Profit motive


Profit motive

The profit motive is the concept in economics that refers to individuals being provided incentive to relinquish some of their spending power (i.e. capital) for deployment to a productive purpose. If humans are rational and self-interested (see Homo economicus), then they should only divert some of their capital toward production for others in society (i.e. invest) if there is some payback for their self-sacrifice and risk. If there was no profit motive then the rational actor would merely conserve their capital for personal use and no investment would occur. The concept of profit motive was first raised by Adam Smith to explain why rational actors should invest their personal capital and why they needed to be provided a rent for use of that capital. Adam Smith also explained why the profit motive was an intrinsic enabler of the efficient utilisation of an economy's resources toward society's overall benefit.

Economies that are utilising their economic resource for maximum sustainable societal benefit need to be both profit efficient and productivity efficient (including labour efficiency, resource efficiency and sustainability). The profit motive must be sufficiently high to incentivise owners of capital to deploy their capital, but not so high as to extract too much rent from the productive capacity of the economy.

The theory proposed now by most modern economists is that goal of an economy is the maximization of growth and therefore profit (see Milton Friedman). This being the key difference between classical economists like Smith and modern economists. As a result, in modern economics, profit has been elevated from being merely a key plank in optimising societal benefit (the goal of classical economists), to becoming the sole purpose of economies.[citation needed]

References

  • Kottak, Conrad Phillip. Windows on Humanity. New York: McGraw-Hill, 2005.