Efficiency Created By The Prospect Of Profit
I recently came across a quote by an economist that described anyone who did not appreciate how the pursuit of profit incentivised efficiency as being ‘economically illiterate’. A bit unreasonable to tag people as illiterate, but more importantly, a false belief that profit is a good measure, and driver, of efficiency.
Active Knowledge Question:
How do you determine whether your business is operating efficiently?
I do enjoy many of Tim Ferris’s podcasts and writings, and usually read his ‘5-Bullet Friday’ blog. His blog of 20 September 2019, carried a quote that Tim was ‘pondering’ that caught my eye:
“To the economically illiterate, if some company makes a million dollars in profit, this means that their products cost a million dollars more than they would have cost without profits. It never occurs to such people that these products might cost several million dollars more to produce than if they were produced by enterprises operating without the incentives to be efficient created by the prospect of profits.” Thomas Sowell
This quote reflects what l understand to be an economist view of the purpose of corporate existence, which is profit. And therefore, efficiency is achieved, and measured, through profit.
And whilst I agree with Thomas’s statement that the simple assumption, that take away profit and the business’s products would cost less is false, his conclusion that businesses which do not pursue profit as an incentive are grossly inefficient is an even simpler assumption and one I cannot agree with.
It renders any business which does not seek to maximise its profit as inefficient.
Profit as the purpose, and motive, of business, can only lead to profiteering. A profit-first motive seeds self-interest, politics and short-termism, all of which feed inefficiency. A profit-first approach actually produces less profit than is otherwise possible.
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All the best in the success of your business,
Richard Shrapnel
