Students of economics learn that it is assumed that firms seek to maximise profit. Higher profit means higher dividends for shareholders, more resources that can be used to finance research and development, it makes the firm less vulnerable to takeover, and ensures the long-term sustainability of the firm. The theory also states that higher profit enables higher salaries for workers. However, is this last point always the case?
An article that appeared in a recent edition of the UK newspaper, The Guardian (left leaning and pro-EU), claimed that the recent wave of popularity of the so-called populist politicians (Farage in the UK, Grillo in Italy, Le Pen in France, and Trump in the US) is not so much the result of any liking for populist politics but more of a retaliation by the working class, who have been made to feel that they are bearing the brunt of the negative international financial and economic situation of the last years. Let us keep in mind that in 2018, it would have been a decade since the major financial crisis.
So the votes obtained by such politicians have been more related to the need to express anger and protest, than a belief in the policies of these politicians. I tried to put this line of thinking in the context of the profit motive that firms have and a number of considerations arise.
The first is the current rate of interest. A fixed bank account in most leading economies would not pay more than one per cent. In such a scenario, how appropriate is it that investors expect a return (either through profit distribution or through capital growth) of 15 per cent or more? Admittedly that expectation is partly linked to the perceived risk being undertaken when investing. However, the difference between one per cent and 15 per cent is not 14 per cent, but 15 times more. If the rate of interest were to move to around three per cent, would investors expect a return of 45 per cent per annum?
Is it correct that shareholders seek to continue increasing their returns while the major contributor (the worker) to those profits is being asked to reduce their income?
The second consideration is of a macroeconomic nature. One way of measuring the gross domestic product is through the income method. This classifies the components of the GDP between compensation of employees on one hand and gross operating surplus and mixed income (hence profit) on the other. What has been the ratio between these two variables over the last years in a number of countries? How appropriate is it that the gross operating surplus and mixed income consistently outstrip compensation of employees?
The third consideration is unemployment. Firms have sought to maximise profit by reducing costs. That has often meant reducing labour costs, either through redundancies or through a freezing of (if not reduction in) wages. Workers have very often accepted a reduction in wages as the alternative would have been unemployment. Is it correct that shareholders seek to continue increasing their returns while the major contributor (the worker) to those profits is being asked to reduce their income?
Anyone who knows me is fully aware that I am no socialist and that do not subscribe at all to a leftist ideology. We actually doubt whether such a leftist ideology still exists as we now take it for granted that workers shoulder the burden of an economic crisis. The profit motive has been fully embraced even by those who in the past considered it as a scourge of the working class. Is this the way things should be?
As we argue about the politics of economic austerity and contrast it with policies of economic growth, I believe that we need to redefine the concept of the profit motive. Should it continue to be profit at all costs?
One way of counterbalancing this view is the increased importance that I believe we should give to the third sector (not tertiary), family businesses, cooperatives and similar structures. These structures embrace values that are not governed solely by profit. Such values provide a higher value to society than the pure profit motive.