The Point about Profit

Profit is wilThe idea of profit has caused much aggravation over the years and even today is still the source of heated debate. Marx borrowed Ricardo’s idea that profit was no more than the wages earned by labour but stolen by the providers of capital. This explained the grossly unfair divergence between the poverty of the labouring classes and the wealth of the capital owners. The neo-classical economists argued that the purpose of industry was to maximise profits, referring not so much to the theft of wages but the surpluses to be earned from industrial and business activity. Latterly, the free market fundamentalists, to which all three of the main political parties are to some extent in thrall, have argued that maximisation should apply to shareholder wealth rather than profit. This then seems to confirm again the inequity first argued by Ricardo, consolidating the position of the owner over that of the employee.

Clearly, none of these theoreticians have really understood the vital role of profit in industry and business. Adam Smith argued the self interest of the butcher, baker etc as vital to the effectiveness of their businesses, because that was how they earned a living and supported their dependents. The survival and long term prosperity of the business was what mattered, profit being some measure of that ability to survive and prosper.

The idea of maximising profit is based on a misunderstanding of business realities, which are concerned with, as Peter Drucker put it, the ‘real risk of ending up with an impoverishing deficit, and the need, the absolute need, to avoid this loss by providing against the risks’. But providing against the risks is anathema to the free market fundamentalist. They regard any such provisions against risk, such as spare or underutilised assets, as evidence of inefficiency and therefore grounds for replacing the business management with one that will maximise shareholder wealth, and this is most easily achieved through the firm being taken over and often being broken up..

Whatever profit is argued to be, it is a necessity for the survival of any business. Its theft by shareholders, or any other stakeholder, only serves to destroy the real economy.

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