- Taylor Tomasini
- Sugar Land, TX
- United States
This conversation is closed. Start a new conversation
or join one »
What if profit maximization is not only wrong, but dangerous?
Profit maximization implies hierarchy, standardization, and efficiency (how else do you maximize?) but these activities limit diversity and create bureaucracy.
Genetic diversity is what helped people survive the Bubonic plague. Terrorist organization survive because they have no leader (hierarchy). Your body creates redundancies (think two kidneys). And your psychological frame (profit maximization) can help you act in highly unethical ways.
What if profit maximization is contributing to unethical behavior, economic fragility, boom and bust cycles, and the degradation of society?
What if instead of placing profit at the center of our aims and desires we sought to maximize something else and simply made profits a constraint -- your business must be profitable in order to continue to exist?
Taylor Tomasini
The thought: Leverage helps companies make larger profits, but it also fragilizes the organization -- making it susceptible to volatility.
The question: What if profit maximization is responsible for over-leveraging our companies and thus making our companies susceptible to unforeseen risks and to shocks and volatility?
Example: You see this in the banking crisis -- over-leveraged banks not capable to withstanding extreme market volatility. Why is this problematic? Because what we found was that we couldn't let the banks fail. We couldn't let them fail because we realized how much our livelihood was tied to theirs. That's the problem and that's my question. What if profit maximization means fragility, and even worse; in today's society, what if profit maximization means fragility for the entire global economy because of how interconnected we are?
That's my question.
pat gilbert 50+
Fritzie Reisner 100+
pat gilbert 50+
Fritzie Reisner 100+
pat gilbert 50+
Krisztián Pintér 200+
leverage is a tool that helps risk management, and thus makes business more effective. when things go in the wrong direction, one can say that efficiency is a bad thing. going slow in the wrong direction is better than going fast. but i think everyone in the right mind would say that it is not a solution. the solution is to turn to the right direction.
one needs to analyze the situation, and find the real causes.
Krisztián Pintér 200+
http://www.youtube.com/watch?v=3PLORO0-ApM
Why Capitalism Needs Losses, Too | Robert P. Murphy
Taylor Tomasini
pat gilbert 50+
Taylor Tomasini
"let me add that we (often) live our lives in a way that is not fault tolerant. if i look around, i see people who are indebted to a level and have a lifestyle that consumes all their income. should their income drop 5%, they are in trouble. should it drop 20% and they are screwed. they just burned the bridges behind themselves."
Your quote is what I'm getting at in my question. What if by seeking to maximize profits companies are leveraging themselves to the point where they are screwed if their income drops? What if profit maximization is the problem?
Krisztián Pintér 200+
btw strangely, free market and actual reality has the same attitude to human beings. in a free market, if you make bad decisions, you suffer the consequences. society, in general, benefits from that, as smart individuals succeed, not smart ones fail.
the only difference is perception. whenever a human suffers, it is a problem. we can feel pain and pity. whenever a company fails, the same instinct kicks in, but we have to override this with reason. we need to understand that companies does not suffer. if they fail, they need to reform or die. no sorrow in that. that is progress. that is the free market. we want this. companies can die. companies are ideas. ideas die. that is cool.
Taylor Tomasini
Krisztián Pintér 200+
Taylor Tomasini
"The need for profit is universal for all businesses in a healthy market economy. Unfortunately, early economists went far beyond merely describing how entrepreneurs always seek profits as an important goal, to concluding that maximizing profits is the only important goal of business."
Mackey, John; Sisodia, Rajendra (2012-12-25). Conscious Capitalism: Liberating the Heroic Spirit of Business (Kindle Locations 486-488). Perseus Books Group. Kindle Edition.
edward long 100+
Taylor Tomasini
edward long 100+
Jedrek Stepien 10+
If you want people to be more human then appeal to their souls (like the churches are doing) but do not try to redefine economics as such.
The field of economics is concerned with the human action, and it could not care less for people's motivations or beliefs.
Profit maximization is neither good nor bad. Everything depends on how people understand 'profit and what are their intentions'. Economics can later help realize it.
Taylor Tomasini
Rory Sutherland also speaks to this point. He talks about the power of perceived value, which has everything to do with people's motivations and beliefs.
