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Taylor Tomasini

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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?


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    Feb 1 2013: Or.

    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?
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      Feb 1 2013: Are you saying, then, that flexibility and innovation are not good for business- that businesses maximize profits by not being able to make flexible adjustments to changing market circumstances and by not innovating?

      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.
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        Feb 1 2013: Here's the thought: The goal of an organization must be to survive, first, before an organization even thinks about maximizing profits. So the question is this: In an attempt to seek maximal profits by standardizing processes, eliminating redundancies, and using a centralized command and control hierarchy, are you directly contracting your need to survive?

        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?
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          Feb 1 2013: I would like to see you address my question first, please, as it is a question of clarification.

          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.
        • Feb 1 2013: proficiency kills; The more proficient a species becomes at procuring its food source , the more rapid its decline. DANGER DANGER DANGER
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        Feb 1 2013: Defend them? They're so ubiquitous I didn't realize they needed a defense. UPS has a commercial running right now that touts how wonderful they are at helping companies realize supply chain efficiencies. That's how ubiquitous it is. The commercial is literally about how UPS can take an organization -- and without adding any innovation -- create more money by reducing the cost of doing business.

        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.
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          Feb 1 2013: Businesses do seek to reduce costs, of course. They do not rely on product innovation alone.They also consider a variety of process innovations.
          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.
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        Feb 1 2013: All great points. I understand what you're saying and I think I've gotten off track so I want to bring it 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?
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          Feb 1 2013: My purpose was to get you to reconsider some dubious assumptions you are making without, I think, research to verify their validity. A case based on those assumptions (about incentives to standardize or not to innovate) cannot stand if the assumptions are misconceptions.

          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).
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        Feb 1 2013: Kathy, will you elaborate?
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        Feb 1 2013: I'll check out the Harvard Magazine issue your talking about. Always glad to learn something new. Thanks.
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        Feb 6 2013: I've gone back and read through some of your posts on this page, and they make more sense to me now. You wrote:

        "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?
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          Feb 6 2013: What is difficult for me to follow is your (changing) premises. Before you put forward an unsupported argument that profit maximization is inconsistent with working in a flexible and innovative way and then asked why wouldn't firms do better building in such flexibility and innovativeness. Why would you assert that profit-maximization is inconsistent with flexible and innovative organization? What is your theory or evidence? Many might argue it makes flexibility and innovativeness MORE likely.

          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.
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        Feb 7 2013: I think my premise has changed. I've learned from what you've said. You've rightly pointed out that firms can make money from both cutting costs and innovating and you've also pointed out that innovation can be part of any firm.

        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.

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