A. Definition
Economic theory is supported by the idea of the profit motive. Profit refers to the money left to the business after all expenses and taxes have been paid.
Narrowly defined, the profit motive states that: 'Entrepreneurs are willing to risk capital in the hopes of a monetary profit reward if the venture succeeds. Indeed, success is defined as making a profit.'
A widely used measurement of success is the Return on Investment percentage [ROI], or the annual profit received divided by the capital invested. Investment opportunities are frequently ranked by that measurement with the higher percentage ROI projects or investments deemed more desirable than lower percentage ROI projects.
When competitive markets exist, capital is drawn toward higher ROI's and away from lower ROI's. Theory suggests that a society is 'efficient' when all invested capital is making the highest ROI possible.
B. Flaws inherent to the profit motive when extended beyond the firm
Numerous factors create costs and difficulties for the greater society when businesses are motivated to achieve 'efficiency' as measured by a high ROI.
1. External costs
Unfortunately, the idea of 'efficiency' does not include benefits to any people or organizations outside of the narrowly defined business. It is possible for a business to have a high ROI while making the overall society poorer. For example, making and selling cars can be a profitable business when only the direct costs paid by the company are considered. But, cars require roads and the car companies do not pay for the roads. This is called an 'external' cost, or a cost created by the company that the company does not pay. Instead, consumers pay the cost through taxes or tolls, which then benefit the company by enabling it to pass onto the public costs created by their product.
2. Adversarial relationships
Another thorn in the side of the profit motive is that business owners are motivated to reduce costs wherever possible in order to get a higher ROI. Specifically, any business is motivated to lower any and all costs like wages and salaries and to charge the highest price possible. That's how ROI is raised.
Businesses then are placed in an adversarial position with employees, suppliers and customers. Lower costs mean higher profits.
It does happen that some entrepreneurs occasionally attempt to harm competitors in order to benefit their own venture.
3. Income Inequalities and Monopolies
A regular feature of for profit economies is the concentration of income and wealth into fewer and fewer hands. As the rich become influential they will regularly block redistribution efforts from the central government in the belief that they will lose income and power.
II. Alternative organizational models
Economies where the profit motive is the dominant model frequently fail to provide adequate real benefits to the general population; some benefits do not lend themselves to the profit motive. Firms have no incentive to provide for any good or service from which they do not make a profit. Public goods like national defense and public parks don't have the possibility of generating enough revenue to create profits with a sufficient ROI to attract private capital. Instead there is a drive toward higher and higher ROI at the expense of the greater population.
Defenders of the profit motive argue that any such public good must be provided by the public sector and paid for though tax revenue to the government. However, some entrepreneurs lobby for and argue that taxes should be lowered to allow them to raise their ROI.
But, when a society fails to provide funding for public services through tax revenue, the central government frequently chooses to borrow money to fund the deficit. Seemingly several governments have reached the limit of funding public deficits through borrowing in the private capital markets. The lender of last resort, the International Monetary Fund [IMF], does require that governments wishing to finance their deficit raise taxes and lower expenditures to balance their budget. To date, the United States of America has avoided that exercise since private lenders seem happy to lend the US sufficient funds at low interest rates to fund our deficit. This may end at some future date; then the US would likely face the same IMF mandates we have avoided so far.
Here are some ways to organize enterprises which offer a better method of balancing private, for-profit interests and public interests.
A. Public Utility Model - For profit with regulation oversight
This is the Public Utility Model where a for profit company provides an essential product or service which requires a significant investment to deliver efficiently. The company is granted a monopoly but must submit to a publicly elected board with power to set its prices and operational methods. In California, the PUC regulates electricity and natural gas distribution.
The Board tries to set rates so that the company can attract private capital to its shares and bonds. Sometimes the Board fails to grasp the intricacies of the system and can sometimes be bought.
B. State Enterprise -
Many countries use the State model where a government organization provides a good or service. Sometimes this model creates problems when the company fails to make enough revenue and the government covers its losses. A case can be made that the subsidies are in fact an investment into a social goal that the organization provides for the country.
C. Non-Profit Organizations
Many successful organizations operate on a non-profit model, where the goal is to combine maximization of one or more social goals with enough revenue to cover costs. There are, for example, many non-profit credit unions which provide the same services as for profit banks but without the excessive concentration of money and power which commercial banks accumulate. [See my kindle book on BANK SLUSH FUNDS here: https://www.amazon.com/gp/product/B07B6RYQ7C/ref=dbs_a_def_rwt_bibl_vppi_i6]
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