Yes, you are right. Economics, as it exists today, is not concerned with people's motivations or beliefs; but this is because of our push to make it logical and rational and deductive. By separating Economics from people's motivations and belief's you, as von Hayek puts it, make the assumption that that which can be measured is all that matters.
Taylor Tomasini
What if profit maximization is harmful because it causes companies to pursue high levels of efficiency and standardization and hierarchy to the detriment of the organizations flexibility and ability to deal with risk and stressors.
Profit maximization frames the world as a zero-sum game. We have a company. It does a process. And if we could only eliminate this many people, and standardize these processes, and make sure that everybody follows the rules we could have a slightly larger slice of the pie.
You see it all around. Pink slime was an effort to cut costs by 2c per pound in the meet packing business. Your company buys the worst coffee and creamer it can find because its cheaper and it 'maximizes' profits.
Innovation, which is the driver of economic value because its the only means by which we create that which hasn't existed before, is risky and it's not efficient, and it doesn't quite align with profit maximization. Sure, it'll get you higher profits in the long-run, but when you're on the hook to maximize profits for your investors now it's really easy to shirk innovation and go for some more efficiency and standardization (as cost cutting measures).
What if profit maximization is creating a psychological frame that causes us to be too short-term focused? What if it really is doing us harm?
What if it's antithetical to capitalism? What if it's opposed to free trade? What if it's opposed to all of the good things we think of when we think of capitalism's role in raising our global standards of living?
Fritzie Reisner 100+
And in terms of hierarchy, that businesses tend to be more hierarchical than nonprofit and public sector organizations that do not aim to maximize profits and that profit maximization is at the root of hierarchy?
I am only looking for you to support these specific claims with which you open.
I see you assert these claims to Kristzian in the thread, but I still see only claims rather than support. As he is pushing you for specific support for these unusual assumptions, I will leave it to him.
Taylor Tomasini
This isn't science fiction. Your body uses redundancy to help you survive stressors it can't predict. Terrorist organizations would be gone if they had a centralized command and control structure -- because the US government could have easily just gone after the center / the head / the one in control.
What if profit maximization contradicts survival?
Fritzie Reisner 100+
You say the body uses redundancy and other organizations need to have a flexibility to move beyond hierarchy in order to survive. But THEN you claim that profit-maximizing organizations do not build in redundancy or flexibility of this kind.
You claim that profit-maximization causes organizations to standardize processes, shun innovation, and so forth. I am asking that you defend these claims if they are the foundation of your argument.
It is not controversial that businesses need to be flexible and innovative in order to survive.
kathy conway
Taylor Tomasini
Every single organization I can think of standardizes their processes. Look at the educational system. It's literally built of off the industrial model of standardization. Kids batched by age and compared against quality standards. Watch Ken Robinson's TED talk on education. Standardization and efficiency and hierarchy are everywhere.
And they are fine. And good -- but to a point. My question is whether we've exceeded that point. Seth Godin writes about how our educational system is producing compliant, mindless, box-checking workers and how our educational system is killing creativity and initiative. My question is: is this right? Should it be this way? Are we okay with the trade-off of: I'll make your educational system efficient if you just kill individual creativity and initiative? That's the question?
And the same question goes for business. By standardizing and seeking efficiency, have we killed initiative and creativity, which are things I believe are crucial to continued economic growth.
Fritzie Reisner 100+
School systems swing from less standardization to more and back, with the standardization right now being a response to government inducements for common core standards and standardized testing. But this does not help your case about private profit-making companies, because schools are not that.
I am familiar both with Kenneth Robinson and with Seth Godin and also extremely familiar with the inner workings of schools, the myths and the realities. But that is, I think, a different discussion than yours which is specifically about profit-maximizing businesses.
Taylor Tomasini
"The need for profit is universal for all businesses in a healthy market economy. Unfortunately, early economists went far beyond merely describing how entrepreneurs always seek profits as an important goal, to concluding that maximizing profits is the only important goal of business."
Mackey, John; Sisodia, Rajendra (2012-12-25). Conscious Capitalism: Liberating the Heroic Spirit of Business (Kindle Locations 486-488). Perseus Books Group. Kindle Edition.
