Filed under: character, competition, corporations, decision-making, ethics, finance,profits, white collar crime | This is the third in a 3-part series on the ethics of profit. (See also Part 1 and Part 2. ) As mentioned in previous postings, we should distinguish between our ethical evaluation of profit per se (which, after all, just means financial “gain”), and our ethical evaluation of the profit motive.
After all, I don’t worry at all that Big Pharma makes big profits — that just means that they make products that lots of people think are worth paying for — but I do have serious worries about what people inside the pharmaceutical industry are willing to do to maintain those profits. But we should be cautious about jumping too quickly to criticize the profit motive, either in particular cases or as a force in the economy as a whole. Here are just a few points: 1) People often suspect the profit motive — or at least, excessive focus on the profit motive, in the form of greed — of being responsible for a lot of corporate wrong-doing.
But, anecdotes aside, that intuitive hypothesis isn’t necessarily well-supported by the facts. I’ve mentioned previously a paper by philosopher Joseph Heath* that points out that there are problems with the theory that greed is the root cause of a lot of wrongdoing. Corporate crime is actually more often aimed at loss-avoidance than at profit-making. And it’s also worth noting that we see lots of white-collar crime occurring at the top of organizations, committed by people who are already rich and who hence have relatively little to gain in financial terms.
As Joe points out, the criminological literature has long since discarded the notion that greed is the root of all (or even most) evil. 2) Despite the fact that the traditional corporate (and anti-corporate) rhetoric has focused on the significance of profits, it’s probably much more likely that corporations and the key decision-makers within them are moved by a much broader range of motives, including things like: A desire to increase market share; The desire to innovate; The desire to create cool products;
Basic competitive drives to be (and prove yourself to be) bigger, stronger, faster, smarter, etc. ; The CEO’s desire to build his or her personal legacy; etc. Of course, each of those motives can almost certainly result in wrongdoing too. But that just reinforces the point that even if the profit motive causes trouble, it isn’t unique in that regard. 3) The profit motive, whatever else it may do, plays 2 absolutely essential roles in any modern economy. Economist Steven Horwitz points this out in his “Profit: Not Just a Motive”.
One role (as Adam Smith pointed out) is the basic one of motivating productive activity. Now, Smith never said that the profit motive is the only thing that motivates people to engage in production and trade. But what he did say is that even someone who doesn’t happen to have much love for his or her fellow human being is liable to end up doing something productive, even if only because he or she wants to earn a living. The other role for the profit motive is more subtle, and has to do with information.
As Horowitz puts it: What critics of the profit motive almost never ask is how, in the absence of prices, profits, and other market institutions, producers will be able to know what to produce and how to produce it. The profit motive is a crucial part of a broader system that enables producers and consumers to share knowledge in ways that other systems do not. 4) The profit motive also plays an essential role in modern corporate governance. Most large corporations are “owned” (in a very loose sense) by shareholders, to whom corporate managers and directors owe a fiduciary duty.
In particular, managers and directors are obligated to try to make a profit. (Note that, contrary to what many seem to think, there is no obligation to actually make a profit, and the need to make a profit is not, in fact, legally binding or overriding. Shareholders only ever get a profit after a number of other, legally-binding, obligations — such as the obligation to pay workers, to pay suppliers, to provide refunds for consumers who bought faulty products, etc. — are met. ) The strong obligation to try to make a profit for shareholders provides focus for managers.
Rather than being pulled in 20 different directions by 20 different stakeholders, corporate managers have in mind that, yes, they need to keep in mind various stakeholder obligations, but all of that has to be part of an overall plan aimed at shareholder profits. Many people believe that this imposes a kind of discipline on corporate executives, without which those executives would be free to feather their own beds, throw lavish parties for their favourite charities (not necessarily the most needy ones), hire under-qualified siblings for key roles, etc. 5) Getting rid of the profit motive would essentially mean abolishing private ownership.
When we talk about “profit”, we’re typically talking about the money that flows from owning something. It might be the landlord’s profit (i. e. , whatever’s left after costs are subtracted from rent) or the shareholder’s profit (i. e. , the dividend that might be paid out on the shares he or she owns, if the corporation happens to make a profit). Abolishing the profit motive basically means and end to permitting individuals to own things. So why do critics of the profit motive so seldom (in the last, say, 4 decades) propose ending private ownership? Hmmm.
As Joseph Heath put it in “Learning to love the Psychopath” [PDF] (a review of the movie, The Corporation), “If public ownership is not the solution, then private ownership cannot be the problem. ” 6) Even if we could keep our attachment to private ownership and wish into existence more “positive” motives than the profit motive, it’s not clear that we would be better off. Even if large numbers of executives (and shareholders) could be convinced not to aim at profit, but instead to aim at things like charitable deeds or the public good or world peace, it’s not clear that that would solve the problems we are most worried about.
Does anyone really think that fraud couldn’t be, or indeed hasn’t been, committed in the name of charity? Does anyone believe that lies haven’t been told and thefts committed in the name of the public good? None of this is intended as a blanket endorsement of profit-seeking. It’s just a reminder that in our haste to criticize the profit motive, we ought not ignore important questions about just what role the profit motive plays, what current institutions do to transform a range of motives into a range of outcomes, and what alternative motives and institutions are available to us.