Profit maximization as moral purpose: Channeling Milton Friedman

Profit maximization as moral purpose: Channeling Milton Friedman

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To many, profit maximization seems cold, heartless, even exploitative. They consider business immoral and the profit-seeking corporate model to be in need of reform. The advocated reform is for corporations to adopt “social” goals—reducing poverty, protecting the environment, increasing social justice, and the like.

The corporate reform movement is not new. Almost 50 years ago, Milton Friedman, the Nobel-Prize-winning economist, was observing “the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces.” A critic of “corporate social responsibility,” Friedman remains one of the few defenders of profit making, along with novelist-philosopher Ayn Rand.

Since Friedman’s 1970 article, “The Social responsibility of Business Is to Increase Its Profits”, the corporate reform movement has grown stronger, as Terence Corcoran writes in an excellent Financial Post article.  As evidence, Corcoran notes recent books: Prosperity: Better Business Makes the Greater Good (2018) by Colin Mayer, a business school professor(!) at Oxford University, and Re-imagining Capitalism (2016), edited by Dominic Barton, former head of McKinsey & Co, and Dezsö Horvath, dean of Schulich School of Business, York University. Both denounce profit making and capitalism, as do business leaders such as the former CEO of Unilever Paul Polman and BlackRock CEO Larry Fink, prominent proponents of “social purpose” for business.

Profit seeking and capitalism are natural and beneficial and provide the proper moral purpose for business.

Corcoran reports that in Prosperity, Mayer denounces “the Friedman doctrine” [defense of profit-making and capitalism] as “unnatural” and claims that it will destroy nature and society. The longer it is supported, Mayer writes “the greater will be the damage it inflicts on our societies, the natural environment, and ourselves.”

But is the profit-maximizing corporate model in need of reform? Are profit making and capitalism unnatural and destructive and “wicked and immoral,” as the reformers argue?

Channeling Friedman and drawing from the philosophical foundation of rational self-interest in Rand’s philosophy of Objectivism, I argue “no.” Profit seeking and capitalism are natural and beneficial and provide the proper moral purpose for business.

Profit seeking is natural. Contrary to arguments of Mayer, profit seeking is natural: it is consistent with the requirements of human survival and flourishing. Many corporate critics reject those as the standard of value and instead adopt environment untouched by humans, or equality of income and wealth, both of which contradict the requirements of human survival and flourishing.

Humans survive and flourish through one primary means: the use of reason, to achieve self-interest, their values.  We must achieve values, from energy, food and shelter to cell phones—not lose them. We create material values by shaping nature to meet our needs.

Profit seeking is self-interested value pursuit that, when achieved, makes the lives of corporate shareholders, as well as of their trading partners (employees, customers, and suppliers) better by providing them the material means of survival. Seeking and making profits does not harm anyone, as long as there is no deception or fraud involved. If there is, then profit making is not in the shareholders’ nor in anyone else’s interest and not sustainable.

The use of reason has but one social requirement: freedom. In order to think and act on our thinking, we must be free of coercion and fraud. We must be free to create material values, trade with whomever is willing, and own private property. That is made possible by capitalism, which Ayn Rand defines as “the social system based on the recognition of individual rights, including property rights, in which all property is privately owned.”

Freedom and profit seeking under capitalism do not damage “societies, the natural environment, and ourselves.” The individual rights to life, liberty, property, and the pursuit of happiness protect an individual’s freedom to act in a social context. They do not permit a person to do whatever he feels like, on a whim, as everyone else has the same rights that the government (under capitalism) protects.

Freedom, ensured by individual rights, and profit making do not damage “societies.” As Friedman observes, “society is a collection of individuals and the groups they voluntarily form.” Damaging society would mean damaging its individual members through coercion or fraud—which the protection of the individual rights deters and punishes. Similarly, when all property is privately owned, property rights protect against pollution and damage by others (and self-interest motivates protection of one’s own property). Finally, freedom and profit making do not damage “ourselves” but makes our survival and flourishing possible.