Question: What are your thoughts on John Mackey's statement? Is he right? Is he wrong? Is there something to it? That's all I'm after. What do you think?
Fritzie Reisner 100+
To your question about whether maximizing profits is the only important goal of business, let me step sideways to broaden the picture. Externalities are real and economists typically argue for a structure of property rights or incentives to internalize them. Given such a structure, profit-maximization is not at odds with pursuing these values. If I remember correctly, Coase will be a reference on this. Public goods too are, in my opinion, real, and require a mechanism for sustaining them.
One of the issues of Harvard Magazine in Fall or Winter would likely be of interest to you. There are interviews or papers from a variety of prominent Harvard Business School faculty about how the interests of business line up well with the investment in certain public goods.
I will look for the link. Okay, go to the site and find October.
(You may also take interest in the article in the same issue about some of the experimental initiatives in classroom organization Harvard is undertaking. As I recall, it was either with their most popular class, CS50, or with a math class. I cannot remember now. This is not related to the present topic).
Taylor Tomasini
Taylor Tomasini
Taylor Tomasini
"You say the body uses redundancy and other organizations need to have a flexibility to move beyond hierarchy in order to survive. But THEN you claim that profit-maximizing organizations do not build in redundancy or flexibility of this kind."
I get what you are saying here, so I'll take another attempt at responding.
There is a inverse relationship between company leverage and profits -- the more debt you take on the more capital you can employ toward making profits. This inverse relationship means that as you seek to maximize profits through leverage you simultaneously fragilize your organization.
We saw this in the banking crisis with banks that couldn't deal with a weakening economy because they were over-leveraged.
Here is my question: What if profit maximization is to blame here because a focus on maximizing profits pushed banks to fragilize themselves?
And to Mackey's point, What if there is a more holistic way to look at business; for example, maximizing value for all stakeholders?
Fritzie Reisner 100+
Now you have reread my post, say you understand my question, and then reply by saying profit maximizing firms borrow in order to have resources to put toward making profits.
I don't see the connection between borrowing for the business and innovativeness/flexibility. Borrowing reduces flexibility to do some things in order to increase flexibility to do others.
I could look up the word 'fragilize.' It was not a term of art in the economics I have taken or read. I assume it means vulnerability to some things. When a business takes risks, as innovation requires, that may "fragilize" the organization, then, in the sense that the innovation might fail to produce its expected return? So are you saying that profit maximization produces too many forays into unknown territory- too much innovation that carries risk?
I am in a position again of not understanding where your assumptions are coming from- how they make sense.
That's okay, though. If others follow your argument better, I will leave this discussion in their hands and yours.
Taylor Tomasini
I think that at the end of the day I'm worried about the psychology of profit maximization and whether it leads our organizations to act in ways that are sub-optimal. That's all.
The discussion over flexibility or redundancy or debt or antifragility were all to get at the idea that perhaps by maximizing profits firms act in a way that hampers their overall wellbeing.
I have appreciated the discussion.
Taylor Tomasini
Profit maximization is not synonymous with free trade. It was an economic concept that was developed after seeing the success of free trade. So, what if this concept is not only useless, but harmful? What if it creates the wrong psychological frame? I'll expand the idea a psychological frame just a little bit.
A quote from Ann Tenbrunsel, "...certain cognitive frames make us blind to the fact that we are confronting an ethical problem at all." This quote is from an NPR story entitled Psychology of Fraud: Why Good People Do Bad Things. The point of what Ann is saying is that the way you frame a decision affects how you approach it. So if you see a legal contract as strictly a business document your more likely to be okay with breaking it, but if you see the document as an ethical contract you're less likely.
What if by seeing the purpose of business as profit maximization we've created a psychological framework that allows us to act highly unethically because we no longer see business in terms of its impact on the people around us?
Gail . 50+
Taylor Tomasini
I can't tell if you are kidding or not.
Gail . 50+
Taylor Tomasini
Gail . 50+
John Locke ("Treatises of Government") states that property ownership rights are based on three principles.
