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A Perspective on Profit

Almost 50 years ago the New York Times published an article by Milton Friedman under the heading The Social Responsibility of Business is to Increase its Profit.[1] In it he argued that discussions of the ‘social responsibility of business’ lacked rigour and that the manager of a business was primarily responsible to the people who own it and should always act in their interest – which is presumed to be financial, says Professor Simon Bridge, Visiting Professor at Ulster University

While many people may not have heard of the article there is nevertheless a common view that those in business are, or should be, concerned primarily with maximising their income – and therefore it is expected that businesses will usually be seeking to maximise the profit they can make from any deal.

Profit or greed?

Such was Friedman’s reputation that this belief may, to at least some extent, be a legacy of his article which came at a time when views labelled neo-liberal were again becoming popular. With the ending of the cold war there was a belief that capitalist economic systems had triumphed over socialist ones as the only credible foundation for a sound economy and that the essence of capitalism (and what drove it) was the desire by individuals to profit personally from their investments of time and/or money. So private greed was lauded (“greed is good”) and thought to be the key to economic success.

But two things about Friedman’s article are not widely appreciated: he was only talking about corporations whose shareholders had appointed boards of directors charged to deliver returns from the shareholders’ investments – and he did not consider over what term the profits should be delivered.

Most business is small

However most businesses are not big corporations. Indeed a very large proportion of them are small and most owners of small businesses do not seek to maximise their financial returns come what may. They may be more aware than the shareholders of larger businesses that their businesses only survive and prosper in a culture of mutual benefit.

Businesses, as opposed to co-operative self-sufficiency, probably started because it was advantageous for people to focus on their advantages, such as their particular skills or access to natural resources, and then to exchange with others who had different advantages.

Thus if you were good at fishing and lived near water you might have exchanged fish for stone knives from someone who was good at stone knapping and had a supply of flint. Both benefitted from the trade – otherwise they wouldn’t have done it.

It is reported that as late of 1815 most Americans were largely self-sufficient growing their own food and making most things they needed themselves or trading with a few local craftsmen. Manufacturing businesses existed in cities but the cost of distributing their output further afield was prohibitive[2].

What changed this was the advent of railways which made transport so cheap that farmers could concentrate just on the crops it was easy for them to grow and import other things they needed from distant and similarly specialised producers and manufacturers. And of course they traded for money.

It has been suggested that this was why money was invented – as an exchange mechanism instead of other commodities such as salt. It was though that all barter had to be exchanges made at the time so, as salt was valuable, you could accept it because you knew that in time you could trade it for something else.

However it is now suspected that it was much more likely that trading was done on account and that writing may have been invented to record who had given what to whom and that money was later adopted as a means of quantifying this.

And if money could thus stand in for things traded its initial use may have been as temple offerings as bringing actual goods to the temple was often not convenient for either party. Thus it is argued that money may have evolved initially as a vehicle for paying one’s dues to society – but it has now become an end in itself as the epitome of private greed.

And greed can be damaging to wealth. Maximising short-term profits can often harm longer-term prospects. It can be detrimental to sustainability, and thus to future ability to make profits, which can be best ensured by seeking fair, socially acceptable, win-win deals rather than trying always to extract maximum advantage.

In addition, as Kay has shown, even for bigger businesses, focusing on the bottom line can lead to less profit than focusing on other things such as quality[3] and it has also been suggested that the longest surviving businesses – those that have for centuries provided a livelihood for their owners and employees – are often ones which have not sought to grow but have instead consistently delivered a good service to a relatively limited customer base[4].

[1] Milton Friedman, ‘The Social Responsibility of Business is to Increase its Profits’, New York Times Magazine, (13 September 1970)

[2] James McPherson, Battle Cry of Freedom, (London: Penguin, 1990)

[3] John Kay, Obliquity, (London: Profile Books, 2010)

[4] Geoffrey West, Scale, (London: Wiedenfield & Nicholson, 2017)