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In recent years “profit” has become something of a dirty word and corporations have been encouraged to seek wider social goals following an agenda of so-called “social responsibility”. I would like to start by saying a word or two in defence of “profit”. As the Pope has just been here, I am going to start by referring to Catholic social teaching – and then I will not refer to it again explicitly. The Compendium of the Social Doctrine of the Catholic Church describes profit as an ‘indicator’ that a business is performing well and that the productive factors have been properly employed. This is true – profit is a signal that important ends are being achieved by a business.
In economic terms, profit is the return from entrepreneurship. Entrepreneurship, in turn, involves the discovery of forms of economic activity that lead to the fulfilment of a hitherto unfulfilled need or that fulfil existing needs more effectively. The mobile phone, artificial hip and so on are all products of entrepreneurship. Profit is an indicator to the entrepreneur that he has been successful in creating something of value to others. Even an individual who had no material desires whatsoever, who wanted to give to charity all his profits, may wish to consider a vocation of entrepreneurship which involves industrious attempts to make profits because the profits would be an indicator that he was producing something of value to others…
Read the rest of the piece on the Cobden Centre website.
4 thoughts on “Profit is an indicator of success”
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There are two technical qualifications to make before unreservedly regarding ‘profit’ as an indicator of ’success’.
First, some kind of ‘cost of capital’ needs to be charged for all capital employed (not just borrowed money, on which the accounts will normally have already charged interest before arriving at profit, but also equity capital).
Second, in times of inflation, such as we are living through, accounts using money as the unit of account will as a rule be overstating their profits (as compared with an ‘inflation-adjusted’ version using what is called Constant Purchasing Power accounting).
Not every business that reports a profit is ‘really’ making one!
Just to add to DR Myddleton’s point (if I may?)… We know that it is government which is the source inflation (despite those many who deny government controls the money supply, it is clear that it manipulates it hugely and lays the basis of it).
This inflation is therefore sending a misleading signal that certain activities (like financial instruments) appear far more profitable than they are in reality. This is, is it not, the malinvestment of which Mises and Hayek wrote? Which perfectly explains to me the basic cause of so much malinvestment – namely, government interference in the money supply!
Dr Booth: an interesting essay, particularly your aside on the wider implications of Corporate Social Responsibility, a phenomenon that can sound most laudable in the abstract yet be very problematic—and invite conflicts of interest between managers toward their shareholders and the wider community—in practice. Proponents of CSR almost never concede that a successful (ethical) business is by definition serving a public function (with de facto popular approbation).
With respect to co-operatives, I’ve read of an inverse problem to the one you mention: that profits are distributed to the worker shareholders without sufficient monies left in reserve for capital investment.
Stephen – I am sure you may be right on the “inverse” problem. Which problem you get will depend on the institutional structure, but because the capital investment cannot be sold, the one thing you will get is owners of capital not being able to effectively invest in entities where they like the corporate governance arrangements.