimist Says:

    Thanks, Herb, for reminding me of the left-wing anti-capitalist viewpoint. You make much of health care. In fact the reason health costs are so out-of-whack and irrational is precisely because this sphere does NOT act like a market, with competitors vying, on price and service quality, for the consumer dollar (the normal situation).
    Lee, the person emerging from the desert and being overcharged for water is not an instructive example. The vast bulk of the wealth of this world is not earned that way — rather, it is earned (Steve Jobs again) by businesses providing desired products and services at prices people willingly pay.

  5. Lee Says:

    There is almost no one who disagrees with the statement “The vast bulk of the wealth of this world is … earned (Steve Jobs again) by businesses providing desired products and services at prices people willingly pay.” However there are some few cases where the willingness hits shades of gray … which is where all the interesting discussion is.

  6. Herb Van Fleet Says:

    rationaloptimist, I’m a little disappointed in your response to my post. I thought surely you could get past your confirmation bias and see the forest that’s actually there and not the one you want to see. Denial is not a long river in Africa. You are apparently just another right-wing Tea-partyer who believes that the news on FOX News.is actually news.

    On the other hand, this is your blog and you can say anything you want. So I appreciate your indulging my particular point of view. Disagreement is not disdain.

  7. rationaloptimist Says:

    Lee: I guess Herb is a counter-example (“almost no one”).
    Herb: I get weary of responding to the usual demonization of opposing points of view. It’s poisoning American politics.

  8. Lee Says:

    Yes, your rhetoric and Herb’s are at opposite ends of the spectrum, but I think there is a large amount of “It is always true except when it is false” vs. “It is always false except when it is true” going on here. In these kinds of disagreements, I look away from the general statements and, instead, at the specific examples. Herb’s examples of “bad capitalism” are health care organizations and pharmaceutical companies (that could be said to exploit the sick), companies that fight the minimum wage (which could be argued is akin to reviving indentured servitude), companies that export jobs (to the desperate in other countries), illegal activities at banks, and the existence and rescue of banks too big to fail.

    Perhaps I am reading too much into his words, but all but the last two of these are examples where he thinks the average consumer cannot be considered willing in the positive desirable sense. People may disagree as to whether these cases cross the line from tolerable to something intolerable, but I think we all agree that the other party is not insane; there is something that could be discussed. Furthermore, the penultimate could be argued to be illegal activity, which you both agree is out of bounds. Only the “too big to fail” problem is an example where I do not see the degree of willingness or illegal activity come in to play. But the rescue there ain’t capitalism, so this one is not a criticism of capitalism!

    In short, I think you and Herb agree that capitalism is best, except where one party shouldn’t be considered willing. That is, you both agree that capitalism is terrible, except where both parties should be considered willing in the positive sense. Yes, I expect that you two would quibble over the extent to which various cases fall into which category, but to me it appears that your overall positions are not as far apart as they declare themselves to be. I suspect an acceptable compromise could be found in each of these realms, if only we had some politicians who represented the middle ground.

  9. Anonymous Says:

    I will just defer to the wisdom of Winston Churchill, “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

  10. Rashad Says:

    I bet rich businessmen doing philanthropy (and especially institutionalized philanthropy a la the Bill and Melinda Gates Foundation) is much higher than it ever was before. Bill Gates waited a long time before starting doing any philanthropy or even thinking about it, but now his example has encouraged younger entrepreneurs to start giving earlier, like Mark Zuckerberg. Some of the not so young generation also couldn’t help but follow the example: Just last month or so Al-Waleed Bin Talal gave up his entire 32 billion dollar fortune to philanthropy (https://www.youtube.com/watch?v=uigITns41UY).

    These people who are so perfectly able to pragmatically as businessmen distance themselves from politics and ideologies, will fill the gaps in health and education, etc, where governments are struggling financially and perhaps also because of corruption.

    Christopher Hitchens, who self-identified as a leftist for all of his life (even the period after 11/september), said in an interview that Marx was right on the materialistic conception of history, but he didn’t envision how revolutionary capitalism would turn out to be in solving its own problems without the need for a revolution. Better times for everyone lie ahead.

  11. rationaloptimist Says:

    I agree. What Marx failed to anticipate was that technological and productivity advancement would transform the human landscape and raise the average person in advanced countries from mere subsistence to decent living standards.

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