1) There must be enough left over for others
2) You must not let it spoil
3) Must mix your labor with it
So, for as long as you take no more than you can use, and you mix your labor with it, private property ownership works well. BUT, he then goes on to say that once the introduction of money is made by men's tacit consent, the rules change. Now
1) You don't have to mix your labor with the world - you can buy labor using money. (pro inequality)
2) Money doesn't spoil so you can have as much as you can get your hands on. (pro greed)
3) There is no longer consideration for whether there is enough left over for others. (poverty creation and senseless destruction of earth resources encouraged)
This appealed to the interests of capital owners (wealthy)
Then Adam Smith comes along. He says that markets become stable through the invisible hand of the markets (invisible hand = a god-concept). He says that that among the inferior ranks of people (the not wealthy), the scantiness of subsistence sets natural limits on their reproduction - so that the "race" of laborers will be held in check by "natural law". The greater number of their children MUST die of poverty related causes - keeping the fiscal system stable. (The wealthy have no responsibility to the poor they created, because God takes care of that through "natural law" that protects the wealthy = divine right and divine intent.)
Without the money that is intentionally threatening the lives of most, there cannot be profit maximization. No more plundering the earth's resources & devaluing fellow humans (inequality.) It is replaced with community working towards our self-iinterests
Taylor Tomasini
When businesspeople operate with a low level of consciousness about the purpose and impact of business, they engage in trade-off thinking that creates many harmful, unintended consequences. Such businesses view their purpose as profit maximization and treat all participants in the system as means to that end. This approach may succeed in creating material prosperity in the short term, but the resultant price tag of long-term systemic problems is increasingly unacceptable and unaffordable. Too many businesses fail to recognize the significant impacts they have on the environment, on other creatures that inhabit the planet (such as wildlife and livestock animals), and on the physical health and psyches of team members and customers. Many businesses have created stressful and unfulfilling working conditions and fostered and fed unhealthy appetites and addictions in their customers. Many companies tend to treat all these as externalities, outside the scope of their own concerns.
Mackey, John; Sisodia, Rajendra (2012-12-25). Conscious Capitalism: Liberating the Heroic Spirit of Business (Kindle Locations 457-464). Perseus Books Group. Kindle Edition.
Krisztián Pintér 200+
if one studies proper economic theory, one realizes that the opposite of profit is waste. profit is synonymous with creation and efficiency, loss (negative profit) is synonymous with waste.
every notion that condemns profit actually promotes waste.
Taylor Tomasini
I think there is a difference in mindset here. In a zero-sum system waste is tantamount to negative profits, but in a value-creating system you're not certain that your actions will yield profits and thus you subject yourself to waste and failure on your journey to create something of social value.
Krisztián Pintér 200+
and we only know in retrospect for sure if we were right or wrong. if we generated profit, we were right. if we did not invest in something that would have generated loss, we were right. if we invented in something that generated profit, we were right. if we invested in something that generated loss, we were wrong. if we did not invent in something that would have generated profit, we were wrong. the goal is always profit.
as profit, as i explained, but you just ignored, *equals* to creation. it does not follow or correlate. it is the same thing. profit means you have grabbed some resources, and transformed them into something more valuable then other usual possible uses of the same resources. you have added to the world's wealth. loss means you have grabbed some resources, and transformed them into something less valuable than other known uses of those resources could have been transformed into. you deprived the world of some wealth.
that is the economic meaning of profit.
Taylor Tomasini
What if profit maximization causes an individual to frame their situation so narrowly that all you can see is the short-term? There's a psychology to take into account here.
Krisztián Pintér 200+
Taylor Tomasini
Markets are efficient in the long-run, but they're sticky in the short-run.
Krisztián Pintér 200+
why would that concern us? how realistic that scenario is? companies controlling huge amount of capital usually have multiple means of checks and evaluation. they have a board of directors, many teams of revision and control, they have detailed public reports, and many of them have zillions of shareholders and a liquid market of stocks.
another thing is that it is happening in parallel. there is zero chance that on 03/2013, all companies go bankrupt at the same time. and honestly, i could not care less if say apple goes bankrupt. its competitors are still there to satisfy the market.
it is funny that you say markets are not efficient in the short run, because you have accused companies to be short sighted. these are two opposite views.
the reality is that long term and short term need to be balanced. this balance is unknown. it is the task of an entrepreneur to find that balance, and risk his own money doing so.
