Profit Maximization: the Ethical Mandate of Business

Profit maximization: The ethical mandate of business

Profit maximization: The ethical mandate of business

Journal of Business Ethics; Dordrecht; Apr 1994; Primeaux, Patrick; Stieber,

John

Source (subtitle): JBE

Volume: 13

Issue: 4

Start Page: 287

ISSN: 01674544

Subject Terms: Profit maximization

Models

Ethics

Economic theory

Profit maximization

Models

Ethics

Economic theory

Profit

Economic theory

Business ethics

Classification Codes: 3100: Capital & debt management

2410: Social responsibility

1130: Economic theory

Abstract:

A model is proposed for business ethics which arises directly from the business

practice. This model is based on a behavioral definition of the economic theory

of profit maximization and situates business ethics within opportunity costs.

Within that context, it is argued that good business and good ethics are

synonymous, that ethics is at the heart and center of business, and that profits

and ethics are intrinsically related.

Full Text:

Copyright Kluwer Academic Publishers Group Apr 1994

In the contemporary world of commerce, the very term "business ethics" creates a

kneejerk reaction in executive suites signaling negative, defensive responses.

Why? Partly because "business ethics" has become associated with abuse and

mismanagement. Partly because "business ethics" is a relatively new term, a

misunderstood concept, which frightens managers.

There also exists a tendency by detractors of the present economic system to

universalize exceptions and to think that all men and women in business are

seeking greed and power for its own sake. Basic to our argument is a sense of

faith and trust in humanity, that the vast majority of men and women in business

are struggling to do the right thing in the pursuit of good ethics. Also basic

to our argument is a faith and trust in private enterprise and its inherent

tendency towards equilibrium and balance. A few exceptions, a few mistakes do

not reflect the good ethics of the majority. That same positive, optimistic view

of humanity and of the open market is not shared by the traditional voices of

morality and ethics - philosophy, religion, and law--at least not to the

practical degree of the business enterprise.

Consider the virtually impossible task of a Defense Department contractor trying

to keep informed and updated on rapidly changing government specifications and

regulations. The minute a failure is detected, a red flag is thrown into the air

and charges of unethical cheating and over-charging the public become headlines

in our newspapers. Once the charge is made the damage is done. Human and

financial resources are immediately directed coward clearing the charges through

a bewildering maze of litigation. Cleared of deliberate or intentional

wrong-doing, it is often said that the contractor is lucky to read a fifth-page,

small-print announcement.

In this hypothetical case, as in so many others, there exists an implicit

mythology on the part of the media (and on the part of the public) which assumed

that business is inherently unethical. The business enterprise is besieged by

popular misconceptions as well as by legal, religious and academic theorists

anxious to prove that business seeks only self-serving aggrandizement, i.e., to

maximize its profits and to do so at any cost to the consumer, the community and

the environment. Constantly besieged by these kind of assertions, it is little

wonder that business is defensive in matters concerning ethics.

There are two ways in which business theory and practice can respond to negative

ethical allegations. First, there is a need for business to clarify its function

within society as a whole, i.e., to define its role along side those other

social entities concerned with ethics in general and business ethics in

particular such as academic philosophy, religion and law. Second, there is a

need for business to situate ethics within the heart and center of its very

self-identification, i.e., within private enterprise and profit maximization.

1. BUSINESS WITHIN SOCIETY

What is the role of business within society as a whole? In an earlier essay,

John Stieber addressed that question and answered it directly and simply: "to

provide the goods and services the consumer wants ..."(1) The word "wants" is

deliberately used to distance business from the judgmental implications of

personal or communal "needs." The implication here is that judgment or choice

belongs to the individual consumer.

This question of judgment demands explanation. Decidedly, the "open market" or

"private enterprise" system rests in individual decision-making. The "judge"

within this economic frame of reference is any individual who possesses the

freedom to produce or not produce, to purchase or not purchase any product he or

she so desires. According to the private enterprise purist, the market will

regulate itself without any need for externally induced controls. Likewise, in

questions of judgment, ethical decisions about the purchase or sale of a product

will be determined and/or regulated by the market in compliance with the free

choice of individuals. Ideally, there would be no need for external ethical

controls.

Who determines whether there exists a "want" for guns? The individual consumer

does. Were the individual consumer to judge that he or she had no "want" for

this particular product, it would not be produced. On the other hand, if the

producer judged, in conscience, that he or she should not produce this item, it

would not be produced, at least not by that individual. It could, however, be

produced by another individual whose ethics would allow him or her to do so.

There is, then, integral to the private enterprise economic system a bias

towards individual ethics and judgments. This bias is grounded in a positive

evaluation of individual human dignity and the capacity of the human spirit to

choose what is best for itself. That decision or judgment is, accordingly, made

by the individual who may or may not, to one degree or another, be influenced or

not influenced by implicit or explicit philosophical, religious or legal tenets.

Even though free market theory and business practice focus on the individual as

the locus of judgment or choice, that individual judgment or choice is

influenced or tempered by social, communal factors, i.e., by the judgments and

choices of others. It is precisely through genetic and environmental development

factors (influenced by philosophical, religious, and legal concerns) that this

social dimension is realized. These factors and influences situate the

individual within society and provide a context for individual decision-making.

Business and free enterprise have always valued that social dimension and have

always realized its practical significance. In practice, both the producer and

the consumer have also been conscious and aware of social customs, values and

beliefs when buying and selling. Stieber recommends an economics based not

simply on "providing goods and services the consumer wants," but doing so within

the "ethical mores of society."(2) If the individuals who comprise a particular

society perceive birth control methods to be unethical, those particular items

would not be bought. Nor would any producer, sensitive to the ethical mores of

that particular society, attempt to produce or market them. Or, perhaps he or

she would attempt production and distribution, thereby moving to change ethical

mores. That change could not or would not occur unless a significant number of

individuals would themselves choose to do so. Is that not one way in which

change is realized?