Profit maximization is the proper moral purpose of business. Profits can be maximized only when superior value is being created. Profits don’t emerge out of nothing: a company must create products or services that customers are willing to pay more for than it costs the company to produce them. In other words, companies must provide value to customers before they can create value for shareholders. Such value creation requires the voluntary collaboration of multiple partners, from employees to supplier to creditors, which can only be obtained by trading with them fairly.

While profit maximization is the purpose that motivates shareholders’ investment, it is only possible through production and trade of material values, the stuff of our survival and flourishing. Therefore, profit maximization is moral

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7 Responses

  1. please look at the word order in the second to last paragraph … “willing to pay for more than it costs”. I think you mean to reverse, for and more.

  2. Very good, thankyou.

    Suffused in the claims you rebut are:
    – Marx drive to the bottom’ ethics presumption (which is based on denial of the human mind’s effectiveness for life).
    – Marx’ determinism (inevitability, which denies human capability).
    – Teachings that separate business from life (instead of recognizing that people are the cause of any problems with both business and government).

  3. A side note is that the market has many examples of pricing not matching expectations because of demand.

    For example, customers for airliners commit to finish paying and take delivery on completion, paying a substantial amount for progress in production. But if they no longer need the airplane (lead times being long), they may have to resell it at a loss or may be able to sell it at a profit. (The manufacturer will try to match the seller to another customer who has a need). Unusual configurations take longer to sell, such as the 707s with Western Airline’s very different air conditioning system – Canadian Forces bought them.

    Closer to home, clearance bins in stores have deeply discounted products that didn’t sell because people just didn’t want such a product, or it has defects (design or manufacture), or the maker did not communicate what it is.

  4. Equating “maximizing profits” with the “self” – the individual? The author makes an interesting argument. However – once one considers that individuals aren’t just executives, board members, employees, supplier, vendors – that individuals are everyone – I personally don’t believe that a strict “profit maximization” philosophy is beneficial for society or individuals.

    The truth is – the viability of this strict “profit maximization” argument feels like a justification for greed while ignoring history, facts and our current reality.

    Among the many areas of progress that came out the European Renaissance and the Enlightenment – areas of progress that we enjoy today – are the various ideas around the value of and the rights of the individual. Previously – most individuals were at the mercy of those that wielded power (which came in the form of land-ownership and other wealth – grown and passed from one generation to the next). Justice (fairness) was at the whim of those that held the power (wealth) and the caste/class you were born into was likely the one you died in (as would your children, their children, etc.). Of course – then (as now) – those with wealth looked to improve upon their wealth (aka – maximize profits). After all – the society in which they lived favored and rewarded those with the most power (wealth). This enabled the wealthy (powerful) to manipulate those “below” them (the less powerful/wealthy) and curry favor with those “above” (the more wealthy, royals, the Church, etc.) and make sure that justice (fairness) favored them whenever possible. The focus certainly was on maximizing profits – but could that be considered a highly moral society?

    As we left the 17th century, we came to understand that a successful and moral society – one that aspired to ensure true justice and domestic tranquility – would have to take a new path. Old traditions were difficult to break – but the Europeans had a chance to start fresh across the Atlantic. (Still, the pursuit of maximum profits – after 300+ years of war over land, resources and spoils – would continue to rage across Europe for another 300 years. How many tens of millions dead? Moral?). And even in the “New World”, the former Europeans realized “Nice – there is gobs of land and rivers here that we could use to maximize profits through fishing, sailing, hunting, raising animals, farming and mining – but there are already people here – and they’re in the way. Well – I guess we’ll have to kill and/or relocate them in order to maximize profits”. Moral?

    Also – sure, it’s romantic to consider how profit maximization drives product innovation, superior services and the like. . .and that is often the case. However, oligopolies and monopolies consistently fail to innovate while extremely successful at maximizing profits. Additionally, they’re often crushing or gobbling up competition in the process (for a timely example, see the ticketing industry). That’s moral?

    The author’s argument also fails to take into account the full ledger that is reviewed in the C-Suite. Time and again, executives see employees (and their sick days, vacation, training, benefits) as a drag on profitability. Having fewer and fewer employees has a positive impact on the bottom line – thusly maximizing profits. (Side note – fewer workers also eventually translates to fewer consumers). If profit maximization is an absolute philosophy, let’s take this to the absolute extreme – wouldn’t free labor be the ideal work force for maximizing profits? So perhaps enslaving your workers would be the best option. But slavery – moral?

