2.2 Profit maximisation
‘Making a profit is as important as the air we breathe.
It would be sad if we were only here to breathe air.
It would be just as bad
if we only ran companies to make a profit.’21
Hermann Josef Abs (1901–1994),
Chairman of the board of Deutsche Bank
In the 1970s, lecturers at St. Gallen were already drawing attention to the fact that the call for profit maximisation needed to be defined more specifically. It had been observed that some managers had been making large short-term profits at the expense of the future. Maximising short-term profits at the future’s expense puts that company at risk. Typical measures include lengthening maintenance periods, reducing the budget for research and development, and scrapping training programmes. In order to combat this, the lecturers recommended that profit targets be given a long-term and thus a sustainable perspective. Even if this view is certainly correct, it still needs more thorough consideration.
What students are taught
Business students have only one answer to the question about what a company’s main goal is: profit maximisation. Whether it be students in their first term or those taking their final exams, research assistants or PhD. students, whether early in the morning, in the afternoon, or when they are jolted slightly inebriated out of their deepest sleep at night, these budding managers and economists only have one answer: profit maximisation. From the very outset, the goal, or task, of ‘profit maximisation’ burns itself into business students’ brains in such a way that it becomes part of them and goes unquestioned. And so profit maximisation becomes an implicit guideline that characterises almost the entire world of management.
This chief goal of profit maximisation, which plants itself in their heads and moulds their psyche for the long term, is graphically explained in the very first semester using a model: profit is the difference between revenue and costs, and the goal is to find the point where revenue and costs are as far apart as possible. This point of maximum profit can be determined as a measurement in a system of coordinates.
The assumption with revenue is that initially it will increase rapidly as quantity output increases, and then flatten out to reach what is known as maximum revenue. From there, revenue will fall as the output quantity increases. If revenue is plotted on the y-axis and quantity on the x-axis, the curve resembles a bell. The actual background to this bell is the falling price-sales function, which assumes that more products will be sold when the price is reduced. Multiplying the prices given by the relevant quantities necessarily produces the revenue bell curve mentioned.
Costs are assumed to be a bloc that is still incurred even when nothing is produced. These fixed costs, as they are known, start on the y-axis and increase with output quantity. In some models this occurs as a line; in more complicated models they usually diminish in order to be able to depict economies of scale or the effects of learning.
Then the output quantity is sought at the point where the two curves are the furthest apart, or a new curve is drawn which depicts the difference between the two curves, from which the maximum is determined. This can be done using geometry or by using algorithms from the curve sketching.
Fig. 2: Graph of maximum profit calculation
What is astounding here is the complete absence of any relation to real life: managers who keep these two curves on their desks in order to refer to them in practice do not exist. But even more astoundingly, profit maximisation is not even measurable even though measurability is one of the main requirements for operational targets! In retrospect it cannot be said whether the measures taken actually led to maximum profit or not; maybe a little more profit could have been made after all.
The mathematical underpinnings of the basic thesis that profit maximisation should be a company’s main goal contribute decisively to its lodging itself almost indelibly in people’s brains and becoming part of their identity. After all, whatever can be expressed by mathematical models and be (apparently) calculated surely cannot be wrong! This would not be quite so bad if profit maximisation were a goal worth aspiring to from an ethical point of view.
To illustrate how dangerous profit maximisation is, it first has to be divided up analytically: profit maximisation is nothing other than maximising revenue whilst simultaneously minimising costs.
Revenue maximisation requires making as much revenue as possible. Behind it is the invitation, ‘Get as much money out of your customers as you can!’ and ‘Set prices as high as they’ll go!’ To put it clearly, the principle of profit maximisation contains a clear invitation to rip people off – without doubt an ethically questionable way to act.
Revenue maximisation involves ripping people off.
Ripping people off involves demanding an unjustifiably high price. Even if no crime is committed in the legal sense, such as intending to commit unlawful enrichment under false pretences, let alone profiteering, the offers made by many companies against this backdrop do appear questionable. Planned wear and tear22, i.e., intentionally reducing the lifespan of products, and subscription traps are just the tip of the ugly iceberg of business reality. What is more, even responsible companies do not shy away from ripping their customers off with overly expensive service hotlines or barely affordable offers of services (e.g., surcharges on flights for luggage over the weight limit).
Cost minimisation is often exploitation.
The requirement to minimise costs is also not without its problems: cost minimisation requires spending as little as possible on resources, paying the lowest possible price, pushing suppliers’ prices under the company’s own (at least for a while), and putting economic standards before social ones. To put it clearly, the principle of cost minimisation, and with it of profit maximisation, involves an unmistakable invitation to exploit – which is no less ethically questionable.
The neutral definition of exploitation primarily denotes any kind of use or consumption. However, by Karl Marx’s time the term referred to employing people oppressively in production processes. Today exploitation is understood to mean particularly abhorrent forms of labour such as slavery or child labour. Tellingly, this term, which is clearly negatively loaded, is used quite unthinkingly in several standard works on business studies in connection with the utilisation of production factors, although we should give the authors credit for the fact that they do not refer to the production factor of labour, but rather to materials or capital goods.
Ripping people off, exploitation and therefore profit maximisation require taking advantage of the plight of others.
As has already been mentioned, the job of companies is nonetheless to make profit. We may therefore suggest not saddling this important goal of business with the inoperative, radical suffix ‘maximisation’. The goal of ‘profit maximisation’ could be replaced with the terms ‘intention to make profit’ or ‘making an appropriate profit’.
2.3 Focusing on competition
‘In order to win you do not need to beat others.
Only simple souls define themselves solely and directly
by the fight, the desire to beat others.’23
Michael ‘The Albatross’ Gross,
swimming world and Olympic champion
Economics works on the basic assumption that competition produces the best supply of services. A lack of competition leads to higher prices, worse services and, in the worst-case scenario, to a lack of provision for people.
The basic