This article provides information about “Is Profit Maximisation a Sole Objective of Business?”:
In order to fully understand the objectives of business, it is important to discuss one more aspect, namely, the profit objective of business. It is generally believed that business activity is carried on with the sole objective of maximising profit. In this regard the following two aspects need to be discussed:
1. Relevance of profit in business (with special relevance to Peter F. Drucker’s views on the subject);
2. Objections against ‘profit maximisation objective’.
Relevance of Profit in Business:
The private enterprises are primarily motivated by the objective of profit. Some may go even further and emphasise that profit is the sole objective of business enterprises, and all other objectives are facilitative objectives and are meant to be subservient to the profit motive.
It is pointed that private business enterprises are operated on behalf of the owner who have assumed the business risk of investing their funds. Profit as a surplus of business revenue over the cost of doing business, accrues to the owners.
It is their share, just as wages are the share of workers. People invest in business for getting a return. It is a reward for risk taking, so far as owners are concerned. As a motive, profit serves as a stimulant for business effort, initiative, and entrepreneurship.
Apart from being a motive of the owners, profit has an objective function in business. Enterprises need profit for sheer survival and self-reliance. Profit earning is essential if additional capital is to be attracted and reserves are to be built-up for successfully meeting the risks surrounding the business.
Profits help strengthening and broadening the capital- and-assets base of business and ensure its future growth, and for enhancing its ability to absorb shocks and set-backs common in business.
The profit criterion provides the much needed sense of direction and discipline to corporate managers in their business process of planning, decision-making, and control. And, above all, profit is often regarded as an index of successful operation and efficiency of business enterprises.
While talking about the relevance of earning profit, Peter F. Drucker a well-known management scholar, specifies the following purposes of profit:
It measures the effectiveness and efficiency of a business’s efforts. It is indeed the ultimate test of business performance.
It is the “risk premium” that covers the costs of staying in business — replacement, obsolescence, market risk, and uncertainty. Seen from this point of view, there is no such thing as “profit”; there are only “costs of being in business” and “costs of staying in business”. And the task of a business is to provide adequately for these “costs of staying in business” by earning an adequate profit — which not enough businesses do.
Profit insures the supply of future capital for innovation and expansion, either directly (by providing the means of self-financing out of retained earnings), or indirectly (through providing sufficient inducement for new outside capital in the form in which it is best suited to the enterprise’s objectives).
It is, therefore, perfectly legitimate for a business to aim at a ‘satisfactory’ level of profits — the raison detre of a business.
Objections against Profit Maximisation Objective:
According to Drucker, “none of these three functions of profit (stated above) has anything to do with the economist’s maximisation of profit. All the three (functions of profit) are indeed “minimum” concepts — the minimum of profit needed for the survival and prosperity, of the enterprise”.
This statement of Drucker does point that earning ‘reasonable’ profit is different from, and even in contrast to, profit ‘maximisation’. Obviously, one would be interested in knowing: What is wrong with profit maximisation? The main objections against, or misgivings about, profit maximisation objective are indeed serious and are stated below:
(i) Profit maximisation places greater emphasis on the ‘end result’ and not on the ‘mean’ employed to achieve it:
Profit maximisation objective gives the impression of being the ultimate aim (end-result) of business; whereas it ought to be a ‘means to an end’. The end (or aim) should be the social welfare.
If it is considered to be the ultimate aim of business, the businessmen might (and sometimes they do) try to achieve it by socially undesirable means such as black-marketing, profiteering, exploitation of workers and consumers, etc.
(ii) Profit maximisation places greater emphasis on the reward for owners while overlooking the interests of other people:
Since profit is the reward for capital (which owners contribute), profit maximisation objective certainly takes more care of the interests of owners. This is not correct because a business endeavour is possible only with the fullest cooperation of all the factors of production (labour, management, capital, etc.) and not by capital alone.
(iii) Profit maximisation misdirects managers to the point where they may endanger the survival of the business:
To maximise profits today, mangers may tend to undermine the future. They may push the most easily saleable product lines and disregard those that form the market of tomorrow.
They tend to short-change research, promotion, and other postponable investments. In other words, they are directed into the worst practices of management — by no imagination the raison d, etre of a business enterprise.
(iv) Profit maximisation is inconsistent with certain developments that characterise the modern business:
With the advent of industrialisation, the markets have widened, and to meet increased demand, the size of business has also increased. This has resulted into divorce between ownership and management, growth of institutional holding (including mutual funds, hedge funds, pension funds, private equity firms, etc.) increasing size and complexity of business units, and emergence of professional mangers and technocrats.
These professionals shall not pursue the objective of profit maximisation if it cuts at the very root of their survival and growth. Thus, in this age of emergence of new corporate personality, profit-maximisation is regarded as unrealistic, difficult, inappropriate, and sometimes immoral by these professionals.
(v) Profit maximisation has capitalistic overtones:
The recent recession due to sub-prime crisis (emanating the US and engulfing the whole world) brings out it very clearly. To maximise returns loans were given to those who did not deserve and ultimately losses were socialised.
To end the debate, we are of the opinion that profits are important but not the sole objective. We must eat to live, not to live to eat. Profit maximisation is like blood cancer where the end result (death) is known and we must not allow the blood cancer to afflict us.