    Finally – the Enlightenment’s concept of the individual has become fetishized in the West (the image of lone rugged cowboy on horseback, concepts of “By my own bootstraps” and “the self-made man/woman”). The truth is that civilization came about because of our willingness to cooperate and work together. It was only with that understanding that we can accomplish more together, that we crawled out of the caves and began to advance. Without someone figuring out “Hey – you know, if you go around that tree and you go around that rock and we go at the woolly mammoth from different angles, we’ll have much more success than if I just try to take it down on my own”. Later on, “Hey – since it no longer takes all of use to procure protein, I’m going to sit here and weave some storage devices – while Steve over there is going to see what he can get from putting those seeds in the ground”. . . and later still “Since those folks have successfully penned in some animals, we’re having luck growing grain and we have storage devices, we now don’t have to move around every week. This will allow me the time to build a very strong fire, experiment with putting things in the fire and see what sort of metal alloys come out”. Yes – each individual contributed and tried to get the most out of what they were putting into their endeavors (maximized profits?) . . .and perhaps they even started trading this for that. . .but they were doing so as part of the larger community. Each individual in the community benefited.

    And even today – we can look around and see that our community/society is essential to our individual success. The teacher who stays late after school (uncompensated) with our kid because we’re running late due to snarled traffic . . . the unpaid mentor that coached us when we switched careers . . . the parent that spends time nurturing their child rather than making another sales call. To maximize profits, the teacher should demand payment from the parent or “Next time, your kid is on their own” . . . the mentor that states “I feel fortunate in my success and I’m happy to ‘pass it on’ and help you – but here is my bill.” . . . the parent that arrives home ready to nurture the child but explains “I’m here for you kid. I’m going to help you with your homework, but I’m missing out on a commission – so I need you to make up the difference”. These are all examples of profit maximization – but are they moral?

    Perhaps seeing life through this prism is difficult . . . perhaps inconvenient. This is difficult because life is complex. Life is nuanced. There is no black and white – life is pretty much just a bunch of gray. Given all the gray, it’s tempting to cling to absolutes. In the past 40 years, folks have sought comfort in the idea of pure “profit maximization” . . . but it’s a false god. It typically enforces peoples’ worst tendencies and echoes myths and stories we tell ourselves. We see this reflected in the poisoning of our culture, politics, systems of justice and the growing distance between the have and have-nots since the publishing of Friedman’s book. Following the beliefs of Ayne Rand (whose philosophies are a human’s whip-lash response to Marxist-Leninism) and Milton Friedman will take us down the primrose path back to 16th century Europe.

    I don’t mean to make the argument that companies should not pursue A profit . . . but pure profit maximization . . . profit maximization at the expense of ALL else . . . that’s absolutely anything BUT moral. Balancing profits while accounting for its impact – that is the natural and righteous path to benefit the self – as well as the larger culture and society. If corporate entities are incapable of doing that themselves, then institutions need to exist and have the power to do it for them.

    Thanks.

    1. Thank you for your comments. Long-term profit maximization that I am advocating cannot involve the violation of individual rights, i.e., the initiation of physical force and fraud. Slavery, or any other kind of coercion, is therefore not consistent with profit maximization. I recommend reading my book, or the writings of Ayn Rand, and even Milton Friedman (who also opposes initiation of physical force or fraud, even if not with the same emphasis and clarity as Rand).

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Jaana Woiceshyn teaches business ethics and competitive strategy at the Haskayne School of Business, University of Calgary, Canada.

She has lectured and conducted seminars on business ethics to undergraduate, MBA and Executive MBA students, and to various corporate audiences for over 20 years both in Canada and abroad. Before earning her Ph.D. from the Wharton School of Business, University of Pennsylvania, she helped turn around a small business in Finland and worked for a consulting firm in Canada.

Jaana’s research on technological change and innovation, value creation by business, executive decision-making, and business ethics has been published in various academic and professional journals and books. “How to Be Profitable and Moral” is her first solo-authored book.

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