Profit Maximization: An Actual or Theoretical Objective?
Profits are necessary to day both for the capitalist socialist and any type of economy to survive. Multinationals and giant companies have the profit motive and therefore maximizing profit as the base of their operations. This also goes under a new label namely stock holder gain. This is a form of profits that happens when the profit margins of the company go up and the market reflects these profits. Therefore profit maximization is or rather ought to be actual. To enter the argument therefore it is necessary to examine what profit is and how it is maximized.
Theories of Profit and Profit Maximization:
A firm survives if it can provide for the costs of production, the factors of production and then have a surplus for the entrepreneur. Profits are the foundation of the capitalist economy. Profit is based on the desire for personal gain, and this makes the entrepreneur to invest capital in ventures. This is the foundation of capitalism and Adam Smith's 'Wealth of Nations' begins with an address to the self-interest and moves on to show how profitability is achieved by specialization. The profit income is the foundation of the modern capitalist business firms. Profit is a concept that sprang from the consideration of rent and interest, especially in the neoclassical era. There is a 'profit factor' that is shown to be a reward for entrepreneurial labor. (Obrinsky, 1983)
These were the seeds that later became the classical theory of profits, by beginning from the theory of wages and rent. This theory has undergone many changes and the modern economists have developed Smith's theory of equilibrium into a disequilibrium analysis. This is based on the growth with regard to the increasing returns to scale. This is more evident in the area of international trade, division of labor and the free markets. In the international trade, it is evident that Smith acknowledged the existence of disequilibrium that is a trade surplus. Ricardo was a vehement critic of this acquiesces and Ricardo maintained that the equilibrium will be reached, no matter what surplus seems to exist in the short run. (Brown, 2004)
The profit maximizing firm keeps the activity level at where the Marginal Revenue will equal Marginal Cost (MR=MC). Thus the marginal revenue being the revenue from the last unit produced as compared to the cost of the last unit produced determines the profitability. The profit maximizing must occur at a point where the MR becomes zero. This is critical and for this firms tend to take up better production methods that cut costs and always try to increase revenue by cutting costs. (Hirschey, 2009) Therefore a firm strives to achieve the optimum sale and the least cost remaining within the equilibrium. This essence is the theory. Is this a reality?
Actual Views -- Maximization Possible?
The microeconomic views of the classical and the modern economists may not be accurate if we consider the problems of the 'Small Business Enterprises.' Although the profit motive and the need to maximize the profit is the basis of the business there are more uncertainties and the firms are forced to operate in shallow markets and small market niches that large firms ignore or abandon. In that situation the growth of the market, demand and marginal profits are not applicable as the giant business. The small business does not have financial and human resources, and therefore these firms have to adopt a different business strategy. One of the key elements that determine the profitability of the small firm is often the industry's long-run profit potential and the adopting of proper profitable strategies. (Reid; et al., 1993)
Now 'marginalism' and profit theory of the marginalists have been substituted by a number of other theories, some most recent. The criticism of the marginalists led to the examination of other means of attaining the equilibrium or in general the cause for what happens and why. Though in sum and substance the marginal analysis cannot be rejected, it is argued that all theories proposed so far have their own flaws. (Vromen, 1995) The difference in the estimate of profit maximization came with the macroeconomic concepts. For example, Keynes's demand phenomena and short period analysis had a perspective for profit theory, based on a world of uncertainty, the marginal theory seems to crumble and the profit based on the productivity-general equilibrium fails when there is a depression and the "investment largely governs profits, and profits largely comprise the savings magnitude." (Obrinsky, Mark. (1983)
Keynes advocated government spending as a method of getting over recession. Though the consumption and spending creates the spiral, the one agency that can arrest the fall is the government. Governments can indirectly interfere with spending because the government is in absolute control of the economy. The main mechanism that the government uses to control the economy is the federal government budget. Federal government makes grants to other institutions for various categories of services that cannot be run with profit motive. These funds may be unrestricted and increasing goods and services by the concerned agency. In some projects the entire spending and lastly the production and consumption of public goods is done by the government. The public goods could be clean water, roads and other services that may not be lucrative to the private sectors. This increases the government spending and consequently the income and money flow in the economy. (Beamer, 2000)
Thus profits are not merely a function of MR & MC. The take on the economy after globalization is different. In modern times it is based on a system rather than the simplified economic force of marginal cost and marginal revenue. The 'Business Process Management' is a concept that aims at creating a process improvement and quality principles and methods to achieve improvement in the production process and to improve quality. Thus the employees, the process of manufacture and the buyer are important. Taking into consideration that business exists to create and maintain profitability. This is sought to be achieved by better production process and standardization and other management parameters and not based merely on economic considerations. (Eckes, 2001)
One of the interesting models that have been propounded as the alternate is the biological models that would be inconceivable normally in the case of the business firm. It was created by Hirshleifer who calls a firm as a "consciously contrived 'cultural grouping." (Vromen, 1995) Thus in the activities of the firm, the individuals who make up the firm, and the family is also considered. This is argued to be so because there is a great deal in the activities of the firm that is controlled by the makeup of the individual human beings. It is argued further that the "natural selection of inheritable behavioral traits of individuals and units of selection." (Vromen, 1995) This makes the firms progress a paradigm of how well the individual can make or is designed by his or her genes in running the firm. However there are no observable features in the corporate world that can support this theory. Yet this theory has a dimension with the altruistic individuals, individuals and the explanation of 'altruistic' behavior which in turn can explain the existence of non-profit organizations.
The Non-Profit Case
The opposite of profit maximization occurs in non-profit organizations which try to fill the demand for services that either are not profitable and is not attended to by government or business. The resources needed to meet the service demand, with very scarce resources internally there is also a maximization need but not necessarily profits because such companies cannot make profits. So the measure becomes in terms of services cost and fund budgets to meet the cost. (Cutt; Murray, 2000)
That organizations can exist without making a profit is a challenge to the…