We can, of course, continue to discuss the relationship between the individual

and the community in an abstract manner, questioning to what degree any

particular relationship is more or less individualist or communal. We can also

question to what degree the individual or the community has precedence in moral,

ethical judgment. However, inquiries of that kind fall within the realm of

philosophy which is at least two, if not three, steps removed from practical

decision-making in business.

2. PROFIT MAXIMIZATION AND BUSINESS ETHICS

Perhaps an analogy may help to substantiate the argument. The individual athlete

approaches a game of football with his or her own personal sensibility to a

certain philosophical perspective, religious commitment, and adherence to the

law. That sensibility may even define the individual athlete and his or her

relationships with others. In practice, however, that sensibility is "bracketed"

or suspended as the rules of the game assume precedence. Of course, the

individual can make a prior choice to play or not to play, and perhaps

philosophical, religious or legal commitments may inspire that choice. But once

that choice has been made the rules of football dictate a certain behavior.

We would argue, as in the case of a game of football, that there are rules of

business which, in practice, take precedence. We would also argue that the rules

of business actually constitute the basis for a business ethics which is both

internally consistent and externally valid.

Essentially, we would define business ethics in terms of neo-classical economic

theory and its advocacy of profit maximization. Integral to our understanding of

profit maximization is a behavioral dimension which reaches beyond an exclusive

preoccupation with bottom-line profit and, at the same time, presumes a social

or communal dimension as integral to business. In other words, we would not

define business exclusively in terms of individualist self-aggrandizement or

self-interest but, rather, in terms of a behavioral efficiency of benefit to

both individuals and society that is embodied, but usually overlooked, in the

behavior of profit maximization.

The neo-classical theory of economic efficiency is rooted in a dual realization:

(1) that men and women in business are managers and (2) that managers allocate

scarce resources of land, labor-time, capital, and human creativity in a world

of unlimited human wants. The success or failure of a manager is measured by the

amount of goods or services produced from a given sec of scarce resources. Those

who produce the most are efficient; those who produce less are inefficient. The

human behavior driving this efficiency is prescribed in the paradigm of profit

maximization.

When business men and women profit maximize, i.e., allocate resources

efficiently, people have more of the things they want, and that is good. When

they do not profit maximize, i.e., allocate scarce resources inefficiently,

people have less of the things they want, and that is bad. This is especially

true if the things they want are food, health care, education, and other

necessities of life. Since ethics is basically a study of good and bad activity,

then the decision to profit maximize or not to profit maximize becomes a

question of applied or practical ethics.

Unfortunately, the ethical considerations prescribed in the profit-maximization

paradigm are much more complex than one might readily perceive. The simple

choice to profit maximize or not to profit maximize is deeply rooted in

behavioral tenets which tie the allocation of scarce resources to good business

as well as to good business ethics.

The origins of profit maximization, with its own ethical considerations and its

own tenets, originated in antiquity. When Adam and Eve were evicted from the

Garden of Eden they discovered how once upon a time, in illo tempore, inside the

garden they had unlimited resources. They could have anything they wanted.

Evicted from the garden, they discovered that resources were scarce and that

survival and prosperity demanded efficient management of these scarce resources.

Because they did survive, it is safe to presume that they had learned the basic

tenets of profit maximization.

There are two ways to examine the tenets of profit maximization. One is from a

technical perspective; the other from a behavioral perspective.

Technically, profit maximization is defined as that set of conditions where the

marginal revenue of the firm is equal to its marginal cost (MR = MC)(3) and the

marginal cost curve must intersect the marginal revenue curve from below. For

the manager of the firm, these conditions mean that the firm will continue to

produce as long as the revenues from each unit sold exceed the cost. As more

units are produced, the scarce resources used reach diminishing returns hereby

causing marginal cost to increase. Eventually, marginal cost will equal marginal

revenue. At that point, and only at that point, the firm will be operating at a

level of output that guarantees the community the maximum amount of goods and

services the firm can produce with the given set of resources it has.

If the firm produces at a point where marginal revenue is greater than marginal

cost (MR > MC), it is choosing a level of output that is less than the profit

maximizing output, and the community will have fewer goods and services.

Inasmuch as more homes, more education, more health care, etc. from a given set

of resources are good, and less of these goods and services from a given set of

resources are bad, there is an ethical dimension associated with any decision to

produce at an output level where marginal revenue is greater than marginal cost

(MR > MC).

If the firm produces at a point where marginal revenue is less than marginal

cost (MR < MC), it is choosing a level of output that is greater than the

profit-maximizing output, and the community has more goods and services. The

problem with this decision is that it costs more to make these additional units

of output than the revenues they generate, and the company will lose money. It

is axiomatic that any firm continuing to produce at a loss will eventually go

out of business. Therefore, what first appears to be a windfall for the

community turns into a disaster. The firm shuts down, all of the things it once

produced, including the windfall, disappear; and the community has fewer goods

and services. As before, there is an ethical dimension associated with the

decision to produce where marginal revenue is less than marginal cost (MR < MC).

Everyone would be hurt: managers, employees, stockholders, consumers and the

community as a whole, i.e., less taxes, employment and philanthropy.

Since more is better than less from a given set of scarce resources, producing

where marginal revenue is equal to marginal cost (MR = MC), profit maximizing,

is efficient and ethical. Producing where marginal revenue is greater than or

less than marginal cost, not profit maximizing, is inefficient and unethical.

That ethical judgment rests first and foremost within practical economics and

has consequences for individuals as well as for society as a whole.