Taylor Tomasini
I think I've gotten off track so I want to bring the conversation back to one question that I'd like your thoughts on.
"The need for profit is universal for all businesses in a healthy market economy. Unfortunately, early economists went far beyond merely describing how entrepreneurs always seek profits as an important goal, to concluding that maximizing profits is the only important goal of business."
Mackey, John; Sisodia, Rajendra (2012-12-25). Conscious Capitalism: Liberating the Heroic Spirit of Business (Kindle Locations 486-488). Perseus Books Group. Kindle Edition.
Question: What are your thoughts on John Mackey's statement? Is he right? Is he wrong? Is there something to it? That's all I'm after. What do you think?
Krisztián Pintér 200+
Taylor Tomasini
Taylor Tomasini
So why does profit maximization not imply diversity? Because standardization and efficiency are systemic ways of killing internal diversity. That's what creates the inefficiencies. If processes are diverse and actions are diverse and the way each division or geography or sub-division of the organization acts is different from the other then there's waste. That waste is the cost of diversity.
The same rings true for hierarchy. Hierarchy is a way to garner efficiency. This is why you saw government agencies clamoring for shared-service organizations 10 years ago. If you centralize everything. If you make things neat, and you get efficiency.
But standardization and efficiency come at cost. They come at the cost of creating systematic risks. Now your entire organization is subject to the same risks because all of your processes and actions and aims are homogeneous. Now, instead of having parts of your organization as being more robust than others, it's all the same. If one part goes down. It all goes down.
Krisztián Pintér 200+
profit seeking corporations are the single biggest sources of innovation by a huge margin.
Taylor Tomasini
I'm talking about the difference between, profit maximization being the only goal a corporation should have -- as has been stated by Milton Friedman -- and organizations that seek to benefit society first and make profits in doing so.
Krisztián Pintér 200+
Taylor Tomasini
A.J. Jacobs has a TED talk titled How Healthy Living Nearly Killed Me. His talk articles his journey to live as healthy of a life as he possible could for a year. To do this he heeded all medical advice, including wearing a walking helmet. And he maximized his health.
But his talk lead me to question the point of his actions and whether maximizing health really is the goal. Like all things, his actions had trade-offs. And I think what I'm trying to say with profit maximization is that while profits are good they have trade-offs -- most of which are completely justified and worth it, just like your air conditioning company example.
The concern I have is on the maximization part. Just as in maximizing one's health you can lose sight of that which really matters -- which is the beneficial trade of value for the good of all involved.
What's if we've gone too far with the maximization part to the detriment of our employees, stakeholders, customers, and society? That's what I'm getting at with the call center example I gave in another post or the think pink slime example. What if the creation of pink slime is that step too far, that trad-off too many, that maniacal focus on profit maximization that is doing us harm?
Krisztián Pintér 200+
you obviously have some metaphorical mental concept about profit, and you imagine a bunch of suits conspiring to exploit and brainwash people.
Jedrek Stepien 10+
pat gilbert 50+
W. Ying 10+
Profit maximization makes inequality, anti-symbiosis, war, .... self-extinction of humankind.
Thus, the profit above its OPTICAL POINT gives us untrue, unreal, INVALID happiness.
(For INVALID (ineffective) happiness and OPTIMAL POINT, see the 1st article, points 1-3, 10, 14, at https://skydrive.live.com/?cid=D24D89AE8B1E2E0D&id=D24D89AE8B1E2E0D%21283&sc=documents)
Feyisayo Anjorin 50+
Taylor Tomasini
george lockwood 20+
pat gilbert 50+
Why you ask, glad you asked.
Because when people exchange freely no one is forced to buy what the other is selling. So the person who is selling has to offer something the buyer is willing to trade his hard earned dollars for. The seller either does this or perishes, this means he has to be competitive with the other sellers in the marketplace. This is as ethical as it gets, and the standard of living of the whole world has been raised by exactly this mechanism.
The exception to this is through crony capitalism, which is extremely unethical. E.G. GM would be gone if not for this, the big banks portfolio would look different if were not for this, many of the defense contractor's portfolios would look a lot different as well especially when they prosper through war.
Questions?
Fritzie Reisner 100+
Taylor Tomasini